Financial Stability in Unstable Times: RBI’s Assessment of the Indian Economy

Context: 

The Reserve Bank of India (RBI) released its Financial Stability Report (FSR) for June 2025 amid ongoing global economic uncertainty. The report assesses the resilience of India's financial system, evaluates potential risks, and provides insights for policymakers. Despite global headwinds, India continues to act as a key driver of global growth.

About Financial Stability Report (FSR)

• Published by: Reserve Bank of India (RBI)

• Frequency: Twice a year – in June and December

• Purpose:

  • To assess the health and stability of the Indian financial system

  • To identify and monitor systemic risks

  • To guide policy actions for ensuring financial resilience

Key Features:

• Covers: Banks, NBFCs, cooperative banks, mutual funds, and other intermediaries

• Stress Testing: Assesses banks’ ability to withstand adverse economic scenarios

• Policy Guidance: Offers inputs for maintaining macro-financial stability

Key Highlights from June 2025 Report

1. India: A Global Growth Engine

• Despite global challenges, India continues to drive global economic growth

• Growth is supported by:

  • Strong domestic demand

  • Sound macroeconomic fundamentals

  • Prudent fiscal and monetary policies

2. GDP Growth Outlook

• Real GDP growth for FY2026 is projected at 6.5%

• However, growth is slightly constrained due to:

  • Global economic uncertainty

  • Disruptions in international trade

  • Elevated geopolitical tensions

3. External and Climate-Linked Risks

• Rising external threats include:

  • US tariffs

  • Fragmentation of global trade

• Climate-related risks:

  • Weather shocks affecting agriculture, inflation, and growth

• Geopolitical unpredictability further intensifies global economic volatility

Inflation and Monetary Policy

• May 2025 CPI inflation stood at 2.8% – lowest since February 2019

• Well within the RBI’s target range of 4% ± 2%

• RBI expresses confidence in maintaining durable price stability under the Flexible Inflation Targeting (FIT) framework

Resilience of Indian Financial System

1. Scheduled Commercial Banks (SCBs)

• SCBs are in strong health, backed by:

  • Multi-decadal low NPAs

  • Robust capital adequacy

  • Healthy earnings

• Stress tests confirm banks can withstand severe economic shocks

2. Non-Banking Financial Companies (NBFCs)

• Exhibit:

  • Sizable capital buffers

  • Improving asset quality

  • Strong profitability

• Contribute positively to credit flow and financial inclusion

3. Insurance and Mutual Funds

• Insurance sector maintains a solvency ratio well above regulatory minimum

• Mutual funds and clearing corporations show high resilience to market stress

4. Corporate Sector

• Indian corporates have:

  • Deleveraged balance sheets

  • Sustainable profitability

• Remain a pillar of macroeconomic and financial stability

Supportive Financial Conditions

• Favourable monetary policy stance has eased financial conditions

• Low market volatility supports credit flow and investment

Global Financial Risks

• Global financial system faces elevated risks, including:

  • High public debt burdens

  • Tech-driven disruptions

  • Climate change vulnerabilities

  • Ongoing geopolitical conflicts

• April 2025 market turbulence exposed fragile asset markets and high sensitivity to shocks

Systemic Risk Assessment

• Systemic Risk Survey (May 2025) findings:

  • All major risk categories assessed as ‘medium’

  • 92% of respondents expressed confidence in India’s financial system

Conclusion: Need for Vigilance

• The RBI emphasizes:

  • Policy vigilance and regulatory agility

  • Need to adapt to structural economic shifts

  • Continuous monitoring of emerging global and domestic risks

• As global uncertainty rises, preserving India’s financial stability is crucial for sustaining growth and investor confidence