FILE PHOTO: FILE PHOTO: The Reserve Bank of India (RBI) logo is pictured outside its head office in Mumbai November 2, 2010. REUTERS/Danish Siddiqui/File Photo//File Photo/File Photo
| Photo Credit:
The Indian economy and the financial system continue to remain susceptible to geopolitical tensions and associated shocks despite headwinds from the West Asia conflict receding with the signing of the interim peace deal, cautioned the Reserve Bank of India’s Financial Stability Report (FSR).The report, a half-yearly publication with contributions from all financial sector regulators, highlighted that India’s sound macroeconomic fundamentals provide ample buffers to deal with external shocks.However, the economy remains exposed to energy price shocks and supply-chain disruptions given its high dependence on imported oil and other key commodities.In his foreword to the report, RBI Governor Sanjay Malhotra said the Indian economy and the financial system have demonstrated remarkable resilience despite facing external shocks of significant magnitude.“Strong growth, low inflation, healthy balance sheets of financial and non-financial firms, and ample buffers have helped preserve macro-financial stability.“Nevertheless, we remain alert to evolving external and domestic risks and are committed to further strengthening the guardrails that protect our economy and financial system from potential shocks,” he said.External shocksMalhotra acknowledged that the risk of adverse external shocks has increased, with geopolitical conflicts and fragmentation emerging as key challenges for policymakers.In this environment, preserving financial stability, strengthening the financial system and building systemic resilience have become more important than ever, he added.The Indian economy recorded a strong growth of 7.7 per cent in FY26 (with an average growth of 7.3 per cent over the last three years), supported by strong private consumption and fixed investment, according to the FSR.“Most of the high-frequency indicators for April–May 2026 point to continued resilience in economic activity, suggesting that growth has remained firm in the first quarter of 2026–27 despite headwinds arising from the West Asia conflict.“Nevertheless, elevated oil and other commodity prices, along with weaker global growth could adversely affect India’s domestic growth in 2026-27,” the report said. RBI has projected FY27 GDP growth at 6.6 per cent.Referring to the sharp increase in crude oil prices due to the West Asia conflict, the FSR warned that this could lead to a widening of India’s current account deficit (CAD), as has been the experience during past episodes.Fiscal deficitThe report also cautioned that the fiscal deficit could come under some pressure. It underscored that higher prices of energy and other commodities could adversely impact the fiscal arithmetic due to limited pass-through of oil price increase, excise duty cuts, and higher outgo on account of subsidies.An increase in customs duty on imports of gold and silver, on the other hand, will provide a fiscal cushion.Any fiscal slippage could potentially harden government bond yields and exacerbate the already elevated debt servicing burdens, the report saidHowever, the expected revival in FPI debt inflows, after the recent measures, alongside a decline in energy prices would increase demand for government bonds and ease pressure on yields.The report observed that exchange rate volatility may rise if oil prices increase due to the delayed normalisation of supply chain disruptions and additional demand to replenish inventory.The macro stress-test results for scheduled commercial banks indicate that they remain well-positioned to absorb potential shocks, with aggregate capital ratios projected to remain comfortably above regulatory thresholds even under adverse conditions.Stress test results of non-banking financial companies indicate that their aggregate capital position would remain comfortably above regulatory requirements even under adverse scenarios, although a few entities could face pressure under severe stress conditions.Published on June 30, 2026
