Mumbai: The Reserve Bank of India signaled the disconnect between the real economy and the exuberance of the stock markets during the Covid era, and signaled a swift withdrawal of liberal measures to counter the slowdown as soon as the economy returns to the normal.

There is “a growing disconnect between movements in certain segments of financial markets and activity in the real sector,” wrote RBI Governor Shaktikanta Das in the latest Financial Stability Report. “Once we enter the post-pandemic phase, the focus will be on the calibrated flow of regulatory and other exemptions. ”

The RBI governor’s warning comes amid a sharp rally in stocks when the lockdown resulted in businesses shutting down for months and lost revenue. Economists forecast a contraction of gross domestic product of more than 5% and an increase in defaults. But the benchmark Sensex has climbed more than 45% since its March lows. The central bank has declared a moratorium on payments for six months until the end of August.

While the RBI’s financial stability report does not provide an assessment of what the impact of the moratorium might be on banks, it warned that banks could see an increase in defaults. He said that in the first weeks of the moratorium, nearly half of borrowers across the spectrum took advantage of the benefit. The bank has since said these decline as cash flow improves.

“The regulatory waivers that the pandemic has necessitated in terms of a moratorium on loan disbursements and deferral of interest payments may have implications for the financial health of SCBs,” he said.

The bad debt situation, which has calmed down in recent quarters, could worsen again.

“Stress tests indicate that the GNPA (gross non-performing assets) ratio of all banks could drop from 8.5% in March 2020 to 12.5% ​​by March 2021 in the baseline scenario,” he said. -he declares. “If the macroeconomic environment deteriorates further, the ratio could climb to 14.7% under a very stressed scenario. ”

Since March, the central bank has implemented numerous measures, including interest rate cuts and flooded the market with liquidity. But public finances could still distort, he said.

“Central government finances are expected to suffer some deterioration in 2020-21, with tax revenues hit hard by COVID-19-related disruptions, although spending is strained due to the fiscal stimulus,” said the FSR.

Another worrying trend in financial markets is the slowdown in corporate deleveraging and the unproductive use of borrowed funds.

“The deleveraging of the private business sector in recent years has stagnated in the second half of 2019-2020, with leverage ratios (as measured by the debt-to-asset ratio) increasing due to the increase in borrowing,” he said. he declared. “The additional borrowings were used for the creation of financial assets (loans and advances to subsidiaries / other companies and financial investments) and not for the formation of investments, as demand conditions remained moderate.