India’s financial sector stability risks remain contained, but recurring external shocks could spill over and affect the macroeconomic outlook, the Reserve Bank of India (RBI) said in its Financial Stability Report (FSR) released on Tuesday. However, the central bank asserted that strong fundamentals provide “ample buffers” to withstand potential disruptions.
The Indian economy remains vulnerable to energy price shocks and supply chain disruptions, but the financial system’s resilience is supported by strong balance sheets of banks and non-bank financial companies (NBFCs), the report said.
According to the RBI, banks’ aggregate gross non-performing asset (GNPA) ratio is projected to remain at 1.9% over the next three years under the baseline scenario. Banks are supported by strong capital and liquidity buffers, stable profitability and continued improvement in asset quality.
Under a severe stress scenario, the GNPA ratio could rise to 3.8-4.1%, but no bank would fall below minimum capital requirements. The banking system’s aggregate capital ratio is projected at 15.6% by March 2028 under the baseline scenario and could decline to 13-13.3% under severe stress conditions.
The central bank said one or two banks could breach minimum capital norms under extreme stress, but all banks would continue to meet the common equity tier-I capital requirement across stress-test scenarios.
RBI Governor Sanjay Malhotra, in his foreword, said inflationary pressures could force advanced economies to maintain a hawkish monetary policy stance, potentially tightening global financial conditions. He highlighted risks from high public debt, bond market vulnerabilities, stretched asset valuations and the growing role of leveraged non-bank financial intermediaries.
“The Indian economy and the financial system have demonstrated remarkable resilience despite facing external shocks of significant magnitude,” Malhotra said.
Strong growth, low inflation, healthy balance sheets of financial and non-financial firms, and adequate buffers have helped preserve macro-financial stability, he added. However, the RBI remains watchful of evolving domestic and global risks and is strengthening safeguards against potential shocks.
The report noted that strong capital inflows could help offset funding pressures arising from a widening current account deficit. At the same time, it said funding challenges remain a key concern despite the resilience of the banking system.
The RBI’s assessment comes amid a global environment marked by recurring shocks, tighter financial conditions and geopolitical uncertainty. Domestic financial system stress remains low compared with previous crisis periods, it said.
Global risks remain elevated, with uncertainties around supply chains, inflation and monetary policy continuing to weigh on stability. The RBI said vulnerabilities from elevated public debt, bond market fragilities, high asset valuations and leveraged non-bank financial intermediaries could amplify future shocks.
The central bank warned that exchange rate volatility could rise if oil prices increase due to delayed supply chain normalisation and inventory rebuilding. A sharp correction in global equity markets, particularly due to concerns over corporate earnings growth and high valuations in artificial intelligence-related stocks, could also spill over into domestic markets.
The report said India’s macroeconomic fundamentals remain stronger than those of many peers and compared with previous crisis episodes, providing important buffers against external shocks. A resilient financial system, supported by well-capitalised banks and NBFCs, continues to limit the risk of systemic stress spilling over into the real economy.
The RBI added that the balance of risks has improved, supported by the easing of tensions in the West Asia conflict and recent policy measures by the government and the central bank to strengthen capital inflows.