RBI’s Financial Stability Warning: Why Global Shocks Still Pose Risks to India’s Growth Story

Even as India continues to post strong growth driven by domestic demand, the global environment remains unsettled — and that uncertainty could spill over into India’s economy and financial system. This is the central message of the latest Financial Stability Report (FSR) released by the “Reserve Bank of India”, which flags near-term risks from geopolitics, trade tensions and volatile global financial markets, even while underlining India’s underlying resilience.

What does the RBI’s Financial Stability Report say?

The FSR acknowledges that the Indian economy has remained on a strong footing despite persistent global headwinds. Robust domestic consumption, sustained investment activity and relatively benign inflation have helped cushion the impact of external shocks.

However, the RBI cautions that external uncertainties — particularly geopolitical conflicts and trade-related disruptions — pose tangible near-term risks. These could increase exchange rate volatility, dampen global trade, compress corporate earnings and reduce foreign capital inflows. A sharp correction in U.S. equity markets, the RBI warned, could transmit stress to Indian markets and tighten domestic financial conditions.

Why global uncertainty worries the central bank

In his foreword to the report, RBI Governor “Sanjay Malhotra” noted that the outlook for 2026 and beyond is “shrouded in uncertainty”. He pointed out that major policy shifts reshaping the global economic landscape remain fluid and largely untested, increasing the risk of unintended consequences.

According to the RBI, the global financial system remains vulnerable due to a combination of stretched valuations of risk assets, expanding public debt across economies, and growing interconnectedness between banks and non-bank financial institutions (NBFIs). This interconnectedness, while supporting credit flows, can also amplify shocks when stress emerges in one segment of the system.

The rise of new financial risks

The FSR highlights that the financial landscape is changing rapidly, driven by technological advances and the growing role of non-bank financial intermediation. While these trends offer efficiency and innovation, they also introduce new layers of risk.

The RBI specifically flags emerging concerns such as the rise of stablecoins and the expansion of private credit markets. These segments often operate outside traditional regulatory perimeters, raising questions about transparency, leverage and contagion risks during periods of stress.

A resilient global economy — but not without scars

Despite a challenging year marked by geopolitical conflicts, trade frictions and persistent policy uncertainty, the RBI notes that the global economy has proven more resilient than initially expected. Financial systems across major economies have remained largely stable, avoiding the kind of systemic stress seen in past crises.

Yet this resilience, the central bank suggests, should not breed complacency. Elevated asset prices and high debt levels mean that shocks — if they materialise — could still be abrupt and destabilising.

Why India is better placed than many peers

On the domestic front, the RBI paints a largely reassuring picture. The Indian economy and financial system, it says, remain robust and resilient, supported by strong growth momentum, healthy balance sheets of banks and corporates, and sizeable policy buffers.

Inflation has remained manageable, while prudential reforms over recent years have strengthened the financial sector’s shock-absorbing capacity. Banks and NBFIs, according to the report, are well-capitalised and maintain comfortable liquidity buffers, enabling them to withstand adverse scenarios.

The RBI’s approach: guardrails, not complacency

While projecting high growth driven by domestic consumption and investment, the RBI is careful to stress that near-term challenges from external spillovers cannot be ignored. The emphasis, therefore, is on building and maintaining strong “guardrails” — through prudent regulation, close monitoring of systemic risks, and adequate capital and liquidity buffers.

The message from the FSR is nuanced: India’s growth story remains intact, but it unfolds in a world marked by volatility and structural change. Navigating this phase will require constant vigilance, adaptive policymaking and a clear-eyed assessment of emerging risks — global and domestic alike.