NEW DELHI: The momentum gained by the economic recovery could be lost if Omicron cases surge and inflation remains high, the Reserve Bank of India warned on Wednesday.
Flagging challenges to the economy, RBI said the new Covid variant haunts the near-term prospects and the outlook is overcast with global risks.
In the worst-case scenario, banks’ gross non-performing assets may jump from 6.9% in September 2021 to 9.5% by September 2022, it warned in the 24th issue of the Financial Stability Report, released on Wednesday.
“More recent high-frequency indicators of economic activity suggest some loss of momentum in the third quarter of 2021-22. The pace of the recovery remains uneven across sectors, inflation formation is being subjected to repetitive supply shocks and the outlook is overcast with global risks. Omicron haunts near-term prospects,” it added.
The report underlines that inflation remains a major concern as commodity and food prices have remain elevated for a protracted period and has called for stronger supply-side measures to contain food and energy prices.
Among the major risks to economic growth are high commodity prices, domestic inflation, equity price volatility, asset quality deterioration, credit growth, and cyber disruptions.
In this context, on the domestic front, stronger and sustainable recovery hinges on the revival of private investment and shoring up private consumption, which still remains below their pre-pandemic levels, RBI governor Shaktikanta Das said in his foreword to the report.
On public finance, the report said that even when the government manages to stick to its fiscal deficit target, the Centre’s gross borrowing is likely to remain elevated notwithstanding fiscal consolidation.
“Macro stress tests for credit risk indicate that the gross non-performing asset ratio of SCBs (scheduled commercial banks) may increase from 6.9% in September 2021 to 8.1% by September 2022 under the baseline scenario and to 9.5% under a severe stress scenario,” the report noted.
At the same time, the report said the strong balance sheets of banks with higher capital and liquidity buffers will help mitigate future shocks.
