Reserve Bank of India governor Shaktikanta Das. Photo: AFP

The Reserve Bank of India said the second wave of the Covid-19 pandemic has taken a “grievous toll” on the economy, but expressed hope and added that signs of recovery were visible.

In his foreword to the annual Financial Stability report, Governor Shaktikanta Das said: “The recovery that had commenced in the second half of 2020-21 was dented in April-May 2021, but with the wave of infections abating as rapidly as it had set in, economic activity has started to look up in late May and early June.”

The central bank publishes this report biannually and it reflects the collective assessment of the Sub-committee of the Financial Stability and Development Council on risks to financial stability.

Das said that gross non-performing assets of banks have been stable at 7.5% in March 2021 – the same level as six months ago – but may go up to 9.8% by March next year, according to its baseline scenario. The dent on balance sheets and performance of financial institutions in India have been much less than what was projected earlier, he added.

However, the governor also added that a clearer picture will emerge as the effects of regulatory relief fully work their way through. “Capital and liquidity buffers are reasonably resilient to withstand future shocks, as the stress tests presented in this report demonstrate,” Das observed.

The central bank governor said the financial system was on the front foot to aid recovery, but the priority was to maintain and preserve financial stability.

But he also expressed concern over the threat posed by “new risks.”

“These include the still nascent and mending state of the upturn, vulnerable as it is to shocks and future waves of the pandemic; international commodity prices and inflationary pressures; global spillovers amid high uncertainty; and rising incidence of data breaches and cyberattacks,” Das said.

This was the first time the governor had flagged the risks posed by data breaches and cyberattacks to the economy.

In the last fiscal year, the Indian economy recorded its first full-year contraction in four decades. It continues to face a demand slowdown and consumer price inflation in May breached the central bank’s upper threshold of 6%.

The central bank’s consumer confidence index fell to an all-time low in May as people’s perceptions of the general economic situation and employment scenario remain bleak.

Since the outbreak of coronavirus last year, the central bank has taken a series of measures to offer relief to stressed borrowers and cushion its likely impact on bank balance sheets. These included loan moratoriums, loan restructuring and a host of measures to induce liquidity in the healthcare sector.