India’s economy remains strong despite global risks, driven by robust domestic demand, low inflation, and healthy banks, the RBI’s Financial Stability Report said. Banks are well capitalised, bad loans are falling, and growth remains strong.
India's economy continues to show strong growth and stability, even as the world faces wars, trade tensions, and market uncertainty. This is the key message from the Reserve Bank of India’s latest Financial Stability Report (FSR), released in December 2025.
The report says India’s growth is being powered mainly by strong domestic demand, low inflation, and a healthy banking system. At the same time, it warns that global risks such as geopolitical conflicts, trade barriers, and financial market shocks could still affect India in the near future.
What is the Financial Stability Report?
The Financial Stability Report (FSR) is a half-yearly publication by the Reserve Bank of India. It includes inputs from all major financial sector regulators. The report presents the combined assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC). Its main purpose is to examine:
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- The health of India’s financial system
- Risks to financial stability
- How well banks and markets can handle future shocks
The December 2025 edition looks at both domestic strengths and global risks.
Strong domestic demand keeps growth steady
According to the RBI, India’s economy continues to grow at a robust pace, mainly because of strong demand within the country. People are spending more, businesses are investing, and the government continues to support growth through public investment. These factors have helped India remain stable even when global growth has slowed.
The report says real GDP growth surprised on the upside in the first two quarters of the 2025-26 financial year:
- 7.8 per cent in Q1 (April-June 2025)
- 8.2 per cent in Q2 (July-September 2025)
This strong performance was supported by:
- Healthy private consumption
- Increased government spending on infrastructure
- Stable financial conditions
- Low inflation and prudent policies improve resilience
The RBI said benign inflation, fiscal consolidation, and careful macroeconomic policies have helped strengthen India’s economic resilience.
Low inflation has allowed households to spend more and businesses to plan better. At the same time, the government’s focus on managing public finances has improved confidence in the economy.
The report noted that India’s growth outlook remains positive due to:
- Low and stable inflation
- Easy financial conditions
- Above-normal monsoon
- Direct and indirect tax reforms
- Expansion of digital public infrastructure
- Indian financial system remains sound and resilient
The RBI said India’s domestic financial system remains strong, supported by:
- Healthy bank balance sheets
- Easy access to finance
- Low volatility in financial markets
The report added that the system has enough buffers to absorb shocks if conditions worsen globally.
Banks are in good health, RBI says
The report highlighted the strong position of scheduled commercial banks (SCBs). According to the RBI:
- Banks have strong capital and liquidity buffers
- Asset quality has improved
- Profitability remains robust
The RBI’s macro stress tests show that banks can handle losses even under severe adverse scenarios.
Bad loans expected to fall further
One of the most positive findings in the report relates to bad loans. The RBI said the gross non-performing assets (GNPA) ratio of banks is expected to improve further.
As of September 2025, the GNPA ratio stood at 2.1 per cent, a multi-decade low. Under the baseline scenario, it may fall to 1.9 per cent by March 2027. However, under adverse scenarios:
- GNPA could rise to 3.2 per cent in a moderate stress case
- It could rise to 4.2 per cent in a severe stress case
Even in these situations, banks are expected to remain stable.
Capital buffers remain strong
From a capital strength point of view, banks continue to be well protected. As of September 2025:
- State-owned banks had a capital-to-risk weighted assets ratio (CRAR) of 16 per cent
- Private sector banks had a CRAR of 18.1 per cent
The RBI said these levels are comfortably above regulatory minimums and allow banks to withstand economic shocks.
Mutual funds and clearing corporations also resilient
The report said stress tests confirm that mutual funds, clearing corporations are also resilient and capable of handling adverse conditions without threatening financial stability.
Despite India’s strong domestic position, the RBI warned of near-term risks from external factors. These include:
- Geopolitical tensions
- Trade-related uncertainty
- Volatility in global financial markets
The report said these risks could:
- Increase exchange rate volatility
- Reduce trade
- Lower corporate earnings
- Slow foreign investment flows
- Global markets show hidden vulnerabilities
The RBI raised concerns about the global financial system.
While markets appear strong on the surface, the report said underlying vulnerabilities are growing. It highlighted risks such as:
- Sharp rise in equities and risk assets
- High leverage among hedge funds
- Growth of opaque private credit markets
- Increasing use of stablecoins
These trends, the RBI warned, make the global financial system more fragile.
Risk of sharp market correction remains
The RBI said ample liquidity has supported risk-taking across asset classes. However, a sudden correction — especially if optimism around artificial intelligence fades could spill over into the wider financial system.
Such a correction could affect emerging markets like India due to rising global interconnectedness.
Impact of US markets and ,tariffs
The RBI warned that a sharp fall in US equities could impact Indian markets and tighten financial conditions. It also noted that the rupee depreciated against the US dollar during the period. This happened due to:
- Falling terms of trade
- High tariffs imposed by the US
- Slowing capital flows
The report said India faced the highest effective US tariff rate among its trading partners. This caused the rupee to weaken even though the US dollar was broadly weak against other global currencies.
Global growth remains resilient but uncertain
Globally, growth has been stronger than expected despite:
- Trade tensions
- Geopolitical conflicts
- Policy uncertainty
This resilience has been supported by:
- Front-loaded trade
- Fiscal support
- Strong investment linked to artificial intelligence
However, the RBI warned that risks remain tilted to the downside due to:
- High public debt
- Policy uncertainty
- Risk of disorderly market corrections
- Conclusion: Strong foundations, cautious outlook
The RBI’s Financial Stability Report makes one thing clear: India’s economy and financial system are on solid ground.
Strong domestic demand, low inflation, healthy banks, and prudent policies have helped India stay resilient in a difficult global environment. At the same time, the RBI remains cautious and alert to global risks that could affect growth and stability.
The message is balanced, confidence backed by caution.
(With agency inputs)
