No sign of stress, but cost of allowing vulnerabilities to build ‘simply too high’, says RBI Governor

“Even in India we have had a very prolonged period of financial stability… But I may like to point out that it is these very prolonged periods of stability that can encourage risk taking and leverage. Fading memories of past crises can weaken the appetite for prudence…. We need to remain alert to these risks,” Malhotra said.

“It took us more than a decade to clean up the legacy of excessive lending and NPAs from the early 2000s, so we cannot afford to become complacent. The economic and financial costs of allowing vulnerabilities to build are simply too high,” he said, speaking at the annual Kautilya Economic Conclave, organised by the Ministry of Finance and the Institute of Economic Growth.

Malhotra’s comments come amid heightened global tensions, with PK Mishra, Principal Secretary-1 to Prime Minister Narendra Modi, also pointing out earlier in the same event on Saturday that the world is confronted not just by risk but also uncertainty. The RBI Governor himself said that the financial system has absorbed the supply shock due to the West Asia conflict quite well. As a result, growth has been resilient. However, the global economic environment coninues to remain “challenging”, with the conflict having “exacerbated not only inflationary pressures but also elevated financial system vulnerabilities”.

Malhotra also said geopolitical and geoeconomic fragmentation, strategic realignment, trade restrictions, repeated supply shocks, technological disruption, and climate change are interacting in ways that are difficult to predict. Moreover, they are “even more difficult to model using historical relationships”, he said, adding that price and financial stability cannot be looked at in isolation.

Listing the possible maturing of the AI investment cycle and any resultant slowdown in earnings of these companies as a risk, Malhotra said they could trigger “sharp repricing” of financial assets. “High risk appetite has spurred an increase in leverage, which along with declining cash flow among major AI firms would further amplify market corrections and financial market volatility.”

At the same time, he pointed out that any corrections in AI related valuations in advanced countries “may have positive impact in terms of capital inflows” for India.

The global AI investment boom has largely bypassed Indian stock markets due to the country’s low exposure to the new technology. As a result, domestic benchmark indices have fared poorly. In conjunction with other factors such as rising global interest rates and trade uncertainty, foreign investors have dumped Indian assets in recent years, leading to heavy pressure on the rupee, which is again trading close to its all-time low of 96.96 per dollar despite the RBI’s forex drive since June attracting over $130 billion from NRIs. This has come at a time when the support of Foreign Direct Investments has not been as strong as previous years, although net FDI in the first four months of 2026-27 amounted to $13.43 billion, up 38% from the same period last year.

While net FDI figures have seemingly turned for the better – 2024-25 and 2025-26 together saw a net inflow of just $7.7 billion – foreign investors continue to exit domestic financial markets. So far in 2026–27, foreign investors have sold Indian stocks and bonds to the tune of $10.35 billion on top of the $16.59 billion of sales in 2025–26.