Indian economy likely to maintain strong growth: RBI
Says adoption of stablecoins could pose risk to monetary sovereignty
Mumbai: The Indian economy is likely to maintain strong growth, underpinned by robust domestic demand, benign inflation, and prudent macroeconomic policies despite an uncertain and challenging global economic backdrop, the Reserve Bank said in a report on Wednesday.
The health of commercial banks (SCBs) remains sound with strong capital and liquidity buffers, improved asset quality and robust profitability, the Reserve Bank said in its Financial Stability Report (FSR).
The report reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on the resilience of the Indian financial system and risks to financial stability.
“The domestic financial system remains robust and resilient, bolstered by strong balance sheets, easy financial conditions, and low financial market volatility. Nonetheless, there are near-term risks from external uncertainties – geopolitical and trade-related,” it said.
Macro stress test results affirm the resilience of scheduled commercial banks to withstand losses under hypothetical adverse scenarios and maintain capital buffers well above the regulatory minimum. It also confirmed the resilience of mutual funds and clearing corporations, the apex bank added.
Also, non-banking financial companies (NBFCs) remain robust, supported by strong capital buffers, solid earnings, and improving asset quality, the report said.
On insurance, the RBI report said the sector continues to display balance sheet resilience, while the consolidated solvency ratio remained above the minimum threshold limit.
The report said widespread adoption of stablecoins could pose significant risks to India’s monetary sovereignty and financial stability.
Stablecoins can create important financial stability risks because of their inherent vulnerabilities, the central bank said in ‘Special Feature’ in its bi-annual financial stability report.
“Trust in money is the foundation for maintaining financial stability,” it said.
Stablecoins have emerged as a key component of the crypto asset ecosystem, and their prominence has risen following legal and regulatory clarity in select jurisdictions.
Widespread adoption of foreign currency denominated stablecoins can cause erosion of monetary control and weaken the transmission channels of domestic monetary policy, the RBI said.
As stablecoins position as an alternative form of money, it is vital to recognise that they fall short of the foundational requirements expected from a sound monetary system — singleness, elasticity and integrity, it said.
“The RBI maintains a cautious stance on crypto assets, including stablecoins, prioritising sovereign digital infrastructure to safeguard monetary sovereignty amid global shifts and preserve financial stability,” the central bank said.
It further said that central bank money is what preserves the integrity of the financial system.
“It must remain the ultimate settlement asset, and it should remain the anchor for trust in money,” the RBI said.
Central bank digital currencies (CBDCs) can achieve the benefits that stablecoins claim to offer, — efficiency, programmability, and instant settlement, but with the credibility and safety of central bank money.
“The RBI, therefore, strongly advocates that countries should prioritise central bank digital currencies (CBDCs) over privately issued stablecoins to maintain trust in money, preserve financial stability and design next generation payments infrastructure that is faster, cheaper and secure,” the apex bank added.
Currently, the RBI said risks from stablecoins to macrofinancial stability outweigh their purported benefits. In their short history, stablecoins have proven to be volatile and vulnerable to confidence shocks and structural fragilities.
Wider adoption of stablecoins can introduce new channels of financial stability risks, particularly during periods of market stress.
To mitigate risks posed by their rapid growth, it is vital that jurisdictions carefully assess the attendant risks and determine policy responses appropriate to its financial system, the RBI said.
The RBI cautioned that stablecoins can circumvent controls on capital movement and complicate macroeconomic management for the central bank.
This is especially important for emerging economies like India where capital flow management frameworks (CFM) play a key role in preserving external sector stability, it added.
It further said stablecoins, like other crypto assets, can be used to bypass the current system for transferring foreign exchange in and out of the country, impeding the effectiveness of CFMs, which aim to maintain macroeconomic stability, safeguard foreign exchange reserves, and manage the risks associated with sudden and volatile capital flows.
The RBI also emphasised that without adequate regulation, stablecoins, like other crypto assets — can be exploited for serious crimes, including money laundering, terrorism financing, and the financing of weapons proliferation.
It also noted that one of the drivers of stablecoin growth could be the emergence of legal/regulatory frameworks across major jurisdictions between 2023 and 2025, including the US, the European Union, Singapore, Hong Kong, and Japan.
In the short history of stablecoins, there have been multiple episodes, such as the May 2022 collapse of TerraUSD and the March 2023 US banking turmoil, wherein they saw significant price volatility.
