RBI Governor Sanjay Malhotra flags five risks to global financial stability

Reserve Bank of India Governor Sanjay Malhotra has identified five major vulnerabilities that could threaten global financial stability, warning that while each risk may not be a major concern individually, their simultaneous occurrence could put significant pressure on the global financial architecture.

The risks highlighted by Malhotra are elevated global debt, stretched asset valuations, high leverage, vulnerabilities in private credit and cyber threats intensified by artificial intelligence (AI).

Speaking at the 5th Kautilya Economic Conclave (KEC) in New Delhi on Saturday, Malhotra said the global financial system had absorbed the supply shock caused by the West Asia conflict relatively well, but the broader economic environment remained challenging. The conflict, he said, had aggravated inflationary pressures and increased vulnerabilities within the financial system.

Debt pressures and tighter financial conditions

Malhotra said elevated global debt was the first major vulnerability. Global debt levels have risen while debt maturities have shortened and bond yields have hardened.

Higher borrowing costs could put pressure on sovereign finances by narrowing fiscal space and worsening debt dynamics. Corporates could also face greater financial pressure as the cost of borrowing increases.

The RBI governor's warning comes against a backdrop of rising global borrowing costs and elevated bond yields, with geopolitical tensions and higher energy prices adding to financial-market uncertainty.

AI boom raises valuation and leverage risks

The second vulnerability relates to stretched asset valuations, particularly those linked to artificial intelligence.

Malhotra said the AI investment cycle had provided significant support to global financial markets, especially in advanced economies, where strong earnings have contributed to substantial gains in AI-related equities.

However, he warned that a slowdown in AI investment or earnings as the investment cycle matures could lead to sharp repricing of financial assets, particularly across the AI value chain. High risk appetite has also encouraged greater leverage, while declining cash flows among major AI companies could amplify market corrections and volatility.

Malhotra said a correction in elevated AI valuations in advanced economies could potentially redirect capital towards India through higher inflows. He added that Indian equity markets had already undergone some correction from elevated valuations in recent months, although the adjustment had remained orderly.

The scale of AI-related borrowing has also become a wider concern internationally. KKR recently warned of growing credit-market exposure to the AI sector, while the Financial Times reported that major technology companies were increasingly using debt to finance AI infrastructure, raising questions about concentration and interconnectedness in credit markets.

Leverage and private credit vulnerabilities

The third risk identified by Malhotra was the expansion of leverage among non-bank financial intermediaries.

Hedge funds, options sellers, exchange-traded funds and other non-bank financial intermediaries in advanced economies have increased leverage across equity and bond markets in pursuit of higher returns.

Malhotra said this becomes particularly concerning when equity valuations are already stretched and links between banks and non-bank financial intermediaries have deepened on both the asset and liability sides. A tightening of financial conditions could therefore spill over into banks and other markets.

Private credit represents another vulnerability, particularly in advanced economies. Malhotra pointed to defaults involving high-profile private-credit cases as evidence of vulnerabilities in lending standards, describing the sector as an area where weak or loose lending practices could pose risks.

AI is also intensifying cyber risks

The fifth vulnerability identified by Malhotra concerns cyber threats, which he said were being compounded by the emergence of sophisticated AI tools.

According to the RBI governor, AI has heightened cyber risks, model risks and dependence on third-party systems, while also raising concerns about the erosion of human oversight and accountability.

He said the most immediate concern arising from increasingly sophisticated AI tools was cyber risk, particularly because financial systems are highly interconnected and operate across national borders.

Malhotra has separately cautioned that a future financial shock need not originate within the banking system itself. A geopolitical event, cyberattack or technological failure could spread through multiple channels, underscoring the need for regulators to understand technological dependencies, interconnectedness and possible channels of contagion.

India exposed but navigating shocks from a position of strength

Malhotra said India, as a large open economy, remained exposed to global financial and economic shocks.

The West Asia conflict, higher commodity prices and pressures on the external sector could affect India's domestic financial system. However, he said the Indian economy was navigating the current phase from a position of strength, supported by relatively low inflation and strong growth compared with other major global economies.

Strong macroeconomic fundamentals and a resilient global financial system, he said, provide confidence in India's ability to withstand lingering shocks.

He also stressed that India was continuing to strengthen its resilience against external disruptions rather than relying solely on current conditions.

Measures aimed at strengthening resilience

Among the measures outlined by Malhotra are diversification of import sources, greater self-sufficiency in energy and other critical resources, and the creation of strategic petroleum reserves.

He also highlighted efforts to accelerate the energy transition, improve the competitiveness of domestic manufacturing and deepen India's integration into global value chains.

Expanding market access through free trade agreements and promoting trade settlement in local currencies are also part of the broader strategy to strengthen India's resilience to external shocks.

Malhotra's remarks came as the 5th Kautilya Economic Conclave, being held from October 3 to 5 under the theme “Resilience in an Age of Flux”, brings together policymakers, economists, academics and financial experts from India and abroad to discuss global fragmentation, technology, trade, finance and India's economic priorities. The conclave has more than 180 participants, including over 80 international participants from around 30 countries.