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India’s rise as the world’s fifth-largest economy is a defining moment, but sustaining this momentum and ensuring long-term, sustainable growth demands a hard look at its financial system. Rapid economic expansion has stretched the system in multiple directions, exposing structural weaknesses, regulatory gaps, and emerging systemic risks. The IMF’s latest Article IV Consultation and Financial Sector Assessment Program (FSAP) recognizes the growing strengths of India’s financial system but also highlights key vulnerabilities — delays in strengthening regulatory oversight, a shallow bond market, limited exchange rate flexibility, and rising risks in digital finance and nonbank financial institutions. India must act decisively in an increasingly volatile global financial environment to ensure its financial system remains globally competitive while supporting domestic economic priorities. The need for deeper financial markets, stronger institutions, and a more adaptive policy framework is no longer a distant ambition but an urgent policy imperative.

Since the 2008 Global Financial Crisis, India’s banking system has improved significantly, with stronger prudential regulations, better capital buffers, and declining non-performing assets. NPAs fell to 3.2% in 2024, the lowest in a decade — but the IMF warns they could rise to 5.8% under macro-financial stress, revealing the fragility of credit risk management. A significant concern is the continued dominance of public sector banks, which hold 60% of total banking assets. While they serve a critical role in financial inclusion, they also contribute to concentrated credit risks and inefficiencies in capital allocation. Their influence extends to the expansion of nonbank financial institutions, raising risks of spillover contagion due to their deep linkages with banks.

The rise of nonbank financial institutions has played a crucial role in expanding credit access, particularly for sectors underserved by traditional banks. However, their increasing interconnectedness with banks has created systemic risks. While regulatory oversight has improved, concerns persist over liquidity mismatches, dependence on short-term wholesale funding, and opaque risk exposures. The IMF underscores the need for stricter liquidity stress tests, higher capital adequacy norms, and better regulatory alignment between banks and NBFIs. Strengthening these measures will be crucial to containing risks and preventing financial contagion.

India’s capital markets have gained momentum, with the National Stock Exchange surpassing China in IPO volume in 2024, raising $19.5 billion through 268 IPOs. This surge signals growing investor confidence and deeper market liquidity. However, the corporate bond market remains severely underutilized, accounting for only 17% of GDP, far below peer economies like Malaysia and South Korea, which stand at 35–40%. As a result, businesses rely disproportionately on bank financing, making corporate credit cycles more vulnerable to economic downturns. Expanding the bond market is critical for diversifying financing channels and improving capital allocation efficiency. The IMF identifies three key reform priorities: broadening the institutional investor base to create stronger demand for corporate bonds, improving secondary market liquidity to help price discovery, and streamlining regulatory processes for corporate debt issuance and more participation. Without these reforms, India’s capital markets will continue to lag behind its vibrant equity markets, constraining long-term investment and economic stability.

The IMF’s review of India’s exchange rate management highlights a growing trade-off between currency stability, external competitiveness, and financial market flexibility. The Reserve Bank of India holds over $630 billion in foreign exchange reserves, providing a critical buffer against external shocks. However, frequent currency market interventions have limited exchange rate flexibility, raising concerns over external competitiveness and financial market efficiency. India’s push for rupee internationalization is a strategic step toward reducing reliance on U.S. dollar-denominated payment settlements. But for this initiative to succeed, India must expand rupee-based financial instruments to facilitate cross-border trade, improve offshore rupee market liquidity to attract global investors, and create a more predictable regulatory framework to encourage sustained foreign capital flows.

Few economies have embraced digital finance as rapidly as India. The Unified Payments Interface processed over $2.4 trillion in transactions in 2024, cementing India’s position as a global leader in real-time payments. Meanwhile, the Digital Rupee is positioning India at the forefront of monetary digitization and cross-border payment efficiency. The IMF and BIS recognize India’s CBDC initiative as one of the most technically advanced emerging markets. However, digitization brings its own set of risks. Cybersecurity threats, rising cases of digital fraud, and the growing dominance of a few large fintech players raise concerns over market concentration and systemic vulnerabilities. Stronger consumer protection laws, enhanced cybersecurity measures, and stricter oversight of dominant digital payment firms can help improve systemic resilience.

As India’s global economic influence expands, the strength and adaptability of its financial system will shape both domestic stability and India’s international financial integration. However, domestic macro-financial and economic stability must remain the priority before global ambitions can be fully realized. A comprehensive review is, therefore, imperative. By deepening financial resilience, accelerating capital market reforms, and fostering global financial integration, India can reinforce its position as a stable, competitive, and inclusive financial powerhouse — one that is fully aligned with its long-term economic ambitions.

Udaibir Das is a Distinguished Fellow at ORF America, Visiting Professor at NCAER, Senior Non-Resident Adviser at the Bank of England, Senior Adviser to the International Forum for Sovereign Wealth Funds, Distinguished Visiting Faculty at the Kautilya School of Public Policy, and Senior Advisor at the Toronto Centre. He previously held roles at the BIS, IMF, Reserve Bank of India, and Bank of Guyana.

After a steady rise for over two years, Indian markets have been in a correction phase since October 2024. Equity markets have declined by 14 percent; the exchange rate has depreciated by 4 percent; the reserves have declined by $65 billion (9 percent of the stock that existed); while FII investors have pulled out nearly $23 billion from the equity and debt markets.

Painful as it seems, the current sell-off is not a one-off phenomenon. Nor is it unique to India. Similar episodes of risk aversion and portfolio rebalancing out of Emerging Markets (EMs) have been occurring every two years, adding up to six such episodes during the last decade – in 2013, 2016, 2018, 2020, 2022, and 2024.

Significantly, four of these episodes have coincided with policy or political developments in the US, pointing to its influence on EMs.

The first sell-off occurred in 2013 (Taper Tantrum), when then Federal Reserve Chairman Ben Bernanke announced the Fed’s intent to reverse the pace of its ultra loose monetary policy. It resulted in an exodus of capital flows from EMs, a sharp depreciation of their exchange rates, decline in equity markets, and increase in bond yields.

The EMs faced  similar shocks  in 2016 after the election of President Trump; in 2018 when the US pressed the pedal on tariffs on China to which Beijing retaliated; in 2020 when   COVID struck; and in 2022 when the Ukraine-Russia war broke out. The latest episode started in early October, when the Fed’s guidance on policy rate was reset to “higher for longer”, and built up as  Trump’s disruptive trade agenda started taking shape.

India was one of the five most impacted economies during the first sell-off in 2013, when its exchange rate depreciated by 25 percent, reserves declined by 6 percent, and equity markets by 9 percent. In 2018, its exchange rate depreciated by 15 percent, reserves declined by 8 percent, and equity markets by 3 percent. In 2022, its exchange rate depreciated by 10 percent, reserves declined by 16 percent, and equity markets by 13 percent.

There are several similarities across these episodes.

First, the impact across countries has less to do with their economic strength, and more to do with the presence of reversible capital, the ease with which this capital can be withdrawn, and the extent of overvaluation. Thus, while strong macroeconomic fundamentals do not insulate India, the extent of reversible capital, its large and liquid markets, and potential overvaluations make it a fertile ground for these reversals.

Second, these events are short-lived, each lasting only a few months. The reprieve starts as soon as valuations become attractive and EMs appear competitive again.

Third, despite initial trauma, they do not leave a trail of destruction. Domestic financial sectors remain resilient to them, neither do they result in economic slowdowns.

Finally, the existing policy frameworks enable countries to respond promptly and adequately to them. Dealing with them does not necessitate any drastic measures including any assistance from the IMF. Countries are able to leverage flexible exchange rates, pool of forex reserves, prudent banking regulations, robust fiscal architecture, and credible monetary policy frameworks (e.g. inflation targeting) to handle them.

Past experiences, thus, suggest that the current storm too shall pass soon, without causing grave damage. Meanwhile, the next one may not be too far on the horizon.

How may India prepare both ex ante and ex post, for future shocks?

For ex ante measures, India should encourage stable, longer-term capital inflows (such as FDI) over volatile short-term flows (like FII flows). It should rebuild its reserves buffer as soon as the conditions turn conducive. While avoiding excessive appreciation or volatility of the exchange rate, it should still let it move more than has been the case in the recent past.

To soften the impact ex post, a fine calibration of exchange rate depreciation and use of reserves is needed. In recent years, policy response has shifted more toward the use of reserves while limiting the depreciation of the exchange rate. This ought to be revisited for speedier mitigation of  the shocks.

It would also help to re-assert the commitment to reforms, macroeconomic stability, and growth in such risk-off times. Equally important is to avoid any policy mis-steps, such as new forms of capital controls (as per the experience in 2013), and adopting a clear communication strategy with the market participants. Occasionally, swap lines with specific countries (particularly Japan) may be renewed; and schemes aimed at attracting funding from the Indian diaspora could be reintroduced.

These events serve as reminders that having graduated to the class of a large emerging market, India needs to remain vigilant, prudent, communicative, and committed to reforms, growth, and macroeconomic stability at all times.

The writer is Director General, NCAER. Views are personal.

Among the many achievements of G20 under India’s leadership in 2023 was their specific commitment to promote women-led development. This commitment went beyond the general catchall of advancing “women’s economic empowerment”.

It signalled an increasing recognition by world’s top leaders that promoting full, equal, effective, and meaningful participation of women in the economy as decision-makers benefits society multidimensionally.

What are these benefits? Where’s the evidence? What is India’s record in promoting more women to the top? What are the hindrances, and what more can be done?

Women in leadership posts | Countries that have embraced gender diversity in decision making have witnessed better economic and financial performance of their economies and companies.

Women leaders in politics also enhance social development. Those in the corporate sector contribute to inclusive workplace policies, fostering a culture of fairness and equity.

In our research paper, co-authors Benedict Clements, Huy Nguyen, and I find that in a sample of about 120 countries, higher share of women in parliaments and cabinet positions raises govt health spend, both as share of GDP and as a share of total spend.

Greater representation of women in policymaking has positive effects on social outcomes, such as infant mortality rates, access to basic water services, and upper secondary school enrolment rates.

Studies conducted by Esther Duflo (Nobel laureate in 2019) and her co-authors during 2004-09 find that female political leadership in Indian villages has several societal benefits. It positively influences adolescent girls’ career aspirations and educational attainment. Female leaders invest more in infra. Exposure to women leaders improves perceptions about their effectiveness and weakens stereotypes about gender roles, while women are also more likely to stand for, and win, elected positions.

The corporate sector, too, benefits. An IMF global study reported that a higher share of women on commercial bank boards and supervisory positions goes hand-in-hand with lower non-performing loans and greater financial stability. A cross-country study of fintech firms also finds that gender diversity on executive boards improves firm’s performance in terms of funding obtained and revenues earned.

In a recent paper on India, my co-authors and I find that having at least one woman on the board in NSE-listed firms is associated with higher profitability and lower debt-equity ratio. When such firms hire women in top management positions as well, employee ratings and sentiment scores are also higher.

Why are women in India not breaking the glass ceiling? | India still has a long way to go in achieving gender parity in policymaking. As of 2024, women held 14% of Lok Sabha seats and 15% in Rajya Sabha, and occupied less than 7% of ministerial positions. This places India far behind the emerging market and developing economies’ average of 23% for parliamentary positions and 20% for ministerial positions.

However, India’s grassroots political representation presents a more encouraging picture. Reservation for women in panchayati raj institutions (PRIs) ranging from 33% to 50% has led to 1.4mn elected women representatives, enhancing gender balance in policymaking at the local level.

Companies Act (2013) played a pivotal role in increasing representation of women on boards in the corporate sector. Between April 2014 and April 2015, the share of women rose from about 5% to nearly 10%. As of April 2023, women held nearly 16% of board positions and 22% of top management positions, according to PRIME Database. This progress, while commendable, still falls short of global averages.

Challenges women face in rising to the top | Several factors contribute to the underrepresentation of women in Indian politics. They face higher levels of harassment, threats, and violence, and patriarchal norms and societal stereotypes remain deeply entrenched. Even when women are elected to political office, decisions are often influenced or controlled by male family members, undermining their autonomy. Financial barriers exacerbate the problem. Women candidates often struggle to secure the funding needed for political campaigns.

What constrains women from rising to the top in corporate sector? While women’s education levels are pretty much at par with men in India, female labour force participation, according to the latest PLFS survey, at nearly 42% is substantially lower than those of men at about 79%. A major factor preventing women from joining the labour force is the disproportionate burden they carry at home of unpaid household duties besides child and elderly care responsibilities. If women don’t join the workforce or many drop out after children are born, the pipeline of senior women shrinks substantially.

A path forward | Govt policies, corporate initiatives, and societal change must work in tandem to dismantle barriers for women.

To increase female labour force participation and prevent women from exiting the labour force, govt regulation and corporate policy should formalise part-time employment, as is common in advanced economies. This means that part-time employment is at par with full-time employment in terms of job security, medical coverage, and other benefits. School and college curricula should incorporate leadership training programmes.

The corporate sector could also set targets for women in C-suite positions, introduce mentorship programmes, and gender bias training. Finally, more equitable burden sharing of unpaid care between men and women and ensuring the safety of women through effective implementation of legal protections against violence and anti-harassment policies should take centre stage.

Creating professional linkages between successful elected women leaders and sharing of peer experiences at the village level can be a step towards addressing the control by male family members. Parliament passed the women’s bill for 33% reservation of seats in Lok Sabha and state assemblies. Its implementation is put off till after delimitation, which will happen only after Census is held. It is never too soon for gender parity in legislatures. 

The writer is Professor, NCAER. Views are personal.