RBI Governor flags risks of a sharp repricing in AI-related assets if spending or earnings growth slows
Indian government bond yields have risen “only partially” in response to higher global energy prices and rising global bond yields, RBI Governor Sanjay Malhotra said Saturday, attributing the relatively contained increase to prudent fiscal management, credible monetary policy and easing structural inflation pressures.
Speaking at the 5th Kautilya Economic Conclave, Malhotra said mark-to-market losses on sovereign bonds could weaken balance sheets, particularly at a time when fiscal pressures may limit governments’ ability to support troubled banks. He noted that emerging markets with high levels of sovereign debt held by non-residents could face capital outflows as carry trades unwind.
India’s relative resilience
On India specifically, Malhotra said the country’s bond market had weathered global pressures comparatively well. “Indian government yields have risen only partially in response to the higher global energy prices and global bond yields. This is reflective of the prudence in fiscal management as the government continues a path of fiscal consolidation. At the same time, it is an acknowledged testimony of credible monetary policy and declining structural pressures on inflation,” he said.
He added that the global economy has weathered repeated shocks since the Covid-19 pandemic, while India has experienced a prolonged period of financial stability.
A caution against complacency
Despite the positive assessment, Malhotra warned against taking the stability for granted. “Long periods of stability can encourage risk-taking and leverage, while memories of prosperity can weaken the appetite for prudence. It’s not that I see any imminent signs of stress, but we need to remind ourselves to remain alert to these risks,” he said.
Warning on AI-driven asset valuations
Malhotra also flagged risks from stretched asset valuations, particularly in the artificial intelligence sector. He said the AI investment cycle has provided significant support to global financial markets, especially in advanced economies where strong earnings have driven gains in AI-related equities, but cautioned that any slowdown in AI spending or earnings as the cycle matures could trigger a sharp repricing of financial assets across the AI value chain. “High risk appetite has spurred an increase in leverage, which, along with declining cash flow among major AI firms, would further amplify market corrections and financial market volatility,” he said.
Rising leverage across markets
The Governor also pointed to growing leverage across advanced economies, with hedge funds, option sellers, exchange-traded funds and other non-bank financial intermediaries increasing their exposure across equity and bond markets in pursuit of higher returns. “Rising leverage is a sign of a maturing financial cycle; this is of concern, especially when equity valuations are stretched and bank and NBFI interconnectedness has deepened, both on the liability as well as the asset side. Any tightening of financial conditions, therefore, can spill over to banks and other markets,” he said.
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