RBI Financial Stability Report (FSR) – June 2025

The June 2025 FSR presents the RBI’s biannual assessment of systemic risks and financial sector resilience in India. Released against a backdrop of rising global economic and geopolitical uncertainty, the report strikes a cautiously optimistic tone on India’s macro-financial stability but flags key vulnerabilities.

Key Takeaways

Global Risks and India’s Exposure

• External headwinds from trade policy conflicts, geopolitical tensions (e.g., Middle East), and volatile capital flows have intensified.
• A 100 bps slowdown in global growth could shave off 30 bps from India’s GDP growth.
• Financial markets remain highly sensitive to interest rate signals and debt sustainability concerns, especially in advanced economies.

Macroeconomic Fundamentals Remain Strong

• India’s GDP is projected to grow steadily at 6.5% in FY26, supported by rural consumption, infrastructure spending, and corporate deleveraging.
• Inflation is well-contained, with food prices softening and imported inflation risks minimal due to stable crude prices.
• Current Account Deficit (CAD) remains manageable and forex reserves are robust, providing external sector stability.

Banking Sector: Strong but Watchful

Capital and Profitability

• Banks are well-capitalised: CRAR remains comfortably above regulatory norms, even under severe stress scenarios.
• Profitability metrics like Return on Assets (RoA) and Return on Equity (RoE) have improved, aided by higher operating efficiency and lower provisioning needs.

Asset Quality

• GNPA and NNPA are at multi-decade lows.
• However, RBI’s stress tests show potential rise in GNPA to 5–6% by 2027 under adverse scenarios.
• The most vulnerable segments are:
  • Unsecured personal loans
  • Retail credit in Tier-III cities and youth borrowers
  • Private sector banks with higher exposure to risky segments

Credit Growth Deceleration

• Bank credit growth has slowed sharply, driven by:
  • Tighter risk-weight norms on personal loans and NBFC exposure.
  • Cautious lending approach amid rising delinquency signals.

Liquidity and Cost of Funds

• Banks face pressure on Net Interest Margins (NIMs) due to:
  • A higher share of EBLR-linked loans which reprice rapidly.
  • Increasing reliance on high-cost term deposits and CDs, eroding margins.
• The CRR cut by 100 bps has helped offset some of this pressure.

NBFCs, Mutual Funds, and Insurance: Mixed Signals

NBFCs

• Continue to show capital adequacy and profitability.
• Stress is emerging in personal loan portfolios, especially fintech-driven, low-ticket lending.

Mutual Funds and Clearing Corporations

• Stress tests show resilience, though market volatility remains a concern.
• Regulatory tightening includes stricter disclosure, monitoring, and cyber resilience measures.

Insurance Sector

• Maintains solvency well above the regulatory minimum.
• Digitisation of premium payments and growing penetration of NPS/APY has strengthened long-term sectoral depth.

Corporate Bond Market

• India’s bond market saw a record ₹9.9 trillion in fresh issuances in FY25.
• However, secondary market activity remains subdued, limiting market depth.
• Credit spreads widened marginally due to liquidity constraints and global risk sentiment, despite softening yields.

Regulatory & Institutional Developments

• RBI and other regulators are aligning with global standards:
  • Digital Lending Norms to improve borrower protection and app transparency.
  • Cybersecurity frameworks like FIRE and MNRL for robust threat monitoring.
  • SEBI reforms in derivatives, investor grievance redressal, and FPI regulation.
  • Deposit insurance coverage now spans 97.6% of accounts.
  • Significant activity in GIFT City, enhancing India’s offshore finance capacity.

Risks and Outlook

Emerging Concerns

• Rising delinquency in unsecured retail loans.
• Shift in bank deposit profiles from CASA to term deposits.
• Credit growth slowdown due to risk aversion and regulatory tightening.
• Rising global instability, commodity shocks, and market corrections.

Positive Anchors

• Strong capital buffers across institutions.
• Regulatory agility and forward-looking policy reforms.
• Improved corporate balance sheets and private investment sentiment.