The Reserve Bank today said the sovereign debt crisis in theEurozone has increased the risks India'sfinancial stability in 2012.
In the Financial Stability Report released here, the centralbank also said the country faces the risk of lower growth in 2012-13 if themonsoon is below average.
Noting that global and domestic outlook have worsened sincelast December, the report said, "The combined effect of the dismal globalmacroeconomic situation and the muted economic performance on the domesticfront has caused marginal increase in risks to stability.
"The Euro area sovereign debt problem is continuing toweigh on global recovery. Although slowing global growth has dampened commodityprices, heightened risk aversion and the resultant slowing of capital flows arelikely to adversely impact emerging and developing economies."
"While growth has clearly slipped, inflation risksremain.
Despite moderation in core inflation, the persistence ofoverall inflation, in the face of significant growth slowdown, points toserious supply bottlenecks and sticky inflation expectations," the reportfurther said.
Warning that weakness in investment in particular hasimplications for the near and medium-term growth outlook, the report said:"Headwinds from the global economy will continue to impact domestic growthin the coming quarters.
"Going forward into 2012-13, downside risks to growthare likely to persist, especially if the monsoons are significantly below longperiod average," it said.
On the risks from rising current account deficit (CAD) --likely to touch 4 percent in FY12 -- the FSR said: "A widening CAD in theface of worsening global economic and financial conditions and muted capitalflows has exerted downward pressure on the rupee.
"Chances of increasing capital inflows depend on bothglobal conditions, particularly a credible resolution of the Euro areasituation, and an improvement in the domestic investment climate."
It said the key risks to domestic economy seem to arise fromglobal sovereign debt problem and risk aversion, domestic fiscal position,widening CAD and structural aspects of food inflation.
The report added that uncertain global situation, risingrisk aversion and slowing capital inflows are impacting emerging and developingeconomies in general, and pose challenges to the domestic growth and balance ofpayments outlook.
On the rising debt burden of corporates, it said risks fromthe corporate sector balance sheets have remained elevated due to relativelyunfavourable domestic and external macroeconomic environment such as subduedconsumption and investment demand, rising costs of inputs, deceleration inexports and risks from unhedged foreign currency.
On the positive side, the FSR said risks in the householdsector have moderated.