Growing trade disruptions and intensifying geopolitical hostilities could negatively impact the domestic growth outlook and reduce the demand for bank credit, which has decelerated sharply, cautioned the Financial Stability Report (FSR).

Moreover, deceleration in global growth will act as a drag on domestic output. It is estimated that a 100 basis points (bps) slowdown in global growth can, ceteris paribus (with other conditions remaining the same), pull down India’s growth by 30 bps.

The aforementioned observation comes even as non-food bank credit growth of scheduled commercial banks (SCBs) decelerated to 9.8 per cent in May 2025 against 16.2 per cent, per the latest RBI data. The slowdown in credit growth was across the board -- agriculture and allied activities, industry, services and personal loans.

Retail risks

The FSR (which is a half-yearly publication, with contributions from all financial sector regulators) also flagged weakening asset quality in unsecured retail loans despite moderation in credit to this segment.

The report underscored that overall, the risks to the Indian financial system from lending to households remain contained, with easing monetary policy cycle likely to reduce debt service pressures on borrowers going forward. However, the trend in household debt accumulation, especially among lower-rated borrowers, requires close monitoring.

Referring to the many structural shifts that are reshaping the global economy, including growing fragmentation in trade, rapid technological disruption, ongoing climate change and protracted geopolitical hostilities, RBI Governor Sanjay Malhotra, in his foreword to the FSR, said: “In this global milieu, the Indian economy remains a key driver of global growth.

Growth outlook

“Growth momentum is buoyed by strong domestic growth drivers, sound macroeconomic fundamentals and prudent policies. Nonetheless, external spillovers and weather-related events could pose downside risks to growth.”

The outlook for inflation, on the other hand, is benign and there is greater confidence in the durable alignment of inflation with the Reserve Bank’s 4 per cent target.

The report noted that the economy is growing at a healthy pace, with the financial system meeting the financing needs of all sectors of the real economy.

At the same time, domestic financial stability risks remain contained, as reflected in improving asset quality, strong capital and liquidity buffers and robust profitability of banks and non-bank lenders.

“The domestic financial system, however, could be impacted by external spillovers....Moreover, it could also lead to increased risk aversion among investors and further corrections in domestic equity markets, which, despite the recent correction, remain at the high end of their historical range,” per the report.

The Governor emphasised that the 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) also augur well for the economy.

Overall, while the broader financial system remains resilient, the report said there is some build-up of stress, primarily in financial markets on account of global spillovers.

This is reflected in the marginal rise in the financial system stress indicator (FSSI), an indicator of the stress level in the Indian financial system, compared to its position in H1:2024-25

Published on June 30, 2025