Finance system resilient, economy braved West Asia crisis: RBI governor

NEW DELHI -- At the Kautilya Economic Conclave, RBI governor Sanjay Malhotra reported that India's financial system demonstrated resilience during the West Asia crisis. Malhotra emphasized that while the economy managed the crisis well, policymakers must remain vigilant against potential vulnerabilities. He cautioned against complacency, stating that the financial system's resilience does not guarantee immunity in the future.

Malhotra warned of the potential adverse effects of the Iran war on supply chains and highlighted that the financial system had absorbed the supply shock well. Nonetheless, the global economic environment continues to pose challenges, with the war exacerbating inflationary pressures and increasing financial system vulnerabilities.

He cautioned against stressed valuations, particularly in AI, elevated debt levels globally, heightened leverage that could affect banks and markets during financial tightening, private credit, and cyber risks compounded by AI.

Despite these challenges, Malhotra noted that India's strong macroeconomic fundamentals and a resilient financial system instill confidence in the country's ability to withstand the lingering effects of the crisis. To bolster resilience against such shocks, Malhotra suggested diversifying import sources, achieving greater self-sufficiency in energy and critical resources, enhancing manufacturing competitiveness, expanding market access through free trade agreements, and promoting trade settlement in local currencies.

The RBI governor also mentioned that Indian bond yields had only risen slightly in response to higher global energy prices and global yields, reflecting prudent fiscal management, a credible monetary policy, and declining structural pressures on inflation. Additionally, Malhotra highlighted the small size of the Indian private credit market, recent equity market corrections, and the importance of strengthening cyber risk governance.

Overall, the financial system was deemed very resilient, backed by healthy bank and non-banking financial company (NBFIs) balance sheets, according to Malhotra.