The Reserve Bank of India on Monday expressed concerns that the domestic financial system, despite its resilience, could be impacted by external spillovers.
“Growing trade disruptions and intensifying geopolitical hostilities could negatively impact domestic growth outlook and reduce the demand for bank credit, which has decelerated sharply. Moreover, it could also lead to increased risk aversion among investors and further corrections in domestic equity markets, which, despite the recent correction, remain at the high end of their historical range,” RBI said in its financial stability report.
The central bank has projected the real GDP to grow at 6.5 per cent in FY26, the same as in FY25, supported by buoyant rural demand, revival in urban demand, an uptick in investment activity on the back of above-average capacity utilisation, the government’s continued thrust on capex and congenial financial conditions. However, the global developments could have a downside impact on growth, the central bank said.
“The headwinds from protracted geopolitical tensions, elevated uncertainty and trade disruptions, and weather-related uncertainty pose downside risks to growth. Moreover, deceleration in global growth will act as a drag on domestic output. It is estimated that a 100 basis points (bps) slowdown in global growth can, ceteris paribus, pull down India’s growth by 30 bps,” RBI said.
Asset quality risk
The central bank said that scheduled commercial banks have continued to record an improvement in asset quality with gross and net non-performing assets (NPA) ratio falling to “multi-decadal lows” of 2.3 per cent and 0.5 per cent as on March 31, 2025.
However, the RBI’s stress tests show that the aggregate gross non NPA ratio of 46 banks may marginally rise from 2.3 per cent in March 2025 to 2.5 per cent in March 2027 under the baseline scenario and to 5.6 per cent and 5.3 per cent under an adverse scenario 1 and an adverse scenario 2, respectively.
Adverse scenario 1 assumes a volatile global environment with heightened geopolitical risks and escalation of global financial market volatility, while adverse scenario 2 assumes a synchronised sharp growth slowdown in key global economies, with spillovers through trade and financial channels as well as market fragmentation.
The RBI also said that despite the solid performance of the banks they could face near term pressures. The easing monetary policy cycle could impact the net interest margin as the growing share of the loan book is linked to the external benchmark-based lending rate, which is reset more frequently with a change in repo rate. Term deposits, which are also growing, have fixed contractual rates that change less frequently.
“The recent 100 bps cut in the cash reserve ratio, however, will cushion this impact by releasing funds for banks and reducing their costs,” the RBI said.
Credit card NPA
Public sector banks’ gross NPAs from the credit cards portfolio inched up to 14.3 per cent in March 2025 against 12.7 per cent six months ago, the RBI said in a report on Monday.
Their private sector rivals seem to be performing much better, with the GNPAs in the credit card receivables category staying stable at 2.1 per cent over the same period, the RBI said in its half-yearly Financial Stability Report (FSR).