RBI To Use AI, ML Tools To Predict Market Behaviour, Detect Abnormal Activities

The Reserve Bank of India (RBI) is examining proposed models for ‘predictive’ analysis of the markets, particularly the use of artificial intelligence and machine learning.

According to a report by the Economic Times, the central bank will deploy AI and ML models to detect early signs of asset bubbles, and market disruptions by deriving insights and patterns from historical data, macroeconomic numbers and market behaviour.

Besides, AI and ML tools will likely help the regulator in ‘stress testing’ of banks, ensuring that banks have enough capital to absorb shocks from economic downturns and declining markets. 

Citing sources, the report further said that the RBI is rejigging its standing committee of analytics and amended the panel’s terms of reference to support its supervisory functions.

The amended terms of reference of the panel now reportedly include:

• Assess the advanced statistical models being used in the department;
• Assess the proposed models for ‘predictive analysis’, particularly the use of AI and ML;
• Assess capabilities of the existing staff engaged in analytics and recommend training;
• Suggest optimal IT resources and system features for the use of advanced analytical methods;
• Assess global developments in the use of analytics for financial supervision so that new tools can be adopted.

It is to be noted that currently, the RBI’s department of supervision conducts offsite risk analytics using mathematical models and statistics by analysing patterns from data. It assesses how a risk model responds to changes in assumptions, which helps it evaluate the ability of financial institutions to withstand risks — a method called ‘multivariate stress testing’.

Several stock market regulators across the world use AI models to identify suspicious trading patterns, market manipulation and spoofing ( an illegal practice where a trader places and cancels orders to create a false perception of demand and supply to manipulate stock prices).

The RBI is already using AI and ML models to combat financial fraud in the country. In December last year, the central bank introduced an AI/ML-powered model dubbed ‘MuleHunter.AI’ to detect mule bank accounts. This has allowed small finance banks to offer pre-sanctioned credit lines through UPI.

The regulator has also set up a committee to develop a framework for the responsible and ethical use of AI in the financial sector. The committee’s responsibilities include addressing critical challenges such as algorithmic bias, decision explainability, and data privacy, while also laying out a roadmap for sustainable AI integration.