“Although India remains exposed to the effects of the West Asia conflict through higher commodity prices and external sector pressures, our economy is navigating this phase from a position of strength,” he said in his special address on the topic -Preserving Financial Stability in an Evolving World – at the Fifth Kautilya Economic Conclave.
“Strong macroeconomic fundamentals and a resilient financial system provide confidence in our ability to withstand this lingering shock. At the same time, we are taking further measures to enhance our resilience to such shocks,” Malhotra said.
These include diversification of import sources; enhanced self-sufficiency in energy and other critical resources; building strategic petroleum reserves; accelerating energy transition; enhancing the competitiveness of domestic manufacturing; deeper integration into global value chains; expanding market access through free trade agreements; and promoting trade settlement in local currencies, he noted.
Indian government bond yields have risen only partially in response to higher global energy prices and global bond yields. This reflects prudence in fiscal management as the government continues the path of fiscal consolidation, credible monetary policy and declining structural pressures on inflation, Malhotra said.
“Equity markets in India have corrected in recent months, albeit from high valuations, but the movement has been orderly. As for corrections in AI-related valuations in advanced economies, they may be positive for capital inflows if and when they happen,” he said.
“As regards AI and cybersecurity, we have strengthened technology and cyber-risk governance through 2026 Directions for commercial banks, including Board oversight, defined CISO responsibilities, and controls for access, third-party arrangements and incident response,” Malhotra said.
The draft Model Risk guidance for regulated entities, including NBFCs, sets out model lifecycle safeguards such as risk-based oversight, explainability, red-teaming and human oversight, he added.
Private credit in India is still small and not assessed to be a risk. Similarly, NBFCs, despite their increasing interconnectedness with banks, are assessed to be strong, Malhotra said.
“Overall, the Indian financial system is assessed to be very resilient, supported by healthy balance sheets of banks and NBFIs,” he said.
“But today’s resilience may not necessarily imply tomorrow’s immunity. We are committed to remaining vigilant of emerging vulnerabilities and continuing to keep our financial system strong and resilient,” Malhotra said.
“Some shocks will be inevitable. Financial stability is not about preventing them. It is about strengthening systemic resilience to face those shocks and contain their amplification,” he said.
The RBI Governor noted that new generation of systemic risks is taking shape.
“Assessing them and their complex interactions is vital. Risks are increasingly exogenous, cross-border and interconnected. The next financial crisis may not originate in a bank, or even in finance. It may begin with a geopolitical event, a cyberattack, or a technological failure and affect the financial system through multiple channels,” he noted.
“We must improve monitoring and assessment frameworks. For that, we need better and more granular data,” Malhotra said.
Strong banking system is necessary, but not sufficient. We need resilience across sectors and institutions: NBFIs, financial markets, payment systems, technology infrastructure, critical third parties and cross-border financial networks. Financial instability anywhere can become a threat to financial stability everywhere, he noted.
Artificial intelligence, tokenisation, and new forms of financial intermediation can dramatically improve efficiency. But innovation will be sustainable only if the financial system preserves the fundamental properties on which trust rests: sound institutions, settlement finality, singleness of money, and financial integrity, Malhotra said.
“The challenge before us is to build a financial system that can withstand the shocks we anticipate and those we cannot yet foresee. This requires resilient institutions, better data, deeper markets, credible safety nets, effective resolution mechanisms and regulation and supervision that are proactive and forward-looking, while being proportionate,” he said.
“If we succeed, financial stability will remain largely invisible. And, in central banking, invisibility is perhaps the most meaningful measure of success,” Malhotra added.
Read full text of speech here https://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/SKEC0310202628F52C4D3F3C4765BA9B377FD27AD3CC.PDF