Thank you for inviting me to speak today.

2. I would like to speak on financial stability, the institutional mechanism, approach and tools for financial stability in our country, the emerging global risks, and our assessment of the financial system.

I. What is Financial Stability?

3. As we all know, financial stability is the ability of the financial system to facilitate and enhance economic and financial transactions, manage risks, and absorb shocks¹. A stable financial system is one in which financial intermediaries, markets and market infrastructures reliably provide the financial services that households and businesses depend on, including during periods of economic and financial market stress. It is a system in which households and businesses have the ability and confidence to save, borrow, invest, insure, make payments, manage risk and plan for the future².

II. Why financial stability?

4. One may ask the question: why talk about financial stability when the global financial system, despite repeated shocks, has been rather resilient and financial markets orderly. India too has had a stable financial system and among the strongest balance-sheets – of banks, corporates, governments and households – for a long period of time.

5. In fact, it is these very prolonged periods of stability that can encourage risk-taking and leverage, while fading memories of past crises can weaken the appetite for prudence, as Minsky's Financial Instability Hypothesis³ reminds us.

6. I say this not because we see signs of any imminent stress but because we need to remind ourselves to remain alert to the risks. Our experience of the past two decades offers an important lesson: banking stress can build quickly and take years to resolve. It took nearly a decade to clean up the legacy of excessive lending and NPAs from the early 2000s. We cannot afford to become complacent; the economic and financial costs of allowing vulnerabilities to build up are simply too high.

7. There is another reason why I wish to speak on this topic. The international order that emerged in the aftermath of the Washington Consensus, providing the broad framework for decades of globalisation, economic integration and relative stability, is under considerable strain. Geopolitical and geo-economic fragmentation, strategic realignment, trade restrictions, repeated supply shocks, technological disruption and climate-related risks are interacting in ways that are difficult to predict, and even more difficult to model using historical relationships. For central banks, this has important implications, as we cannot look at price and financial stability in isolation from these developments.

III. Financial Stability in India – the Institutional Mechanism

8. In the Indian context, while the RBI Act, 1934 does not explicitly mandate RBI to maintain financial stability, it is implicit in the various functions allocated to it. Let me describe a few. The preamble to the RBI Act assigns RBI the responsibility to maintain monetary stability and price stability.⁴ Section 45W of the same Act requires RBI to regulate the financial system of the country to its advantage. FEMA, 1999 provides for the orderly development and maintenance of the forex market.

9. It is also germane to mention that the mandate of price stability cannot be achieved without financial stability. A stable financial system is essential for the effective transmission of monetary policy. Similarly, the full potential of economic growth can only be realised if the financial system is healthy and stable.

10. Being the regulator and supervisor of banks, NBFCs and payment systems, the lender of last resort and deposit insurer gives the RBI the mandate, capability and the tools to assess emerging vulnerabilities and take timely corrective action.

11. The Financial Stability and Development Council (FSDC) and its sub-committee provide the institutional mechanism to exchange information and coordinate policy actions with other financial sector regulators and the government agencies to preserve financial system stability.

IV. Financial Stability in India – Approach and the Tools

12. As for our approach to preserving financial stability, we realise that we cannot prevent every shock, whether originating in the real economy, or through a geopolitical event, commodity price shock or technological disruption. What we can ensure is that the financial system acts as a shock absorber. Our focus therefore is on enhancing the resilience of the financial system.

13. We achieve this through a combination of tools - prudent regulation, risk-based supervision, macroprudential measures, liquidity support including emergency liquidity assistance and resolution.

14. Our regulations focus on building a financial system that is well-capitalised, liquid and well-governed so as to enable it to manage and absorb shocks. We recognise that attempting to remove all risks would curtail innovation and investment. Regulations, therefore, strive to strike the right balance between risk management and supporting economic growth.

15. We have a well-developed system of off-site and on-site supervision. Our supervisory approach increasingly draws on data analytics, technology-enabled surveillance and thematic assessments to identify emerging risks and vulnerabilities at an early stage. We periodically conduct stress tests to identify vulnerabilities and check resilience. In collaboration with the other financial sector regulators, we present our assessment of financial stability in the half-yearly Financial Stability Reports (FSR).

16. Our countercyclical macroprudential policies are particularly important in leaning against the build-up of vulnerabilities over the financial cycle. For example, in 2007, risk weights on commercial real estate were increased and similarly, in 2023, risk weights on certain consumer credit exposures and bank lending to NBFCs were enhanced in view of the rapid expansion in unsecured credit.

17. Central banks have the role of the lender of last resort to deal with a liquidity crisis. This can, however, create a conflict with the goal of price stability in periods of high inflation. This requires tools that are targeted and temporary, provided the crisis is truly of liquidity and not of solvency. For example, during the COVID pandemic, we provided targeted and temporary liquidity facilities to financial intermediaries and markets, including NBFCs, MFIs, mutual funds and other affected sectors like MSMEs.

18. We usually do not use monetary policy to address financial stability risks. We follow the separation principle – monetary policy for price stability and targeted regulatory, supervisory and macroprudential tools where financial stability risks are identified. At the same time, we are conscious that monetary policy can “get in all the cracks”⁵ and therefore we do keep financial stability in mind in our monetary policy discussions.

V. Emerging Risks to Global Financial Stability

19. Let me now come to the major emerging global financial stability risks. The financial system has absorbed the supply shock due to the West Asia conflict well. However, the global economic environment remains challenging. The conflict has exacerbated inflationary pressures and enhanced financial system vulnerabilities. Let me highlight some of the major risks.

20. One, Elevated Global Debt. Global debt-to-GDP levels have risen, maturity periods shortened and sovereign bond yields hardened sharply. This has several implications. For sovereigns, higher borrowing costs can narrow fiscal space, and worsen debt dynamics. For corporates, tighter financial conditions could strain debt-servicing capacity. For banks, sovereign bond losses may weaken their balance-sheets, precisely when the governments face fiscal pressures in supporting troubled banks. Moreover, emerging markets, especially those having high sovereign debt with non-residents, may face capital outflows as the carry trade unwinds.

21. Two, Stretched Asset Valuations, particularly AI-related. The AI investment cycle has been a major support for global financial markets, with strong earnings driving significant gains in AI-related equity valuations. However, as the investment cycle matures, any slowdown in AI investment or earnings could trigger a sharp repricing of financial assets, especially in the AI value chain. High risk appetite has spurred an increase in leverage which, along with declining free cash flows among major AI firms, could further amplify market corrections and financial market volatility.

22. Three, Elevated Leverage. In pursuit of higher returns, hedge funds, option sellers, exchange-traded funds, and other nonbank financial intermediaries (NBFIs) have expanded leverage in both equity and bond markets. Rising leverage is a sign of a maturing financial cycle. This is of concern especially when equity valuations are stretched and Bank–NBFI interconnectedness has deepened across both the liability and asset sides of balance sheets, shifting from a predominantly funding-based relationship into a broader network of balance sheet interlinkages. Any tightening of financial conditions can thus spill over to banks and other markets.

23. Four, Private Credit. Another source of vulnerability is private credit, as signalled by some high-profile defaults in this sector, suggesting weak lending standards.

24. Five, Cyber Risks Compounded by AI. The emergence of AI has heightened cyber risks, model risk, third-party dependence, and erosion of human oversight and accountability.⁶ With the development of sophisticated AI with tremendous autonomy and problem-solving capabilities, the most immediate concern, however, is regarding cyber risk. This is especially so for the highly interconnected financial system which does not have national borders. Large differences in cyber capabilities and resilience among countries have implications for jurisdictions far beyond the source of the weakness.

25. While each one of these risks individually may not be a matter of concern as of now, the simultaneous occurrence of these shocks can put significant pressure on the global financial architecture.

VI. Financial Stability in India: Assessment of the Present

26. What implications do these global risks have for India? Since India is a large open economy, hypothetically, global developments can have implications for the domestic financial system.

27. Although India remains exposed to the effects of the West Asia conflict through higher commodity prices and external sector pressures, our economy is navigating this phase from a position of strength. Strong macroeconomic fundamentals and a resilient financial system provide confidence in our ability to withstand this lingering shock. At the same time, we are taking further measures to enhance our resilience to such shocks. These include diversification of import sources; enhanced self-sufficiency in energy and other critical resources; building strategic petroleum reserves; accelerating energy transition; enhancing the competitiveness of domestic manufacturing; deeper integration into global value chains; expanding market access through free trade agreements; and promoting trade settlement in local currencies.

28. Indian government bond yields have risen only partially in response to higher global energy prices and global bond yields. This reflects prudence in fiscal management as the government continues the path of fiscal consolidation, credible monetary policy and declining structural pressures on inflation.

29. Equity markets in India have corrected in recent months, albeit from high valuations, but the movement has been orderly. As for corrections in AI-related valuations in advanced economies, they may be positive for capital inflows if and when they happen.

30. As regards AI and cybersecurity, we have strengthened technology and cyber-risk governance, through directions issued in 2026 for commercial banks, including Board oversight, defined CISO responsibilities, and controls for access, third-party arrangements and incident response. The draft Model Risk guidance for regulated entities, including NBFCs, sets out model life-cycle safeguards such as risk-based oversight, explainability, red-teaming and human oversight.

31. Private credit in India is still small and not assessed to be a risk. Similarly, NBFCs, despite their increasing interconnectedness with banks, are assessed to be strong.

32. Overall, the Indian financial system is assessed to be very resilient, supported by healthy balance sheets of banks and NBFIs. The June 2026 Financial Stability Report stress tests reaffirm this resilience, with banks’ aggregate CET1 ratio remaining comfortable under all adverse scenarios. Similarly, the NBFCs on average have a CRAR of 24.6 per cent (as on March 31, 2026) as against a regulatory requirement of 15 per cent.

33. But today's resilience may not necessarily imply tomorrow's immunity. We are committed to remaining vigilant against emerging vulnerabilities and continuing to keep our financial system strong and resilient.

VII. Conclusion

34. Let me conclude with five key priorities that policymakers must factor in when safeguarding financial stability.

35. First, let us acknowledge that some shocks will be inevitable. Financial stability is not about preventing them. It is about strengthening systemic resilience to face those shocks and contain their amplification. Shocks may be endogenous or exogenous. Our aim must be to foster a financial system that can provide financial services in all states of the world, even under severe shocks.

36. Second, a new generation of systemic risks is taking shape. Assessing them and their complex interactions is vital. Risks are increasingly exogenous, cross-border and interconnected. The next financial crisis may not originate in a bank, or even in finance. It may begin with a geopolitical event, a cyberattack, or a technological failure and affect the financial system through multiple channels. To strengthen systemic resilience, we must aim to better understand the network of dependencies and contagion channels and make scenario analysis a cornerstone of risk management.

37. Third, we must improve monitoring and assessment frameworks. For that, we need better and more granular data. The financial system is becoming increasingly complex, but data on NBFIs, interconnected exposures, technology dependencies and cross-border positions remain fragmented. In an increasingly interconnected financial system, the quality of our data will increasingly determine the quality of our risk assessment.

38. Fourth, resilience must be system-wide. A strong banking system is necessary, but not sufficient. We need resilience across sectors and institutions: NBFIs, financial markets, payment systems, technology infrastructure, critical third parties and cross-border financial networks. Financial instability anywhere can become a threat to financial stability everywhere.

39. Fifth, innovation must strengthen, not fragment, the foundations of trust. Artificial intelligence, tokenisation, and new forms of financial intermediation can dramatically improve efficiency. But innovation will be sustainable only if the financial system preserves the fundamental properties on which trust rests: sound institutions, settlement finality, singleness of money, and financial integrity.

40. The challenge before us is to build a financial system that can withstand the shocks we anticipate and those we cannot yet foresee. This requires resilient institutions, better data, deeper markets, credible safety nets, effective resolution mechanisms and regulation and supervision that are proactive and forward-looking, while being proportionate.

41. If we succeed, financial stability will remain largely invisible. And, in central banking, invisibility is perhaps the most meaningful measure of success.

Thank you.

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¹ Defining Financial Stability, Garry J. Schinasi, October 2004, IMF Working Paper

² Financial Stability, Reserve Bank of Australia (https://www.rba.gov.au/fin-stability/)

³ Hyman P. Minsky (1992), “The Financial Instability Hypothesis”, The Jerome Levy Economics Institute of Bard College, Working Paper No. 74, May.

⁴ The preamble to the RBI Act 1934 describes RBI’s main functions as: “…….to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth.”

⁵ See Jeremy C. Stein (2013), “Overheating in Credit Markets: Origins, Measurement, and Policy Responses”, Federal Reserve Bank of St. Louis, February 7

⁶ See Sanjay Malhotra (2026), “Winning in the AI Era: The New Playbook for Indian Banks”, FIBAC 2026 Conference, Mumbai, August 11