Structural shifts make policy interventions challenging, RBI governor says

Structural shifts like trade fragmentation, rapid technological disruption, ongoing climate change, and protracted geopolitical hostilities are making “economic forecasts difficult” and “policy interventions challenging,” Reserve Bank of India governor Sanjay Malhotra said in his foreword to the June edition of RBI’s Financial Stability Report (FSR).

Malhotra said that in the near future central banks and regulators must “remain vigilant, prudent and agile in safeguarding their economies and financial systems.”

The FSR, published biannually by the central bank, assesses and communicates the stability, resilience, and risks within India’s financial system.

Malhotra said the announcement of large tariffs by the US administration in April has set in motion a new paradigm in trade and economic policy.

“Geopolitical risks remain elevated. The ensuing policy uncertainty and unpredictability will influence global growth. International agencies, including the IMF, the OECD and the World Bank, have revised growth downwards,” he wrote.

“Near-term global financial stability risks have increased,” he emphasized, while pointing to the April market turbulence following the Donald Trump administration’s announcement of reciprocal tariffs.

Malhotra said it was “a stark reminder of how existing vulnerabilities in the global financial system are amplified by sudden shocks.”

While financial markets have stabilized after this episode, he cautioned that they “remain volatile and highly sensitive to economic and geopolitical developments,” with ongoing risks such as “elevated public debt and possibilities of further corrections in asset prices.”

Turning to India, Malhotra said, “In this global milieu, our economy remains a key driver of global growth. Strong domestic growth drivers, sound macroeconomic fundamentals and prudent policies buoy growth momentum.”

However, he warned, “External spillovers and weather-related events could pose downside risks to growth,” though the “outlook for inflation…is benign and there is greater confidence in the durable alignment of inflation with the Reserve Bank’s target.”

Despite global turbulence, India stands out as a key driver of global growth.

The FSR attributed the Indian economy’s resilience to robust domestic demand, sound macroeconomic fundamentals, and prudent policy decisions.

It added that as the Indian economy continues to expand at a healthy pace and inflation steadily moderates, macroeconomic and financial stability are being supported.

The FSR further highlighted that the domestic financial system exhibits remarkable resilience, supported by healthy balance sheets of banks and non-banks, eased financial conditions due to accommodative monetary policy, low market volatility, and strong corporate sector balance sheets.

Financial stability, like price stability, is a necessary condition but insufficient to boost India’s potential growth, Malhotra said, adding that RBI must develop a well-functioning financial system that promotes macroeconomic stability and efficiently provides financial services.