RBI Report, India Continues to Power Global Growth

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• Despite global economic uncertainty, the Indian economy continues to drive global growth, supported by strong fundamentals and prudent policies, according to RBI’s latest Financial Stability Report.

Financial Stability Report (FSR)

• FSR is a biannual publication released by the Reserve Bank of India (RBI). 
• It provides a comprehensive assessment of the health, resilience, and risks facing the Indian financial system.

Purpose

• To ensure transparency, promote public confidence, and guide policy actions aimed at preserving financial stability in India.

Key Features

• Published Twice a Year
  • Released in June and December to give regular updates.
• Covers Entire Financial System
  • Includes banks, non-banking financial companies (NBFCs), cooperative banks, and other financial intermediaries.
• Assesses Systemic Risks
  • Evaluates both domestic and global risks that may affect India’s financial stability.
• Stress Tests
  • Conducts stress testing on banks to gauge their ability to withstand adverse economic conditions (like high NPAs, credit shocks, etc.).
• Policy Guidance
  • Offers insights for regulators and policymakers on maintaining stability and resilience.

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Key Highlights of the June 2025 Financial Stability Report (FSR)

• India Remains a Key Global Growth Driver
  • Despite a challenging global environment, India continues to contribute significantly to global growth.
  • Growth is supported by strong domestic demand, sound macroeconomic fundamentals, and prudent policymaking.
• GDP Growth Outlook for FY26
  • Real GDP growth projected at 6.5% for FY2026.
  • Growth remains below RBI’s aspirations, constrained by global uncertainty, trade disruptions, and elevated geopolitical tensions.
• Risks to Growth: External and Climate-Linked
  • External spillovers (e.g., US tariffs, global trade fragmentation) and weather-related events (e.g., climate shocks) may impact India’s growth.
  • Geopolitical risks and policy unpredictability have raised global economic uncertainty.
• Inflation Under Control
  • Inflation outlook is benign, with CPI aligning with RBI’s target of 4% ± 2% band.
  • May 2025 CPI at 2.8%, the lowest since February 2019.
  • RBI expresses greater confidence in durable price stability under the Flexible Inflation Targeting (FIT) framework.
• Financial Stability and Sectoral Resilience
  • Indian financial system shows improving resilience, with:
    • Strong capital buffers
    • Low non-performing assets (NPAs)
    • Healthy profitability
• Stress Tests Confirm Systemic Strength
  • Stress tests show that:
    • Banks and NBFCs maintain adequate capital even under adverse scenarios.
    • Mutual funds and clearing corporations show strong resilience.
    • Insurance sector maintains a solvency ratio well above minimum thresholds.
• Scheduled Commercial Banks (SCBs) in Strong Health
  • SCBs benefit from:
    • Multi-decadal low NPAs
    • Robust capital and earnings
  • Macro stress tests validate that most SCBs are adequately capitalized.
• NBFCs and Corporate Sector Remain Robust
  • NBFCs exhibit:
    • Sizable capital buffers
    • Improving asset quality
    • Strong profitability
  • Corporate balance sheets continue to support macroeconomic stability.
• Financial Conditions Remain Supportive
  • Financial conditions have eased due to:
    • Accommodative monetary policy
    • Low market volatility
• Global Financial System: Elevated Risks
  • Near-term global financial stability risks have increased.
  • April 2025’s market turbulence exposed vulnerabilities and high asset price sensitivity.
  • Risks from high public debt, tech disruptions, climate change, and prolonged conflicts remain significant.
• Systemic Risk Perception: Medium but Stable
  • Systemic Risk Survey (SRS) in May 2025:
    • All major risk categories rated as ‘medium risk’
    • 92% respondents are confident in the soundness of the Indian financial system.
• Need for Policy Vigilance
  • The report emphasizes the need for vigilance, agility, and prudence among central banks and regulators.
  • The global economic landscape is becoming harder to forecast due to structural shifts and shocks.

Source: IE | TH