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Picture Courtesy:  TIMESOFINDIA 

Context:

The Reserve Bank of India (RBI) publishes the Financial Stability Report (FSR), it assesses the risks, resilience, and stability of a country's financial system. 

About Financial Stability Report

Biannual Release => The Reserve Bank of India (RBI) releases this report twice a year.

Collective Assessment => It represents the shared viewpoint of the Sub-Committee of the Financial Stability and Development Council (FSDC). This sub-committee collectively assesses the Indian financial system's resilience and identifies potential risks to financial stability.

Highlight of the June 2025 Financial Stability Report

Improving Asset Quality

Banks => Gross Non-Performing Assets (GNPAs) for Scheduled Commercial Banks (SCBs) are currently at a multi-decadal low, standing at 2.3% as of March 2025. Even under a baseline scenario, GNPAs might only see a marginal increase to 2.5% by March 2025 and 2.6% by March 2027 for a majority of SCBs.

NBFCs => These institutions show continued health, possessing strong capital buffers, robust earnings, and improving asset quality. Their capital adequacy surpasses 22%, and GNPAs have decreased to 4.2%.

Urban Cooperative Banks (UCBs) => Capital to Risk-Weighted Assets Ratio (CRAR) has risen to 18.0% in March 2025, and their gross NPA ratio stands at 6.1%.

Strong Capital Buffers => Banking sector's capital to Risk-Weighted Assets Ratio (CRAR) stands at 16.8%, higher than regulatory requirements of 15%by RBI.

Forex Reserves => India's foreign exchange reserves have increased, crossing $642 billion by June 2025, providing a significant cushion against external shocks.

Economic Growth Outlook

Positive Growth Projections => Various international bodies and rating agencies project strong growth for India.

• Morgan Stanley forecasts real GDP growth at 5.9% in 2025 and 6.4% in 2026.
• The OECD projects 6.3% for 2025-26 and 6.4% for 2026-27, highlighting India's lead among G20 nations.
• The World Bank also maintains its forecast at 6.3% for FY26.
• The RBI projects India's GDP growth for 2025-26 at 6.5%.

Domestic Demand as Driver => India's growth greatly depends on strong domestic demand, supported by increasing real incomes and lower personal income taxes.   

Inflation Scenario

Softening Retail Inflation => Retail inflation (Consumer Price Index) has shown a decline, reaching a multi-year low to 2.82% in May 2025, the lowest since February 2019. It is likely to remain below 3% until June 2025.

Favorable Food Inflation Outlook => The outlook for food inflation appears positive, driven by easing prices and record crop production. A likely above-normal monsoon further bodes well for agricultural output.

Revised RBI Forecast => The RBI has revised its CPI inflation forecast for FY 2025-26 downwards to 3.7% from an earlier 4% projection. It anticipates CPI inflation at 2.9% for Q1, 3.4% for Q2, 3.9% for Q3, and 4.4% for Q4 of FY26.

Potential Challenges and Risks

Global Uncertainties => Prolonged geopolitical tensions, elevated global economic and trade policy uncertainties, and potential trade disruptions continue to pose risks. Overvalued global asset prices and sudden reversals in capital flows are also external vulnerabilities.

Weather-Related Uncertainty => Domestic weather-related uncertainties (especially monsoons) could impact agricultural output and overall economic stability.

Domestic Concerns => About high public debt and stress in certain economic sectors that require continuous monitoring. Experts also point to unaddressed external trade risks, potential retail overexposure, and fiscal vulnerabilities. 

Source: 

TIMESOFINDIA