‘Tighter bank-NBFC ties, external spillovers key risks’
MUMBAI: The outlook for 2026 blends domestic resilience with rising global uncertainty, according to RBI’s financial stability report (Dec 2025). While India’s macroeconomic fundamentals and banking system remain sound, the report stresses that the economy is exposed to global shocks translating into rupee pressure, and to vulnerabilities created by deeper financial linkages at home. The main structural risk is the growing interconnectedness between banks and non-bank financial intermediaries. While tighter links have improved credit transmission, they have also amplified contagion risks. NBFCs remain heavily reliant on bank funding, even as banks’ exposures through co-lending, securitisation and direct assignments have risen. Banks’ concentration risks are increasing, with nearly 80% of securitised assets sourced from a few NBFCs, and private banks carrying sizeable non-funded exposures that could crystallise under stress. External spillovers dominate the economy’s risk profile. Geopolitical conflicts, trade tensions and geo-economic fragmentation pose the most immediate threats, with the potential to transmit stress through trade, capital flows and financial markets. Global markets are buoyant but fragile, with stretched valuations, concentrated gains in US technology and AI stocks, and high public debt in advanced economies raising the risk of disorderly equity and bond corrections. Exchange rate volatility is a key transmission channel for these risks. The rupee has weakened against the dollar despite dollar softness elsewhere, reflecting adverse terms of trade, tariffs and slowing capital flows. Market indicators point to rising stress, with wider trading ranges, higher volatility and risk reversals signalling a bearish near-term outlook. Banks enter 2026 from a position of strength, but with weak spots. Stress is evident in unsecured retail lending, treasury income has increased sensitivity to yield and currency swings, and deposit growth still lags credit.
