The global artificial intelligence boom has become a powerful driver of investment and financial markets. But the Reserve Bank of India (RBI) has warned that the same investment cycle supporting AI related valuations could become a source of financial instability if it slows sharply.
In a special address at the Fifth Kautilya Economic Conclave on October 3, RBI Governor Sanjay Malhotra identified “stretched asset valuations, particularly AI related” as one of the major emerging risks to global financial stability.
According to Malhotra, the AI investment cycle has provided significant support to global financial markets, with strong earnings driving substantial gains in AI related equity valuations. However, the RBI Governor cautioned that the risks could increase as the investment cycle matures.
“As the investment cycle matures, any slowdown in AI investment or earnings could trigger a sharp repricing of financial assets, especially in the AI value chain,” he said.
Why a slowdown could matter
The concern goes beyond the possibility of technology companies reporting weaker earnings. A slowdown in AI investment could affect valuations across the broader ecosystem that has developed around artificial intelligence.
AI companies and their suppliers have benefited from expectations of continued investment and strong future growth. If that investment momentum weakens, markets could begin reassessing the earnings and valuations attached to the AI value chain.
Malhotra also highlighted the role of leverage in amplifying this risk. “High risk appetite has spurred an increase in leverage which, along with declining free cash flows among major AI firms, could further amplify market corrections and financial market volatility,” said Malhotra.
The bond market adds another layer of risk
The RBI’s warning comes against a backdrop of rising global debt and higher sovereign bond yields. The 10-year US treasury bond yield jumped to 5.27% on October 6, 2026 against 4.17% on December 31, 2025.
Malhotra said global debt-to-GDP levels have increased, maturity periods have shortened and “sovereign bond yields hardened sharply.” Higher borrowing costs, he said, could narrow fiscal space for governments and weaken debt servicing capacity for companies.
For the AI industry, this matters because a prolonged period of higher interest rates and borrowing costs can make large investment projects more expensive. The governor also warned that tighter financial conditions could put pressure on corporates and that losses on sovereign bonds could weaken bank balance sheets. Emerging markets could additionally face capital outflows if the carry trade unwinds.
AI and leverage could create a bigger shock
The RBI’s concern is not limited to technology companies. Malhotra said hedge funds, option sellers, exchange traded funds and other non bank financial intermediaries have expanded leverage in both equity and bond markets.
“Rising leverage is a sign of a maturing financial cycle,” he said. He also warned that the growing interconnectedness between banks and non bank financial intermediaries means that a tightening of financial conditions could spill over into banks and other markets.
That makes an AI related correction potentially broader than a fall in technology stocks alone.
AI’s cybersecurity risk is also rising
The RBI Governor identified another emerging risk: cyber risks compounded by AI. The development of increasingly sophisticated AI systems, Malhotra said, has heightened cyber risk, model risk, third party dependence and the erosion of human oversight and accountability. “With the development of sophisticated AI with tremendous autonomy and problem solving capabilities, the most immediate concern, however, is regarding cyber risk,” Malhotra added.
Interestingly, the RBI sees a potential upside for India if AI valuations in advanced economies correct.
“As for corrections in AI related valuations in advanced economies, they may be positive for capital inflows if and when they happen,” he added.
The RBI’s message is therefore less about predicting an AI crash and more about preparing for the possibility that AI’s investment boom will eventually mature—and that the transition could test the resilience of global financial markets.
Source: RBI Governor Sanjay Malhotra’s special address, Preserving Financial Stability in an Evolving World, Fifth Kautilya Economic Conclave, October 3, 2026.
