A “sharp correction” in global equity markets, owing to a reassessment of corporate earnings and valuation of AI stocks, could hit India as well  | Photo Credit: ANI

The Reserve Bank of India’s bi-annual Financial Stability Report has observed that India’s financial sector is robust enough to take global financial turbulence in its stride. While this is true, the report does well to point out chinks in the armour — such as the dangers of ‘interconnectedness’, which forms a dominant refrain of the report; loan stress building up in MSMEs; and signs of NBFC vulnerability.

However, the banking sector remains stable in terms of parameters such as capital adequacy and liquidity coverage. On the external account, the RBI’s recent moves to attract overseas debt flows are slated to elicit a positive response. The FSR has taken a surprisingly grim view on global financial stability — despite the interim peace deal between the US and Iran. There could be bouts of exchange rate volatility as supply chain disruptions persist, it observes. There are liquidity risks building up on the global stage. A “sharp correction” in global equity markets, owing to a reassessment of corporate earnings and valuation of AI stocks, could hit India as well. In other words, a war-induced supply shock may be followed by a markets shock. Global bond markets do not seem to inspire confidence either. Large and leveraged hedge funds involved in sovereign bond arbitrage trades could unwind their positions in times of market stress, with global spillovers. Flows taking advantage of the yield spread between the advanced and emerging markets could reverse, the report warns.

A huge private credit market, estimated at $1.5-2 trillion, with a “diverse set of interconnected banks and non-bank participants” is a cause for concern — with GFC overtones. It is worth noting that India’s external debt too has crept up in FY26 to above 20 per cent of GDP. The RBI has the firepower to manage a liquidity shock arising from various factors — with the added one of liquidity tightening by central banks globally. The report observes that gross NPAs of banks are at 1.8 per cent of advances; liquidity coverage ratio stands at 124.2 per cent, and Tier-1 capital is at 15.3 per cent of risk weighted assets. The NBFCs and urban cooperative banks are sound, broadly speaking. Corporate balance sheets are robust.

But there are indications of trouble at the lower end of the socio-economic pyramid. Stressed accounts (SMA-1 and SMA-2) have been climbing across the MSME space, and sharply in micro enterprises. The increase is pronounced in tourism, retail trade, agro products and engineering. This could translate into higher NPAs. Risks in the NBFC sector are up on account of “slight weakening in profitability and liquidity metrics”. Household debt has been on the rise, and stands at 45.5 per cent of GDP, with loans for consumption outpacing asset creation. It is worth asking whether the recent relaxations in prudential norms to push credit require fine-tuning.

Published on July 3, 2026