The Indian economy is growing at a robust pace, driven by strong domestic demand, low inflation and healthy bank balance sheets, the Reserve Bank of India said in its December 2025 edition of the Financial Stability Report released on Wednesday.

The central bank said the domestic financial system remains robust and resilient, supported by strong balance sheets, easy financial conditions and low financial market volatility.

"Nonetheless, there are near-term risks from external uncertainties - geopolitical and trade-related," the report said.

It noted that the health of scheduled commercial banks remains sound, backed by strong capital and liquidity buffers, improved asset quality and robust profitability.

"Macro stress test results affirm the resilience of SCBs to withstand losses under hypothetical adverse scenarios and maintain capital buffers well above the regulatory minimum. Stress tests also confirm the resilience of mutual funds and clearing corporations," the report said.

The central bank said the gross non-performing assets ratio of banks is expected to improve further to 1.9 per cent by March 2027 under a baseline scenario.

As of September 2025, the ratio stood at a multi-decade low of 2.1 per cent, according to the half-yearly Financial Stability Report.

"The aggregate GNPA ratio of the 46 banks may improve from 2.1 per cent in September 2025 to 1.9 per cent in March 2027 under the baseline scenario," the report said.

Under adverse scenarios, the GNPA ratio may rise to 3.2 per cent and 4.2 per cent, based on the RBI’s stress test results.

From a capital perspective, the report said the capital to risk-weighted assets ratio remained strong as of September, with state-owned banks reporting a ratio of 16 per cent and private sector banks at 18.1 per cent.

On the broader economy, the report noted that real gross domestic product growth exceeded expectations in both the first and second quarters of 2025-26, registering 7.8 per cent and 8.2 per cent respectively.

Growth was supported by strong private consumption and public investment.

"Growth outlook remains positive, aided by low inflation, easy financial conditions, above normal monsoon, direct and indirect tax reforms, and the ongoing expansion of digital public infrastructure," the report said.

On the currency front, the RBI said the rupee depreciated against the US dollar, reflecting a deterioration in terms of trade due to the impact of high tariffs and a slowdown in capital flows.

The report added that with the effective US tariff rate on India being the highest among its trading partners, the rupee weakened despite a broad decline in the US dollar against other major and Asian currencies.