Healthy balance sheets augur well for economy: RBI Governor Sanjay Malhotra

In the Financial Stability Report, RBI Governor Sanjay Malhotra says domestic resilience is strong but global tariffs, geopolitics and climate risks could impact growth

Large tariffs by the United States administration and elevated geopolitical risk have increased near-term global financial stability risks, and along with weather events pose downside risks to domestic growth, Reserve Bank of India (RBI) Governor Sanjay Malhotra said in the foreword to the Financial Stability Report released today.

 

Noting that domestic growth momentum is buoyed by strong domestic drivers, sound macroeconomic fundamentals and prudent policies, Malhotra said: “External spillovers and weather-related events could pose downside risks to growth.”

 

On the other hand, he said the outlook for inflation is benign, and there is greater confidence in the durable alignment of inflation with the Reserve Bank’s target.

 

Commenting that the structural shifts reshaping the global economy are making policy intervention challenging, the Governor emphasised the need for central banks and financial sector regulators to remain vigilant, prudent and agile in safeguarding their economies and financial systems. 

“There are many structural shifts that are reshaping the global economy, including growing fragmentation in trade, rapid technological disruption, ongoing climate change and protracted geopolitical hostilities. They make economic forecasts difficult and policy interventions challenging,” he said. 

 

Commenting on the Indian financial system, Malhotra said the resilience of the domestic financial system is continuously improving, bolstered by strong capital buffers, low non-performing loans and robust profitability. He said results of stress tests reaffirm the strength of the banking and non-banking sectors, with capital levels projected to remain well above the regulatory minimum even under adverse shock scenarios.

 

“The healthy balance sheets of corporates, banks and non-bank financial companies (NBFCs) augur well for the economy,” he said.

 

He added that the financial sector regulators remain committed to protecting customers, promoting competition and fostering innovation as they strike the right balance between improving efficiency and growth, and safety and soundness.

 

At the same time, he observed that financial stability is a necessary condition to boost growth, but not a sufficient one.

 

“Financial stability, like price stability, is a necessary condition, and not a sufficient one to boost India’s potential growth. As custodians of financial stability, we must endeavour to develop a well-functioning financial system that not only promotes macroeconomic stability but also provides financial services efficiently,” he added.