A recent report by the Reserve Bank of India (RBI) indicates that a slowdown in global growth could negatively impact India's domestic output. The Financial Stability Report (FSR) highlights that growing trade disruptions and intensifying geopolitical hostilities could hurt the domestic growth outlook and reduce the demand for bank credit.

The report estimates that a 100 basis points (bps) slowdown in global growth could pull down India's growth by 30 bps. This observation comes at a time when non-food bank credit growth of scheduled commercial banks (SCBs) has already decelerated to 9.8% in May 2025, compared to 16.2% in the previous year. The slowdown in credit growth has been across various sectors, including agriculture, industry, services, and personal loans.

Despite these challenges, the RBI suggests that India's growth momentum is supported by strong domestic drivers, sound macroeconomic fundamentals, and prudent policies. The Indian economy remains a key driver of global growth. The central bank has projected a real GDP growth of 6.5% for 2025-26, the same as in 2024-25. This projection is supported by buoyant rural demand, revival in urban demand, an uptick in investment activity, continued government spending on infrastructure, and conducive financial conditions.

However, the RBI acknowledges that external spillovers and weather-related events could pose downside risks to growth. The FSR also points out the weakening asset quality in unsecured retail loans, despite moderation in credit to this segment. It emphasizes the need for close monitoring of household debt accumulation, especially among lower-rated borrowers.

The central bank also conducted stress tests on scheduled commercial banks (SCBs) to assess their resilience to macroeconomic shocks. Under an adverse scenario of a global growth slowdown, the tests revealed that the aggregate capital to risk-weighted assets ratio (CRAR) of 46 major SCBs might marginally decrease to 17.0% by March 2027 from 17.2% in March 2025. This scenario assumes a synchronized sharp growth slowdown in key global economies, with spillovers through trade and financial channels affecting domestic GDP growth.

Despite the potential impact of a global slowdown, the RBI remains optimistic about India's macroeconomic and financial stability. The central bank expects inflation to align durably with its 4% target. The Indian economy is growing at a healthy pace, and the financial system is meeting the financing needs of all sectors. The current account deficit is also expected to remain manageable.

In conclusion, while a slowdown in global growth poses a risk to India's domestic output, the Indian economy's strong domestic demand, sound macroeconomic policies, and resilient financial system provide a buffer against these external headwinds. However, continuous monitoring of global developments, trade tensions, and domestic financial stability is crucial to mitigate potential risks and ensure sustainable economic growth.