Global imbalances, oil pose risks: RBI

However, the apex bank in its report released today said main risks to corporate sector and banks’ balance sheets emanate from their domestic operations and near-term outlook in this respect continues to be positive.

Global financial imbalances continue to grow with the US current account deficit now ruling above 6 per cent of its GDP, said the report on trend and progress of banking in India 2004-05.

There is a risk of currency re-adjustments that could cause heightened volatility in the financial markets through changes in exchange rate and interest rate, it said.

“Abrupt and sharp readjustment of currencies and consequent rise in interest rates increases the risk of economy to reversal of capital flows with its attendant implications for the exchange rate and asset prices and banks’ balance sheets,” the Reserve Bank said. In the event of a sharp rise in interest rate, banks may suffer significant marked to market losses on their investment portfolio, the report said, adding banks may also face increased risks on account of their exposure to the asset market.

There is a risk that rise in interest rates, in general,could impact the housing prices and expose the balance sheets of the households to interest rate risk, the RBI said.

‘‘This, in turn, could impact banks’ balance sheets through increase in loan losses,’’ the report on the banking sector said.

Likewise, the equity market has also seen a sustained uptrend. Reversal of capital flows could impact the equity market and some of the advances extended for investments in the equity market might turn non-performing.

‘‘Some banks also have a direct exposure to the equity market,’’ the banking regulator said. However, it added that although decline in asset prices could cause loan and capital losses, they may not make any significant impact to the banks’ balance sheets, given their limited exposures to the asset markets.

Pointing out that global oil prices continue to remain high and volatile, the Reserve Bank said rise in oil prices could affect the economy directly as India is dependent heavily on oil imports.