Dr. Gurbachan Singh
Professor, ISI, Delhi
Is India Hedged Against Systemic Risk?
of government bonds. These are rated low by international rating agencies. So there is a risk for banks which invest a large proportion of their funds in government bonds. At present, bank capital adequacy norms do not consider the risk in sovereign bonds but this will change once Basel III norms become operational. Second, consider the fiscal position of the Government of India (GOI). The debt to GDP ratio is high but is not alarming. However, the debt to revenue ratio in India is very high. This can be damaging. Moreover, there is concern about some state level debts (e.g. West Bengal). We also need to distinguish between liquidity and solvency. Even if the GOI and state governments are solvent in the long run context, there is a concern about possible liquidity problems in the short run. It is true that the real yields on GOI bonds are low which may indicate that government bonds are safe. However, this is deceptive because we do not have a truly market determined yield on GOI bonds, given the statutory liquidity ratio (SLR) regulation which ‘bails out’ the government. Furthermore, it is true that the GOI can raise funds from the Reserve Bank of
Introduction Is India hedged against systemic risk? The short answer is yes and no. The long answer follows in this article. Before I explain, let me say that this write-up is on a vast topic but the space is limited. So I will be brief. I will avoid hard theory, data and bibliography here though the points made here can be substantiated. The views expressed here are based on my own research on the subject. Before we begin, let us understand systemic risk. This runs through almost the entire economy unlike non-systemic risk which is confined to a part of the economy. Systemic risk relates to serious difficulties with regard to (1) non-performing assets (NPAs) or liquidity in financial institutions, (2) fiscal deficits, (3) current account deficit, (4) prices of financial and real assets, and (5) inflation. Let us consider each in the context of India. Usual possible systemic risks in India First, consider banks. There are rising NPAs in banks and other financial institutions in India. Banks also hold a large amount
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