RBI Financial Stability Report

 The Reserve Bank of India's Financial Stability Report (FSR) of June 2025 frames the discussion on global macrofinancial risks against the backdrop of an uncertain and volatile global macroeconomic environment that is currently testing the resilience of the global financial system.

FSR June 2025 Key Findings Context

The FSR emphasizes that despite a challenging global economic backdrop, the Indian economy remains a key driver of global growth, underpinned by strong macroeconomic fundamentals and prudent policies. The domestic financial system continues to exhibit resilience, supported by healthy balance sheets across banks and non-bank financial companies (NBFCs), robust capital buffers, and low non-performing loans.

However, the report clearly identifies that while the Indian system is relatively well-positioned, risks emanating from external spillovers and escalating geopolitical conflicts remain a key concern. The report notes that the overall financial system stability remains resilient, though there is some build-up of stress, primarily in financial markets, due to global spillovers.

The latest Systemic Risk Survey (SRS) conducted in May 2025 found that all major risk groups stayed in the 'medium risk' category, but the risk perception of global and institutional risks increased marginally. Around two-thirds of respondents expressed decreasing confidence in the stability of the global financial system.

Specific Global Macrofinancial Risks Discussed

The sources highlight several interconnected risks driving global instability:

1. Geopolitical and Trade Policy Uncertainty

The central driver of heightened risk is policy uncertainty and geopolitical friction.

• Tariffs and Trade Fragmentation: The announcement of large tariffs by the US administration in April 2025 introduced a new paradigm in trade and economic policy, leading to increased policy uncertainty and unpredictability that influence global growth. Elevated economic and trade policy uncertainties are specifically testing the resilience of the global economy and financial system.
• Geopolitical Conflict: Geopolitical risks remain elevated. Protracted geopolitical hostilities and growing fragmentation in trade are identified as structural shifts reshaping the global economy, making economic forecasts difficult and policy interventions challenging. In the SRS, geopolitical conflicts/geo-economic fragmentation scored the highest risk assessment among global risks and was identified as a major near-term risk to domestic financial stability.
• Market Volatility: The April market turbulence was a stark reminder of how sudden shocks amplify existing global financial system vulnerabilities. Financial markets, while stabilized post-April, remain volatile and highly sensitive to geopolitical and economic developments.

2. Macroeconomic and Fiscal Vulnerabilities

Global growth prospects have weakened, and multilateral agencies including the IMF, OECD, and the World Bank have revised global growth downwards due to trade disruptions and heightened volatility.

• Debt Sustainability: The risk associated with elevated public debt remains high globally. This is a recurring issue highlighted in recent FSRs. Global public debt as a percentage of GDP is projected to reach above 95% this year and 100% by the end of the decade. Debt sustainability is adversely impacted by high debt levels, slowing growth, and rising debt servicing costs. The interest rate-growth rate differential is becoming increasingly adverse for debt sustainability in the US and Europe.
• Growth-Inflation Dynamics: Globally, output is expected to stay below its historical average, while inflation is projected to be above its long-term average in 2025. While Emerging Market Economies (EMEs) generally see inflation ruling below target, disinflation momentum has stalled in Advanced Economies (AEs), posing upside risks to global inflation, especially alongside uncertainty regarding tariff impacts.

3. Risks in Global Financial Markets and Institutions

The report notes specific structural fragilities in global finance:

• Asset Valuations: Risks remain associated with possibilities of further corrections in asset prices. Asset valuations in several markets stay high relative to fundamentals, particularly US stocks, which form nearly 55% of the global equity market. The forward price-to-earnings (P/E) ratio of the S&P 500 Index is well above the historical median.
• Core Bond Market Fragility: Core government bond markets, such as the US treasury market, are exhibiting vulnerabilities driven by falling liquidity, the rising footprint of highly leveraged NBFIs, and elevated volatility. Highly leveraged relative-value trades (like basis trades) carried out by hedge funds are funded through the repo market, making these trades a source of financial system vulnerability, susceptible to disorderly unwinding.
• Global NBFIs Leverage: Existing vulnerabilities are amplified by excessive risk-taking and high leverage in the non-banking financial intermediaries (NBFIs) sector globally. Global hedge funds have significantly increased their use of synthetic leverage through derivatives, which stands above 20 for multiple strategies. The growing interconnectedness and interdependence between global NBFIs and the banking sector is identified as a source of systemic risk, enabling potential spillovers and spillbacks.
• US Dollar Primacy Challenge: The USD's primacy and safe-haven status are being challenged due to structural changes in the global economy, such as the shift in US trade policy and the resetting of the global economic order.

4. Cyber Risk

The sources note that the expanded scale of digital financial services and interconnected systems have exponentially increased the cyberattack surface. Cyber risk continued to remain in the high-risk category in the latest SRS, signaling a rising risk perception. Globally, supervisors recognize cyberattacks and technology failures as a significant threat to financial stability, leading to efforts to standardize incident-reporting frameworks (like the FSB’s FIRE).

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In essence, while the domestic Indian financial system shows remarkable institutional and structural resilience, the FSR pinpoints that the main threat to stability originates externally, characterized by a potent cocktail of protectionist trade policies, volatile geopolitical conflict, and systemic vulnerabilities embedded in global sovereign debt markets and highly leveraged non-bank financial sectors.

The Reserve Bank of India’s Financial Stability Report (FSR) of June 2025 provides an optimistic assessment of the Domestic Macrofinancial Outlook, highlighting India’s strength as a key global economic driver, even while acknowledging vulnerability to mounting external challenges.

The sources frame the domestic outlook within the context of the FSR Key Findings: the Indian economy remains a key driver of global growth, underpinned by sound macroeconomic fundamentals and prudent policies. The domestic financial system is exhibiting increasing resilience, supported by robust capital buffers, strong profitability, and multi-decadal low non-performing loans (NPLs).

The outlook is detailed through four primary components: Macroeconomic stability (growth and inflation), Fiscal position, External sector strength, and the Resilience of the financial system.

1. Domestic Macroeconomic Outlook

Growth and Demand

The Indian economy continues to be the fastest growing major economy globally during 2024-25. The growth momentum is sustained by buoyant domestic growth drivers.

• Growth Projections: The RBI has projected the real GDP to grow at 6.5 per cent in 2025-26, matching the 2024-25 estimate.
• Drivers: This growth is supported by factors such as the revival in urban demand, buoyant rural demand, favorable financial conditions, and the government’s continued thrust on capital expenditure (capex) and investment activity.
• Insulation: Since India’s growth is mainly driven by robust domestic demand, it remains relatively insulated from global headwinds compared to many other economies.
• Downside Risks: The primary downside risks to growth stem from external spillovers and escalating geopolitical conflicts. It is estimated that a slowdown of 100 basis points (bps) in global growth can potentially pull down India’s growth by 30 bps.

Inflation Dynamics

The outlook for inflation is considered benign, inspiring greater confidence in the durable alignment of inflation with the Reserve Bank’s 4 per cent target.

• Headline CPI inflation recorded a six-year low of 2.8 per cent in May 2025.
• The risk of imported inflation is largely low, as the anticipated global slowdown is likely to soften crude oil and commodity prices.

2. Fiscal Position and Debt Management

India’s fiscal credibility has been significantly enhanced due to ongoing fiscal consolidation and efforts to improve the quality of expenditure.

• Debt Profile: The government debt is predominantly rupee-denominated.
• Maturity: The weighted average maturity of the outstanding stock of central government market borrowings has increased from 10.4 years in 2018-19 to 13.2 years in 2024-25. Furthermore, around 97 per cent of these are issued at a fixed rate.
• Debt Trajectory: Flow data points to a lower debt trajectory supported by strong nominal GDP growth.
• Sustainability: India benefits from a favorable interest rate-growth rate differential for the central government, which augurs well for debt sustainability.

3. External Sector Resilience

The strength of the external sector contributes significantly to overall macroeconomic and financial stability.

• Current Account: The Current Account Deficit (CAD) for 2024-25 remained manageable at 0.6 per cent of GDP, bolstered by sustained buoyancy in remittances and services exports, and even turned into a surplus of 1.3 per cent of GDP in Q4:2024-25.
• Reserves: Foreign exchange reserves stood at US$ 697.9 billion as of June 20, 2025, sufficient to cover more than 11 months of merchandise imports.
• External Vulnerability: External vulnerability indicators remain robust; for example, external debt was a moderate 19.1 per cent of GDP at end-March 2025.
• Capital Risk: While Foreign Direct Investment (FDI) remained high, net capital flows fell short of the CAD during 2024-25, causing a depletion in foreign exchange reserves. An analysis found that under extreme adverse shocks, there is a five per cent probability that total capital outflows (FPI and FDI) could reach about 7 per cent of GDP.

4. Financial System Soundness and Resilience

The domestic financial system remains resilient, supported by healthy balance sheets of banks and non-banks.

• Banking Sector (SCBs): Scheduled Commercial Banks (SCBs) are bolstered by robust capital buffers and low non-performing loans (NPLs). The GNPA ratio and NNPA ratio declined to multi-decadal lows of 2.3 per cent and 0.5 per cent, respectively, in March 2025.
  • Stress Tests: Macro stress test results reaffirm this strength, showing that SCBs' aggregate capital levels are projected to remain well above the regulatory minimum even under adverse stress scenarios by March 2027.
  • Stability Indicator: The Banking Stability Indicator (BSI) strengthened during H2:2024-25, indicating overall resilience.
• Non-Bank Financial Companies (NBFCs): The NBFC sector remains healthy, exhibiting robust interest margins, earnings, and capital adequacy well above the regulatory minimum. Although credit growth moderated following regulatory measures, the sector is well-positioned to support economic growth.
• Market Stress: Despite the overall domestic stability, the Financial System Stress Indicator (FSSI) recorded a marginal rise, reflecting a build-up of stress primarily in financial markets stemming from global spillovers.

5. Systemic Risk Survey (SRS) Findings

The latest Systemic Risk Survey (SRS) conducted in May 2025 generally affirmed the positive domestic outlook while pinpointing vulnerabilities.

• Confidence: 92 per cent of respondents expressed a higher or similar level of confidence in the Indian financial system.
• Banking Outlook: Around 80 per cent of panelists expected better or similar prospects for the Indian banking sector, and about 60 per cent expected asset quality to remain unchanged or improve marginally over the next six months.
• Key Domestic Risks: All major risk groups remain in the 'medium risk' category. However, the respondents identified external factors—specifically Geopolitical conflicts, capital outflows/Rupee depreciation, and reciprocal tariff/trade slowdown—as major near-term risks to domestic financial stability.
• Sector Vulnerability: Respondents perceived export-dependent manufacturing sectors (like textiles and electronics) and Micro, Small, and Medium Enterprises (MSMEs) in export clusters to face the highest risk due to global trade disruptions. Cyber risk also continued to be categorized as a high-risk area.

The Reserve Bank of India's Financial Stability Report (FSR) of June 2025 emphasizes that the domestic financial system is exhibiting resilience and its soundness is continuously improving, a key factor underpinning India's role as a major driver of global growth. This resilience is bolstered by strong capital buffers, multi-decadal low non-performing loans, and robust profitability across major financial institutions.

The detailed assessment of financial institution resilience is documented across various sectors:

1. Scheduled Commercial Banks (SCBs)

The soundness and resilience of Scheduled Commercial Banks (SCBs) are robust. Stress test results consistently reaffirm the strength of the banking sector, projecting capital levels to remain well above the regulatory minimum even under adverse shock scenarios.

• Capital Adequacy: The Capital to Risk-Weighted Assets Ratio (CRAR) of SCBs increased to a record high of 17.3 per cent in March 2025. The Common Equity Tier 1 (CET1) capital ratio also increased across bank groups.
• Asset Quality: SCBs continued to record significant improvement in asset quality. The GNPA ratio and NNPA ratio declined to multi-decadal lows of 2.3 per cent and 0.5 per cent, respectively, in March 2025. The Provisioning Coverage Ratio (PCR) remained healthy at 76.3 per cent.
• Profitability: The profitability of SCBs remained strong in 2024-25, with profit after tax (PAT) increasing by 16.9 per cent (y-o-y), driven significantly by Public Sector Banks (PSBs).
• Liquidity: SCBs further improved their liquidity positions. Both the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) were comfortably above the regulatory minimum of 100 per cent across all bank groups as of March 2025.

Resilience under Stress

Macro stress tests confirm SCBs' high capacity to absorb shocks.

• Macro Stress Tests: Under the baseline scenario, the aggregate CRAR of 46 major SCBs is projected to marginally dip to 17.0 per cent by March 2027 from 17.2 per cent in March 2025. Crucially, the aggregate capital levels are projected to remain well above the regulatory minimum of 9 per cent even under the severe Adverse Scenario 1 (14.2 per cent CRAR) and Adverse Scenario 2 (14.6 per cent CRAR).
• Credit Risk Sensitivity: A severe hypothetical shock resulting in a two standard deviation (SD) rise in the GNPA ratio would reduce the system-level CRAR by 370 basis points (bps) to 13.5 per cent, remaining well above the regulatory minimum.
• Liquidity Stress: Under severe liquidity stress scenarios involving high deposit run-offs, the average LCR of select banks would drop but all banks but one would be able to maintain LCR above the minimum requirement of 100 per cent.

2. Non-Banking Financial Companies (NBFCs)

The NBFC sector is assessed as remaining healthy.

• Financial Health: The sector shows robust interest margins, earnings, and low levels of impairment. The system-level CRAR of NBFCs (Upper and Middle Layers) was healthy at 25.8 per cent in March 2025, significantly exceeding the regulatory minimum.
• Vulnerabilities: While overall healthy, the sector remains vulnerable to stress in household balance sheets and a rise in funding cost for lower-rated companies. Slippage ratios have been trending upwards, particularly for upper layer NBFCs.
• Stress Test Results: Under the high-risk credit scenario, the aggregate CRAR of sampled NBFCs is projected to decline to 20.4 per cent by March 2026, though a limited number of NBFCs (fifteen in the middle layer, representing 3.7 per cent of total advances) may fail to meet the regulatory minimum CRAR.

3. Urban Cooperative Banks (UCBs)

The capital position and asset quality of Urban Cooperative Banks (UCBs) continued to strengthen.

• Capital and Asset Quality: The overall CRAR of UCBs rose to 18.0 per cent in March 2025. GNPA and NNPA ratios decreased significantly across both Scheduled UCBs (SUCBs) and Non-Scheduled UCBs (NSUCBs).
• Stress Test Results: Under severe credit default risk stress, the system level CRAR would reduce to 15.6 per cent. While the system remains resilient, one bank in the largest category (Tier 4) would not meet its regulatory minimum CRAR under severe credit and concentration stress, although the smallest UCBs (Tier 1) exhibited resilience for all risk factors except liquidity risk.

4. Other Financial Entities

The sources also confirm the resilience of key market institutions and the insurance sector.

• Insurance: The consolidated solvency ratio of the insurance sector (life and non-life segments) remained above the minimum prescribed threshold limit of 150 per cent as of December 2024 (Life: 204 per cent; Non-life: 166 per cent).
• Mutual Funds and Clearing Corporations: Stress test results of mutual funds and clearing corporations affirm their resilience to shocks. Liquidity analysis of open-ended debt schemes generally showed liquidity ratios well above the required threshold limits.

5. Interconnectedness and Contagion Resilience

The FSR explicitly addresses the systemic risk posed by interconnectedness, particularly between banks, NBFCs, and Housing Finance Companies (HFCs).

• Contagion Buffer: Contagion analysis shows that hypothetical failures of the single most impactful bank, NBFC, or HFC would cause solvency losses to the banking system's Tier 1 capital (3.4%, 2.9%, and 3.7% respectively), but importantly, none of these failures would trigger the subsequent failure of any bank.
• Post-Shock Contagion: Furthermore, even after applying the initial capital loss projected under severe macroeconomic stress, there would be no additional solvency losses to the banking system due to contagion.

In summary, the FSR of June 2025 finds that the Indian financial sector possesses deep structural and institutional buffers, demonstrating robust financial institution resilience that allows it to withstand extreme credit and macroeconomic shocks without system-wide failure, despite rising external macrofinancial risks.

The Reserve Bank of India’s Financial Stability Report (FSR) of June 2025 contextualizes regulatory initiatives and developments as essential tools for enhancing the resilience of the financial system against a backdrop of global uncertainty, structural shifts, and rising risks from trade fragmentation, technology, and climate change.

The FSR highlights the commitment of financial sector regulators to striking the right balance between improving efficiency and growth, and maintaining safety and soundness.

Global Regulatory Developments

Global standard-setting bodies and regulators are focused on strengthening systemic resilience, particularly concerning liquidity, credit risk management, cyber threats, and climate-related vulnerabilities.

1. Strengthening Banking and Credit Standards: The Basel Committee on Banking Supervision (BCBS) reviewed the impact of Basel III standards, noting that Group 2 banks generally showed an increase in both the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), while Group 1 banks showed a slight decrease in LCR. The BCBS also updated its Principles for the management of credit risk to align with the current Basel Framework, emphasizing a sound credit-granting process, suitable risk environment, and adequate controls.

2. Enhancing Financial Market Resilience:

• Securitization and Leverage: The Financial Stability Board (FSB) evaluated G20 reforms on securitization, noting that while market transparency and overall resilience have improved, it remains challenging to definitively assess resilience as these markets (especially for Collateralized Loan Obligations or CLOs) have not yet faced a full credit cycle. Concerns remain regarding monitoring risks in synthetic risk transfers and private credit.
• Derivatives and Margin: Policy prescriptions were issued on initial margin in centrally cleared markets (by BCBS, CPMI, and IOSCO) recommending margin simulation tools for clearing members and disclosure of anti-pro-cyclicality tools. For non-centrally cleared markets, a joint report advised improving the effectiveness of variation margin and enhancing initial margin responsiveness (e.g., through improvements in the ISDA Standard Initial Margin Model or SIMM).

3. Systemic Risk Monitoring and Governance:

• The International Organization of Securities Commission (IOSCO) assessed the implementation of its standards, noting that the Indian SEBI and IFSCA demonstrated high overall compliance with Principles 6 and 7.
  • Principle 6 (Systemic Risk): India's comprehensive process for identifying, monitoring, and mitigating systemic risk is structured through multiple groups under the Financial Stability and Development Council (FSDC), such as the Early Warning Group and the Technical Group.
  • Principle 7 (Perimeter of Regulation): India affirmed that its regulatory review process is structured around the FSDC and involves coordination among authorities like SEBI, IFSCA, and State Level Coordination Committees.

4. Addressing Non-Traditional Risks (Cyber and Climate):

• Cyber Resilience: The FSB finalized the Format for Incident Reporting Exchange (FIRE), a common framework designed to standardize information elements for reporting operational incidents, including cyber incidents, across financial and third-party service providers.
• Climate Finance: The FSB introduced an analytical framework for assessing climate-related vulnerabilities, providing a toolkit with metrics such as proxies, exposure metrics, and risk metrics (e.g., carbon earnings at risk, climate beta) to quantify financial impacts and monitor systemic risk drivers. Separately, the IAIS published an application paper highlighting the significance of climate risks for the insurance sector.

Domestic Regulatory Initiatives

Domestic regulators are implementing reforms aligned with global best practices, prioritizing stability, transparency, and consumer protection.

1. Prudential Norms and Liquidity Resilience (RBI):

• LCR Framework Amendments: The Reserve Bank introduced calibrated amendments to the Liquidity Coverage Ratio (LCR) framework, implementing additional run-off rate factors for retail deposits enabled by internet and mobile banking (recognizing their higher propensity for withdrawal during stress) and calibrating haircuts on High-Quality Liquid Assets (HQLA). These measures are intended to improve banks' liquidity risk resilience following observations from global banking turmoil.
• Project Finance Directions: New directions established a harmonized prudential framework for financing projects, covering infrastructure and commercial real estate sectors, including the treatment of exposures upon changes in the date of commencement of commercial operations.
• Monetary Transmission: The RBI permitted forward contracts in government securities to further develop the interest rate derivatives market and enable long-term investors (like insurance funds) to manage interest rate risk.

2. Digitalization, Fraud Prevention, and Consumer Protection (RBI & SEBI):

• Digital Lending: The Reserve Bank of India (Digital Lending Directions), 2025 were issued, consolidating previous instructions and introducing measures to promote transparency. Key additions include enabling borrowers to objectively compare loan offers from different Lending Service Providers (LSPs) and aiding borrowers in verifying the association of Digital Lending Apps (DLAs) with Regulated Entities (REs).
• Combating Fraud: Measures were taken to prevent financial and digital payment fraud, including introducing the '.bank.in' internet domain for legitimate bank identification. REs were advised to make transaction/service calls only using the ‘1600xx’ numbering series and promotional calls using ‘140xx’ series. REs were also advised to monitor and clean customer databases using the Mobile Number Revocation List (MNRL).
• Algorithmic Trading Safeguards: SEBI issued a regulatory framework outlining rights and responsibilities to facilitate the safer participation of retail investors in algorithmic trading through brokers.
• Intraday Monitoring: SEBI introduced intraday monitoring of position limits for equity index derivatives contracts (minimum four random snapshots daily) to detect potential breaches beyond permissible limits on the day of expiry.

3. Enhancing Investor Access and Market Structure (SEBI):

• Retail G-Sec Access: SEBI facilitated registered stock brokers' access to the G-Sec market through the NDS-OM platform under a Separate Business Unit (SBU), aiming to facilitate retail participation in Government securities.
• Mutual Fund Reform: SEBI introduced the ‘MF Lite Framework’ for passively managed schemes to encourage entry of new players and reduce compliance. It also mandated disclosure of Risk Adjusted Return (RAR) (specifically the Information Ratio - IR) for equity schemes for more holistic performance assessment by investors. The platform MITRA (Mutual Fund Investment Tracing and Retrieval Assistant) was developed to help trace inactive and unclaimed mutual fund investor folios.

4. Corporate Restructuring and Debt Management (IBBI):

• The Insolvency and Bankruptcy Board of India (IBBI) implemented amendments to the Corporate Insolvency Resolution Process (CIRP) Regulations to enhance efficiency and stakeholder participation. This included enabling the Committee of Creditors (CoC) to invite real estate land authorities to meetings, improving information disclosure regarding development rights, and strengthening resolution plan monitoring mechanisms.

5. IFSC and Insurance:

• IFSC Development: The International Financial Services Centres Authority (IFSCA) issued the Fund Management Regulations 2025, which simplifies processes, lowers investment thresholds, and introduces adequate safeguards for investor protection. The total banking asset size at GIFT-IFSC reached US$ 88.7 billion in March 2025.
• Insurance: The IRDAI issued guidelines allowing insurers to use equity derivatives to hedge their equity investment portfolios, thereby safeguarding against market volatility. IRDAI also mandated electronic record-keeping for regulated entities with robust security and privacy measures.

The collective efforts of domestic regulators are intended to ensure the stability and security of the Indian financial system, enabling it to better promote macroeconomic stability and support India’s growth potential.