External risks on horizon, but RBI keeps faith in local buffers

Financial stability report cautions about exchange rate volatility, trade weakness, muted FDI

- Shayan Ghosh & Subhana Shaikh

The Reserve Bank of India (RBI) is aware of near-term risks to the Indian economy from external spillovers and will continue building strong guardrails to act as a buffer against global shocks, governor Sanjay Malhotra said.

"The Indian economy and the financial system, in contrast, remain robust and resilient supported by strong growth, benign inflation, healthy balance sheets of financial and non-financial firms, sizeable buffers and prudent policy reforms," Malhotra said in the foreword to the central bank's half-yearly financial stability report.

He said that 2025 was challenging as geopolitical conflicts, trade tensions, and persistent policy uncertainty cast a shadow over the global economy and the financial system. The outlook for 2026 and beyond, said Malhotra, is shrouded in uncertainty as the contours of policies that are reshaping the global economic landscape remain fluid and untested.

Elaborating on the risks later in the report, the central bank flagged a cluster of risks to the Indian economy. External uncertainties, including further escalation in geopolitical and trade tensions and widening geoeconomic fragmentation, were cited as the major risks.

"They could lead to higher volatility in exchange rate, weaker trade, lower corporate earnings and muted foreign direct investments," RBI said.