The year 2025 was challenging as geopolitical conflicts, trade tensions and persistent policy uncertainty had cast a shadow over the global economy and the financial system. Amidst these developments, the world economy had proven to be more resilient than anticipated and the financial system had remained steady, he said in the December 2025 edition of RBI’s Financial Stability Report (FSR).
The global financial system in this challenging backdrop remained vulnerable to stretched valuations of risk assets, expanding public debt and growing inter-connectedness among banks and non-bank financial institutions (NBFIs), Malhotra said.
The financial landscape was evolving rapidly, driven by profound technological advances and the continued rise of non-bank financial intermediation, he said. While they brought immense opportunities, they were also adding new layers of risks, such as the rise of stable coins and private credit, he added.
The Indian economy and the financial system, in contrast, remained robust and resilient supported by strong growth, benign inflation, healthy balance sheets of financial and non-financial firms, sizeable buffers and prudent policy reforms, Malhotra said.
“Despite a volatile and unfavourable external environment, the Indian economy is projected to register high growth, driven by strong domestic consumption and investment. Nonetheless, we recognise the near-term challenges from external spill-overs and continue to build strong guardrails to safeguard the economy and the financial system from potential shocks,” he said.
Banks and NBFIs remained healthy, bolstered by strong capital and liquidity buffers, robust earnings and improved asset quality. Stress tests also endorsed the resilience of banks and non-banking financial companies. Financial markets, however, remained susceptible to global spill-overs, Malhotra said.
“Maintaining financial stability and strengthening the financial system remains our north star. But financial sector regulators recognise that financial stability is not an end in itself,” he said.
Promoting innovation and growth, protecting consumers and a pragmatic approach to regulation and supervision that improved financial system efficiency were equally important, the RBI Governor said.
These objectives were mutually reinforcing and vital for increasing productivity and long-term economic growth, he said. “The most important contribution the policy-makers can make is to foster a financial system that is robust and resilient to shocks, efficient in providing financial services and promotes responsible innovation,” he said.
Key highlights from the report
- Global economy has been resilient, supported by fiscal measures, front-loaded trade and strong AI-related investment. However, downside risks persist due to still elevated uncertainty, high public debt and the risk of a disorderly market correction.
- Global financial markets appear strong on the surface but show growing underlying vulnerabilities. Sharp rise in equities and other risk assets, the expanding role of non-bank financial intermediaries and their deepening interconnectedness with banks, and the growth of stable coins all heighten global financial system fragilities.
- Despite an uncertain and challenging global economic backdrop, the Indian economy continues to grow strongly, underpinned by robust domestic demand, benign inflation and prudent macro-economic policies.
- The domestic financial system remains robust and resilient, bolstered by strong balance sheets, easy financial conditions, and low financial market volatility. Nonetheless, there are near-term risks from external uncertainties – geopolitical and trade related.
- The health of the scheduled commercial banks (SCBs) remains sound with strong capital and liquidity buffers, improved asset quality and robust profitability.
- Macro stress test results affirm the resilience of SCBs to withstand losses under hypothetical adverse scenarios and maintain capital buffers well above the regulatory minimum. Stress tests also confirm the resilience of mutual funds and clearing corporations.
- Non-banking financial companies (NBFCs) remain robust supported by strong capital buffers, solid earnings and improving asset quality.
- The insurance sector continues to display balance sheet resilience and the consolidated solvency ratio remained above the minimum threshold limit.
