India's financial system remains vulnerable to continued tension in advanced country financial markets, the International Monetary Fund said in its Financial System Stability Assessment Update on Tuesday.

Going forward, the IMF said enhanced central bank monitoring of corporate indebtedness, refinancing risk, and foreign exchange exposures, appears warranted because of their role as a potential channel of contagion.

The financial system faces near-term risks from worsening bank asset quality and renewed pressures on systemic liquidity, it noted. Nonetheless, stress tests did not reveal near-term stability concerns indicating that the system would be resilient to a range of adverse shocks.

The Washington-based lender urged regulators to reduce the mandatory holdings of government securities by banks and allow them to access private sources of capital.

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