RBI on Crypto, Ai Bubble and the Next Financial Crisis: Decoding Governor Malhotra

RBI Governor Sanjay Malhotra's remarks at the Fifth Kautilya Economic Conclave on October 3, 2026, covered risks linked to cryptocurrencies, artificial intelligence, and financial stability. His concern was that a future shock could spread through markets, lenders and payment systems, even if it did not begin in a bank.

The RBI remains cautious about cryptocurrencies because of their possible effects on monetary policy, capital flows and the singleness of money. Malhotra also flagged the risk of sharp falls in AI-related asset valuations if investment slows or earnings disappoint. He warned that geopolitical events, cyberattacks and technology failures could trigger wider financial stress.

The RBI's concerns go beyond the technology behind cryptocurrencies. They also involve how privately issued digital money could affect monetary control and confidence in the financial system.

The term "singleness of money" refers to money being accepted at par across the financial system. If different forms of private digital money do not maintain that confidence, payments and monetary policy could become harder to manage.

Malhotra added that India embraces distributed ledger technologies and tokenization along with a prudent stance towards cryptocurrency. Capital flow restrictions were also identified by Malhotra as one of the problems faced by developing countries.

Malhotra noted that domestic payments in India have become fast, cheap and convenient. Cross-border payments remain a challenge, and central bank digital currencies (CBDCs) could help address some existing gaps.

central bank digital currency (CBDC) is a central bank liability, unlike a privately issued cryptocurrency.

Malhotra flagged stretched AI-related valuations as a financial stability risk. If investment slows or earnings disappoint, these valuations could fall sharply.

A sharp fall in AI-related valuations could affect more than technology stocks. Investors, lenders and funds with large or leveraged exposures to the same markets could also face losses.

This is a risk scenario, not a prediction that an AI market crash is inevitable. The concern is whether valuations and borrowing have become too dependent on continued growth.

Borrowing lets investors take larger positions than their own capital would allow. That can work in their favor when prices rise, but a market fall can leave them facing bigger losses and pressure to reduce their positions.

Malhotra flagged leverage among hedge funds, option sellers, exchange-traded funds and other non-bank financial intermediaries (NBFIs). If several investors start cutting positions at the same time, their selling can push prices down further. Links between these institutions and banks can carry the stress into other parts of the financial system.

Malhotra warned that a future crisis could begin with a geopolitical event, cyberattack or technology failure rather than a bank's balance sheet.

For example, a cyberattack on a major financial service provider could disrupt payments, trading or access to funds. The effects could then spread to institutions that depend on the affected service.

AI adds further concerns, including cyber risk, model risk, dependence on third-party technology and weaker human oversight. Financial stability therefore depends on more than bank capital. Payment networks, market infrastructure and technology providers also need attention.

Malhotra pointed to the strength of Indian banks and NBFCs, but he also stressed the need to watch for risks that could spread across the financial system. 

The RBI also checked how banks might cope with difficult market conditions in its June 2026 stress tests. Banks kept their aggregate Common Equity Tier 1 (CET1) capital ratio at comfortable levels, even in the adverse scenarios tested.

NBFCs had an average capital-to-risk-weighted-assets ratio (CRAR) of 24.6% on March 31, 2026, against the regulatory minimum of 15%.

These numbers show the capital buffer available at that point. They do not rule out future problems if risks build up across lenders, markets and technology providers.

Malhotra's speech raises questions about risks that may not show up clearly in bank balance sheets. A sharp fall in AI valuations, heavy losses on leveraged positions or a major cyberattack could put pressure on several parts of the financial system at once.

His point was to prepare for those risks before they spread. For regulators, that means looking beyond banks and paying closer attention to market exposure, technology failures and links between financial institutions.

Ans. The RBI’s concerns include monetary policy, capital flows and the singleness of money. It supports technologies such as distributed ledgers and tokenization.

Ans. No. Malhotra pointed out that low earnings and lower AI investment may result in declining AI valuations. He did not predict a crash in the market.

Ans. Malhotra warned that a crisis may not start with a bank failure. A cyberattack, a technology breakdown, or a geopolitical shock could disrupt financial services and create problems for institutions that rely on them.

Ans. During times of decline in the market, traders who borrow money to trade in the market could be forced to sell their investments to offset their losses. When this occurs simultaneously, there could be additional downward pressure on the price level.

Ans. Malhotra described India’s financial system as resilient, citing bank and NBFI balance sheets and stress-test results. He also warned that new risks still need attention.

Sources

• BIS: Preserving financial stability in an evolving world - Governor Sanjay Malhotra's speech covering crypto, AI-related valuations, leverage and financial stability.

• PIB: Fifth Kautilya Economic Conclave

• RBI: Financial Stability Reports