RBI Governor Malhotra flags rising global economic risks

‘Geo-economic fragmentation affecting the free movement of capital and led to fragmentation of financial flows’.

Reserve Bank Governor Sanjay Malhotra on Friday flagged rising global economic risks, warning that geo-economic fragmentation is reshaping supply chains and disrupting global capital and financial flows.

“Geo-economic fragmentation caused by tariffs, trade restrictions, and industrial policies are reshaping not only global supply chains, they are also affecting the free movement of capital and led to fragmentation of financial flows,” he said.

Addressing the FIMMDA-PDAI Annual Conference in Amsterdam, Malhotra cautioned that stretched valuations in certain asset classes—particularly equities, including some technology stocks—could have spillover effects across markets and regions.

Malhotra also identified artificial intelligence as a key source of uncertainty, noting that while it promises productivity gains, concerns persist over the viability of some business models, the pace and scale of efficiency improvements, and potential job impacts.

He further highlighted the rapid growth of private credit markets as a source of opacity and systemic risk due to increasing linkages with regulated financial sectors.

Pointing to macroeconomic vulnerabilities, the governor warned that elevated public debt levels in major economies remain a concern, as continued fiscal expansion has hindered a return to post-pandemic consolidation paths. At the same time, rising geopolitical tensions are driving higher defence spending, a shift he said could pose significant challenges to long-term fiscal sustainability.

He said the country’s external sector position remains resilient, with foreign exchange reserves assessed as “comfortable,” providing an import cover of about 11 months.

Malhotra said the current account deficit (CAD) remains within sustainable levels, though elevated global energy prices could exert upward pressure. However, recently concluded trade agreements are expected to partly offset this impact, he said.

On the capital account, Malhotra highlighted encouraging trends in gross foreign direct investment (FDI), projecting continued robustness amid a surge in greenfield investment announcements, particularly in the finance and technology sectors. “With recent correction in financial asset valuations, we expect repatriations to moderate, improving the net capital account position going forward,” he said.

“India’s strong macro-economic and macro-financial fundamentals remain strong, supported by continued focus on policy certainty, price stability, financial stability, and thrust on reforms, ease of doing business and inclusive growth,” Malhotra said.

Growth impulses in the Indian economy have remained robust, he said. Domestic demand continues to be supported by strong consumption and public investment. The government’s emphasis on capital expenditure has helped crowd-in private investment and improve productive capacity.

India has recorded an average growth of 8.2 per cent during 2021-25. In 2025-26, the economy is estimated to have grown by 7.6 per cent. Growth in 2026-27 is projected at 6.9 per cent.

“While we have made considerable progress in deepening and strengthening our financial markets, more needs to be done,” he said. “Although our central government securities market is liquid by most standards, there is scope to improve liquidity across all tenors and securities,” he said.

“OTC derivatives markets, especially interest rate derivatives, remain concentrated in just one or two few products. It needs to improve if efficient interest rate hedging options have to be made available to stakeholders,” Malhotra said.

“Indian banks are dealing only with offshore market-makers rather than with end-users. If the global INR market has to be on-shored, Indian banks will need to evolve as market-makers globally,” he said. “Usage of the forex Retail platform remains limited. All banks should facilitate this as a priority, so that retail users get a fair deal.”

He said the development of credit derivatives is yet to take off in any meaningful way. This is largely an underutilised area.

At the same time, market participants must acknowledge that while a privilege bestows some benefits, it also entails responsibilities, he said. For example, banks and primary dealers in the G-Sec market have exclusive access to our liquidity facilities and to short term money markets. “They are market-makers in the OTC derivative markets implying that every entity can only transact with you for hedging,” he said.

“We will continue to deepen financial markets, broaden participation, and further strengthen institutional frameworks. We will continue to strive for efficiency, consumer protection, fairness, transparency, and ethical conduct. In this pursuit, we will continue to assess and meet the emerging market needs,” he said.

“We will also stand prepared to deploy appropriate policy measures, as warranted, to mitigate spillovers and ensure orderly market conditions,” he said.

Reserve Bank Governor Sanjay Malhotra on Friday flagged rising global economic risks, warning that geo-economic fragmentation is reshaping supply chains and disrupting global capital and financial flows.

“Geo-economic fragmentation caused by tariffs, trade restrictions, and industrial policies are reshaping not only global supply chains, they are also affecting the free movement of capital and led to fragmentation of financial flows,” he said.

Addressing the FIMMDA-PDAI Annual Conference in Amsterdam, Malhotra cautioned that stretched valuations in certain asset classes—particularly equities, including some technology stocks—could have spillover effects across markets and regions.

Malhotra also identified artificial intelligence as a key source of uncertainty, noting that while it promises productivity gains, concerns persist over the viability of some business models, the pace and scale of efficiency improvements, and potential job impacts.

He further highlighted the rapid growth of private credit markets as a source of opacity and systemic risk due to increasing linkages with regulated financial sectors.

Pointing to macroeconomic vulnerabilities, the governor warned that elevated public debt levels in major economies remain a concern, as continued fiscal expansion has hindered a return to post-pandemic consolidation paths. At the same time, rising geopolitical tensions are driving higher defence spending, a shift he said could pose significant challenges to long-term fiscal sustainability.

He said the country’s external sector position remains resilient, with foreign exchange reserves assessed as “comfortable,” providing an import cover of about 11 months.

Malhotra said the current account deficit (CAD) remains within sustainable levels, though elevated global energy prices could exert upward pressure. However, recently concluded trade agreements are expected to partly offset this impact, he said.

On the capital account, Malhotra highlighted encouraging trends in gross foreign direct investment (FDI), projecting continued robustness amid a surge in greenfield investment announcements, particularly in the finance and technology sectors. “With recent correction in financial asset valuations, we expect repatriations to moderate, improving the net capital account position going forward,” he said.

“India’s strong macro-economic and macro-financial fundamentals remain strong, supported by continued focus on policy certainty, price stability, financial stability, and thrust on reforms, ease of doing business and inclusive growth,” Malhotra said.

Growth impulses in the Indian economy have remained robust, he said. Domestic demand continues to be supported by strong consumption and public investment. The government’s emphasis on capital expenditure has helped crowd-in private investment and improve productive capacity.

India has recorded an average growth of 8.2 per cent during 2021-25. In 2025-26, the economy is estimated to have grown by 7.6 per cent. Growth in 2026-27 is projected at 6.9 per cent.

“While we have made considerable progress in deepening and strengthening our financial markets, more needs to be done,” he said. “Although our central government securities market is liquid by most standards, there is scope to improve liquidity across all tenors and securities,” he said.

“OTC derivatives markets, especially interest rate derivatives, remain concentrated in just one or two few products. It needs to improve if efficient interest rate hedging options have to be made available to stakeholders,” Malhotra said.

“Indian banks are dealing only with offshore market-makers rather than with end-users. If the global INR market has to be on-shored, Indian banks will need to evolve as market-makers globally,” he said. “Usage of the forex Retail platform remains limited. All banks should facilitate this as a priority, so that retail users get a fair deal.”

He said the development of credit derivatives is yet to take off in any meaningful way. This is largely an underutilised area.

At the same time, market participants must acknowledge that while a privilege bestows some benefits, it also entails responsibilities, he said. For example, banks and primary dealers in the G-Sec market have exclusive access to our liquidity facilities and to short term money markets. “They are market-makers in the OTC derivative markets implying that every entity can only transact with you for hedging,” he said.

“We will continue to deepen financial markets, broaden participation, and further strengthen institutional frameworks. We will continue to strive for efficiency, consumer protection, fairness, transparency, and ethical conduct. In this pursuit, we will continue to assess and meet the emerging market needs,” he said.

“We will also stand prepared to deploy appropriate policy measures, as warranted, to mitigate spillovers and ensure orderly market conditions,” he said.