Financial markets in India have acquired greater depth and liquidity over the years. Steady reforms sìnce 1991 have led to growing linkages and integration of the Indian economy and its financial system with the global economy. Weak global economic prospects and continuing uncertain-ties in the international financial markets therefore, have had their impact on the emerging market economies. Sovereign risk concerns, particularly in the Euro area, affected financial markets for the greater part of the year, with the contagion of Greece’s sovereign debt problem spreading to India and other economies by way of higher-than-normal levels of volatility.
The fundìng constraints in international financial markets could impact both the availability and cost of foreign funding for banks and corporates. Since the Indian financial system is bank dominated, banks’ ability to withstand stress is critical to overall financial stability. Indian banks, however, rcmain robust, notwithstanding a decline in capital to risk-weighted assets ratio and a rise in non-performing asset levels in the recent past. Capital adequacy levels remain above the regulatory requirements. The financial market infrastructure continues to function without any major disruption. With further globalization, consolidation, deregulation, and diversification of the financial system, the banking business may become more complex and riskier. Issues like risk and liquidity management and enhancing skill therefore assume greater signifìcance.
According to the passage, in the Indian fìnancial system, banks’ ability to withstand stress is critical to ensure overall fìnancial stability because Indian fìnancial system is