RBI commits to remain vigilant of emerging vulnerabilities, keep financial system resilient

Reserve Bank of India RBI Governor Sanjay Malhotra on Saturday while noting the resilience in the domestic financial system warned that it cannot be taken as guarantee against future vulnerabilities and called for continued vigilance to safeguard financial stability reported news agency PTIHe identified five priorities for policymakers and stressed that financial stability should focus not on preventing shocks but on strengthening the financial systems resilience to withstand and contain their impactTodays resilience may not necessarily imply tomorrows immunity and we are committed to remain vigilant of emerging vulnerabilities and continue to keep our financial system strong and resilient he said at the Kautilya Economic ConclaveHe pointed out that India was navigating a challenging global environment from a position of strength supported by sound macroeconomic fundamentals and resilient balance sheets across banks and nonbank financial companies NBFCStrong macroeconomic fundamentals and the resilience of the financial system provide confidence in our ability to withstand these lingering shocks he saidHe noted that India remains vulnerable to external shocks through commodity prices global financial conditions and capital flowsKey risks to financial systemThe RBI Governor identified AIrelated valuation excesses elevated global debt levels leverage in the nonbank financial sector growing private credit exposures and cybersecurity threats as the five key concerns facing the international financial systemEmphasising that these vulnerabilities do not indicate immediate financial stress he said It is not that I see any imminent signs of stress but we need to remain alert to these risksHe said the next financial crisis may not necessarily originate in a bank or even within the financial sector but could begin with a geopolitical event cyber attack or technological failure and affect the financial system through multiple channelsMalhotra also sought improvements in monitoring and assessment frameworks through better and more granular dataHe noted that the data quality would increasingly determine the quality of risk assessment in an interconnected financial system while pointing out that data on nonbanking financial institutions NBFIs interconnected exposures technological developments and crossborder positions can remain fragmentedHe further said a strong banking system while necessary is not sufficient and resilience needs to be systemwide He said resilience is required across NBFIs financial markets payment systems technology infrastructure providers critical third parties and crossborder financial networksBuild a financial system that can withstand shocksThe RBI governor said technologies such as AI and tokenisation as well as new forms of financial intermediation could significantly improve efficiency but innovation must not weaken the foundations of trust in the financial systemHe stressed that sound institutions settlement finality singleness of money and financial integrity as fundamental properties need to be preservedThe challenge before us is to build a financial system that can withstand shocks that we can anticipate and even those we cannot yet foresee he saidThis would require resilient institutions better data deeper markets credible safety nets effective resolution mechanisms and regulation and supervision that are proactive and forwardlooking while remaining proportionate he addedIf we succeed financial stability will remain largely invisible and in central banking invisibility is perhaps the most invaluable and meaningful measure of success he statedCorrection in AIrelated valuations can benefit IndiaWhile noting that AI investment boom has been a major driver of global financial markets in recent year he said any moderation in AIrelated investment or earnings could lead to a significant repricing of financial assets linked to the sector which could have a favourable impact on IndiaIf corrections in AIrelated valuations were to happen in advanced countries it may have a positive impact in terms of capital inflows he saidThe Finance Ministrys latest Monthly Economic Review report had said AI continues to drive capital investment and capital flows across borders and developed countries are also racing to secure investments to finance their renewed manufacturing aspirations amidst increasing weaponisation of global supply chains Thus developing nations such as India are facing stiff challenges to attract capital flowsWith inputs from PTI and IANS