RBI Financial Stability Report (FSR) – December 2025

The December 2025 Financial Stability Report (FSR) presents a cautiously optimistic assessment of India’s financial system amid a volatile and uncertain global environment. While global macro-financial risks remain elevated due to geopolitical tensions, trade fragmentation, stretched asset valuations and rising public debt, India stands out as a relative anchor of stability, supported by strong domestic demand, improving balance sheets and prudent regulation.  

High global growth masks vulnerabilities

Globally, growth has surprised on the upside in 2025, aided by front-loaded trade, fiscal support and unprecedented investment in artificial intelligence (AI). However, the RBI flags that this apparent resilience masks deeper vulnerabilities. Equity valuations, particularly in AI-linked stocks, are stretched, hedge fund leverage is rising, private credit markets are expanding rapidly with limited transparency, and stablecoins are becoming more systemically relevant. The disconnect between high uncertainty and low market volatility raises the risk of abrupt corrections. A disorderly adjustment in global risk assets, especially US equities, could have meaningful spillovers across emerging markets.

Indian economy remains resilient

Against this backdrop, India’s macroeconomic fundamentals remain robust. Real GDP growth exceeded expectations in the first half of FY26, driven by strong private consumption and sustained public capital expenditure. Inflation has moderated materially, fiscal consolidation is progressing, and India’s sovereign rating was upgraded by S&P in August 2025. The external sector remains resilient, with a manageable current account deficit, improving financial account balance, and foreign exchange reserves providing more than 11 months of import cover.

Domestic financial system remains robust

The domestic financial system continues to display strength across institutions and markets. Scheduled Commercial Banks (SCBs) report strong capital adequacy, ample liquidity buffers, improving asset quality and stable profitability. Stress tests indicate that even under severe macroeconomic shocks, banks would maintain capital well above regulatory thresholds. Credit growth has revived, with improving risk profiles in both corporate and household lending, though pockets of stress remain in unsecured retail loans and microfinance.

Non-Banking Financial Companies (NBFCs) also remain resilient. Capital positions are strong, asset quality is improving and profitability is stable. While NBFC-MFIs have seen some rise in credit costs, overall systemic risk remains contained. Importantly, stress tests suggest that aggregate NBFC capital would remain above regulatory requirements even under adverse scenarios.

Financial markets stable despite foreign outflows

Financial markets in India have been relatively stable despite global volatility. Equity markets have been supported by strong domestic institutional investor flows, resilient SIP inflows and improving corporate earnings. However, valuations remain at the higher end of historical ranges, and earnings expectations have softened. Bond markets are adjusting to higher sovereign issuance and a steepening yield curve, while demand for long-term government securities from traditional institutional investors has moderated.

A notable theme in the report is the growing interconnectedness between banks, NBFCs, mutual funds and other financial entities. While this enhances credit transmission and financial deepening, it also amplifies contagion risks during stress episodes. The RBI’s network and contagion analysis shows that while the system is resilient, shocks can propagate faster in an increasingly interconnected environment.

The report also places emphasis on emerging risks from stablecoins, private credit, climate finance and artificial intelligence. Stablecoins, in particular, are highlighted as a potential channel of cross-border spillovers due to their scale, reserve composition and links to traditional financial markets.

Regulatory framework continuously strengthening

On the regulatory front, Indian authorities continue to strengthen resilience through enhanced supervision, improved governance standards, simplified regulatory frameworks and stronger customer and investor protection. The approach remains balanced—supporting innovation and growth while safeguarding systemic stability.

In conclusion, the December 2025 FSR reinforces confidence in India’s financial system. Strong growth, sound institutions and sizable buffers provide resilience against global shocks. However, elevated asset valuations, global spillover risks and evolving non-bank and digital finance channels warrant continued vigilance. For investors, India remains a structurally strong but tactically selective opportunity.

…more on this tomorrow 

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