External shock risks rise as geopolitics, AI reshape global economy; near-term outlook uncertain: RBI governor
Reserve Bank of India (RBI) Governor Sanjay Malhotra said on Tuesday that intensifying geopolitical fragmentation and rapid advances in artificial intelligence (AI) are the two major forces transforming the global economy and financial system.
Presenting the central bank’s Financial Stability Report (FSR), Malhotra noted that the likelihood of negative external shocks has gone up, with geopolitical conflicts and fragmentation posing significant policy challenges.
The FSR highlighted that banks’ asset quality strengthened further by March 2026, with the gross non-performing asset (GNPA) ratio falling to a multi-decade low of 1.8%. This improvement was seen across all categories of banks.
At the same time, the report projected that the combined GNPA ratio of 46 banks could inch up from 1.8% in March 2026 to 1.9% by March 2028 in the baseline scenario. Under stressed conditions, this ratio could climb to 3.8% and 4.1%.
Malhotra said the Indian economy and financial system have shown strong resilience despite facing large external shocks. He attributed this to robust growth, contained inflation, strong balance sheets of both financial and non-financial entities, and adequate buffers that have supported macro-financial stability. He added that authorities remain vigilant to evolving risks at home and abroad and are focused on further reinforcing safeguards for the economy and financial system.
Under the section ‘Banks, NBFCs remain sound’, Malhotra said the FSR confirms the robustness of India’s financial sector. Banks and non-banking financial companies, he said, are well-capitalised, maintain comfortable liquidity, enjoy healthy profitability, have low NPA levels, and are witnessing strong credit growth. Stress test results suggest these institutions are capable of absorbing adverse shocks.
He cautioned, however, that global financial stability risks are still high. Persistent inflation could force major advanced economy central banks to keep monetary policy tight, which may lead to more restrictive global financial conditions. In addition, high public debt, vulnerabilities in bond markets, elevated asset valuations, and the growing role of leveraged non-bank intermediaries could magnify the impact of future disturbances, he said.
Despite ongoing conflicts and continuing supply chain issues, Malhotra observed that the global economy has held up, supported in part by optimism about productivity gains from AI.
He added that, despite volatility from global uncertainties, financial markets have been operating smoothly. According to him, the financial system continues to be a key pillar backing the real economy and sustaining India’s growth momentum.
Malhotra stressed that maintaining public trust in the financial system requires more than just strong prudential metrics. Policies that ensure fair treatment of customers and enhance their overall experience are also essential. The RBI’s goal, he said, is to nurture a financial system that is resilient and stable, but also efficient, inclusive and dynamic, enabling households and businesses to participate in and benefit from a well-functioning economy.
On the asset quality front, the report said the annual slippage ratio has steadily declined over the past four financial years, reaching 1.2% in 2025-26. This was mainly due to lower fresh slippages into NPAs at public sector and private sector banks.
Credit quality improved across all major sectors of the economy. Even so, agriculture — while showing some improvement — continued to have the highest GNPA ratio at 5.1%, and accounted for the largest share of scheduled commercial banks’ GNPAs at 37.2% as of March 2026, the FSR said.
Within industrial subsectors and personal loan portfolios, asset quality generally improved across the board. The share of large borrowers in total credit of scheduled commercial banks rose slightly to 44.5% by end-March 2026, but their contribution to gross NPAs continued to fall. For large borrowers, the overall GNPA ratio across bank groups dropped to 1.2% at end-March 2026 from 2.4% at end-September 2024, the report added.
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