The global economy and the financial system are being reshaped by two profound forces—growing geopolitical fragmentation and technological disruption brought about by rapid advances in artificial intelligence (AI). Despite ongoing conflicts and persistent supply chain disruptions, the global economy has remained resilient—buoyed partly by optimism around potential AI-driven productivity gains. The near-term outlook, however, remains uncertain amidst the rapidly evolving global environment. Against this backdrop, the global financial stability risks remain elevated. Inflationary pressures may require major advanced economy central banks to maintain a hawkish policy stance, potentially tightening global financial conditions. Meanwhile, vulnerabilities associated with high public debt, bond market fragilities, stretched asset valuations, and the growing footprint of leveraged non-bank financial intermediaries could amplify the impact of future shocks. The Indian economy and the financial system have demonstrated remarkable resilience despite facing external shocks of significant magnitude. Strong growth, low inflation, healthy balance sheets of financial and non-financial firms, and ample buffers have helped preserve macro-financial stability. Nevertheless, we remain alert to evolving external and domestic risks and are committed to further strengthening the guardrails that protect our economy and financial system from potential shocks. This edition of the Financial Stability Report reaffirms the strength of the domestic financial system. Banks and non-banking financial institutions remain sound, supported by strong capital and liquidity positions, healthy profitability, low levels of non-performing assets, and robust credit growth. Stress tests indicate that the financial institutions are well-positioned to withstand adverse shocks. Financial markets, notwithstanding the volatility posed by global uncertainties, have been functioning in an orderly manner. Taken together, the financial system remains a key source of strength and support for the real economy and India’s growth momentum. We acknowledge that the risk of adverse external shocks has increased, with geopolitical conflicts and fragmentation emerging as key challenges for policymakers. In this environment, preserving financial stability, strengthening the financial system and building systemic resilience have become more important than ever. We recognise that maintaining public confidence in the financial system requires more than prudential soundness. Policies that promote fair conduct and improve customer experience are equally important. Our objective, therefore, remains unchanged: we want to foster a financial system that is not only resilient and stable, but also efficient, inclusive, and dynamic—a system which supports businesses and households to participate and grow in a well-functioning economy. Sanjay Malhotra
Governor June 30, 2026 |