RBI Flags AI Stock Risks; Debt Capacity Improves for Firms

Indian firms have demonstrated improved debt-servicing capabilities as of the final quarter of the 2026 fiscal year. The interest coverage ratio reached a two-year high of 6.5 in March 2026, signaling that businesses are comfortably meeting interest obligations through operating profits. Despite this broader strength, the Reserve Bank of India (RBI) has flagged an increase in the number of financially vulnerable firms, noting that a specific segment of the corporate sector remains at risk as market conditions fluctuate.

The central bank has highlighted emerging fault lines within the private credit market, cautioning that a rise in defaults and redemption requests requires proactive monitoring. Furthermore, the RBI has raised concerns regarding the ongoing boom in artificial intelligence-themed stocks. The central bank views this rapid valuation growth as a potential threat to financial stability, though it emphasizes that the overall Indian banking sector remains resilient against these specific speculative pressures.

Banking stocks, which faced intense selling pressure in May, are finding a new tailwind as investors digest the RBI's latest foreign currency deposit schemes. Analysts suggest these moves could lower funding costs, improving the investment appeal of the sector. While the RBI remains vigilant about specific credit market stress, the aggregate picture of the banking industry reflects durability. Future focus will center on how banks navigate the dual challenges of managing private credit risk and potential volatility from high-growth technology sectors.