Rakesh Mohan, deputy governor of the Reserve Bank of India, said on Monday that it was only after the central bank took a slew of steps that the decline in the economy was arrested and that inflation is not a concern anymore.
The Indian financial system has ample liquidity, Mohan said, while addressing the annual general meeting of the Indian Merchants' Chambers in Mumbai.
RBI has been absorbing over Rs 1,00,000 crore (Rs 1 trillion) from banks through the reverse repo window under the liquidity adjustment facility (LAF). Banks are saddled with a huge amount of resources as the credit growth has moderated since late 2008.
In what was probably his last public speech before leaving for his teaching assignment at Stanford University, Mohan said that there were no problems with the banking sector in India and that all Indian banks were well-capitalised.
"Between 2004 and 2007, bank credit grew at 25-30 per cent and, despite this strong growth, there was no corresponding spike in non-performing assets of banks. Also, Indian banks have a negligible exposure to toxic assets which caused such a lot of turmoil in advanced economies," he said.
Mohan added that a stress test carried out on the banking sector had shown that Indian banks were capable of withstanding heavy shocks. However, he emphasised the need for financial institutions to build up their capital adequacy ratio beyond the required minimum when the going was good, as this would act as a buffer if the situation changed.
He also said that there was a need for active capital account management from emerging markets, such as India, which are affected by the cycling of capital flows from the advanced economies of the world.
Commenting on India's gross domestic product growth in the future, Mohan said, "I hope that, when I return from my stint at Stanford, India would be back on its 9 per cent growth trajectory for the next five years."