The second wave of the pandemic took a "grievous toll" on India, but the dented economic activity has started recovering from late-May, Reserve Bank Governor Shaktikanta Das said on Thursday.
In a first, Das flagged the rising data breaches and cyber attacks as a risk facing the economy, along with others like firming global commodity prices.
"The recovery that had commenced in the second half of 2020-21 was dented in April-May 2021, but with the wave of infections abating as rapidly as it had set in, economic activity has started to look up in late May and early June," Das wrote in his foreword to the bi-annual Financial Stability Report prepared by the RBI.
The report said the gross non-performing assets of banks have been stable at 7.5 per cent in March 2021 -- the same level as six months ago -- but are expected to go up to 9.8 per cent in March 2022, as per its baseline scenario.
Das said the dent on balance sheets and performance of financial institutions in India have been much less than what was projected earlier, but was quick to add that a clearer picture will emerge as the effects of regulatory reliefs fully work their way through.
He also said capital and liquidity buffers at financial institutions are "reasonably resilient" to withstand any future shocks.
The financial system is on the front foot to aid recovery, but the priority is to maintain and preserve financial stability, he said.
Domestic financial markets are also boosted by the strengthening signs of the pandemic's abatement, the growing pace and breadth of the vaccination drive and renewed hopes of the economy clawing back lost ground as it unlocks, he said.
"...while the recovery is underway, new risks have emerged on the horizon and these include the still nascent and mending state of the upturn, vulnerable as it is to shocks and future waves of the pandemic; international commodity prices and inflationary pressures; global spillovers amid high uncertainty; and rising incidence of data breaches and cyber attacks," he said.
The governor emphasised that sustained policy support accompanied by further fortification of capital and liquidity buffers by financial entities remain vital to tackle the risks.
The financial system can take the lead in creating the conditions for the economy to recover and thrive, he said, adding that stronger capital positions, good governance and efficiency in financial intermediation will be the touchstones of this endeavour.