Indian financial system resilient despite global risks

The Financial Stability Report (FSR) highlights that despite repeated shocks, the global financial system has demonstrated notable resilience, with markets remaining orderly following initial volatility from the West Asia conflict.

However, global financial stability risks persist.

Elevated public debt, bond market fragilities, stretched asset valuations, and leveraged non-banking financial institutions (NBFIs) are identified as key vulnerabilities that could amplify future shocks.

Persistent supply chain uncertainties could also tighten financial conditions and revive inflationary pressures.

In contrast, India's sound macroeconomic fundamentals position it more strongly than many peers, providing greater resilience to external shocks than in past crisis episodes.

The balance of risks has turned favourable, supported by an interim peace deal and recent policy measures by the Government and the Reserve Bank aimed at strengthening capital inflows.

India's domestic financial system remains resilient, underpinned by strong bank and non-bank balance sheets.

Scheduled Commercial Banks (SCBs) are safe and sound, supported by robust capital and liquidity buffers, continuous improvement in asset quality, and stable profitability.

Macro stress test results indicate the banking system is well-positioned to absorb potential shocks, with aggregate capital ratios projected to remain comfortably above regulatory thresholds even under hypothetical adverse scenarios.

Non-banking financial companies (NBFCs) also remain financially sound, backed by strong capitalisation, healthy profitability, and improving asset quality.

The insurance sector continues to display balance sheet resilience, with the solvency ratio of life insurers remaining above the minimum threshold.