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The Indian economy is growing at a robust pace, driven by strong domestic demand, low inflation, and the healthy balance sheets of banks, said a Reserve Bank report released on Wednesday.
Photograph: Francis Mascarenhas/Reuters
The domestic financial system remains robust and resilient, bolstered by strong balance sheets, easy financial conditions, and low financial market volatility, said the December 2025 edition of the Financial Stability Report (FSR).
“Nonetheless, there are near-term risks from external uncertainties – geopolitical and trade-related,” said the report, which reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on the resilience of the Indian financial system and risks to financial stability.
It further said the health of the scheduled commercial banks (SCBs) remains sound with strong capital and liquidity buffers, improved asset quality and robust profitability.
“Macro stress test results affirm the resilience of SCBs to withstand losses under hypothetical adverse scenarios and maintain capital buffers well above the regulatory minimum.
“Stress tests also confirm the resilience of mutual funds and clearing corporations,” it added.
According to the report, the gross non-performing assets ratio of banks will improve further to 1.9 per cent by March 2027 under a baseline scenario.
As of September 2025, the key ratio stood at a multi-decade low of 2.1 per cent, the central bank said in its half-yearly Financial Stability Report.
“The aggregate GNPA ratio of the 46 banks may improve from 2.1 per cent in September 2025 to 1.9 per cent in March 2027 under the baseline scenario,” the report said.
The GNPA ratio may rise to 3.2 per cent and 4.2 per cent under adverse scenarios, the Reserve Bank of India (RBI) said, pointing to results of its stress tests.
From a capital buffers perspective, the report said, the capital to risk-weighted assets ratio (CRAR) remained strong as of September, with state-owned banks at 16 per cent and private sector banks at 18.1 per cent.
Banks will be able to withstand adverse economic shocks, the report said, listing out how the capital buffers will be impacted in adverse events.
On the economy, the report noted that the real gross domestic product (GDP) growth surprised on the upside in both Q1 2025-26 and Q2 2025-26 at 7.8 per cent and 8.2 per cent, respectively, supported by strong private consumption and public investment.
“Growth outlook remains positive, aided by low inflation, easy financial conditions, above normal monsoon, direct and indirect tax reforms, and the ongoing expansion of digital public infrastructure,” the report said.
On the domestic currency, the report said the rupee depreciated against the US dollar (USD), reflecting falling terms of trade due to the impact of high tariffs and a slowdown in capital flows.
With the effective US tariff rate on India being the highest compared to its trading partners, the rupee depreciated despite the broad weakening of the US dollar against other major and Asian currencies, it added.
