AI valuation correction may redirect more capital toward India: RBI
What's the story
Sanjay Malhotra, the Reserve Bank of India (RBI) governor, has warned that a slowdown in the global artificial intelligence (AI) investment cycle could lead to sharp asset repricing and volatility in financial markets. He was speaking at the Kautilya Economic Conclave in New Delhi on October 3. Despite these risks, Malhotra emphasized India's strong macroeconomic fundamentals and the resilient balance sheets of banks and non-bank financial institutions as key factors helping navigate this uncertainty.
Market influence
AI investment cycle critical for global markets
Malhotra described the AI investment cycle as a major pillar of support for global markets.
He warned that any slowdown in AI investments or earnings could lead to a sharp repricing of financial assets, particularly those linked to the AI value chain.
This correction could have a favorable impact on capital inflows into India, he said.
Risk assessment
Malhotra identifies stretched AI as systemic risk
The rapid growth of artificial intelligence has been a major driver for global equity markets, especially in advanced economies.
However, Malhotra also warned that the use of AI could create vulnerabilities.
He identified stretched AI as one of five key risks to the global financial system, along with high global debt, leverage in non-bank finance, private credit, and cyber threats.
Financial stability
India navigating global uncertainty from position of strength
Malhotra emphasized that these risks don't pose an immediate threat.
He said India is navigating the current global uncertainty from a "position of strength," backed by strong macroeconomic fundamentals and resilient balance sheets of banks and non-bank financial institutions.
Despite being vulnerable to external shocks through commodity prices, global financial conditions, and capital flows, he assured that the domestic financial system remains resilient.
Crisis triggers
Cyber risk amid AI growth is alarming
Malhotra highlighted cyber risk as an immediate concern with the rise of sophisticated AI tools.
He warned that large disparities in cybersecurity capabilities across countries could lead to vulnerabilities spilling over beyond borders.
The next financial crisis, he said, may not even begin in the banking system itself but could be triggered by a geopolitical event or technological failure affecting the financial system through multiple channels.
Risk management
Regulators shouldn't aim to eliminate all financial risks
Malhotra stressed that regulators shouldn't try to eliminate all financial risks as it could stifle investment and innovation.
Instead, the goal should be to ensure that the financial system can absorb shocks without amplifying their impact on the wider economy.
"We cannot prevent every shock. What we can ensure, however, is that the financial system acts as a shock absorber," he said.