Financial Stability Report – An Overview
The Financial Stability Report (FSR) is a half-yearly publication that includes contributions from all financial sector regulators. It provides the collective assessment of the Sub Committee of the Financial Stability and Development Council on current and emerging risks to the stability of the Indian financial system. In this article we will see an overview of the report and will end with conclusion.
Financial Stability Report – An Overview
Global Macro financial Risks
The global economy and financial system are facing challenges due to elevated economic and trade policy uncertainties. Global growth forecasts have been downgraded by multilateral agencies, mainly due to trade disruptions and increased volatility. The changing political landscape and global factors are creating instability in financial markets, with government bond markets significantly affected.
Existing vulnerabilities such as high public debt levels, excessive risk-taking in the non-banking financial sector, and inflated asset valuations could worsen the impact of new shocks.
Different countries are balancing growth and inflation trade-offs, leading to varying monetary policy approaches. Emerging market economies are dealing with challenges from escalating trade tensions, prolonged geopolitical conflicts, and spillovers from advanced economies.
Domestic Macro financial Risks
Despite global economic uncertainties, the Indian economy continues to be a significant contributor to global growth due to its strong macroeconomic fundamentals and prudent policies. The economy’s growth is primarily driven by robust domestic demand, making it less vulnerable to global challenges.
India’s economy is growing steadily, with inflation under control, contributing to macroeconomic and financial stability. The financial system in the country is resilient, supported by healthy balance sheets of banks and non-banks.
Financial conditions have improved due to accommodative monetary policies and stable financial markets. Strong corporate balance sheets also contribute to overall macroeconomic stability. While the economy and financial system are well-equipped to handle tariff-related shocks, risks from global spillovers and geopolitical tensions remain a concern.
Financial Institutions: Soundness and Resilience
Scheduled commercial banks (SCBs) are in a strong position with ample capital reserves, minimal non-performing loans, and healthy profits, ensuring their soundness and resilience. Stress tests show that SCBs will continue to exceed regulatory capital thresholds even in unfavorable conditions.
Urban cooperative banks (UCBs) have improved their capital position, and non-banking financial companies (NBFCs) are meeting regulatory thresholds. The insurance sector, including life and non-life segments, has solvency ratios above the minimum requirements. Stress tests for mutual funds and clearing corporations demonstrate their resilience to shocks.
Regulatory Developments in the Financial Sector
Financial regulators globally have taken steps to bolster the financial system by implementing reforms in liquidity management, credit risk regulation, and securitisation practices. Furthermore, they are ramping up efforts to combat cyberattacks and technological failures through enhancing surveillance.
Regulators are evaluating risks related to climate change and incorporating climate goals into assessments of financial stability. National regulators are implementing reforms to enhance stability, transparency, and inclusivity in accordance with international standards, with a focus on preventing fraud, bolstering liquidity resilience, overseeing digital lending, and safeguarding retail investors.
Systemic Risk Assessment
The latest recent Reserve Bank systemic risk survey in May 2025 indicates that all major risk categories are classified as ‘medium risk’. Respondents are optimistic about the Indian financial system, with 92% expressing confidence. However, two-thirds of respondents have reduced confidence in the global financial system due to near-term risks such as geopolitical conflicts, capital outflows, and trade slowdowns.
Conclusion
The FSR report underlined that “Current account deficit (CAD) at 0.6 per cent of GDP during 2024-25 remains eminently manageable”. It is to be remembered that India has witnessed CA surplus in the fourth quarter of 2024-25.
The Union Budget data indicates that India’s public debt, including internal and external debt, is projected to increase to ₹196.78 lakh crore by the end of the financial year 2025-26, up from ₹181.74 lakh crore at the end of the 2024-25 fiscal year. This is a real concern for the economy.
The RBI’s assessments and stress tests show the system’s readiness, but also emphasize the importance of ongoing policy vigilance in the face of increasing external pressures. Overall, the FSR highlights India’s strong financial ecosystem despite global challenges.
