New Delhi [India], October 3 (ANI): Indian government bond yields have surged "only partially" due to higher global energy prices and global bond yields, reflecting prudent fiscal management, credible monetary policy and easing structural inflation pressures, said RBI Governor Sanjay Malhotra. 

Addressing 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.

At the same time, emerging markets, especially those with high levels of sovereign debt held by non-residents, could face capital outflows as carry trades unwind, he noted. 

For India, "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. 

Commenting on the global economy, the RBI Governor said it has weathered repeated shocks since the COVID-19 pandemic, while India has experienced a prolonged period of financial stability.

However, he cautioned against complacency, noting that extended periods of stability can encourage greater risk-taking and leverage and weaken the appetite for prudence.

"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." 

Malhotra also flagged risks from stretched asset valuations, particularly in the artificial intelligence (AI) sector, noting that 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.

However, he cautioned that as the investment cycle matures, any slowdown in AI spending or earnings could trigger a sharp repricing of financial assets, particularly 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. 

Malhotra also pointed to rising leverage across advanced economies, with hedge funds, option sellers, exchange-traded funds and other non-bank financial intermediaries increasing leverage across equity and bond markets in pursuit of higher returns.

"Rising leverage is a sign of maturing financial cycle, this of concern, especially when equity valuations are pressed and bank and NDFI interconnectedness has deepened, both on the both on the liability as well as on the asset side, any tightening of financial conditions, therefore, can spill over to banks and other markets," he noted. (ANI)