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Informist, Monday, Jun. 30, 2025

NEW DELHI – The global economy is undergoing several structural shifts such as trade fragmentation, climate change, and geopolitical hostilities, Reserve Bank of India Governor Sanjay Malhotra has said. This shift, he said, makes economic forecasting difficult and policy interventions challenging.

"Therefore, even as they navigate through the fog of uncertainty, it is imperative for central banks and financial sector regulators to remain vigilant, prudent and agile in safeguarding their economies and financial systems," Malhotra said in the June edition of the central bank's Financial Stability Report.

The Indian economy remains a key driver of global growth, Malhotra said, adding that growth momentum is buoyed by strong domestic growth drivers, sound macroeconomic fundamentals, and prudent policies. However, external spillovers and weather-related events could pose downside risks to growth, he said in the biannual report.

India's economy grew 6.5% in the financial year 2024-25 (Apr-Mar), and the RBI projects the GDP to grow 6.5% in FY26 as well. The central bank's Monetary Policy Committee has lowered the policy repo rate 100 basis points in 2025 to support growth while inflation is seen under control.

Malhotra said the outlook for inflation is benign and there is greater confidence in the durable alignment of inflation with the RBI's 4% target. The central bank projects CPI inflation to average 3.7% in FY26.

According to the governor, the announcement of large tariffs by the US in April set in motion a new paradigm in trade and economic policy. "Along with high geopolitical risks, policy uncertainty and unpredictability will influence global growth," he said.

In the current geopolitical backdrop, near-term global financial stability risks have increased, Malhotra said, adding that financial markets remain volatile and highly sensitive to economic and geopolitical developments. "Globally, risks associated with elevated public debt and possibilities of further corrections in asset prices remain high," he said.

The governor said India's financial system remains resilient. The resilience of the Indian financial system also continues to improve on the back of strong capital buffers, low non-performing loans, and robust profitability, he said.

"Results of stress tests reaffirm the strength of the banking and non-banking sectors with capital levels projected to remain well above the regulatory minimum even under adverse shock scenarios," Malhotra said. "The healthy balance sheets of corporates, banks and non-bank financial companies (NBFCs) augur well for the economy."

Financial sector regulators in India are committed to "protecting customers, promoting competition and fostering innovation", Malhotra said. "Financial stability, like price stability, is a necessary condition and not a sufficient one to boost India's potential growth."

The Financial Stability Report said the uncertain and volatile global macroeconomic environment is testing the resilience of the global financial system. "Global financial stability risks have increased as heightened policy and trade uncertainties have the potential to interact with existing vulnerabilities, especially elevated public debt, and amplify adverse shocks," according to the report.

The Indian economy and financial system, however, remain resilient, aided by strong macroeconomic fundamentals and a robust financial system, as per the report. "Risks emanating from global spillovers and escalation in geopolitical tensions and policy uncertainties remain a key concern."  End

Reported by Shubham Rana

Edited by Rajeev Pai

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