The Reserve Bank of India’s (RBI) Financial Stability Report for June has flagged a sharp build-up of risk around artificial intelligence (AI)-linked investments globally, even as it assessed that India’s domestic financial system remains resilient despite the lingering effects of the West Asia conflict. The report notes that global financial markets, having recovered from the initial shock of the West Asia conflict, are now being propped up largely by enthusiasm around AI. This, even as a combination of softer-than-expected oil price increases, strong corporate earnings, the AI-driven rally and supportive financial conditions has kept volatility “contained”.
However, the RBI warns this optimism conceals mounting concentration risk as a small cluster of AI-linked firms is increasingly driving stock market performance in economies at the centre of AI adoption, with just five US stocks contributing roughly half of the S&P 500 returns this year; similarly, just two companies have done so in Korea and Taiwan. It adds that even the “outperformance” in some emerging markets was similarly driven by a handful of AI-linked companies and not broad-based growth.
While emphasising that this remains a source of “financial fragility”, the report adds that “sell-offs in these firms could cause broader market declines in the US, and cause spillovers to other markets through wealth effects.”
The report highlights that AI investment is now spilling into bond markets. Hyperscalers, or massive cloud service companies, have ramped up capital expenditure on AI infrastructure even as their free cash flows have declined. For instance, companies including Microsoft, Meta, Google, Nvidia, Amazon and Anthropic have sharply increased debt issuances over the past two years to fund this buildout, with longer-tenor borrowing rising notably in 2026. The report warns that an AI-driven asset price correction could pose systemic risks, since banks may carry indirect exposure through private credit firms and other intermediaries financing the boom.
Non-bank lenders amplifying risk
The report notes that as non-bank financial intermediaries (NBFIs) are growing at twice the pace of the banking sector globally, “their rising footprint across asset classes heightens the risk of shock amplification and turning market turmoil into financial instability”.
Hedge funds’ exposure to sovereign bonds and interest rate derivatives has more than doubled from less than $9 trillion in 2020 to over $18 trillion in 2025, and their use of high leverage in arbitrage trades leaves them vulnerable to rapid unwinding during stress. This was seen in past episodes when forced treasury sales pushed yields higher. NBFIs are also dampening volatility in equity options markets through heavy trading in short-dated contracts, a dynamic the RBI says can itself amplify market swings during periods of stress, while leveraged ETFs add to mechanical price amplification.
Bond market strains and sovereign debt
Beyond AI-specific risks, the report flags broader bond market fragilities. Advanced economy government bond yields have surged to 20-year highs in some cases following the war in West Asia. “The rise in sovereign bond yields is being driven by multiple factors, including inflationary pressures from higher energy prices linked to the West Asia conflict, central bank rate hike expectations, sustained fiscal deficits necessitating greater bond issuance, higher term and inflation premia demanded by investors amid rising geopolitical uncertainty, and quantitative tightening by central banks,” the report explains.
Compounding the strain, governments have also shortened the maturity profile of their debt in recent years, leaving them more exposed to refinancing risk just as borrowing needs are rising, refinancing needs among OECD countries hit a record $13.5 trillion in 2025, accounting for around 80 percent of total borrowing and is expected to rise further.
India’s buffers hold, but funding pressures emerge
On the domestic front, the central bank struck a more reassuring tone. India’s banking sector continues to show strong capital adequacy, and declining non-performing assets. Foreign exchange reserves of $672.6 billion (as of June 19) comfortably cover external financing needs.
Still, the report flags “funding is emerging as a key challenge”. Banks’ funding mix is shifting from low-cost current and savings deposits toward costlier term deposits, squeezing margins, even as credit demand stays robust. Foreign portfolio investors pulled a record $30.7 billion from Indian equities this year, the steepest outflow in two-and-a-half decades, pushing their ownership share in domestic equities to a two-decade low.
Gold loans also in focus
The report separately highlights the rapid expansion of gold loans, growing at over 40 percent annually, driven largely by existing borrowers leveraging higher gold prices. Gold loans have not only emerged as the largest segment within non-housing retail loans, but have grown at twice the pace of overall non-housing retail loans. Moreover, banks and NBFCs have significantly expanded their gold loan portfolios in FY26, “outpacing growth in other retail loan categories, including housing loans”.