RESILIENT FINANCIAL SYSTEM AND EXTERNAL CLOUD OVER GROWTH.

 DOMESTIC RESESILIENCE

Reserve Bank of India has released the June 2025 issue of  Financial Stability Report prepared by  sub committee of Financial Stability and Development Council  (FSDC) which dealt in detail the resilience of Indian financial system and various challenges faced in maintaining  financial stability. As of now despite many uncertainties and global challenges Indian economy  continues to remain a key driver of world economic growth underpinned by strong macroeconomic fundamentals and Prudent economic management. The domestic financial system is experiencing greater resilience supported by healthy balance sheets of banks and  non banking financial institutions .It is also strongly  supported by conditions like accommodative monetary and economic policies and relatively low fluctuations in both capital and financial markets. The strength of the corporate  balance sheets also further contributed to strengthening overall macroeconomic Stability and G⁸DP growth resilience in the country.Unlike in the  past relatively they are well supported by the soundness and resilience of scheduled commercial banks bolstered by robust capital buffers,negligible non performing assets /loans and strong earnings. Results of macro stress  tests conducted showed favourable factors like that most of the Scheduled commercial banks have sufficient capital buffers relative to required minimum even under most adverse stress scenarios. Both  mutual funds and clearing corporations also successfully undergone stress tests and emerged as financially stable and resilient. Non banking financial companies remained healthy with sizable capital buffers, robust earnings and improved asset quality. Similarly the Consolidated Solvency ratio of the insurance sector also remained above the minimum threshold limit. In short the domestic financial conditions are continously improving buttresed by strong capital buffers, low non performing loans, healthy balance sheets of corporates,banks, non banking financial companies, low solvency ratio of insurance companies and favourable results from  macro stress resulted in a very resilient domestic financial system in India .

EXTERNAL SPILLOVERS 

While India's growth remains generally insulated against major global headwinds primarily due to buyont domestic demand the domestic financial system is vulnerable to external spillovers.In addition to the rising trade disputes and reciprocal tarrif menace which could negatively impact domestic growth  outlook and reduce demand for bank credit which has been decelerating sharply. It may lead to increased risk aversion among investors and further correction in the domestic equity market.Further even after recent correction market remain at the high end of their historical range..Moreover there is some build up of stress primarily in financial markets on account of global financial spilloves as reflected by marginal increase in financial  system stress indicator,that  impact markets.However there are some clouds looming across both external and domestic fronts over growth prospects of Indian economy. Those challenges are- financial markets continues to be volatile particularly Government bond markets due to both shifting policies and geopolitical factors including climate and weather changes. Infact existing vulnerabilities like elevating public debt levels and rising asset valuations etc.may lead to amplifying fresh shocks. Within two years the aggregate level percapita debt of the individual borrowers in India increased from ₹3.9 lakh in March 2023 to ₹4.8 lakh in March 2025.As per RBI data non bank food credit growth of scheduled commercial banks decelerated to 9.8% in May 2025 from 16.2% in May 2024.The slow down in credit growth is across the sectors including agriculture and allied activities, industry, services and personal loans. Credit growth of Non Banking financial companies (NBFCS) are loosing stream and they are increasingly depending on bond markets for cheaper and quicker funding. Stress in microfinancing and unsecured business loans made banks are more precarious. 

IMPLICATIONS 

RBI's June 2025 Financial Stability Report evaluated overall risks of the financial sector from lending to households to easing of monetary policy cycle, reducing debt service pressures on borrowers. However the trends in households debt accumulation among lower rated barriers require special treatment particularly in applying cibal score for promoting inclusive growth. Stress tests showed that banks' gross NPAs will rise under baseline scenario. As global financial stability risks have increased highly sensitive external spillovers and climate and weather change related events could pose downside risks to growth. The rising global trade  disputes and aggravating geopolitical hostilities could negatively impact both global economy and domestic growth outlook and reduced demand for bank credit that already decelerated sharply. Developments in the USA  West Asia  Russia Ukraine , China North Korea and Pakistan and consequent policy uncertainties could affect the global economy and domestic Indian economy through different channels. It is to be noted here that India's current account deficit (CAD)is modest at 0.6% of GDP. in 2024-25.However overall net capital flows were insufficient to finance CAD which may reduce foreign exchange reserves. There are also  positive features for Indian economy presently in terms of  reduced retail inflation and and above average good monsoon likely to impact GDP growth positively. Unfortunately the unhealthy and irresponsible approach of global powers especially US in  disowning multilateral institutions like WTO,and WHO and resorting to bilateral / regional free Trade Agreements etc are bound to distort and disrupt smooth trade and investment flows .

in