Indian financial system looks stronger than in past amid global headwinds: RBI Deputy Governor

Expressing optimism over India’s financial system, Reserve Bank of India Deputy Governor M Rajeshwar Rao has said that Indian financial system looks stronger than in the past and the country's economy is an outlier even as strong headwinds globally. He also highlighted that India has achieved the highest climate change performance index (CCPI) score among G20 members in 2024, which reflects the country's unwavering commitment to this cause. He said ‘This also shows that by aligning economic policies with climate action, we can spur green investments, enhance energy efficiency, and foster sustainable development across the sectors’.

Rao said the global financial system is facing strong headwinds from various quarters, including high levels of public debt, stretched asset valuations, economic and financial fragmentation, geopolitical tensions, and risks arising from increasing cyber threats. He added ‘Amidst these global challenges, the Indian economy is an outlier which shows strong macroeconomic fundamentals. Economic activity is growing steadily, supported by a financial system that looks stronger than in the past’. He further said the Indian banking sector, in particular, has demonstrated significant improvement in key metrics such as capital adequacy, asset quality, and profitability, supported by robust macroeconomic fundamentals and business confidence. There has been sustained growth in credit expansion, primarily driven by personal loans and loans to services sector.

He said ‘however, despite the financial system exhibiting strong performance and healthy financials, as a regulator and supervisor, we need to remain vigilant to the risks on the horizons. We have been flagging our concerns on strong credit growth in certain segments of unsecured retail loans. Increase in use of technology has also increased threat of cyber risks’. On climate risks and the leadership challenge, he said from an Indian perspective, the country's diverse topography, with snow-clad mountains, fertile plains, deserts and a long coastline with different temperature and precipitation patterns, generates diverse set of risks with attendant challenges for growth and inflation.

The agricultural sector, heavily reliant on monsoon rains, plays a critical role in India's economy and food security. The El Nino event of 2023-24 exemplifies this vulnerability, leading to hotter summers, reduced productivity, inadequate monsoons affecting reservoir levels, and lower agricultural production. He said these factors have cascading effect on inflation due to food price fluctuations. An added element is the dependence on agriculture that has bearing on their spending patterns and resultantly impact the country's growth. He said ‘Climate-related events also adversely impact the credit quality and loan-repayment capabilities of the borrowers. They can wipe out the assets created from institutional finance thereby impacting health of financial institutions’.