Global Financial Stability Report (GFSR): Key Highlights, Insights, and India’s Perspective

The Global Financial Stability Report (GFSR), published twice a year by the International Monetary Fund (IMF), serves as one of the most authoritative assessments of the health of the global financial system.

It evaluates potential risks, systemic vulnerabilities, and the stability of global financial markets while offering policy recommendations to safeguard economic growth.

The October 2025 edition of the GFSR, titled “Shifting Ground Beneath the Calm”, warns that although global markets appear stable, underlying vulnerabilities are deepening due to high debt levels, rising interest rates, and increased exposure of banks to non-bank financial institutions.

What is the Global Financial Stability Report (GFSR)?

The IMF’s Global Financial Stability Report is a semi-annual publication, released every April and October, alongside the World Economic Outlook (WEO).

Its objective is to:

• Assess global financial conditions and systemic risks.

• Identify emerging vulnerabilities in the banking, sovereign, and corporate sectors.

• Recommend policy measures to enhance financial stability and resilience.

The GFSR complements the IMF’s broader macroeconomic analysis by focusing specifically on the interlinkages between finance and the real economy.

Structure of the GFSR

Each edition of the GFSR includes:

1. Chapter 1: Overview of global financial stability conditions — highlighting risks in credit, equity, and bond markets.

2. Chapter 2: Analysis of specific vulnerabilities — such as non-bank financial institutions (NBFIs), housing markets, or sovereign debt risks.

3. Chapter 3: Thematic research — covering evolving financial trends like fintech, climate finance, or cross-border capital flows.

It also contains country-specific data, stress tests, and policy implications for both advanced and emerging economies.

Key Findings – Global Financial Stability Report (October 2025)

Theme: “Shifting Ground Beneath the Calm”

Despite apparent market calm, the IMF warns that structural risks are mounting in global finance.

Market Stability May Be Deceptive

• Asset valuations are stretched, particularly in equity and housing markets.

• Low volatility in financial markets masks deep-seated fragilities, such as excessive corporate leverage and speculative trading.

Growing Role of Non-Bank Financial Institutions (NBFIs)

• The global non-bank sector — including hedge funds, private credit, and investment funds — now accounts for nearly 50% of total financial assets.

• The IMF warns that banks’ exposures to hedge funds and private lenders could trigger systemic risks if sudden market corrections occur.

Rising Sovereign Debt Risks

• Many advanced and emerging economies are facing unsustainable debt trajectories due to post-pandemic spending and rising interest rates.

• Sovereign bond yields are rising, increasing borrowing costs for developing nations.

• The report calls for fiscal consolidation and improved debt management frameworks.

Global Foreign Exchange Vulnerability

• The IMF flagged risks in the $9.6 trillion foreign-exchange (FX) market, warning that liquidity stress and concentration among few key players could magnify volatility.

• Currency mismatches in emerging economies pose additional financial stability risks.

Emerging Market Fragility

• Emerging markets face capital outflows, currency depreciation, and tight external financing conditions.

• Nations with high external debt or low foreign reserves are most vulnerable to financial shocks.

Climate and Geopolitical Risks

• Climate-related events and trade tensions — particularly between major economies — are adding to uncertainty.

• The report cautions that fragmentation of global trade and financial systems could reduce growth potential and increase long-term financial instability.

April 2025 Edition: Background Insights

The April 2025 GFSR, titled “Enhancing Resilience amid Uncertainty”, already warned that financial risks were intensifying amid tighter global financial conditions.

It highlighted:

• Elevated market valuations, especially in U.S. tech and real estate sectors.

• Debt distress in several low-income countries.

• Volatility in sovereign bond markets due to differing monetary policy paths.

Thus, the October 2025 report builds upon these findings, showing that vulnerabilities are persisting and deepening.

Implications for the Global Economy

1. High Debt Vulnerability:
   Many economies, particularly developing ones, risk entering a debt trap as borrowing costs rise and growth slows.

2. Reduced Fiscal Space:
   Governments’ ability to spend on infrastructure, health, and welfare is constrained by the need to stabilize debt.

3. Financial Market Contagion:
   Linkages between banks and shadow lenders can transmit shocks across borders, threatening global stability.

4. Investment Uncertainty:
   Investors are becoming more risk-averse, leading to volatile capital flows — especially in emerging markets.

5. Policy Divergence:
   Differing monetary policies among major economies (e.g., U.S. vs. EU vs. China) could further fragment global financial systems.

India’s Perspective

The GFSR is crucial for India, as it helps policymakers assess external vulnerabilities and domestic financial resilience.

Capital Flows and Rupee Stability

• Global tightening and risk aversion can lead to capital outflows from India’s equity and bond markets.

• The RBI’s foreign exchange reserves (~$645 billion as of October 2025) act as a buffer against volatility.

Banking Sector Resilience

• Indian banks remain largely stable, but the IMF cautions against overexposure to corporate debt and non-banking entities.

• Strengthening macroprudential supervision is essential to mitigate systemic risk.

External Debt and Current Account

• India’s external debt-to-GDP ratio (~19%) remains moderate compared to peers, but rising global interest rates could pressure debt servicing.

• The GFSR urges emerging markets to maintain sound fiscal frameworks and diversify external financing sources.

Non-Bank Financial Institutions (NBFCs)

• The IMF highlights the need to regulate NBFCs effectively — a lesson India learned after the IL&FS crisis (2018).

• The RBI’s new NBFC framework (Scale-Based Regulation) aligns with IMF recommendations to enhance stability.

Policy Recommendations (IMF’s Suggestions)

1. Strengthen Financial Regulation: Improve oversight of non-bank entities and increase transparency.

2. Enhance Cross-Border Coordination: Regulators should share information to prevent contagion.

3. Maintain Adequate Buffers: Build foreign exchange reserves and capital adequacy in banks.

4. Promote Debt Sustainability: Adopt fiscal rules to control sovereign borrowing.

5. Monitor Emerging Risks: Especially those related to fintech, crypto-assets, and climate finance.

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