The Indian economy continues to show resilience despite a turbulent global backdrop, but near-term risks from geopolitical tensions, trade disruptions, and volatile financial markets remain significant. This is the central message of the latest Financial Stability Report released by the Reserve Bank of India, which flags that while domestic fundamentals are strong, external spillovers could test the economy and financial system in the coming years.
What the RBI’s Financial Stability Report highlights
The Financial Stability Report (FSR) assesses risks to India’s financial system and its capacity to absorb shocks. The RBI notes that robust domestic demand has sustained economic growth, but external uncertainties could still transmit stress through financial channels. Key risks identified include exchange rate volatility, moderation in trade flows, pressure on corporate earnings, and potential decline in foreign capital inflows.
External uncertainties and global spillovers
The RBI cautions that geopolitical conflicts and trade-related tensions could amplify volatility in global markets. A sharp correction in U.S. equity markets, for instance, may spill over into Indian equities, tightening domestic financial conditions. Such global shocks can affect investor sentiment, capital flows, and borrowing costs, even when domestic macroeconomic indicators remain stable.
Global financial system: vulnerabilities beneath resilience
In the foreword to the report, RBI Governor underlines that the outlook for 2026 and beyond is clouded by uncertainty. While the world economy has displayed more resilience than anticipated, the global financial system remains vulnerable due to:
- Stretched valuations of risk assets
- Rising public debt across economies
- Growing interconnectedness between banks and non-bank financial institutions (NBFIs)
Technological change and new-age financial risks
The report draws attention to the rapidly evolving financial landscape shaped by technological advances and the expanding role of non-bank financial intermediation. While innovations offer efficiency and inclusion, they also introduce new risks. The rise of stablecoins and private credit markets is cited as adding layers of complexity that regulators must closely monitor to prevent systemic vulnerabilities.
India’s relative resilience and policy buffers
Despite a volatile global environment in 2025, the RBI notes that India’s economy and financial system have remained robust. This resilience is attributed to strong growth momentum, relatively benign inflation, healthy balance sheets of banks and corporates, and sizeable policy buffers built over time. Prudent regulatory and supervisory reforms have also strengthened shock-absorption capacity.
Health of banks and non-bank financial institutions
The FSR points out that Indian banks and NBFIs are currently well-capitalised and liquid. Strong capital adequacy and liquidity buffers provide confidence that the financial system can withstand moderate stress scenarios, even if global conditions deteriorate.
What to note for Prelims?
- Financial Stability Report is published by the Reserve Bank of India.
- It assesses risks to the financial system and resilience of banks and NBFIs.
- Key risks flagged include global spillovers, asset price volatility, and emerging fintech risks.
What to note for Mains?
- Interlinkages between global financial markets and domestic stability.
- Role of domestic demand in insulating India from external shocks.
- Regulatory challenges posed by NBFIs, stablecoins, and private credit.
- Importance of capital buffers and prudent policy reforms in ensuring financial stability.
