AI investment boom supports markets, but slowdown could trigger sharp repricing: RBI Governor Malhotra

The artificial intelligence (AI) investment cycle has emerged as a key support for global financial markets, however any slowdown in investments or earnings could have an adverse impact as it can also trigger a sharp repricing of financial assets, particularly across the AI value chain, Reserve Bank of India Governor Sanjay Malhotra said on Friday.

During his address at the Kautilya Economic Conclave, “The AI investment cycle has been a major support for global markets,” while he cautioned that any moderation in AI-related investment or earnings could lead to a sharp correction in valuations and financial assets.

Malhotra said a correction in AI-related valuations in advanced economies could, however, have a positive spillover for emerging markets such as India through higher capital inflows. "As for corrections in AI-related valuations, if they were to happen in advanced countries... it may have a positive impact in terms of capital inflows,” Malhotra said.

The governor also flagged rising global bond yields as a key concern, saying public debt was increasing amid higher public consumption and growing investments in AI. The increase in debt, he said, could have implications for bond yields in developed economies. Thus, Malhotra noted that public debt is increasing due to high public consumption and increased investment in AI.

“Bond yields are hardening globally,” Malhotra said, adding that the rise in international interest rates would have implications for real interest rates in India as well.

Malhotra identified stretched AI valuations among five major risks facing the global financial system, alongside elevated global debt, leverage in non-bank finance, private credit and cyber threats.

The governor also flagged that the risks posed by the rapid adoption of AI and cybersecurity can pose threats to the financial system. However, he assured that the RBI had taken several steps to address challenges arising from AI and cyber security, without elaborating on the measures.

His comments come as AI-related investments, particularly in computing infrastructure, data centres and advanced semiconductors, have become an important driver of global corporate spending and financial-market valuations.