IMF: Financial Calm is Deceptive; Nonbank Risks and Debt Pressures Threaten Global Stability
SDG 8: Decent Work and Economic Growth | SDG 9: Industry, Innovation and Infrastructure
Institutions: Reserve Bank of India (RBI) | Securities and Exchange Board of India (SEBI) | Ministry of Finance
The International Monetary Fund’s (IMF) Global Financial Stability Report (GFSR) October 2025, Chapter 1 titled Shifting Ground beneath the Calm, warns that the global financial system’s current calm exterior is misleading, as underlying dangers are growing. The IMF’s financial stability risk measure, the Growth-at-Risk (GaR) metric, confirms these risks remain high. This “shifting ground” is driven by three main, interconnected vulnerabilities:
Overvalued Assets: Prices for risk assets, especially those linked to Artificial Intelligence (AI) and mega-cap tech stocks, are judged to be “stretched” (too high relative to actual financial health). This risk of overvaluation significantly increases the chance of a sudden, sharp market crash.
Mounting Government Debt: Expanding global fiscal deficits are forcing governments to issue more bonds, which puts upward pressure on borrowing costs and long-term interest rates. This creates a vulnerability where rising debt concerns could abruptly strain banks’ finances.
Nonbank Intermediaries (NBFIs): The sector of Nonbank Financial Institutions (NBFIs)—firms like private credit funds and mutual funds that are lightly regulated—continues to grow and become more closely tied to traditional banks. Stress tests show that problems in the NBFI sector can quickly infect the core banking system, amplifying shocks across the entire financial world.
The IMF’s global stress tests show 18 percent of banks could fall below minimum capital thresholds under adverse conditions, rising to 21 percent if shocks to NBFIs are added. Meanwhile, a $300 billion forced-sale scenario in bond funds could disrupt liquiditytext.
Chapters 2 and 3 extend the concern to foreign-exchange fragility and emerging-market debt, warning that local bond markets—though more resilient—remain vulnerable to shocks in investor sentiment.
For India, the findings reinforce the need to tighten oversight of shadow-banking entities, maintain fiscal discipline, and strengthen stress-testing frameworks for both banks and mutual funds. The RBI and Ministry of Finance may draw lessons for managing sovereign-bank linkages and developing deeper local-currency bond markets. With India’s rising retail participation in credit and equity funds, the IMF’s warning on over-concentration and liquidity mismatches is particularly salient.
What is an NBFI?
Non-bank financial intermediaries include mutual funds, insurance firms, pension funds, and private credit entities that operate outside traditional banking but influence liquidity and credit flows. Their rise expands financial access but can also amplify market stress.
What is the “Growth-at-Risk” (GaR) metric? → The Growth-at-Risk (GaR) metric is an IMF-developed tool used to assess financial stability risks by measuring the downside tail risk to a country’s future GDP growth. A persistently high GaR metric, as observed in the report, indicates that there is an elevated chance (e.g., a 5% probability) that global growth over the next year could fall significantly below expectations, reflecting heightened macrofinancial vulnerabilities.
Follow the full report here: Chapter 1 of IMF Global Financial Stability Report, October 2025