RBI governor Sanjay Malhotra warns against complacency over financial stability

India’s financial system is currently in strong shape, but the country cannot afford to grow complacent. Speaking at the Kautilya Economic Conclave in New Delhi on Saturday, Reserve Bank of India Governor Sanjay Malhotra warned that prolonged periods of calm can blind markets to danger, cautioning that "today's resilience may not necessarily imply tomorrow's immunity."

While Malhotra stressed he does not see any immediate signs of stress, he argued that financial crises build up quietly overnight and can take years to clean up. He pointed to India's own history, noting it took more than a decade to resolve the legacy of excessive lending and non-performing assets from the early 2000s.

To prevent a repeat, the central bank is keeping a close watch on a new generation of global vulnerabilities. Malhotra identified five major risks that could test the global financial architecture if they occur together.

Five global risks to stability

First is the burden of rising global debt. Government borrowing costs have hardened, with the US 10-year Treasury yield recently touching a 24-year high of 5.34%. High interest rates limit the fiscal room for governments to support troubled banks, while emerging markets could face sudden capital flight.

Second, the intense hype around artificial intelligence has stretched asset valuations. Malhotra warned that any slowdown in AI earnings or investment could trigger a sharp, painful repricing across the technology value chain. However, he noted a silver lining for India: a correction in Western AI stocks could redirect capital inflows toward Indian markets.

Third, leverage is expanding rapidly outside traditional banks. Hedge funds, option sellers, and exchange-traded funds are borrowing heavily to chase yields in expensive equity and bond markets.

Fourth, private credit markets in advanced economies are showing signs of strain, with high-profile defaults pointing to loose lending standards. Malhotra noted that India is largely insulated from this particular threat because its domestic private credit segment is still small.

Finally, the rapid evolution of autonomous AI tools has made cyber warfare the most immediate threat to borderless financial systems. Malhotra warned that the next systemic crisis might not even start within a bank, but could instead be triggered by a major cyberattack or technological failure.

India's buffers and policy priorities

Despite these global headwinds and the ongoing conflict in West Asia, Malhotra said India is steering through the volatility from a position of strength. Domestic banks are well-capitalised, and non-banking financial companies (NBFCs) boast an average capital adequacy ratio of over 25%, well above the regulatory requirement of 15%. Inflation remains manageable, and India continues to record the strongest growth among major economies.

Even so, the RBI is working to insulate the economy further by diversifying import sources, building strategic petroleum reserves, and keeping a tight leash on high-risk lending. Last year, the central bank raised risk weights on unsecured consumer credit and bank loans to NBFCs to curb aggressive lending.

For policymakers, Malhotra outlined a clear strategy: accept that shocks are inevitable and focus on making the financial system a shock absorber. This means improving cross-border data sharing, running better stress tests, and expanding supervision to payment networks and third-party technology providers.

"If we succeed, financial stability will remain largely invisible," Malhotra said. "And in central banking, invisibility is perhaps the most invaluable and meaningful measure of success."