The systemic risk survey (SRS), the fifteenth in the series, was conducted during October-November 2018 to capture the perceptions of experts, including market participants, on the major risks presently faced by the financial system. According to the survey results while financial market risks are perceived as a high-risk category affecting the financial system global risks, risk perception on macroeconomic conditions and institutional positions are perceived as medium risks affecting the financial system (Figure 1).

Within global risks, the risk on account of commodity prices (including crude oil prices) was categorised as high risk. Within the macroeconomic risks group, risks on account of decreasing capital inflows, higher current account deficit¹ and corporate sector vulnerabilities moved from medium to high risk category. Risks to domestic growth, domestic inflation, fiscal deficit, pace of infrastructure development, real estate prices and household savings continued to be in medium risk category in the current survey. In the financial market risks category equity price volatility, foreign exchange risk and liquidity risk moved from medium to high risk category. Among the institutional risks, the asset quality deterioration of banks, risk on account of additional capital requirement and cyber risk continued to be perceived as high risk factors (Figure 2).

Participants opined that ability of Centre and State governments to maintain fiscal discipline in the wake of the upcoming general elections would be essential in uplifting market sentiments. Tightening global liquidity with a further appreciation of the U.S. dollar could lead to a reversal of capital flows with attendant risks to the current account. Market participants expect the volatility to remain elevated ahead of the general elections accentuated by the uncertain global environment due to trade tensions.

About 50 per cent of the respondents feel that the prospects of Indian banking sector are going to improve marginally in the next one year supported by stabilisation of the IBC process (Chart 1).

Majority of the participants in the current round of survey expect the possibility of occurrence of a high impact event in the global financial system or in the Indian financial system to be medium in the short term (upto 1 year) as well as in the medium term (1 to 3 years). There was a decrease in the number of respondents in the current survey who were fairly confident of the stability of the global financial system (Chart 2).

Majority of the respondents were of the view that the demand for credit in the next three months would increase marginally. Average credit quality is also expected to improve marginally in the next three months. (Chart 3).

¹ The survey was launched on October 10, 2018 and concluded before the decline in oil prices and moderation of strength of US dollar.