‘Virus poses serious threat to global financial system’
The ultimate impact, timing of recovery are uncertain, cautions FSDC
NEWDELHI: The Financial Stability and Development Council (FSDC) chaired by finance minister Nirmala Sitharaman on Thursday cautioned that the pandemic poses a serious threat to the stability of the global financial system as the ultimate impact of the crisis and the timing of recovery is uncertain at this point of time.
“While, decisive monetary and fiscal policy actions aimed at containing the fallout from the pandemic have stabilized investor sentiment in the short-run, there is a need to keep a continuous vigil by government and all regulators on the financial conditions that could expose financial vulnerabilities in the medium and long term. The efforts of the government and regulators are focused on avoiding a prolonged period of dislocation in financial markets,” the finance ministry said in a statement after the meeting.
Covid-19 has thrown the global economy into its worst recession since the Great Depression in the 1930s, and India is no exception. Domestic economic growth is expected to contract for the first time in forty years in FY21.
Crisil, Goldman Sachs and Fitch Ratings have projected the Indian economy to contract 5% during the current financial year. The Centre has announced a ₹20.9 trillion financial package including reform measures to help mitigate the economic fallout of the pandemic.
The FSDC discussed the initiatives taken by the government and the regulators to help revive the economy. “Government and the RBI have announced various fiscal and monetary measures to pre-emptively limit the economic damage and would continue to address the liquidity and capital requirements of the financial institutions,” the statement said.
In a report titled “Impact of covid-19 on the global financial system”, the World Economic Forum (WEF) last month said while financial system resilience, fiscal support, regulatory flexibility and liquidity provision to date have helped ensure that the financial system is supportive of economic recovery, a more protracted slowdown may present new risks to the financial system. “Whereas most advanced economies are addressing emerging recessions with large fiscal packages, many emerging-market and developing economies lack the fiscal space to adequately respond. Moreover, since the beginning of the crisis, investors have fled from emerging markets, with portfolio outflows exceeding those during the GFC and other periods of major stress,” it added.
The FSDC meeting also reviewed the current global and domestic macro-economic situation, financial stability and vulnerabilities issues, major issues likely to be faced by banks and other financial institutions as also regulatory and policy responses, solvency of non-bank financial institutions, housing finance companies and micro-finance institutions. “Besides, market volatility, domestic resource mobilisation and capital flows issues were also discussed by the Council,” the ministry said.
The WEF report said while in the short term, the focus should be on liquidity support, ultimately, governments might need to take equity in some firms in order to keep them afloat, which would require developing the tools to fairly, efficiently do so.
“As the crisis develops from a ‘liquidity phase’ into a ’solvency phase’, it will be necessary for governments to consider a range of policy tools, including efficient bankruptcy and restructuring systems, government guarantees and other support for private investments, programmes for sector-specific government equity injections, and establishing asset management companies,” the report said.