RBI flags AI bubble and NBFI risks as threats to global financial stability

The Reserve Bank of India has sounded the alarm on two significant threats to global financial stability: an asset bubble fuelled by artificial intelligence and rising vulnerabilities in non-bank financial intermediaries (NBFIs). In its latest Financial Stability Report, the central bank warned that these factors could trigger widespread market disruption if left unchecked.

AI bubble: a new fault line

The RBI noted that the rapid adoption of AI technologies has driven a surge in valuations of related stocks and assets. This has created what it described as an 'AI-driven bubble,' where prices appear disconnected from underlying fundamentals.

The central bank cautioned that a sudden correction in these inflated markets could spill over into the broader financial system. It pointed to the concentration of investments in a handful of AI firms and the lack of transparency in AI-related financial products as exacerbating factors.

Regulators across the world have been scrambling to understand the implications of AI for financial markets. The RBI's assessment adds to growing concerns that euphoria around generative AI and machine learning may be creating a classic speculative mania.

NBFI risks: shadow banking's growing shadow

The RBI also highlighted the increasing role of NBFIs, including hedge funds, private credit funds, and money market funds, in the global financial system. These entities now account for nearly half of global financial assets, yet they operate with less regulatory oversight than traditional banks.

The central bank warned that NBFIs are vulnerable to liquidity mismatches and high leverage. A sudden loss of confidence or a spike in redemptions could trigger fire sales, amplifying market stress. The report cited the 2020 dash for cash during the pandemic as a stark reminder of how quickly NBFI vulnerabilities can morph into systemic crises.

India's own NBFI sector has been under scrutiny after a series of defaults and liquidity crunches in recent years. The RBI has been tightening norms for shadow lenders, but it acknowledged that global coordination is needed to address cross-border risks.

Call for coordinated action

The RBI's report calls for enhanced monitoring of AI-related market exuberance and stricter oversight of NBFIs. It recommends that regulators develop tools to detect asset bubbles early and impose macroprudential measures, such as higher margin requirements or limits on leverage, to cool speculative excesses.

For NBFIs, the central bank suggests introducing liquidity stress tests and requiring greater disclosure of leverage and counterparty exposures. It also emphasises the need for international cooperation, as many of these entities operate across jurisdictions.

• AI-driven asset valuations are at multi-year highs, with the tech-heavy Nasdaq index surging over 40% in the past year.
• Global NBFI assets reached $250 trillion in 2025, according to the Financial Stability Board.
• The RBI has already tightened norms for Indian NBFIs, including higher capital requirements and restrictions on loan concentration.

The next few months will be critical. Central banks and financial regulators are expected to hold emergency meetings to discuss these risks. Market participants are watching closely for any signs of policy action, such as interest rate adjustments or new regulatory curbs, that could burst the AI bubble or rein in NBFI leverage.