Macroprudential surveillance of the financial system is conducted on an on-going basis aimed at identifying the nature, magnitude and implications of systemic risks that may have bearing on the macroeconomic environment, financial institutions, markets and infrastructure. The purpose is to keep the policy makers informed about the existing / emerging fault lines and undertake pre-emptive policy responses to the incipient risks in the financial system.

Financial Stability Report (FSR) acts as a communication tool of the central bank in limiting instability by pointing out the key risks and vulnerabilities, which may have systemic impact, to policy makers, market participants and the public at large. It reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC-SC) on risks to financial stability and the resilience of the financial system in the context of contemporaneous issues relating to development and regulation of the financial sector. A biannual Systemic Risk Survey is also conducted to gauge perceptions of market participants and other stakeholders about the key sources of risk to the Indian financial system and is published as a part of the FSR.

Macro Stress tests and Sensitivity Analyses 

Stress tests are tools designed to test the resilience of the financial system to extreme but plausible shocks. Macro stress tests are performed to assess the vulnerability of bank balance sheets to hypothetical but plausible macroeconomic stress scenarios. Macro stress tests for assessment of credit risk broadly involve three steps: (i) designing of a baseline and two adverse macroeconomic risk scenarios, (ii) projection of asset quality indicators (GNPA ratios) at bank-group level and at aggregate level and (iii) projection of capital adequacy indicators (capital ratios) at bank-level, under baseline and adverse macroeconomic scenarios. A battery of single-factor stress tests (sensitivity analyses) are also conducted as part of quarterly surveillance. These tests assess credit risk, credit concentration risk, sectoral credit risk, market risk, equity price risk and liquidity risk of scheduled commercial banks.

Network and Contagion Analysis

FSU carries out network analysis of bilateral exposures between entities in the financial sector to gauge the level of interconnectedness in the financial system. Contagion analysis is performed to assess systemic risk in the banking sector arising out of failure of large banks, non-banking financial companies or housing finance companies.

Banking Stability Indicator

The banking stability map and indicator present an overall assessment of changes in underlying conditions and risk factors that have a bearing on the stability of the banking sector during a period.

The FSDC-SC has been set up under the chairmanship of Governor, RBI. Its members include the heads of all other financial sector regulators (SEBI, IRDAI, PFRDA, IBBI & IFSCA), Secretaries of the Departments of Economic Affairs, Financial Services, Revenue, the Chief Economic Adviser and the Secretaries of the Ministry of Corporate Affairs and the Ministry of Electronics and Information Technology and the Secretary (FSDC). Executive Director, RBI (in charge of Financial Stability) is the Member Secretary.

The Sub-Committee assists the FSDC in dealing with issues related to (i) financial stability, (ii) financial sector development, (iii) inter-regulatory co-ordination, (iv) financial literacy, (v) financial inclusion, (vi) macro-prudential supervision of the economy etc. Financial Stability Unit (FSU) of RBI serves as the Secretariat for the Sub-Committee and handles the responsibilities relating to convening meetings of the FSDC-SC.