Financial Stability Report
Also called: FSR · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
The Financial Stability Report (FSR) is a report the RBI publishes twice a year, in June and December. It checks how safe India's financial system is: what could go wrong, and whether banks and other lenders could survive a shock. It uses stress tests, which are "what if" exercises that show how banks would cope with bad times such as a deep recession, run under baseline, medium and severe scenarios. It also includes the Systemic Risk Survey, which asks experts what they see as the biggest risks. Its figures for bad loans (GNPA, NPA), capital (CRAR) and warnings about new risks make it a key source for the exam.
Example
FSR data show that the gross NPA ratio of scheduled commercial banks peaked at about 11.2% in March 2018 and fell to 2.15% by September 2025. The December 2025 FSR named five emerging risks: unsecured retail credit, links between banks and NBFCs, climate risk, private credit and stablecoins.
Don't confuse with
- Report on Trend and Progress of Banking: also an RBI report, but it reviews how the banking sector has performed and how policy has changed. The FSR looks ahead at risks to the whole system.
- FSDC (Financial Stability and Development Council, 2010): a council chaired by the Finance Minister that coordinates all financial regulators. The FSR is a report, and it is published by the RBI alone.
Recent developments
- June 2026 FSR, record FPI selling: The RBI reported that FPIs (foreign portfolio investors, i.e. foreigners buying Indian shares and bonds) had pulled US$30.7 billion out of Indian equities by June 2026. That was already more than 2025's record full-year outflow of US$18.9 billion. The RBI gave three reasons: Indian shares were expensive, India had no exposure to the AI trade, and Indian earnings were growing more slowly than other markets. This matters because FPI flows are part of how the FSR judges external and market risk to India's financial system.
- June 2026 FSR, change of view on FPI outflows: In December 2025 the FSR called the outflows cyclical profit-taking, meaning investors were cashing in gains for a while. By June 2026 it was linking them partly to India's lack of AI exposure, which is a structural reason that will not pass on its own. This shows the FSR updates its risk assessment from one edition to the next.
- June 2026 FSR, banks' indirect AI exposure through private credit: The FSR warned that hyperscalers (giant cloud companies building AI data centres) have borrowed heavily from private credit funds, which are investment funds that lend directly instead of banks. Banks lend to those funds, so a fall in the AI boom could reach banks even if they never lent to an AI firm directly. This builds on the private-credit risk named in December 2025 by tying it to AI.
- June 2026 FSR, global spillover but India "contained": The FSR warned that a sell-off in a few AI firms could pull down the whole US market. Through the wealth effect (people spend less when their investments lose value), the damage could then spread to other countries. Even so, it judged India's own risks to be "contained," which is a typical example of the FSR weighing global threats against how strong the domestic system is.