RBI Governor Sanjay Malhotra stated on Saturday that the Indian financial system has demonstrated resilience and the economy has successfully managed the crisis in the Middle East; however, he emphasized the need for vigilance among policymakers.
At the Kautilya Economic Conclave, organized by the Institute of Economic Growth and the Ministry of Finance, Malhotra asserted that complacency should not be shown, as the economic and financial costs of accumulating vulnerabilities are too high. He added that today's stability does not guarantee future immunity and expressed commitment to maintaining a strong and resilient financial system by closely monitoring emerging vulnerabilities.
The Governor warned about the potentially adverse impact of the war in Iran, which affected supply chains. He noted that the financial system absorbed the supply shock caused by the Middle East conflict well. Nevertheless, the global economic environment remains complex, as the conflict has intensified inflationary pressures and exacerbated financial system vulnerabilities, though India is handling this situation from a position of strength.
Malhotra cautioned against overestimations, particularly regarding artificial intelligence (AI), as well as the high level of global debt and leverage, which could negatively affect banks and markets if financial conditions tighten. Furthermore, he mentioned cyber risks exacerbated by the development of AI.
He stated that strong macroeconomic fundamentals and a resilient financial system provide confidence in the ability to withstand this prolonged shock. In this regard, additional measures are being taken to enhance resilience to such shocks, including diversifying import sources, increasing energy self-sufficiency and other critical resources, improving production competitiveness, expanding market access through free trade agreements, and promoting settlements in local currencies.
The Governor also noted that the yield on Indian bonds rose only partially in response to rising global energy prices and global rates, indicating prudent fiscal management, sound monetary policy, and reduced structural inflation pressure. He added that the private lending market in India remains small, stock markets have corrected in recent months, and cyber risk management has been strengthened. Overall, the financial system is very resilient, supported by healthy bank and NBFI balance sheets.