BTL 851 - Financial System Stress Indicator – RBI

 

The Banking Tutor’s Lessons

BTL 851                                                                                                18-12-2025

Financial System Stress Indicator – RBI

The RBI uses various tools, primarily its Financial Stability Report (FSR) and internal indicators like the Banking Stability Indicator (BSI) and Financial Conditions Index (FCI) to gauge financial system stress, combining macro-prudential analysis, stress tests, and market data (volatility, spreads) to assess vulnerabilities and resilience against global & domestic risks, flagging potential issues for policymakers.

Key RBI Indicators & Reports:

Financial Stability Report (FSR): A biannual publication assessing India's financial system's health, risks, and resilience, incorporating stress tests and highlighting vulnerabilities like global spillovers, asset valuations, and credit growth.

Banking Stability Indicator (BSI): Measures the banking system's resilience by assessing individual bank vulnerabilities and their potential to transmit distress, indicating increased or decreased stress.

Financial Conditions Index (FCI): A real-time measure of financial sector ease or tightness, using 20 indicators to capture market trends and potential crises, with positive values signalling tightness and negative easing.

Composite Indices: The RBI constructs composite indicators (like FCI) by combining multiple market-based and macroeconomic variables (interest rates, spreads, asset prices) into a single number.

Stress Testing: The FSR details stress tests on the banking system to see how institutions would fare under adverse scenarios (e.g., growth slowdowns, global shocks).

Early Warning Signals: Indicators like the BSI use network tools to spot contagion risks and systemic vulnerabilities, alerting on rising stress levels, as seen with increased divergences in banks' distress potential.

Monitoring Risks: RBI monitors global factors (geopolitics, debt) and domestic trends (credit, asset bubbles) to provide early warnings, as indicated by reports showing increased systemic stress due to external factors.

In essence, the RBI uses these indicators and reports to provide a comprehensive view of financial stability, moving from simple stress metrics to complex analyses of interconnected risks.

Sekhar Pariti

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