India's top financial policymakers have put artificial intelligence and soaring global borrowing costs on their list of threats to the country's financial stability, as volatile markets and conflict in West Asia test the resilience of the financial system.
The Financial Stability and Development Council (FSDC), chaired by Finance Minister Nirmala Sitharaman, met in New Delhi on Friday, October 23, for its 30th meeting, Business Standard reported. The council flagged the AI boom, a "steep rise in global bond yields" and cyber threats as risks, and stressed "the need to be vigilant especially in view of the ongoing geopolitical uncertainties."
The council directed financial regulators to strengthen coordination and take proactive steps to mitigate risks to financial stability, while keeping safeguards in place for the system's resilience.
Who was at the table
The FSDC brings together the heads of India's financial regulators and senior government officials. Attendees included Reserve Bank of India Governor Sanjay Malhotra, who also chairs the FSDC's sub-committee; Economic Affairs Secretary Anuradha Thakur; Financial Services Secretary Sanjay Lohiya; Revenue Secretary Arvind Shrivastava; Chief Economic Adviser V Anantha Nageswaran; and the heads of other financial sector regulators, such as the securities, insurance and pension regulators.
Sitharaman urged that the council meet more frequently and on a fixed schedule.
Why the AI boom is a stability risk
The council's concern about the AI boom reflects worries that are being voiced by central banks and international institutions around the world. Massive investment in AI infrastructure, soaring valuations of AI-related companies and the growing use of debt to finance data centres have raised fears of a bubble that could unwind abruptly.
For India, the risks are indirect but real. A sharp correction in global AI stocks could trigger wider market turmoil, affect foreign investor flows and hit the valuations of Indian technology companies. The growing use of AI within financial institutions also creates new operational and cyber risks.
Speaking on the same day at a separate event, RBI Governor Malhotra said AI's implications for financial stability were real and should not be downplayed, citing data security and the risk of cyberattacks that could disrupt systems.
Bond yields and the rupee
The "steep rise in global bond yields" is already being felt in India. The US 10-year Treasury yield has climbed above 5%, its highest level in decades, as persistent inflation and expectations of further Federal Reserve rate increases weigh on bond markets.
Indian government bond yields have risen for ten consecutive weeks, the longest such streak in about three decades, with the benchmark 10-year yield settling at 7.47% on Friday. Higher yields raise borrowing costs for the government, companies and households, and reduce the value of bonds held by banks and other investors.
India's foreign exchange reserves have fallen by $65 billion in six weeks from a record high in early September, as the RBI has sold dollars to support the rupee.
The cyber threat
The council took note of a Financial Sector Cyber Security Strategy drafted by an inter-ministerial group, and discussed critical information infrastructure and the cybersecurity readiness of regional rural banks.
Cyber risk has risen sharply up the agenda in recent weeks. A global security crisis triggered by vulnerabilities in the PHP programming language forced banks and governments around the world to take systems offline, and Indian banks have reported customer data appearing on the dark web. Malhotra acknowledged these growing risks on Friday.
