India's banking system is stable and can withstand global shocks, but there are weak spots like decelerating growth and rising fiscal deficit which are needed to be addressed, said a Reserve Bank report.
"The domestic financial system remains stable in the face of an adverse international backdrop ... Soft spots (are needed) to be addressed going forward," said the RBI's Financial Stability Report (FSR) released today.
Referring to the weak spots, the report said, "Poorer global growth prospects and sovereign debt crisis in Europe has heightened external sector vulnerability. At the same time the domestic growth has weakened while inflation has remained high".
As regards weakening rupee, the report said, "Exchange rate depreciation has inflationary implications through the increase in the cost of oil and other imported goods which are inputs in overall production".
Moreover, it said the increase in petrol and diesel prices and minimum support prices have a cascading effect on the entire economy. It is also moderating impact of the monetary policy measures taken by the RBI earlier.
Rupee has weakened nearly 18% since January and is currently trading at Rs 52.65 against dollar.
The other major challenge before the government would be to contain fiscal deficit during 2011-12. "The fiscal situation remains challenging as the revenue collection was lower than expected in the first half of the current year," it said.
The government proposes to bring down the fiscal deficit to 4.6% in the current fiscal, from 4.7% in 2010-11. However, poor disinvestment and tardy revenue collection is putting pressure on fiscal deficit.
As far as growth is concerned, it is likely to moderate to 7.5% in 2011-12 from 8.5% a year ago.
The report, further, said that the global risks to the stability of the domestic financial system have intensified over the past 6 months.
"Emerging developments in the macro economy and in the financial soundness indicators of the banking system pose some concerns as do the sharp corrections accompanied by high volatility in financial markets," RBI said.