[Shuchi Agrawal is a financial regulatory lawyer and researcher]
In the last decade, India has emerged as a pioneer in digital public infrastructure (“DPI”) platforms. The country has made substantial technological advances through Aadhaar, Unified Payments Interface (“UPI”) and DigiLocker. Through these innovations, India has leveraged technology for social and financial development. This has also had the effect of positioning India as a world leader with respect to inclusive digital progress.
Nevertheless, the past few years have also witnessed the rapid rise of artificial intelligence (“AI”). AI’s transformative potential and its ability to enhance efficiency, reduce costs, and offer task automation have led to high adoption levels for the technology. AI’s integration across industries has drawn the attention of regulators around the world, and highlighted the need for comprehensive regulation.
India has maintained a particularly receptive outlook towards AI, as evidenced by the fact that the respondents of a survey in India have expressed higher levels of optimism about AI than their global counterparts. India has also astutely recognized the economic benefits of harnessing AI, especially for the purposes of financial progress and inclusion. According to a recent projection, AI adoption will generate at least USD 376 billion (~ INR 33.8 lakh crore) of economic value by 2030 in India. Further, accelerated adoption of AI is likely to contribute almost USD 500-600 billion (~ INR 45 lakh crore – 54 lakh crore) to India’s GDP by 2035. Due to this, the ineffective or delayed implementation of AI would have significant opportunity costs for a developing country such as India.
The banking and financial services (“B&FS”) sector has been at the forefront of AI adoption and has implemented AI for several functions, including customer interaction, and fraud analytics. The expanding role of AI in the B&FS sector has also prompted regulators, such as the Reserve Bank of India (“RBI”) and the Securities and Exchange Board of India (“SEBI”), to adopt a proactive approach to the supervision of AI.
On 13 August 2025, the RBI published the ‘FREE-AI Committee Report’ (“Committee Report”) to encourage the responsible use of AI in the financial sector while balancing innovation and risk mitigation. The Committee Report underscores that AI may be leveraged for an array of tasks including the development of indigenous machine learning models as well as increasing the products and services offered to underserved communities. According to surveysconducted by the RBI, at present around 20.8% of the RBI regulated entities are utilising AI for purposes such as sales and cybersecurity.
SEBI has also taken steps to allow for better and streamlined integration of AI in the securities markets. On 4 February 2025, SEBI issued a circular proposing a regulatory framework for algo-trading in India by retail investors (“Retail Algo Framework”). The Retail Algo Framework provides guidance on application programming interface-based trading, and the conduct of algo providers.
Such actions by the regulatory authorities signal a pro-innovation outlook while maintaining prudent protections for the users. At the same time, the increasing use of AI is also accompanied by regulatory risks and ethical concerns. The challenges arising from algorithmic bias, liability allocation and cybersecurity vulnerabilities have drawn the attention of regulatory authorities and governments across the world. In order to effectively address these issues, India must mobilize coordinated policy measures. To this effect, the RBI has put forth 26 recommendations for AI adoption in the B&FS sector. These include the development of B&FS sector data infrastructure, creation of an AI innovation sandbox and offering financial incentives to smaller entities.
More recently, the Ministry of Electronics and Information Technology has also published the ‘India AI Governance Guidelines’ (“AI Guidelines”) to provide a framework that fosters innovation with accountability, and offers a strategic approach to AI governance. The AI Guidelines focus on capacity building and utilising DPIs for scale and inclusion, to enable the seamless adoption of AI. The AI Guidelines also advocate for a principle-based, flexible regulatory regime that would allow for AI to be used for ‘economic growth, inclusive development, resilience and global competitiveness.’ Accordingly, the AI Guidelines recommend governing AI through existing laws, and making targeted legislative amendments only where the existing laws are unable to satisfy the evolving regulatory demands of AI. This approach has the advantage of avoiding sweeping regulatory changes and allowing for a gradual, organic development of systems and processes to govern AI, as the technology evolves. This is a progressive step, as regulatory measures adopted without a deliberative process cause the private sector to view the regulatory authorities as a regulatory risk.
In conclusion, it is evident, that the Government of India’s present approach towards the regulation of AI is aimed at furthering innovation and addressing ethical, security, and societal concerns. While India’s legal and policy initiatives in this sphere are commendable, the country must also focus on devising strong guardrails against the misuse of AI. At present, there is limited clarity on the mechanisms for remedying harms caused through the misuse of AI in the B&FS sector. Consequently, it is imperative to conduct detailed and thorough studies as well as deliberations with stakeholders to understand the emerging concerns with respect to the regulation of AI. Effective liability frameworks will inspire confidence among the new users of AI and consequently, support higher rates of adoption for AI.
India’s journey to global leadership with respect to DPIs has been noteworthy until now. In order to maintain its position in this capacity, India must embrace the opportunities that AI presents while building safeguards for the users. Harmonizing and balancing conflicting interests is where the true success of India’s AI governance regime lies.
– Shuchi Agrawal
Leave a comment