Economic Survey 2011-12: Greece debt crisis, market volatility to make funds costlier

NEW DELHI: A prolonged debt crisis in Greece has begun spreading to India and the continuing volatility in global financial markets could make it more difficult and costlier for the Indian banks and corporates to get foreign funds, the Economic Survey said today.

"Greece's sovereign debt problem spreading to India and other economies by way of higher -than-normal levels of volatility," said the pre-Budget annual report card on the state of the economy, tabled in the Parliament by Finance Minister Pranab Mukherjee.
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Sovereign risk concerns, particularly in the eurozone area, affected financial markets for the greater part of the year, the survey noted.

Apart from India, the weak global economic prospects and continuing uncertainties in the financial markets have had impacted other emerging market economies as well.

The survey said that continuing uncertainties in the international financial markets may negatively impact the availability and cost of foreign funding for banks and corporates.

"The funding constraints in international financial markets could impact both the availability and cost of foreign funding for banks and companies, since the Indian financial system is bank-dominated and banks' ability to withstand stress is critical to overall financial stability," it added.

However, the survey said Indian banks remain robust, despite a decline in the capital to risk weighted assets ratio and spurt in their non-performing asset levels in the recent past.

It said that capital adequacy levels remain above the regulatory requirements in the country.

Although, liquidity situation tightened, but countervailing steps taken by government helped mitigate the strains.

Apart from global economic developments, rising trade imbalance, pace of reform initiatives to boost capital flows, and domestic growth concerns are likely to influence the movements in the Indian financial markets.

The survey said that Indian financial markets, especially currency and equity performed under pressure during the year.

Global market turmoil and moderation in capital inflows had resulted in currency stress during August-December 2011 and the rupee value had depreciated by more than 20 per cent during the period.

During the global crisis of 2008, India emerged largely unscathed due to its strict external commercial borrowings ( ECB).