Lessons from FSR – June 2026

Besides the risks of ALM mismatches, banks have to cope with elevated risks arising from geopolitical interconnected risks. Financial Stability report (FSR) – June 2026 released by RBI recently provides risk intelligence inputs that can potentially improve preparedness to mitigate emerging collateral risks. The risk management optimism stems from the fact that banks can strategize to manage risks from a position of strength. 

In its FSR, RBI revised its real GDP growth forecast for FY27 to 6.6% (down from its initial baseline projection of 6.9%). It emphasized that managing price stability remains a core priority as the RBI navigates a delicately poised growth-inflation dynamic. As such headline inflation for FY27 is projected at 4.6%, with risks firmly tilted to the upside. Due to a combination of geopolitical supply shocks and the potential onset of a weaker southwest monsoon driven by El Niño conditions, the RBI cautions that headline inflation could temporarily scale toward the higher end of the tolerance band—potentially reaching close to 6.0% in Q3 FY27—before easing. The government is anticipated to continue its fiscal consolidation path, with the Gross Fiscal Deficit (GFD) projected at 4.3% of GDP for FY27, coming in safely below the medium-term 4.5% target. Banks may have to interpret these evolving economic conditions in their future approach towards strategic planning and growth projections. 

Banks could improve asset quality with gross NPAs at a decadal low of 1.8 percent, Capital adequacy ratio (CAR) at 16.6 percent and NIM at 2.9 percent and ROA at 1.30 percent. Net profit for PSBs hit an all time high of Rs. 1.98 trillion in FY26 compared to Rs. 1.78 trillion in FY 25. The FSR affirms that domestic banks are thus structurally strong and resilient. 

When risks are elevated across the industry impacting the economy, even the risks of bank customers (depositors and borrowers) may also stretch into pool of banking risks to impact the performance parameters of banks. If the loan repayments are delayed or deposit growth further slows down, they can elevate risks. The continued dependence of banks on liquidity windows to meet their ALM risks can put pressure on NIM and profitability. 

• Risks flagged in FSR – June 2026

While every half year since March 2010, FSR provides analytical data on risks to stability with stress testing outcomes, the analysis of FSR of June 2026 is more critical due to the unprecedented eventful risky geopolitical headwinds sweeping the global and domestic economy in most part of risk assessment period. The West Asia conflict now in its fifth month, crude above $100 per barrel, the rupee at record lows, and the twin regulatory transitions of ECL and Basel 3.1 approaching from April 2027 pose several complex challenges to the banking and financial system. 

But it is notable that banks are better positioned than most peers to absorb shocks in the given global financial stability risks that remain elevated amid the ongoing West Asia conflict, geopolitical fragmentation, public debt concerns, fragilities in bond markets, and stretched asset valuations. Persistent supply chain uncertainties could tighten financial conditions and revive inflationary pressures posing elevated risks. Leverage among non-bank financial institutions remain another key area of concern.

Among the key risks, FSR flags geopolitical fragmentation and rapid advances in Artificial Intelligence (AI) as two structural forces which is reshaping the global economy and financial system. Supply chain disruptions, energy market volatility, and trade realignment. AI is generating optimism that may mask underlying vulnerabilities and susceptibility to global spillovers. The near-term outlook, however, remains uncertain amidst the rapidly evolving global environment. 

Due to inflation risks the central banks of major economy may follow a hawkish tone in pursuing monetary policy potentially tightening global financial conditions. The near-term risks of these vulnerabilities could be daunting. Expanding role of leveraged non-bank financial intermediaries (NBFIs) is also flagged as a systemic concern.

The lenders should be mindful about the risks when the energy price transmits to elevate inflation headwinds turning monetary policy more hawkish. It may lead to repo rate continuing at 5.25 percent for longer duration if not hiked. The liquidity conditions may also tighten to stem inflation. 

The exchange rate volatility, drop in external trade, current account deficit may widen increasing external sector vulnerability.  The outlook of FPI capital inflows may not revive too soon putting pressure on exchange rate and foreign exchange reserves. NBFC foreign currency exposure though a major part of it is hedged may expose them to risks. 

The conditions of international trade may improve due to calming of hostility in West Asia as the interim peace agreement restores permanent peace in the region. The oft repeated threats of closure of Strait of Hormuz may come to an end reducing the structural risks of geopolitical fragmentation. Stablecoin risk may lead to money laundering activities, AI risk is assessed as the double-edged sword, Fintech lending risks and G-Sec yield pressures etc may compound into risks that need follow up to mitigate. 

Though banks have built strong resilience with capital buffers and asset quality, beneath this resilient surface, the stress tests and accompanying analysis signal a definitive transition in regulatory focus—away from traditional asset quality repair and toward emerging structural, liquidity, and technological risks.

In priority, guarding the asset quality of banks will call for tectonic shift to  improve credit underwriting skills, close monitoring and control of credit quality and orchestrating handholding skills in the present stressed times by capturing early signs of impairment of loan and investment assets will be more critical. Similarly, the measurement and monitoring of risks of entities of ITES services that are more exposed to AI risks will be necessary to ensure that exposure to them does not impair asset quality and does not open to market risks in investments portfolio. 

Banks should actively use the regulatory windows opened by RBI to stimulate inflows of foreign currency resources through freshly mobilized FCNR deposits, funds accessed by PSUs by raising ECBs, restoring the time limit to speed up realisation of export proceeds in nine months instead of 15 months, inflows into long tenor G-Secs and bond markets. The FCNR funds can be converted into INR to compensate for the shortfall in lendable resources thereby reducing dependence on high-cost local resources.  

The timely sensitization towards upcoming risks discussed in the latest FSR can help banks and FIs to increase the robustness of systemic controls, plan business mix and strengthen proactive risk mitigation steps. It can work as a strategic risk intelligence input if explored properly.

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