Abstract: India's economy has been growing at a relatively fast pace for years, but GDP growth rate has slowed since reaching a record high of 8.3% in 2016 and fell to 3.1% in the first quarter of 2020. At the same time, India's economy has structural and cyclical problems, which increased risks to the financial system. In order to assess and predict the stability of India's financial system, this paper uses index synthesis and stress testing to carry out an empirical analysis based on existing studies. It shows that in the short term, due to economic reform, demographic dividends and other factors, India's economy is unlikely to decline significantly, and the possibility of financial crisis is less likely. In the medium to long term, in the absence of effective structural reform and reform in the legal system reform, the risk of financial system will increase to a medium range, but the probability of an outbreak of financial crisis is still small. Unless India's macroeconomic deterioration accelerates in the future, financial risks won’t build up to a high range and the probability of a crisis won’t rise significantly. This paper builds a currency crisis early warning model to identify factors of currency crisis and assess the probability of currency crisis in India in the next few years. Logit-model shows that decline in net savings/GDP or GDP per capita or export to GDP ratio and rise in foreign debt to GDP ratio will lead to higher probability of currency crisis, and the probability of currency crisis will increase year by year starting from 2020. Still, if the response is timely and effective, the likelihood of a currency crisis triggering a financial crisis remains low.
Full text: A Study on the Stability of India’s Financial System
