Global Financial Stability; Risks and Opportunities
Keynote Address by Shri Shaktikanta Das, Governor,
Reserve Bank of India,
at the Future of Finance Forum 2024 organised by the Bretton
Woods Committee, September 13, 2024, Singapore
I am happy to participate in the third annual conference of the Bretton
Woods Committee's Future of Finance Forum. The conference
brings together leaders and experts from the public and private
sectors, multilateral institutions and think tanks to deliberate on
emerging issues, trends and technologies in the financial sector. This
comprehensive horizon scanning can enrich decision making and
help to fashion strategies for exploiting opportunities, managing risks
and building future resilience. Against this backdrop, I propose to
focus on the global financial stability landscape and the evolving
balance of risks and opportunities beyond the current macro-
economic environment.
I. Current conditions
2. The global financial system has exhibited remarkable resilience
in weathering several high impact shocks in the recent period. While
global economic activity and trade have largely withstood downside
risks, the last mile of disinflation has proved to be challenging, giving
rise to financial stability risks. As market expectations about the
future course of monetary policies re-align with policy guidance from
central banks, the prospects of a hard landing appear to be receding.
This is reflected in most forecasts, which suggest that near-term
prospects are improving, notwithstanding the persisting uncertainties
in the international economic and financial environment. Macro-
financial health has been shored up by stronger balance sheets of
financial intermediaries and supportive, and even proactive, micro
and macroprudential policy responses. More recently, however, the
implications of monetary policy divergence among countries are
beginning to unfold, especially in the form of exuberance and sudden
sell-offs in financial markets. Together with the recent unprecedented
IT outage globally, these developments have shown how risks to the
financial system can materialise on a global scale, and sometimes
very quickly, as in a few banks in early 2023. These facts have
brought home, once again, the importance of crisis preparedness
and robust business continuity plans (BCP).
3. Nelson Mandela had said and I quote: "After climbing a great
hill, one only finds that there are many more hills to climb." While
several near-term risks appear to have receded, the global financial
system continues to face heightened uncertainty from the outer-term
outlook. Some of these risks are well known and well acknowledged,
but other risks are just emerging or are lurking in the background. As
macroeconomic conditions diverge in different regions of the world
and policy responses get increasingly unsynchronized, spillovers to
advanced and emerging economies alike are getting amplified.
4. In this highly uncertain scenario, policy makers and financial
sector regulators have to work with renewed urgency to buffer
economic activity and financial sector from unforeseen shocks. A
flexible and robustly equipped regulatory architecture in the
financial sector would be essential to stay ahead of the curve
and minimise risks. Macroeconomic policy makers and other
stakeholders must also be quick to adopt a forward-looking
approach to navigate the difficult bends and turns on the road
ahead. Employing sustainable business models and judiciously
harnessing the full potential of technological advances will be
the cornerstones of this approach.
II. Macroeconomic Outlook
5. The resilience of global economic activity in the first half of 2024
prompted a repricing of policy paths by financial markets.
Accordingly, a better balance in the risks to the outlook began to
emerge. Output path divergences started narrowing across
economies. Cyclical effects also started waning. Going into the
second half of the year, while global growth appears to be steady, it
remains subdued by historical standards1, with disparities between
regions. Some emerging market economies (EMEs) continue to
demonstrate resilience and adaptability, while others - mostly low-
income countries (LICs) - are still in a vulnerable situation. A few
advanced economies (AEs) are also at the risk of facing a slowdown.
6. In its July 2024 world economic outlook update, the
International Monetary Fund (IMF) presented a cautiously optimistic
outlook for the global economy2. In its view, varied momentum of
activity is narrowing divergences across economies, while world
trade is firming up. The growth of global trade is expected to align
with the pace of global growth in 2024-25, thus keeping the trade-
GDP ratio stable over the medium-term. At the same time, however,
cross-border trade restrictions have increased amidst rising shipping
costs and logistics disruptions. Overall, the risks to the outlook are
judged to be balanced, although in the near-term, they weigh on
the downside. Let me now touch upon some salient risks to the
global macroeconomic outlook.
7. First, the momentum of global disinflation is slowing, warranting
caution in easing monetary policy. The persistence of inflation,
particularly in the services sector, poses a significant risk. Fuelled by
a combination of elevated wage growth and constrained productivity,
these factors are placing the balance sheets of financial
intermediaries at risk from recognised and unrecognised valuation
losses. The stickiness in inflation could delay the return to price
stability which, in turn, increases external, fiscal and financial risks.
In such a scenario, monetary policy management by Central Banks
has to be prudent and supply side measures by government have to
be proactive.
8. Second, unprecedented high levels of debt characterise the
global economic landscape. It has reached a level of US$ 315 trillion
or 333 per cent of global GDP according to the 2024 estimates of the
Institute of International Finance. At these levels, the debt overhang
poses significant spillover risks to EMEs. In particular, the low income
and some middle-income countries are very vulnerable. Coexistence
of high levels of debt and elevated interest rates can feed a vicious
cycle of financial instability through impairment of government and
private-sector balance sheets. Fiscal deficits or net accretions to debt
stocks are higher than pre-pandemic levels. There also appears to
be little scope for improvements in fiscal aggregates, given the fact
that 2024 - the Great Election Year - is seeing 88 economies going
into election cycles. Needless to emphasise that fiscal consolidation
has become even more crucial than before for achieving the arduous
'last mile of disinflation'. For emerging economies, such consolidation
could also lessen the incidence and severity of capital outflows by
improving their ratings.
9. Third, increased and persisting geopolitical risks can further
add to the heightened risk aversion among investors, prompting
flights to safety and volatility in asset prices. Countries at the
receiving end of such a situation have to build their own buffers and
strengthen their resilience through appropriate policy responses.
10. Fourth, with trade policy uncertainty reaching exceptionally high
levels, the risks associated with protectionism and unilateral trade
policies threaten to undermine the multilateral trading system. Such
a scenario is filled with potential to create a protracted period of
economic fragmentation and reduced global growth. Revival of
multilateralism and co-ordinated policy action can mitigate the
severity of this situation.
11. Fifth, climate change related adverse weather conditions are
imparting considerable uncertainty to both growth and inflation
trajectories. Inward-looking policies, including trade-distorting
measures, could compromise the ability to tackle global challenges
like climate change. Climate commitments made by nations must be
fulfilled, while adhering to the widely accepted principle of common
but differentiated approach.
12. All these risks are getting increasingly interdependent, as
changes in the profile of any one of the risks usually shifts
expectations relating to others. The need of the hour for policy
authorities and central banks is, therefore, to remain agile and
craft appropriate forward looking measures and structural
changes to overcome the risks.
III. Global Financial Stability Risks
13. I would now like to outline a few global financial stability risks.
First, global financial markets have displayed resilience in recent
months, with equity and bond yields rallying, volatility remaining low
for the most part, and narrowing of corporate bond spreads; but there
has been a sharp increase in prices of relatively riskier assets. While
stocks have been supported by strong earnings, the narrowing of
corporate spreads has coincided with rising episodes of corporate
defaults3. The current scenario also differs from past monetary policy
tightening cycles when markets displayed risk-off sentiments and
prices of riskier assets declined. To the extent that valuations are
currently stretched, sudden shocks could precipitate stress that
spreads contagiously across financial market segments through sell-
offs and band-wagon effects.
14. Second, market expectations of higher interest rates in the
United States (US) along with other factors, had kept the US dollar
strong. The generalized global risk-on risk-off environment had
increased the volatility of capital flows for many emerging markets4.
Further, a strong USD increases debt service burdens and
inflationary pressures for EMEs. To what extent this scenario will get
impacted would depend upon the quantum and timing of policy pivot
by the US Fed, following their recent pronouncements to this effect.
15. Third, the proliferation of non-bank institutions in financial
intermediation may create risks to financial stability due to their size,
complexity and interconnectedness with domestic and global
financial systems. In recent years, a number of vulnerabilities have
emerged in NBFIs in advanced economies, contributing to periods of
market dysfunction5. Hidden leverage and liquidity mismatches of
these institutions can amplify shocks and propagate strains
throughout the financial system.
16. Fourth, private credit6 has grown four-fold over the last ten
years. It is now a major source of corporate financing among middle-
market firms that have low or negative earnings, high leverage, and
lack high-quality collateral. Proliferation of this asset class, along with
intensifying competition with investment banks on larger deals, may
shift supply-demand dynamics and result in poorer underwriting
standards. As a consequence, the probability of credit losses can rise
and make existing risk management models obsolete. The rapid
growth of private credit, their increasing interconnectedness with
banks and NBFIs, and their opacity creates vulnerabilities that could
become systemic. Regulators world over need to give a closer look
to these developments and come out with necessary guardrails.
17. Fifth, stress in the global commercial real estate (CRE) sector
needs to be watched closely7. Banks exhibit high sensitivity to
expected and unexpected CRE losses, due to the relatively high CRE
coverage ratios in their loan books. Further, liquidity squeezes can
materialise for banks with large CRE exposures, as short sellers may
target them and investor confidence may slip further. As I said earlier,
staying alert and undertaking forward looking regulatory measures
ahead of the curve can contain the risks to bank balance sheets and
systemic stability.
IV. Higher for Longer Interest Rates
18. The interaction of financial conditions with monetary policy can
present overwhelming risks to financial stability. The synchronized
monetary policy tightening in the last couple of years across the
globe, is gradually giving way to monetary policy divergence in 2024.
While quite a few central banks have started treading the path of rate
cuts on account of recession worries8, many still continue to maintain
restrictive stances and refrain from reducing policy rates so as to
break the back of inflation persistence decisively. The 'higher for
longer' interest rate environment did bring forward financial stability
risks, as seen in March 2023 in certain advanced economies. Tight
financial conditions impacted balance sheets of banks in these
jurisdictions. Market expectations of rate cuts are now regaining
momentum, especially after indications of a policy pivot from the US
Fed, but the adverse spillovers from the 'higher for longer' interest
rate scenario remains a contingent risk. On the other hand there are
central banks which naturally and justifiably remain averse to
premature loosening of policy before inflation has been durably
reined in their countries. Central Banks in these countries need to
remain watchful of their domestic inflation-growth balance and make
policy choices.
V. Geo-Political Risks
19. The resurgence of geopolitical risks and their persistence pose
high risks to financial stability, given their high speed of transmission
and the multi-faceted exposure of the financial sector. Geopolitical
risks may emanate not only in the form of wars, terrorist attacks, trade
disputes and political gridlocks, but also through supply chain strains,
technology decoupling, cyberattacks and weaponisation of finance.
20. The geopolitical risk index9 has spiked sharply in 2024 amidst
increases in trade restrictions and financial sanctions, reversing the
gains from several decades of global economic integration10.
Geopolitical risks are imparting heightened volatility to capital flows
and asset prices. They are even impacting bystanders or countries
not directly involved in conflicts. These developments often result in
strains on the international monetary system, undermining the
efficiency of the global payments systems. Even as we reap the many
benefits of increasing financial integration, it is evident that the
contagion risks from geopolitical events can no longer be ignored,
especially in the context of transactions in forex, equity and debt
markets as well as in the banking system11.
21. Geo-economic fragmentation is weighing on the medium-term
outlook for global growth. This can delay the convergence of
emerging and developing economies with better living standards. In
addition, geopolitical tensions in the past have generally been
associated with volatility in crude oil prices and disruptions in supply
conditions. With their negative feedback loops, they aggravate the
stress on the real economy and the financial system. While it may
not be possible to completely insulate from such risks, it is important
to deal with them through systematic monitoring, building buffers,
devising contingency plans and fostering multilateral cooperation.
VI. Opportunities
22. As we navigate these risks and challenges, we need to
recognise that there are also huge opportunities ahead of us.
Current challenges open pathways for economic resilience and
a stronger global outlook, if addressed collaboratively and
strategically. Let me highlight some of these opportunities.
(i) Impending monetary policy pivots with a strong probability of soft
landing provides hope that global inflation could be on a sustained
downward trajectory. This would open up space to strengthen the
foundations of growth in an environment of benign input costs and
revival of the labour market. For emerging market economies in
particular, this possibility offers opportunities to capitalise on robust
fiscal, monetary, and financial policy frameworks to exploit the
potential to attract investment and accelerate sustainable growth.
This is also an apt time to consolidate the gains from the post-
pandemic rebound with deeper structural reforms in both product and
factor markets.
(ii) Despite the uncertainty surrounding the geo-political outlook, the
latest projections suggest a turnaround in world trade is taking hold12.
This offers another engine for economic expansion. Addressing trade
policy uncertainties more forcefully and in coordination presents an
opportunity to strengthen global prosperity.
(iii) It is important to acknowledge the role that finance will continue
to play in the global growth story, particularly for emerging markets
such as India13. This is an opportune time to enhance the breadth,
access and efficiency of financial markets while also protecting
consumer interests. A forward-looking approach would require
developing regulatory sandboxes, fostering collaboration with
innovators, and ensuring the integration of new players into the
regulatory framework without compromising prudence and stability.
(iv) Digitalisation has been a game changer, driving empowerment,
entrepreneurial innovation, productivity, and enabling an irreversible
transformation of the economic landscape. Leveraging the
digitalisation channel has the potential to bring in improvements in
the field of financial inclusion, formalisation of finance and
enhancements in cross-border payments systems.
(v) Climate change gives us another critical opportunity for
innovation. Quest for new climate technologies and harnessing them
can be instrumental in fostering energy independence, especially for
developing countries. Climate-smart financial solutions such as
issuance of green bonds also provide avenues for private sector
involvement and engagement.
(vi) Reforming the international monetary and financial and system is
crucial for ensuring global economic stability, fostering growth, and
mitigating systemic risks. The current system, while having
supported decades of economic expansion, is increasingly
challenged by imbalances and inefficiencies, including the
dominance of a few currencies in global trade and finance. While
reforms should address these imbalances to enable greater inclusion
of emerging economies in global financial governance, they should
also focus on strengthening the global financial safety net (GFSN).
VII. Conclusion
23. As I proceed to conclude, let me briefly touch upon India's
prospects in this unsettled and highly uncertain international
environment. The Indian economy rebounded from the severe
contraction imposed by the COVID-19 pandemic and averaged real
GDP growth of above 8 per cent during 2021-24. For 2024-25, the
Reserve Bank of India (RBI) projects real GDP growth at 7.2 per cent,
with risks evenly balanced around this forecast. This growth outlook
reflects the underlying strength of India's macro-fundamentals, with
domestic drivers - private consumption and investment - playing a
major role. Moreover, the growth trajectory is supported by an
environment of macroeconomic and financial stability. Inflation has
moderated from its peak of 7.8 per cent in April 2022 into the
tolerance band of +/- 2 per cent around the target of 4 per cent, but
we still have a distance to cover and can not afford to look the other
way. The Reserve Bank's projections indicate that inflation is likely to
ease further from 5.4 per cent in 2023-24 to 4.5 per cent in 2024-25
and 4.1 per cent in 2025-26. Meanwhile, fiscal consolidation is
underway and public debt levels are on a declining trajectory over
the medium-term. Corporate performance has improved strongly,
enabling deleveraging and strong growth in profitability. Balance
sheets of banks and non-banking financial intermediaries, regulated
by the Reserve Bank of India, have also strengthened14. Our stress
tests reveal that these financial intermediaries will be able to maintain
regulatory capital and liquidity requirements even under severe
stress scenarios.
24. India's vision of global progress emphasises international
cooperation that is people-specific, ambitious, action-oriented and
decisive. India's G20 Presidency in 2023 and its continuing
contributions thereafter reflects India's vision of the world being one
earth, one family with one future. These priorities include
strengthening the Multilateral Development Banks (MDBs) to
address shared global challenges of the 21st century; achieving
14
(i) Gross Non-Performing Assets (GNPA) ratio of banks was 2.7 per cent at end-June 2024, the lowest
since end-March 2011. The annualised slippage ratio, which measures new NPA accretions as a
percentage of standard advances, continued to decline to reach at 1.3 per cent at end-June 2024. The
provision coverage ratio (PCR) continued to improve to reach at 76.5 per cent by end-June 2024.
Capital to risk-weighted assets ratio (CRAR) stood at 16.8 per cent at end-June 2024, much above the
regulatory threshold. The annualized profitability indicators, namely, return on assets (RoA) and return
on equity (RoE) stood at 1.4 per cent and 14.5 per cent, respectively, at end-June 2024, showing
continued improvement.
(ii) GNPA ratio of NBFCs was 2.8 per cent at end-June 2024, the lowest since end-March 2021.
Similarly, NNPA ratio improved to 1.0 per cent at the end-June 2024. The annualised slippage ratio,
which measures new NPA accretions as a percentage of standard advances, continued to decline to
reach at 2.6 per cent at end-June 2024. The provision coverage ratio (PCR) continued to improve to
reach at 61.5 per cent by end-June 2024. Capital to risk-weighted assets ratio (CRAR) stood at 26.6
per cent at end-June 2024, much above the regulatory threshold. The annualized profitability indicators,
namely, return on assets (RoA) and return on equity (RoE) stood at 3.2 per cent and 11.6 per cent,
respectively, at end-June 2024, showing continued improvement.
financial inclusion and productivity gains through digital public
infrastructure; debt resolution for lower and middle-income countries;
and financing cities of tomorrow, among many others.
25. In conclusion let me say that, India remains committed to the
reshaping of the global order in the decades ahead for the betterment
of the world. It is now time for everyone to work for 'one future' for
the entire mankind.