MUMBAI: Though elevated economic and trade policy uncertainties are testing the resilience of the global economy and the world’s financial system, the domestic economy, especially the financial system, is in good shape and is a major driver of global growth, the Reserve Bank has said in its financial stability report for the first half of the year.
“Despite an uncertain and challenging global economic backdrop, our economy remains a key driver of global growth, underpinned by sound macroeconomic fundamentals and prudent macroeconomic policies,” the biannual FSR released Monday said.
However the report warns that if the tariff wars and other uncertainties lead to a 100 bps slowdown in global growth, it can, ceteris paribus, pull down our growth by 30 bps.
The report blames the volatility in the global financial markets, especially core government bond markets, to the shifting policy and geopolitical environments. Alongside, existing vulnerabilities such as soaring public debt levels and elevated asset valuations have the potential to amplify fresh shocks, the report warns.
On the other hand, the report says, “The domestic financial system is exhibiting resilience fortified by healthy balance-sheets of banks and non-banks. Financial conditions have eased supported by accommodative monetary policy and low volatility in financial markets. The strength of the corporate balance sheets also lends support to overall macroeconomic stability.”
On the health of the banking system, the FSR notes that, “the soundness and resilience of commercial banks are bolstered by robust capital buffers, multi-decadal low non-performing loans ratio and strong earnings.”
Based on its macro-stress tests, the report sees a marginal 20 bps rise in bad loans by March 2027 to 2.5% in a normal scenario and to 5.6% in an extreme adverse scenario. The year 2025 closed with 2.3% gross NPAs.
“The aggregate gross non-performing-assets of 46 banks may marginally rise from 2.3% in March 2025 to 2.5% in March 2027 under the baseline scenario and to 5.6% and 5.3% under the adverse scenario of geopolitical risks and adverse scenario of global growth slowdown respectively,” the FSR says.
The stress tests affirm that most banks have adequate capital buffers relative to the regulatory minimum even under adverse stress scenarios. Stress tests also validate the resilience of mutual funds and clearing corporations. Similarly, non-banking financial companies remain healthy with sizable capital buffers, robust earnings and improving asset quality.
Also, the consolidated solvency ratio of the insurance sector also remains above the minimum threshold limit.
In his foreword, governor Sanjay Malhotra says the higher tariffs announced by the US administration in April “has set in motion a new paradigm in trade and economic policy. Geopolitical risks remain elevated. The ensuing policy uncertainty and unpredictability will influence global growth. International agencies, including the IMF, the OECD and the World Bank, have revised growth downwards.
“Against this backdrop, near-term global financial stability risks have increased. The market turbulence in April was a stark reminder of how existing vulnerabilities in the global financial system are amplified by sudden shocks. Though financial markets have stabilised after this episode, they 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.”
“In this global milieu, our economy remains a key driver of global growth. Growth momentum is buoyed by strong domestic growth drivers, sound macroeconomic fundamentals and prudent policies. Nonetheless, external spillovers and weather-related events could pose downside risks to growth. The outlook for inflation, on the other hand, is benign and there is greater confidence in the durable alignment of inflation with the Reserve Bank’s target,” says the governor.
The report projects real GDP growth at 6.5% in fiscal 2026, the same as in FY25, supported by buoyant rural demand, revival in urban demand, an uptick in investment activity on the back of above-average capacity utilisation, government’s continued thrust on capex and congenial financial conditions.
In sum, the report presents a broadly positive outlook for the country’s financial sector grounded in strong fundamentals, but mindful of evolving global and domestic risks.
Source: The New Indian Express
