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RBI releases India’s Financial Stability Report
Close on the heels of new cyber security guidelines being introduced by the Government of India to monitor VPN, digital service providers, and government employees, the governor of the Reserve Bank of India, Shaktikanta Das, sounded an alarm against cryptocurrencies and called them a “clear danger”.
On Thursday, the RBI released the 25th issue of the Financial Stability Report (FSR). The FSR is published biannually and includes contributions from all the financial sector regulators. It reflects the collective assessment of the Sub Committee of the Financial Stability and Development Council on risks to stability of the Indian financial system.
In the foreword of RBI’s Financial Stability Report released on Thursday, Das has warned, “we must be mindful of the emerging risks on the horizon”.
Das has stated: “Cryptocurrencies are a clear danger. Anything that derives value based on make-believe, without any underlying, is just speculation under a sophisticated name. While technology has supported the reach of the financial sector and its benefits must be fully harnessed, its potential to disrupt financial stability has to be guarded against. As the financial system gets increasingly digitalized, cyber risks are growing and need special attention.”
The FSR has elaborated: “Technological advances powered by cryptography and distributed ledger technology (DLT) have led to the rise of new digital assets such as crypto assets and stablecoins, which generally have no underlying assets and are primarily used for speculative investments. The market value for crypto assets grew tenfold from early 2020 to late 2021 when it peaked at almost USD 3.0 trillion before recording a sharp decline below US $ 1 trillion in June 2022.”
“Cryptocurrencies, typically created on decentralized systems, are designed to bypass the financial system and all its controls, including Anti Money Laundering (AML), Combating Financial Terrorism (CFT) and Know Your Customer (KYC) regulations. They are characterized by highly volatile prices.
Currently, the market capitalization of a total of 19,920 cryptocurrencies trading on 528 exchanges stands at $908.7 billion, with Bitcoin accounting for 44 percent of this market capitalization,” the report explained.
Mincing no words, the FSR warns that cryptocurrencies are not currencies as they do not have an issuer and also that such private currencies have always posed risks. The report states: “Historically, private currencies have resulted in instability over time and in the current context, result in ‘dollarisation’, as they create parallel currency systems, which can undermine sovereign control over money supply, interest rates and macroeconomic stability. For developing economies, cryptocurrencies can erode capital account regulation, which can weaken exchange rate management. Furthermore, cryptocurrencies can lead to disintermediation from the formal financial system, impairing financial stability.”
The FSR of RBI added: Although the degree of cryptoization thus far appears limited, its growth circumvents restrictions on exchange rates and capital controls and limits the effectiveness of domestic monetary policy transmission, posing a threat to monetary sovereignty. Problems with these assets such as price crashes. could spill over to payment systems and adversely affect real economic activity.”
On a positive note, this year’s FSR has stated that the Indian economy is on the path of recovery. The report has also said that Indian banks and non-banking financial institutions have sufficient capital to withstand shocks. RBI has, however, cautioned that inflationary pressures and geopolitical risks should be handled carefully and monitored closely.
In his foreword, Das has stated: “Overall, the financial stability risks to the Indian economy are skewed towards global spillovers and geopolitical tensions. Nevertheless, the Indian financial system exhibits underlying robustness and resilience to withstand these shocks.
Other highlights of the FSR:
* The outlook for the global economy is shrouded by considerable uncertainty because of the war in Europe, front-loaded monetary policy normalization by central banks in response to persistently high inflation and multiple waves of the COVID-19 pandemic.
* Notwithstanding the challenges from global spillovers, the Indian economy remains on the path of recovery, though inflationary pressures, external spillovers and geopolitical risks warrant careful handling and close monitoring.
* Banks, as well as non-banking financial institutions, have sufficient capital buffers to withstand shocks.
* The capital to risk weighted assets ratio (CRAR) of scheduled commercial banks (SCBs) rose to a new high of 16.7 percent, while their gross non-performing asset (GNPA) ratio fell to a six-year low of 5.9 per cent in March 2022.
* Macro stress tests for credit risk reveal that SCBs would be able to comply with the minimum capital requirements even under severe stress scenarios.