India's financial system remains resilient supported by strong bank, non-bank balance sheets: RBI report
The Reserve Bank of India (RBI) in its Financial Stability Report (FSR) has said that Indian financial system remains resilient, supported by strong bank and non-bank balance sheets, as gross non-performing assets of banks have touched a multi-decadal low of 1.8% at end-March 2026. It pointed that the country’s sound macroeconomic fundamentals place it in a stronger position than many of its peers and provide greater resilience to external shocks than in past crisis episodes. However, it flagged that exchange rate volatility may rise if oil prices increase due to the delayed normalisation of supply chain disruptions and additional demand to replenish inventory. Although, it added that the interim peace deal between Iran and the US can provide tailwinds to Indian economic growth.
Despite banking system’s resilience, the report highlighted funding as key emerging challenge for the banks at a time when savers chase higher-yielding avenues like equities and mutual funds to park their money. It added that banks’ liability profile is shifting from low-cost current and savings account (CASA) to higher-cost term deposits and certificates of deposit, pushing up the marginal cost of funds. However, the banks have resorted to higher-yielding loan avenues like small business lending to protect margins. Besides, it noted that AI-enabled cyberattacks are the most important near-term challenge for banks from a cyber threats perspective amid the threats posed by Anthropic’s Mythos model.
The report has emphasised that the Indian economy and financial system are exposed to geopolitical tensions and associated shocks, despite receding headwinds from the West Asia conflict amid the signing of the interim peace deal. It also flagged that fiscal deficit can come under pressure because of the higher prices of energy and other commodities, their limited pass through to pump prices, excise duty cuts and higher outgo on subsidies. However, RBI noted that the pressure on the exchange rate and bond yields has eased post the measures taken by the RBI and the Government to attract capital flows, helping overall financial conditions to ease. On the inflation front, it said a combination of conflict-driven supply shock and projected weak monsoon due to El Nino can push headline inflation to the higher end of the tolerance band or around 6% in Q3FY27 and also worsen inflation expectations.
