RBI outlines five priorities for financial stability as global risks grow more interconnected

Reserve Bank of India Governor Sanjay Malhotra has outlined five key priorities for safeguarding financial stability, warning that the nature of systemic risks is changing as financial markets, institutions and technologies become increasingly interconnected.

Speaking at the Fifth Kautilya Economic Conclave on October 3, Malhotra said financial stability should not be viewed as an effort to prevent every shock. Instead, the focus should be on ensuring that the financial system can absorb shocks without allowing them to spread across the wider economy.

“Financial stability is not about preventing them. It is about strengthening systemic resilience to face those shocks and contain their amplification,” Malhotra said.

Five priorities for financial stability

The first priority, according to Malhotra, is to strengthen systemic resilience. He said shocks can be endogenous or external, and the objective should be to ensure that financial institutions continue providing services even under severe stress.

The second is to better understand a new generation of systemic risks and their interactions. “Risks are increasingly exogenous, cross-border and interconnected,” Malhotra said, noting that the next financial crisis may not originate in a bank or even in finance. It could begin with a geopolitical event, cyberattack or technological failure and affect the financial system through multiple channels.

Malhotra said prolonged periods of financial stability can themselves encourage greater risk-taking and leverage, while fading memories of past crises can weaken prudence. He cautioned that vulnerabilities can build gradually before triggering significant economic and financial costs.

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His third priority is improving monitoring and risk-assessment frameworks through better and more granular data. Malhotra said information on non-bank financial intermediaries, interconnected exposures, technology dependencies and cross-border positions remains fragmented.

“The quality of our data will increasingly determine the quality of our risk assessment,” he said.

The fourth priority is to ensure that resilience extends across the entire financial ecosystem rather than being concentrated in banks. This includes NBFCs, financial markets, payment systems, technology infrastructure, critical third parties and cross-border financial networks.

“Financial instability anywhere can become a threat to financial stability everywhere,” Malhotra said.

Innovation must preserve trust

The fifth priority is ensuring that financial innovation strengthens rather than weakens the foundations of trust. Malhotra said artificial intelligence, tokenisation and new forms of financial intermediation can significantly improve efficiency, but their adoption must preserve sound institutions, settlement finality, the singleness of money and financial integrity.

The RBI Governor said achieving these objectives would require “resilient institutions, better data, deeper markets, credible safety nets, effective resolution mechanisms and regulation and supervision that are proactive and forward-looking, while being proportionate.”

Malhotra’s framework comes against a backdrop of elevated global debt, stretched asset valuations, rising leverage among non-bank financial intermediaries, private-credit vulnerabilities and growing cyber risks linked to artificial intelligence. He said the simultaneous occurrence of such shocks could put significant pressure on the global financial architecture.

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