Next financial crisis may stem from cyberattack or geopolitical shock, RBI governor says

The next financial crisis may originate from a geopolitical event, cyberattack or technological failure rather than from banks or the financial sector, Reserve Bank of India Governor Sanjay Malhotra said on Saturday, calling for stronger system-wide resilience against a new generation of interconnected risks.

“Risks are increasingly exogenous, cross-border and interconnected,” Malhotra said in a speech at the Fifth Kautilya Economic Conclave. “To strengthen systemic resilience, we must aim to better understand the network of dependencies and contagion channels and make scenario analysis a cornerstone of risk management.”

“Financial stability is not about preventing” inevitable shocks, he said. “It is about strengthening systemic resilience to face those shocks and contain their amplification.”


That resilience must extend beyond banks to non-bank financial intermediaries, financial markets, payment systems, technology infrastructure, critical third parties and cross-border financial networks, Malhotra said.

“A strong banking system is necessary, but not sufficient,” he said. “Financial instability anywhere can become a threat to financial stability everywhere.”

Malhotra also called for better and more granular data, saying information on NBFIs, interconnected exposures, technology dependencies and cross-border positions remained fragmented.

“In an increasingly interconnected financial system, the quality of our data will increasingly determine the quality of our risk assessment,” he said.

On emerging technologies, Malhotra said artificial intelligence, tokenisation and new forms of financial intermediation could significantly improve efficiency. But innovation would be sustainable only if it preserved sound institutions, settlement finality, singleness of money and financial integrity, he said.

Turning to India, Malhotra said a correction in AI-related valuations in advanced economies could benefit capital flows into the country.

“As for corrections in AI-related valuations in advanced economies, they may be positive for capital inflows if and when they happen,” he said.

He said private credit remained small in India and was not currently considered a threat to financial stability.

“Private credit in India is still small and not assessed to be a risk,” Malhotra said, adding that NBFCs were assessed to be strong despite their increasing interconnectedness with banks.

The Indian financial system was “very resilient”, supported by healthy balance sheets of banks and non-bank financial institutions, he said, but cautioned against complacency.

“Today’s resilience may not necessarily imply tomorrow’s immunity,” Malhotra said. “We are committed to remaining vigilant of emerging vulnerabilities and continuing to keep our financial system strong and resilient.”

Policymakers must build a financial system capable of withstanding both anticipated and unforeseen shocks through resilient institutions, better data, deeper markets, credible safety nets and effective resolution mechanisms, alongside proactive, forward-looking and proportionate regulation and supervision, he said.