Finance system resilient, economy braved West Asia crisis: RBI governor

Malhotra cautioned against stressed valuations, especially those related to AI, elevated debt levels globally, elevated leverage that could spill over to banks and markets in case of tightening of financial conditions, private credit, and cyber risks that have been compounded by AI.

NEW DELHI: RBI governor Sanjay Malhotra on Saturday said the Indian financial system remained resilient and the economy had navigated the West Asia crisis well, but policymakers needed to stay vigilant.“We cannot afford to become complacent; the economic and financial costs of allowing vulnerabilities to build up are simply too high… Today’s resilience may not necessarily imply tomorrow’s immunity. We are committed to remaining vigilant of emerging vulnerabilities and continuing to keep our financial system strong and resilient,” he said at the Kautilya Economic Conclave, organised by the Institute of Economic Growth and the finance ministry.He cautioned against the possible adverse impact of the war in Iran, which has hit supply chains. “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,” the RBI governor said, adding India was navigating from a position of strength.Malhotra cautioned against stressed valuations, especially those related to AI, elevated debt levels globally, elevated leverage that could spill over to banks and markets in case of tightening of financial conditions, private credit, and cyber risks that have been compounded by AI.“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,” he said, listing diversification of import sources, greater self-sufficiency in energy and other critical resources, enhancing manufacturing competitiveness, expanding market access through free trade agreements, and promoting trade settlement in local currencies, among others.

The RBI governor also said Indian bond yields had risen only partially in response to higher global energy prices and global yields, reflecting the prudence in fiscal management, credible monetary policy and declining structural pressure on inflation.He said the Indian private credit market remained small, equity markets had corrected in recent months, and cyber risk governance had been strengthened. “Overall, the financial system is assessed to be very resilient, supported by healthy balance sheets of banks and NBFIs,” Malhotra said.