Though the Indian economy, despite persistent global challenges, continues to grow strongly on the back of robust domestic demand, it and the financial system faces near-term risks from external uncertainties – geopolitical and trade related, the Reserve Bank of India (RBI) said in the Financial Stability Report (FSR), its half yearly publication, which was released on Wednesday (December 31, 2025).
“These factors could increase exchange rate volatility, dampen trade, reduce corporate earnings, and lower foreign investment. A sharp correction in U.S. equities could influence domestic equities and tighten financial conditions,” the central bank cautioned in the report.
In the foreword of the FSR, Governor Sanjay Malhotra said the outlook for 2026 and beyond was shrouded in uncertainty as the contours of policies that were reshaping the global economic landscape remained fluid and untested.
“The global financial system in this challenging backdrop remains vulnerable to stretched valuations of risk assets, expanding public debt and growing interconnectedness among banks and Non-Bank Financial Institutions (NBFIs),” he flagged.
“Alongside, the financial landscape is evolving rapidly, driven by profound technological advances and the continued rise of non-bank financial intermediation. While they bring immense opportunities, they are also adding new layers of risks, such as the rise of stablecoins and private credit,” he emphasised.
Stating that though the year 2025 was challenging as geopolitical conflicts, trade tensions, and persistent policy uncertainty cast a shadow over the global economy and the financial system, he said amidst these developments, the world economy had proven to be more resilient than anticipated and the financial system remained steady.
He said the Indian economy and the financial system remained robust and resilient supported by strong growth, benign inflation, healthy balance sheets of financial and non-financial firms, sizeable buffers and prudent policy reforms.
“Despite a volatile and unfavourable external environment, the Indian economy is projected to register high growth, driven by strong domestic consumption and investment. Nonetheless, we recognise the near-term challenges from external spillovers and continue to build strong guardrails to safeguard the economy and the financial system from potential shocks,” he stated.
In the FSR the RBI said Banks and NBFIs remained healthy, bolstered by strong capital and liquidity buffers, robust earnings and improved asset quality. “Stress tests also endorse the resilience of banks and non-banking financial companies. Financial markets, however, remain susceptible to global spillovers,” it pointed out.
The FSR which has been prepared with contributions from all financial sector regulators, presents the collective assessment of the Sub Committee of the Financial Stability and Development Council on current and emerging risks to the stability of the Indian financial system.
In the global context risks to the outlook remain skewed to the downside due to still elevated uncertainty, high public debt, and the risk of a disorderly market correction as per the FSR.
“Financial markets appear strong on the surface but show growing underlying vulnerabilities. Sharp rise in equities and other risk assets, high hedge funds’ leverage, expanding opaque private credit markets and growth of stablecoins all heighten global financial system fragilities,” it said.
“Ample liquidity is supporting risk-on sentiment across asset classes, but a sharp correction – especially if AI optimism fades – could spill over to the broader financial system, given rising interconnectedness,” it cautioned.
It said though a sharp correction in U.S. equities could influence domestic equities and tighten financial conditions, the economy and financial system could withstand adverse shocks due to strong buffers, it stated.
As per the FSR the health of the Scheduled Commercial Banks (SCBs) remains sound with strong capital and liquidity buffers, improved asset quality and robust profitability.
“Macro stress test results affirm the resilience of SCBs to withstand losses under hypothetical adverse scenarios and maintain capital buffers well above the regulatory minimum. Stress tests also confirm the resilience of mutual funds and clearing corporations,” it said.
“Non-Banking Financial Companies (NBFCs) remain robust supported by strong capital buffers, solid earnings and improving asset quality. The insurance sector continues to display balance sheet resilience and the consolidated solvency ratio remained above the minimum threshold limit,” it concluded.
Published – December 31, 2025 06:06 pm IST
