labels: rbi, economy - general
RBI expects the economy to grow at 7 7.5 per centnews
25 November 2005

Mumbai: According to the Reserve Bank of India's Report on Trend and Progress of Banking in India 2004-05, the economy is expected to grow at 7 to 7.5 per cent during 2005-06.

The industrial sector in particular has been performing well and is expected to maintain its momentum in the near future. The report said that there has been all round improvement in inflation rates, financial conditions of corporate houses, which are now raising resources from the international market.

As loans and advances constitute the bulk of assets of the banking system, credit risk is the primary source of risk for banks, notes the report. Accordingly, banks are exposed to some short to medium term risks like credit risk and market risk it says.

However, it adds, there has been a significant improvement in the credit risk environment in India in recent years as reflected in the sharp decline in non performing loans of the banking sector. The growing share of retail and mortgage loans in the portfolio of banks may also have a positive impact on credit risk.

Global financial imbalances continue to grow with the US current account deficit now ruling above 6 per cent of its GDP. The RBI says that there is a risk of currency readjustments which could cause heightened volatility in the financial markets through changes in exchange and interest rate which in turn can effect the banks' balance sheets. However, notwithstanding some uncertainties about market risk, given the increased resilience the banking system should be able to cope with the evolving situation.

The report noted that buoyant exports growth at over 24 per cent emerged as a driver of demand in a large spectrum of industries. The current account surplus, however slipped into a modest deficit after being surplus for three consecutive years. Portfolio flows to India accounted for 30.6 per cent of global flows to emerging market economies and developing countries in 2004.

All these factors results in an accretion of foreign exchange reserves to $26.2 billion during the year. At $141.5 billion at the end of March 2005 it was the fifth largest stock of international reserves in the word, sufficient to finance about 14 months of imports. The report noted that the banking sector stocks outperformed the market during 2004-05 and during the current financial year up to September 30.


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RBI expects the economy to grow at 7 7.5 per cent