Global Financial Stability Report

What’s in today’s article?

• Why in News?
• What is the Global Financial Stability Report (GFSR)?
• What is the IMF’s Worry About Inflation?
• What Does it Mean for India?
• What About the Private Credit Market?

Why in News?

• The International Monetary Fund (IMF) released the latest Global Financial Stability Report 2024 (with the central theme - ‘The Last Mile: Financial Vulnerabilities and Risks’).
• It warns about the risks to the global financial system from persistent high inflation, rising lending in the unregulated credit market, and increasing cyber-attacks on financial institutions.

What is the Global Financial Stability Report (GFSR)?

• The GFSR is a semiannual report by the International Monetary Fund (IMF) that assesses the stability of global financial markets and emerging-market financing.
  • It is released twice per year, in April and October.
• It focuses on current market conditions, highlighting systemic issues that could pose a risk to financial stability and sustained market access by emerging market borrowers.
• The Report draws out the financial ramifications of economic imbalances highlighted by the IMF's World Economic Outlook.

What is the IMF’s Worry About Inflation?

• The IMF has flagged rising enthusiasm among investors that the fight against high inflation over the last few years has almost come to an end.
• However, the IMF believes that investor enthusiasm about slowing inflation and a possible cut in interest rates by central banks may be quite premature.
• The fall in inflation has probably stalled in some major advanced and emerging economies where core inflation in the most recent 3 months has been higher than in the previous 3 months.
• The IMF has also warned that geopolitical risks such as the ongoing war in West Asia and Ukraine could affect aggregate supply and lead to higher prices.
  • This might stop central banks from lowering rates anytime soon.

What Does it Mean for India?

• The IMF notes that fund flows into emerging markets have been strong till now due to optimism over central banks easing interest rates.
• In fact, India was the second-largest recipient of foreign capital after the U.S., in the calendar year 2023.
• But things could change quickly if western central banks signal that they could keep interest rates high for a long time.
• This could cause investors to pull money out of emerging markets like India and increase pressure on their currencies.
• The Indian rupee has already been depreciating and traded at a new low of 83.57 against the U.S. dollar last week despite likely intervention by the Reserve Bank of India (RBI).
• A severe outflow of capital if western central banks fail to lower interest rates could cause further depreciation of the rupee and have effects on the country’s financial system.
• In such a scenario, the RBI is likely to defend the rupee by curbing liquidity to raise interest rates, which could cause the economy to slow down.

What About the Private Credit Market?

• The IMF in its report also noted that the growing unregulated private credit market, in which non-bank financial institutions lend to corporate borrowers, is a growing concern.
• The IMF is worried that the borrowers in the private credit market may not be financially sound and noted that many of them do not have current earnings that exceed even their interest costs.
• India has seen the growth of a small private credit market with the rise of Alternative Investment Funds (AIFs).
  • These funds lend money to high-risk borrowers who are not catered to by the traditional banking system and non-bank financial companies.
  • They have also invested in distressed assets that have come up for sale under the Insolvency and Bankruptcy Code (IBC) regime.
  • The SEBI notes that investments made through these funds, although still small, have more than tripled from ₹1.1 lakh crore in 2018-19 to ₹3.4 lakh crore in 2022-23.
  • As financial regulators, both the RBI and SEBI have been noticing this trend and tried to increase scrutiny over these funds.

Q.1. What is the IMF World Economic Outlook (WEO) for India?

According to the IMF's WEO, growth in India is projected to remain strong at 6.8% in 2024 (FY25) and 6.5% in 2025 (FY26), with the robustness reflecting continuing strength in domestic demand and a rising working-age population.

Q.2. What is the Insolvency and Bankruptcy Code (IBC)?

The IBC 2016 is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.

Source: What is the outlook on the global economy? | Explained