However, with every percentage point increase in the fiscal deficit, maintaining adequate liquidity in the system becomes that much more difficult. Managing this trade off between our short term compulsions and longer term sustainability will be one of the big challenges going forward. Looking ahead – financial stability Beyond monetary and fiscal policies, preserving financial stability is key to navigating these uncertain times.
A sound and resilient banking sector, well-functioning financial markets, robust liquidity management and payment and settlement infrastructure are the prerequisites for financial stability. The banking sector in India is sound, adequately capitalized and well-regulated. By all counts, Indian financial markets are capable of withstanding the global shock, perhaps somewhat bruised but definitely not battered. But how sure can we be?