Global Financial Stability Report 2024

Context:

The International Monetary Fund (IMF) has released the Global Financial Stability Report 2024, focusing on ‘The Last Mile: Financial Vulnerabilities and Risks.’ The report cautions about the risks to the global financial system stemming from persistent high inflation, escalating lending in the unregulated credit market, and growing cyber-attacks targeting financial institutions.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

1. Global Financial Stability Report (GFSR)
2. IMF’s Concerns About Inflation
3. Private Credit Market in India

Global Financial Stability Report (GFSR)

• The GFSR is a semiannual report by the International Monetary Fund (IMF) that evaluates the stability of global financial markets and emerging-market financing.
  • Released twice a year, in April and October.

Key Focus:

• Assesses current market conditions and highlights systemic issues that could threaten financial stability and sustained market access for emerging market borrowers.
• Draws out financial implications of economic imbalances identified by the IMF’s World Economic Outlook.

IMF’s Concerns About Inflation:

• The IMF has noted a rising investor enthusiasm that the fight against high inflation in recent years is nearing its end.
• Contrary to this optimism, the IMF believes that investor expectations of slowing inflation and potential interest rate cuts by central banks may be premature.
• In some major advanced and emerging economies, the decline in inflation seems to have stalled, with recent core inflation rates higher than in previous months.
• Geopolitical risks, such as the ongoing wars in West Asia and Ukraine, could disrupt aggregate supply and drive up prices, possibly preventing central banks from reducing rates soon.

Implications for India:

• Strong fund flows into emerging markets have been driven by optimism over central banks easing interest rates.
• In 2023, India was the second-largest recipient of foreign capital after the U.S.
• If western central banks indicate a long-term high-interest rate policy, it could prompt investors to withdraw from emerging markets like India, increasing pressure on their currencies.
• The Indian rupee has already depreciated, reaching a new low of 83.57 against the U.S. dollar despite likely intervention by the Reserve Bank of India (RBI).
• A significant outflow of capital could further devalue the rupee and impact the country’s financial system.
• In such a scenario, the RBI may defend the rupee by reducing liquidity to raise interest rates, potentially slowing down the economy.

Concerns About the Private Credit Market:

• The IMF has expressed concerns about the growing unregulated private credit market, where non-bank financial institutions lend to corporate borrowers.
• Many borrowers in this private credit market may not be financially robust, with their current earnings often not exceeding their interest costs.

Private Credit Market in India:

• India has witnessed the growth of a small private credit market with the emergence of Alternative Investment Funds (AIFs).
  • These funds lend money to high-risk borrowers not served by traditional banking systems and non-bank financial companies.
  • They have also invested in distressed assets under the Insolvency and Bankruptcy Code (IBC) regime.
• According to SEBI, investments through these funds have more than tripled from ₹1.1 lakh crore in 2018-19 to ₹3.4 lakh crore in 2022-23.
• Both the RBI and SEBI have observed this trend and increased scrutiny over these funds.

-Source: The Hindu