The Financial Stability Report (FSR) is a half-yearly publication, with contributions from all financial sector regulators. It presents the collective assessment of the Sub Committee of the Financial Stability and Development Council on current and emerging risks to the stability of the Indian financial system.1 Global Macrofinancial Vulnerabilities Despite repeated shocks, the global financial system has thus far demonstrated notable resilience, with markets remaining orderly after an initial bout of volatility following the outbreak of the West Asia conflict. Market optimism has been supported by lower-than-anticipated increase in price of oil futures, strong corporate earnings, the AI-driven investment boom, and easy financial conditions. Nevertheless, global financial stability risks remain elevated. Despite the interim peace deal to end the conflict, lingering supply chain uncertainties could tighten financial conditions and worsen inflationary pressures, prompting a reassessment of the monetary policy outlook. At the same time, vulnerabilities arising from elevated public debt, bond market fragilities, high asset valuations, and the growing role of leveraged non-bank financial intermediaries (NBFIs) could amplify future shocks. Consequently, while markets remain resilient, the combination of elevated vulnerabilities and evolving macro-financial risks continue to pose challenges to global financial stability. Domestic Macroeconomic Conditions Though headwinds from the West Asia conflict are receding with the signing of the interim peace deal, the Indian economy and the financial system continue to remain susceptible to geopolitical tensions and associated shocks. Exchange rate volatility may rise if oil prices increase due to the delayed normalisation of supply chain disruptions and additional demand to replenish inventory. A sharp correction in global equity markets, particularly if driven by a reassessment of corporate earnings growth and elevated valuations in AI-related stocks, could spill over to domestic markets. India’s macroeconomic fundamentals are stronger compared to many of its peers and in comparison, to previous crisis episodes, which provide important buffers to withstand these shocks. A robust and resilient financial system, underpinned by strong bank and non-bank balance sheets with adequate capital and liquidity buffers, provides a strong foundation. Accordingly, even amid an uncertain global backdrop, the potential for external shocks to generate systemic financial stress and spill over to the real economy remains contained. Moreover, the balance of risks has shifted favourably, supported by the cessation of hostilities in the West Asia conflict and the recent policy measures by the Government and the Reserve Bank aimed at strengthening capital inflows. Financial Institutions: Soundness and Resilience Scheduled commercial banks (SCBs) remained resilient, supported by strong capital and liquidity buffers, continued improvement in asset quality with non-performing assets ratios declining to multi-decadal lows, and stable profitability. Credit and deposit growth gained momentum during the second half of 2025-26. Macro stress test results indicate that the sector remains well-positioned to absorb potential shocks, with aggregate capital ratios projected to remain comfortably above regulatory thresholds even under adverse conditions. The primary (urban) co-operative banks (UCBs) continued to strengthen their balance sheet position through improved asset quality and adequate capitalisation, even as profitability moderated. Stress test results suggest that the sector remained resilient at the aggregate level, notwithstanding some bank-specific vulnerabilities under severe shocks. Non-banking financial companies (NBFCs) remained financially sound, supported by strong capitalisation, healthy profitability, and improving asset quality. Stress test results indicate that the sector’s aggregate capital position would remain comfortably above regulatory requirements even under adverse scenarios, although a few entities could face pressure under severe stress conditions. Stress tests of mutual funds and clearing corporations also confirmed their resilience, while the insurance sector remained healthy. However, increasing interconnectedness across entities and sectors, while indicative of deeper financial integration, could act as an additional channel for shock transmission and therefore merits close surveillance. Regulatory Initiatives in the Financial Sector Global regulatory priorities in 2026 have focused on implementation effectiveness of existing regulations and resilience-building. In the banking sector, policy efforts have concentrated on strengthening Basel III implementation, operational risk management, and resolution readiness, alongside efforts to simplify supervisory requirements. In the NBFI sector, policymakers have increasingly targeted structural vulnerabilities stemming from leverage, interconnectedness, repo market dynamics, and the rapid growth of private credit. Concurrently, international standard-setting bodies have also advanced work on digital assets, climate finance, and artificial intelligence. Domestic regulatory efforts have focused on measures to promote ease of doing business, enhance customer protection, advance financial inclusion, enhance flow of credit, strengthen UCBs, and deepen financial markets. Alongside, authorities are strengthening their supervisory toolkit through off-site surveillance, vulnerability assessments, early warning indicators, thematic reviews, and micro-data analytics. Collectively, through calibrated and adaptive regulation and risk-based and forward-looking assessment of supervised entities, authorities aim to enhance the resilience of the financial system.
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