RBI Report: India’s Financial System Resilient Amid Global Volatility

The Reserve Bank released the June 2025 issue of the Financial Stability Report (FSR), which reflects the collective assessment on the resilience of the Indian financial system and risks to financial stability. The global economic scenario reflects the uncertainties in economic and trade policy uncertainties Soaring public debt levels, volatile government bond markets reaching unbelievable levels, and highly increased asset valuations do not potent a comfortable economic future. Amidst this uncertain economic future, interestingly, India remains an oasis with its strong macroeconomic fundamentals, and prudent economic policies. Presence of sound balance sheets of the banks with sufficient capital buffers, healthy passing of stress tests by mutual funds and clearing corporations add bright future incorporating an optimistic feeling for the global growth. Banks do undergo very strenuous stress tests to withstand the vicissitudes of time.

Let us understand the report containing 152 pages report, inclusive of 3 chapters (Macro financial risks, Financial Institutions: Soundness and Resilience, and Regulatory Initiatives in the Financial Sector). It delves thereafter into Annex 1: Systemic Risk Survey, Annex 2: Methodologies and Annex 3: Important Domestic Regulatory Measures. Nearly 120 plus charts explain and finalize the economic scenarios firmly.

I shall lead the understanding in a systematic manner to comprehend the lengthy reports.

Chapter 1: Macro financial Risks

Geopolitical Risk and Economic Policy Uncertainty index was immediately affected by US Tariff and Trade Policy Uncertainty. Chat 1.1 reflects the global uncertainty and U.S. Tariff trade policy.

Charts 1-19 indicate the following indicators.

• The unsettling of the global trade outlook following the announcement of tariffs by the US in April 2025 created significant turbulence in global financial markets,
• Tariff by U S government followed by the reactive economic measures taken by other countries resulted in increase in safe haven government bonds yields going up enormously. Violent reactions in U S Stock prices showed concern among the investing public.
• The market liquidity in the US$ 29 trillion US treasury market, the largest and the most liquid bond market in the world, has been falling and dropped further in April 2025.
• What about the US currency, the global transaction currency among all nations? In the current episode of exceptional economic uncertainty, the prices of US financial assets, including equities, have fallen forcing global investors to rebalance their portfolio. This has contributed to the depreciation of the USD, as growth slowdown fears and fiscal worries continue to weigh on the dollar.
• Now Domestic financial markets: Charts 20-73 do arrive at some of the major conclusions based upon the study of the variables.
• Since April 2025, financial conditions have eased supported by the Reserve Bank’s liquidity infusion measures and policy rate cuts. The Reserve Bank has injected durable liquidity amounting to about ₹9.5 lakh crore through suite of liquidity measures (open market operation purchases, buy-sell swaps and term variable rate repos) since January 2025, which led to system liquidity transitioning from deficit to surplus at end-March 2025. Additionally, the decision to cut cash reserve ratio (CRR) by 100 bps in a staggered phase will release ₹2.5 lakh crore of primary liquidity starting September till December 2025.
• During periods of heightened volatility, risk-off sentiments and sustained selling of Indian equities by the foreign portfolio investors, DIIs and individual investors (domestic households) have been providing strong support, thereby preserving market stability. Surprisingly, the constant support given by the domestic institutional investors and individual investors showed enormous faith in our economy. A very redeeming feature of our investment climate.
• One is tempted to ask whether any case study has been quoted by RBI in its lengthy report? Yes, please refer to pages 24-26 wherein the market reactions to the geo political risks like the wars at Gaza or Russian – Ukraine wars or earlier ones are given. I do quote charts Chart 1: Geopolitical Risk Indices (Standardised) – Global and India, index, Chart 2: Price and Volatility Reaction after Major Geopolitical Risk Event, and Chart 3: Dynamics of Stock Market Returns and Exchange Rate (USD/INR) Around Geopolitical Events.
• The conclusion arrived at was that the events did have impact on short term basis but the impact was not similar between the global and domestic geopolitical risk events.
• What about corporate sector? Indian corporate sector remained resilient even as firms are navigating heightened trade policy uncertainty. Despite the moderation in sales growth of listed private non-financial corporates (NFCs), their operating profit margin remained solid.
• At an aggregate level, the per capita debt of individual borrowers has grown from ₹3.9 lakh in March 2023 to ₹4.8 lakh in March 2025 (Chart 1.41 a). The rise in per capita debt has been mainly led by the higher-rated borrowers (Chart 1.41 b). 1.51 The share of better-rated customers (prime and above) among total borrowers is growing, both in terms of the outstanding amount and number of borrowers (Chart 1.42 a and b).
• This is important from a debt serviceability and financial stability perspective, as it indicates that household balance sheets at an aggregate level are resilient.

Chapter II: Financial Institutions: Soundness and Resilience (pages 55-95)

Some of the important conclusions arrived at and reported in these 40 pages are narrated below.

• Pages 55 to 77 contain enormous information on Asset Quality, Sectoral Asset Quality, Credit Quality of Large Borrowers, Capital Adequacy, Earnings and Profitability, Liquidity, Resilience – Macro Stress Tests, Sensitivity Analysis, Sensitivity Analysis of Small Finance Banks, Bottom-up Stress Tests: Derivatives Portfolio, Bottom-up Stress Tests: Credit, Market and Liquidity Risk.
• Let us learn some of the observations on the above matters. SCB indicates scheduled commercial bank.
• Deposits: SCBs’ aggregate deposits grew at 10.7 per cent (y-o-y) during 2024-25, notwithstanding a deceleration in respect of private sector banks (PVBs) and foreign banks (FBs) (Chart 2.1 a). Growth in term deposits continued to outpace that in current and savings account deposits.
• SCBs’ (Scheduled Commercial Banks) credit growth decelerated in 2024-25 across bank groups. SCBs continued to record improvement in their asset quality, with the GNPA ratio and NNPA ratio declining to multi-decadal lows of 2.3 per cent and 0.5 per cent, respectively (Chart 2.2 a and b).
• The half-yearly slippage ratio, measuring new accretions to NPAs as a share of standard advances at the beginning of the half-year, remained stable at 0.7 per cent (Chart 2.2 c). The provisioning coverage ratio (PCR) of SCBs at 76.3 per cent in March 2025 (Chart 2.2 d) was marginally lower than that in September 2024.
• The credit quality of larger borrowers has improved steadily over the last few years and their share in total GNPAs of SCBs stood at 37.5 per cent in March 2025, while their share in overall credit of SCBs stood at 43.9 per cent (Chart 2.4 a).
• As of March 2025, the capital to risk weighted assets ratio (CRAR) of SCBs increased to a record high of 17.3 per cent (Chart 2.5 a).
• SCBs have further improved their liquidity positions in March 2025.
• We may recollect the last decades failure of too big banks. Did RBI indulge in stress tests on banks?
• Stress tests: Three scenarios were considered like scenario no.1: (i) Adverse Scenario 1 (Geopolitical risk scenario): This scenario assumes a volatile global environment with heightened geopolitical risks and escalation of global financial market volatility.
• (ii) Adverse Scenario 2 (Global growth slowdown scenario): This scenario assumes a synchronised sharp growth slowdown in key global economies. Spillovers through trade and financial channels as well as market fragmentation dent domestic GDP growth. As a result, monetary policy eases to support growth. The scenario further assumes widening of lending spread due to higher uncertainty.
• What are the results? Please keep your deep breath to settle down.
• The macro stress tests results emphasise the resilience of SCBs to macroeconomic shocks. The results revealed that the aggregate CRAR of 46 major SCBs may marginally dip to 17.0 per cent by March 2027 from 17.2 per cent in March 2025, under the baseline scenario. It may decline to 14.2 per cent under adverse scenario 1, and to 14.6 per cent under adverse scenario 2.
• Yes, the final conclusion that none of the banks will fall short of the regulatory minimum of 9% in above stress tests.
• For a scholar, research student or any micro/macro- economic institutions, pages 13-44 offer a treasure hunt of various charts explaining various other tests on large borrowers, sensitivity analysis of small banks (let us recollect the recent occurrences of the failure of various banks to pay even the deposits on time), various tests on all types of loans, mutual funds, and clearing corporations is available.

Let’s move on to Chapter 3.

Global regulatory developments

Information on Banking, Financial Markets, Cyber Resilience, Climate Finance enlighten our minds.

Some concrete assertions from RBI.

1.0 The Basel Committee on Banking Supervision (BCBS) regularly reviews the impact of the Basel III standards on banks and publishes. the results reflecting different degrees of implementation of these standards such as risk-based capital ratio, leverage ratio framework and disclosure requirements, liquidity metrics such as LCR and NSFR. The good news is that the results1 highlighted that for Group 1 banks, NSFR remained stable while the LCR decreased slightly. Group 2 banks showed an increase in both LCR and NSFR.

2.0 What about the complex financial markets filled with the latest frameworks unknown to the operators due to the most complex technology on offer of financial products with the least information, the role of cyber crooks lifting the money under your own eyes, or the control of securitisation markets? One may recollect the complex opaque structures recently studied by SEBI/RBI and the results shown to us recently. Some related party transactions missed by the SCBs in disbursing of credit do remind us the opaque structures of the big borrowers.

3.0 To address such vulnerabilities, a recent evaluation report by the Financial Stability Board (FSB) assesses the extent to which G20 reforms on securitisation have achieved their financial stability objectives. The report reviews the implementation status of the International Organisation of Securities Commission (IOSCO) policy recommendations across FSB jurisdictions.

4.0 IOSCO made its observations on the basis of implementation of its guidelines on surveillance capabilities on a cross-market and cross-asset basis by market authorities. Its directions are as under.

5.0 Principle 6: The regulator should have or contribute to a process to identify, monitor, mitigate and manage systemic risk, appropriate to its mandate.

6.0 Principle 7: The regulator should have or contribute to a process to review the perimeter of regulation regularly.

7.0 To obviate the international cyber crooks operating across borders, the FSB has also issued a taxonomy package that uses the Data Point Model approach. Data Point Model is a data-centric method for organising objects hierarchically and can model various reporting scenarios.

• What about the local regulators from India who initiated a plethora of regulatory measures which are given below:
• Use of Indian Rupee for Cross Border Settlements, Prevention of Financial and Digital Payments Fraud, Amendments to Liquidity Coverage Ratio (LCR) Framework, Reserve Bank of India (Digital Lending Directions), 2025, Reserve Bank of India (Forward Contracts in Government Securities) Directions, 2025, Introduction of Specialised Investment Fund, Safer Participation of Retail Investors in Algorithmic Trading, etc. One can read pages 6-11 of the chapter 3 for details.
• Then what about the enforcement by regulators? During December 2024 – May 2025, the Reserve Bank undertook enforcement action against 177 REs (10 PSBs; 12 PVBs; three SFBs; one PB, three foreign banks, three RRBs; 118 co-operative banks; 22 NBFCs, one ARC, three HFCs and one CIC) and imposed an aggregate penalty of ₹29.15 crore for non-compliance with/ contravention of statutory provisions and/ or directions issued by the Reserve Bank. During December 2024-April 2025 prosecution cases were filed while penalties were imposed on 277 entities amounting to Rs 38.5 Crores.
• Corporate Insolvency Resolution Process (CIRP): Since the provisions relating to the corporate insolvency resolution process (CIRP) came into force in December 2016, a total of 8,308 CIRPs have been initiated till March 31, 2025 (Table 3.8), out of which 6,382 (76.8 per cent of total) have been closed. Out of the closed CIRPs, around 20 per cent have been closed on appeal or review or settled, 18 per cent have been withdrawn, around 43.2 per cent have ended in orders for liquidation and 18.7% ended in approval of resolution plans.
• Insurance: The IRDAI (Maintenance of Information by the Regulated Entities and Sharing of Information) consolidated its various directions issued and issued a new direction in 2025. It has issued comprehensive guidelines allowing insurers to use equity derivatives to hedge their equity investment portfolios, thus safeguarding the market value of insurers’ equity holdings by mitigating the impact of market volatility.

Now, we may need guidance to read annexure 1, 2, 3 which adorn the pages 117-152 of the report.

Annexure 1. Risk survey: Based on the views of 50 experts, all major groups were perceived to be in the medium category.

Annexure 2: Detailed mathematical formulations, statistical assumptions and the samples used on Scheduled commercial banks, Primary urban cooperative banks, Stress testing methodology of mutual funds, and non-banking financial companies for stress testing, credit default risk, credit concentration risk, Interest rate risk in trading book, Interest rate risk in banking book, liquidity risk etc.

Annexure 3: Important regulatory measures issued by RBI, SEBI, IRDAI, IBBI, International Financial Services Centres Authority (IFSCA) are given.

Conclusion:

RBI report contains nearly 120 charts, covers various scenarios both domestic and global, and refers to almost all relevant regulations issued by both global and domestic regulators. With the timely tightening of both global/domestic security/financial/regulatory measures, there is no likelihood of the total failure of the markets affecting the investor, depositor or one who avails the loans from the institutions. Definitely a common man is advised to be aware of cyber crooks, timely monitoring of their accounts and take remedial measures when the necessity knocks at his/her doors.

Reference

Reports- Reserve Bank of India

RBI – Financial stability report, June 2025

Caution

Though I tried to quote, assimilate, or explain in plain terms the complex picture given by RBI in its voluminous reports with the enabling assistance from the regulators, is not to be relied upon totally and the original report of nearly 152 plus pages must be studied for adequate reference.