Economy showing signs of getting back to normalcy: RBI Governor

India's economy is showing signs of getting back to normalcy, Reserve Bank of India Governor Shaktikanta Das said on Saturday.

In a keynote address at the 7th SBI Banking and Economics Conclave, Das noted that medium term outlook still remains uncertain.

"Despite the substantial impact of pandemic in our daily lives, the financial system of the country, including all the payment systems and financial markets, are functioning without any hindrance," he said.

"The Indian economy has started showing signs of getting back to nor malcy in response to the staggered easing of restrictions. It is, however, still uncertain when supply chains will be restored fully; how long will it t ake for demand conditions to normalise; and what kind of durable effects the pandemic will leave behind on our potential growth."

He elaborated that a multi-pronged approach adopted by the Reserve Bank has provided a cushion from the immediate impact of the pandemic on banks, however, the medium-term outlook is uncertain and depends on the Covid-19 curve.

"Policy action for the medium-term would require a careful assessment of how the crisis unfolds. Building buffers and raising capital will be crucial not only to ensure credit flow but also to build resilience in the financial system."

According to Das, the Reserve Bank has asked financial institutions to carry out a Covid stress test to see weaknesses in their balance sheet.

"We have recently advised all banks, non-deposit taking NBFCs and all deposit-taking NBFCs to assess the impact of Covid-19 on their balance sheet, asset quality, liquidity, profitability and capital adequacy for the financial year 2020-21.

"Based on the outcome of such stress testing, banks and non-banking financial companies have been advised to work out possible mitigating measures, including capital planning, capital raising, and contingency liquidity planning, among others. The idea is to ensure continued credit supply to different sectors of the economy and maintain financial stability," Das said.

In addition, he said that post containment of Covid-19, "a very careful trajectory has to be followed in orderly unwinding of counter-cyclical regulatory measures and the financial sector should return to normal function ing without relying on the regulatory relaxations as the new norm".

"The Reserve Bank is making continuous assessment of the changing trajectory of financial stability risks and upgrading its own supervisory framework to ensure that financial stability is preserved," he said.

"Banks and financial intermediaries have to be ever vigilant and sub stantially upgrade their capabilities with respect to governance, assurance functions and risk culture."