IMF flags rising global financial stability risks, highlights India’s central role in private credit boom

The International Monetary Fund (IMF) has warned that global financial stability risks remain “elevated,” as geopolitical tensions in the Middle East, tighter financial conditions, and rising leverage across markets combine to heighten vulnerability in the global financial system.

In its latest Global Financial Stability Report, the Fund said markets have so far adjusted in an “orderly” manner to the conflict, but cautioned that risks are increasingly tilted to the downside. Global equities have fallen about 8 percent since the escalation, while sovereign bond yields have risen sharply as investors price in higher inflation and tighter monetary conditions.

Emerging markets are among the most exposed to these shifts. The IMF highlighted a “K-shaped” pattern in capital flows, with investors favoring short-term debt inflows and carry trades over more stable foreign direct investment. This leaves many economies vulnerable to sudden reversals in sentiment, currency depreciation, and refinancing pressure, particularly as a stronger US dollar and higher energy prices weigh on external balances.

A key concern is the growing influence of leveraged nonbank financial intermediaries, including hedge funds, exchange-traded funds, and options-based strategies, which could amplify market stress through forced selling during periods of volatility. The Fund also warned that sovereign bond markets have become more fragile due to higher debt levels, greater reliance on short-term issuance, and a more price-sensitive investor base, increasing the risk of abrupt yield spikes.

At the same time, the IMF flagged early signs of strain in private credit markets, where rising borrower defaults could spill over into broader corporate debt segments, especially among highly leveraged firms. Simultaneous sell-offs in both equities and bonds are also becoming more frequent, reducing diversification benefits and increasing the risk of forced deleveraging during downturns.

Eric LeCompte, Executive Director of the Jubilee USA Network warns that the IMF’s concerns about global financial stability are increasingly alarming, as ongoing conflict in the Middle East, persistent inflation, and rising sovereign debt levels combine to heighten risks across financial markets. He notes that the longer the Iran conflict continues, the greater the potential damage to market stability, with developing economies likely to bear the brunt. 

Within this broader trend, the IMF underscored the rapid rise of private credit in emerging markets as both an opportunity and a new source of risk. While private credit can deepen financial intermediation and provide financing to borrowers underserved by banks, its fast expansion could amplify leverage and create vulnerabilities in jurisdictions with weaker supervisory and data frameworks.

India stands out as a central hub in this expansion. The IMF estimates that emerging market private credit assets under management are between $50 billion and $100 billion, with roughly half concentrated in India. This makes India the largest single market for private credit among emerging economies, highlighting both its growing financial sophistication and its increasing exposure to non-bank credit channels.

Deal activity in emerging markets has also accelerated, rising from about $14 billion in 2024 to more than $22 billion in 2025, reflecting strong investor appetite despite rising global uncertainty. The IMF noted that global managers typically lend in hard currency to larger firms, shifting currency risk onto borrowers, while domestic managers rely more on local institutional and retail pools.

The Fund urged policymakers to strengthen oversight, close data gaps, and enhance stress testing frameworks as private credit expands, warning that without robust regulation, it could become a new channel of financial instability even as it supports growth.