“Prospects for the Indian economy are expected to improve after the slowdown in the pace of economic activity in the first half of 2024-25,” Reserve Bank of India Governor Sanjay Malhotra wrote in the foreword of the bi-annual Financial Stability Report released on Monday.

“Consumer and business confidence for the year ahead remain high and the investment scenario is brighter as corporations step into 2025 with robust balance sheets and high profitability,” he said.

Malhotra, a career bureaucrat, was a surprise candidate when he was appointed to the post just two days before his three-year term began on Dec. 11. In a press briefing to mark his appointment, he said stability and growth were important to the economy, although steered clear of giving any guidance on the outlook and possible future moves on monetary policy.

The RBI under previous Governor Shaktikanta Das has kept interest rates unchanged for almost two years despite growing calls, including from within the government, to ease. Economists now expect Malhotra to shift gear and possibly cut interest rates as early as February.

The economy grew at its weakest pace in almost two years in the past quarter, prompting analysts and the RBI to pare back growth projections for the current fiscal year to about 6.5%, down from more than 8% in the previous fiscal year that ended in March 2024.

The RBI said in its Financial Stability report that growth in the third and fourth quarters of the financial year is expected to recover “supported by pick up in domestic drivers, mainly public consumption and investment, strong service exports and easy financial conditions.”

On the global economy, Malhotra said prospects are brighter because of a slowdown in inflation, and monetary policy space will open up to support growth. Over the medium term, though, the outlook “remains challenging,” he said, citing possible geopolitical tensions, financial market turmoil, extreme climate events and rising indebtedness.

Financial Stability

The new governor said the RBI will remain focused on financial stability to support “a higher growth path for the Indian economy.” The financial sector was bolstered by robust earnings, low levels of impaired assets and strong capital buffers, he said.

The RBI’s stress tests revealed that capital levels of the banking system and non-banking financial companies remain well above the regulatory requirement, according to the Financial Stability Report. The capital adequacy ratio in the banking system is expected to reach 16.5% in March 2026, largely unchanged from 16.6% in September 2024, and no lender will fall short of the minimum capital requirement of 9% even in adverse cases. 

However, the RBI expects bad loan ratios to worsen after falling to multi-year lows, mainly because of stretched asset valuations and rising indebtedness, according to the report. Gross non-performing assets ratio of Indian banks will likely climb to 3% in March 2026, from 2.6% in September this year.

A weakening economy hurts corporate profits and household income, making it harder for borrowers to repay loans and posing a challenge to banks.