IMF Report Warns Foreign Exchange Markets Face Fragility from Global Shocks
SDG 8: Decent Work and Economic Growth | SDG 9: Industry, Innovation and Infrastructure
Institutions: Reserve Bank of India (RBI) | Ministry of Finance
The International Monetary Fund’s (IMF) Global Financial Stability Report (GFSR) October 2025, Chapter 2, reveals significant strain on the global foreign exchange (FX) market. When worldwide economic uncertainty flares up, investors quickly pull money into safe assets, causing rapid price shifts and reduced liquidity in the FX market. This destabilizing behavior is notably driven by large, fast trades from Nonbank Financial Institutions (NBFIs), such as mutual funds and hedge funds. While NBFIs are essential for market activity under normal conditions, their swift movements during a crisis can accidentally make the entire system more fragile.
Beyond the trading environment, the chapter stresses that basic functions of the FX market are at risk. Operational glitches like system failures, cyber incidents, and settlement risk—the chance of one party paying up but not receiving the promised currency—can swiftly paralyze trading, especially in developing economies. The IMF suggests that nations with strong policy track records and deep, domestic local currency debt markets—like India—are better positioned to cushion against these shocks. This internal financial strength helps reduce the reliance on external borrowing and minimizes the disruptive impact of sudden capital flight.
This IMF analysis is crucial for the Reserve Bank of India (RBI), underscoring the need to accelerate the transition to simultaneous settlement systems and strengthen cyber resilience within the Digital India financial ecosystem to mitigate operational risks in the high-volume FX market.
What is FX Market Settlement Risk? The risk that one party in an FX trade delivers its currency but fails to receive the currency owed by the counterparty. It matters as it threatens the stability of cross-border transactions and can lead to systemic failures if a major counterparty defaults, demanding enhanced regulatory oversight and infrastructure adoption.
Follow the full report here: Chapter 2 of IMF Global Financial Stability Report, October 2025