Reserve Bank of India (RBI) governor Sanjay Malhotra on Saturday flagged five major vulnerabilities to global financial stability, including elevated debt, stretched asset valuations, high leverage, private credit risks and cyber threats amplified by artificial intelligence (AI).
Any tightening of financial conditions, therefore, can spill over to banks and other markets, he added.
“Conflict has exacerbated not only inflationary pressures, but it has also elevated financial system vulnerabilities,” he said, highlighting five key risks. “One of them has elevated global debt levels… they have risen, maturity periods have shortened, bond yields have hardened…,” he said. Elaborating on the second risk of stressed asset valuations, particularly related to artificial intelligence (AI), he said the AI investment cycle has been a major support for global financial markets as one has witnessed across the world, especially in advanced economies, with strong earnings driving significant gains in AI-related equity valuations. On the risk of high leverage, he said, “In pursuit of higher returns, and this is particularly true of advanced economies, hedge funds, option sellers, exchange traded funds, and other non-bank financial intermediaries, they have expanded leverage both in equity and bond markets. This is of concern, especially when equity valuations are stressed and bank and NBFI interconnectedness has deepened, both on the liability as well as on the asset side, he said. Elaborating the risks concerning private credit, he said: “This is more prominent in advanced countries.
These will have implications for sovereigns in terms of high borrowing costs that can narrow fiscal space and worsen the debt dynamics for corporates, he added. However, as the investment cycle matures, any slowdown in AI investment or earnings could trigger a sharp repricing of financial assets, especially in the AI value chain. High risk appetite has spurred an increase in leverage, which, along with declining cash flow among major AI firms, could further amplify market corrections and financial market volatility, he added. It’s a source of vulnerability as was witnessed by the default of some of the very high-profile cases in the sector, suggesting weak and loose standards of lending.
