The RBI, as the central bank of the country, is also responsible for ensuring financial stability. Broadly, one can say that when a country’s fiscal position is strong, its capacity to take on the risks arising from the failure of financial institutions is higher.
On the other hand, with a weak fiscal situation, the capacity to take care of a financial or banking crisis is rather limited. More important, whenever pockets of vulnerability arise in the financial sector, the headroom available in the fiscal position to provide succour to financial entities needs to be assessed.