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

RBI Cautions Against Complacency

Reserve Bank of India Governor Sanjay Malhotra has urged continued vigilance even as the financial system shows no immediate signs of strain. Speaking at the Kautilya Economic Conclave, organised by the Ministry of Finance and the Institute of Economic Growth, he cautioned that resilience today does not guarantee immunity tomorrow. Drawing on India's experience over the past two decades, he noted that banking and financial stress can emerge suddenly but take years to resolve, often painfully. He pointed to the more than a decade spent cleaning up the legacy of excessive lending and non-performing assets from the early 2000s as a reason complacency is unaffordable.

Stability Can Breed Risk Taking

The Governor observed that prolonged periods of financial stability, both globally and in India, tend to encourage greater risk taking and leverage while memories of past crises fade. This, he said, can weaken the appetite for prudence. He also flagged the maturing of the global artificial intelligence investment cycle as a possible trigger for sharp repricing of financial assets. High risk appetite has already increased leverage, and declining cash flows among major AI firms could amplify market corrections and volatility. Any correction in AI-linked valuations abroad, however, might redirect capital inflows toward India.

Why It Matters for Businesses

The remarks carry weight for Indian companies and compliance teams because they signal that the regulator remains focused on preventing vulnerabilities from building, even during calm periods. Malhotra noted that the financial system absorbed the supply shock from the West Asia conflict reasonably well, but the global environment remains challenging, with the conflict adding to inflationary pressure and financial system vulnerabilities. He also highlighted that geopolitical and geoeconomic fragmentation, trade restrictions, repeated supply shocks, technological disruption and climate chang…