00:00Let me now come to the major emerging global financial stability risks that the world today
00:07is facing. The financial system has absorbed, as I mentioned earlier, the supply shock due to the
00:14West Asia conflict quite well. Growth has been very resilient. However, the global economic
00:23environment continues to remain challenging. The conflict has exacerbated not only inflationary
00:31pressures, but it has also elevated financial system vulnerabilities. Let me highlight some
00:41of the risks, and Prisha mentioned one of them as elevated global debt levels, first and foremost.
00:48They have risen. Maturity periods have shortened. Bond yields have hardened at the same time
00:55sharply. These have implications for sovereigns. Higher borrowing costs can narrow fiscal space
01:03and worsen the debt dynamics. For corporates, tighter fiscal conditions could strain debt
01:09servicing capacity. For banks, sovereign bond losses because of market to market may weaken
01:17the balance sheets, and this happens precisely at a time when the governments face fiscal pressures
01:26and would find it difficult in supporting troubled banks. Moreover, in emerging markets, especially
01:35those having high sovereign debt with non-residents, they may face capital outflows as carry trade
01:43unwinds. Two, stressed asset valuations, particularly related to AI. The AI investment cycle has been a
01:53major support for global financial markets as one has witnessed across the world, especially in advanced
02:02markets, economies, with strong earnings driving significant gains in AI-related equity valuations. However, as the
02:12investment cycle matures, any slowdown in AI investment or earnings could trigger a sharp repricing
02:21of financial assets, especially in AI value chain. High risk appetite has spurred an increase in
02:29leverage, which along with declining cash flow among major AI firms could further amplify market
02:37corrections and financial market volatility. Three, as mentioned, high leverage. In pursuit of higher returns, and this is
02:48particularly true of the advanced economies, hedge funds, option sellers, exchange trade, traded funds, and other
02:58non-bank financial intermediaries have expanded leverage both in equity and bond markets. Rising leverage is a sign of
03:07maturing financial cycle. This is of concern, especially when equity valuations are stressed, and bank and
03:16NBFI interconnectedness has deepened, both on the liability as well as on the asset side. Any tightening of
03:27financial conditions, therefore, can spill over to banks and other markets. Four, private credit. Again, this is more a
03:36phenomenon in the advanced countries. It's a source of vulnerability as was witnessed by the default of some of the
03:44very high-profile cases in this sector suggesting weak and loose standards of lending. Five cyber risks compounded by AI,
03:59again
03:59mentioned by cliche, as to how one is coping and managing AI. The emergence of AI has
04:08heightened cyber risks, model risks, third-party dependence, and erosion of human oversight and
04:16accountability. To my mind, with the development of sophisticated AI tools, which have tremendous autonomy and problem-solving
04:27capabilities, the most immediate concern is regarding cyber risk. This is especially so for the highly
04:37interconnected financial systems, which do not have national borders. Large differences in cyber capabilities and
04:48resilience and resolution capabilities across countries have implications for jurisdictions far beyond the source of
04:57the vulnerability. Each of these five risks individually, I may mention, may not be a matter of
05:06concern as of now, but simultaneous occurrence of these shocks can put significant pressure on the global
05:18financial architecture. What implications do these risks, global risks, have for India?
05:28India, as you are aware, is a large open economy and hypothetically it should have implications for our domestic
05:35financial system.
