The next financial crisis could originate from a source outside the world of finance, Reserve Bank of India Governor Sanjay Malhotra said Saturday.
“It may begin with a geopolitical event, or cyber attack or a technological failure that affects the financial system through multiple channels,” Malhotra said at an event in New Delhi. While India remains exposed to the effects of the war in Iran through higher commodity prices and “external sector pressures,” the economy is navigating this phase “from a position of strength,” he said.
The governor was highlighting a new generation of systemic risks that are increasingly “exogenous” in nature, underscoring the need for regulators to look beyond traditional sources of financial instability.
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Malhotra echoed the views of Finance Minister Nirmala Sitharaman, who last month flagged risks from the rapid adoption of artificial intelligence. Sitharaman described the technology as a “double-edged sword” that can help detect fraud faster, while also enabling larger and more sophisticated cyberattacks.
The RBI is due to announce its monetary policy decision on Wednesday. Most economists expect the central bank to raise interest rates for the first time since early 2023 as inflation accelerates in Asia’s third-largest economy.
India’s economy has remained resilient despite external headwinds, expanding 7.8% in the April-June quarter. Strong growth could give policymakers greater room to raise borrowing costs without materially weakening demand.
To strengthen systemic resilience, “we must aim to better understand” interconnectedness and potential channels of contagion, Malhotra said.
The RBI governor stressed the need to safeguard financial stability, calling it “the foundation on which price stability rests,” and essential for the effective transmission of monetary policy and for achieving the economy’s full growth potential.
Remain Vigilant
India draws strength from a healthy, well-capitalized banking system, Malhotra said, while cautioning against complacency. “Today’s resilience may not necessarily imply tomorrow’s immunity, and we are committed to remain vigilant of emerging vulnerabilities and continue to keep our financial system strong and resilient.”
Bad loans at 46 Indian banks could rise to 1.9% of total advances by March 2028 from 1.8% at the end of March this year, the RBI said in its biannual Financial Stability Report released in June.
While the RBI typically doesn’t use monetary policy to address financial-stability risks, Malhotra said such concerns are factored into policy discussions and decisions because “monetary policy can get in all the tracks.”
Photograph: An Indian Army soldier stands on a truck with Akash Surface-to-Air (SAM) missiles during the Republic Day parade in New Delhi, India, on Sunday, Jan. 26, 2020; photo credit: T.Narayan/Bloomberg
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