Even as India sustains one of the fastest growth rates among major economies, the global environment in which this growth unfolds remains deeply unsettled. The latest Financial Stability Report (FSR) released by the Reserve Bank of India captures this dual reality with clarity: domestic fundamentals are strong, but external risks are rising. The report underscores a central policy challenge for India — how to preserve financial stability and growth momentum in a world marked by geopolitical conflict, trade tensions and volatile capital flows.
A reassuring domestic picture, with caveats
The FSR begins on a cautiously optimistic note. India’s economy has shown remarkable resilience despite global headwinds. Strong domestic consumption, steady investment activity and relatively contained inflation have insulated growth from external shocks. Corporate balance sheets have improved, banks are well-capitalised, and liquidity buffers remain comfortable across the financial system.
This resilience reflects years of prudential reforms, tighter supervision and lessons absorbed from past crises. Indian banks today are better placed to absorb stress than they were a decade ago, while non-bank financial institutions (NBFIs) operate under closer regulatory scrutiny than in the past.
Yet the RBI is careful not to project complacency. Stability, the report suggests, is a condition that must be continuously defended rather than assumed.
Why global uncertainty looms large
In his foreword, RBI Governor Sanjay Malhotra warns that the outlook for 2026 and beyond is “shrouded in uncertainty”. This uncertainty stems from multiple, overlapping global risks. Ongoing geopolitical conflicts threaten supply chains and energy markets. Trade tensions and protectionist measures are reshaping global commerce. Meanwhile, sharp shifts in monetary policy expectations in advanced economies continue to drive volatility in capital flows and exchange rates.
The RBI highlights a particularly important transmission channel: global financial markets. Elevated valuations in U.S. equity markets, if followed by a sharp correction, could spill over into emerging markets like India through portfolio outflows, currency depreciation and tighter financial conditions. In an increasingly interconnected world, even economies with strong domestic demand are not immune to global risk sentiment.
Structural vulnerabilities in the global financial system
Beyond immediate shocks, the FSR points to deeper structural vulnerabilities. Public debt levels across advanced and emerging economies remain historically high, limiting fiscal space to respond to future crises. At the same time, financial intermediation is increasingly shifting beyond traditional banks to NBFIs, private credit funds and market-based entities.
This growing interconnectedness between banks and non-banks can be a double-edged sword. While it diversifies sources of credit and supports growth, it also creates channels through which stress can spread rapidly. A problem in one segment can quickly cascade into others, amplifying systemic risk.
New-age risks: technology and finance
The report also flags emerging risks linked to technological change. Stablecoins, digital assets and private credit markets are expanding rapidly, often operating outside conventional regulatory frameworks. While these innovations promise efficiency and financial inclusion, they raise questions about transparency, leverage and consumer protection.
For central banks, the challenge lies in balancing innovation with stability. Overregulation can stifle progress, but regulatory blind spots can allow risks to accumulate unnoticed. The RBI’s emphasis on close monitoring reflects an awareness that future crises may originate in unfamiliar corners of the financial system.
Why India is relatively better placed
Despite these global and technological risks, the RBI believes India is better