Why in News?

Despite global economic uncertainty, the Indian economy continues to drive global growth, supported by strong fundamentals and prudent policies, according to RBI's latest Financial Stability Report.

What’s in Today’s Article?

• Financial Stability Report (FSR)
• Key Highlights of the June 2025 Financial Stability Report (FSR)

Financial Stability Report (FSR)

• FSR is a biannual publication released by the Reserve Bank of India (RBI).
• It provides a comprehensive assessment of the health, resilience, and risks facing the Indian financial system.
• Purpose
  • To ensure transparency, promote public confidence, and guide policy actions aimed at preserving financial stability in India.
• Key Features
  • Published Twice a Year
    • Released in June and December to give regular updates.
  • Covers Entire Financial System
    • Includes banks, non-banking financial companies (NBFCs), cooperative banks, and other financial intermediaries.
  • Assesses Systemic Risks
    • Evaluates both domestic and global risks that may affect India’s financial stability.
  • Stress Tests
    • Conducts stress testing on banks to gauge their ability to withstand adverse economic conditions (like high NPAs, credit shocks, etc.).
  • Policy Guidance
    • Offers insights for regulators and policymakers on maintaining stability and resilience.

Key Highlights of the June 2025 Financial Stability Report (FSR)

• India Remains a Key Global Growth Driver
  • Despite a challenging global environment, India continues to contribute significantly to global growth.
  • Growth is supported by strong domestic demand, sound macroeconomic fundamentals, and prudent policymaking.
• GDP Growth Outlook for FY26
  • Real GDP growth projected at 6.5% for FY2026.
  • Growth remains below RBI's aspirations, constrained by global uncertainty, trade disruptions, and elevated geopolitical tensions.
• Risks to Growth: External and Climate-Linked
  • External spillovers (e.g., US tariffs, global trade fragmentation) and weather-related events (e.g., climate shocks) may impact India’s growth.
  • Geopolitical risks and policy unpredictability have raised global economic uncertainty.
• Inflation Under Control
  • Inflation outlook is benign, with CPI aligning with RBI’s target of 4% ± 2% band.
  • May 2025 CPI at 2.8%, the lowest since February 2019.
  • RBI expresses greater confidence in durable price stability under the Flexible Inflation Targeting (FIT) framework.
• Financial Stability and Sectoral Resilience
  • Indian financial system shows improving resilience, with:
    • Strong capital buffers
    • Low non-performing assets (NPAs)
    • Healthy profitability
• Stress Tests Confirm Systemic Strength
  • Stress tests show that:
    • Banks and NBFCs maintain adequate capital even under adverse scenarios.
    • Mutual funds and clearing corporations show strong resilience.
    • Insurance sector maintains a solvency ratio well above minimum thresholds.
• Scheduled Commercial Banks (SCBs) in Strong Health
• SCBs benefit from:
  • Multi-decadal low NPAs
  • Robust capital and earnings
• Macro stress tests validate that most SCBs are adequately capitalized.
• NBFCs and Corporate Sector Remain Robust
  • NBFCs exhibit:
    • Sizable capital buffers
    • Improving asset quality
    • Strong profitability
  • Corporate balance sheets continue to support macroeconomic stability.
• Financial Conditions Remain Supportive
  • Financial conditions have eased due to:
    • Accommodative monetary policy
    • Low market volatility
• Global Financial System: Elevated Risks
• Near-term global financial stability risks have increased.
• April 2025’s market turbulence exposed vulnerabilities and high asset price sensitivity.
• Risks from high public debt, tech disruptions, climate change, and prolonged conflicts remain significant.
• Systemic Risk Perception: Medium but Stable
  • Systemic Risk Survey (SRS) in May 2025:
    • All major risk categories rated as ‘medium risk’
    • 92% respondents are confident in the soundness of the Indian financial system.
• Need for Policy Vigilance
  • The report emphasizes the need for vigilance, agility, and prudence among central banks and regulators.
  • The global economic landscape is becoming harder to forecast due to structural shifts and shocks.