The flexible inflation targeting (FIT) framework has completed 8 years since its introduction in 2016. This is a major structural reform of 21st century in India. It stands out for its committee approach to decision making; transparency of policy making process and communication; accountability hinging upon quantitatively defined inflation target; and operational independence. Over the years, the framework has matured across various interest rate cycles and monetary policy stances.

2. When I look back, I can say with confidence that FIT has served us well over the years and has proved its mettle. It brought about an era of price stability in the pre-COVID-19 period, with inflation averaging around the target rate of 4 per cent. Thereafter, despite continuing global turmoil from multiple sources in the last four years or so, the flexibility embedded in the FIT framework has helped us to effectively address these unprecedented challenges, while supporting growth.  Monetary policy in India was able to respond to the  economic slowdown decisively and swiftly in the wake of COVID-19 pandemic and again pre-emptively during the build-up of inflationary pressures after the war began in Ukraine in early 2022. The prevailing well balanced growth-inflation dynamics is a testimony to the success of the FIT framework.

Decisions and Deliberations of the Monetary Policy Committee (MPC)

3. The Monetary Policy Committee (MPC), with new external members, met on 7th, 8th and 9th October, 2024. After assessing the evolving macroeconomic and financial conditions and the outlook, the MPC decided by a majority of 5 out of 6 members to keep the policy repo rate unchanged at 6.50 per cent. Consequently, the standing deposit facility (SDF) rate remains at 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent. Further, the MPC decided unanimously to change the stance to ‘neutral’ and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.

4. The MPC noted that currently the macroeconomic parameters of inflation and growth are well balanced. Headline inflation is on a downward trajectory, though its pace has been slow and uneven. Going forward, the moderation in headline inflation is expected to reverse in September and likely to remain elevated in the near-term due to adverse base effects, among other factors. Food inflation pressures could see some easing later in this financial year on the back of strong kharif sowing, adequate buffer stocks and good soil moisture conditions which are conducive for rabi sowing. Adverse weather events continue to pose contingent risks to food inflation. Core inflation, on the other hand, appears to have bottomed out.¹ Fuel component of CPI remains in contraction.²

5. Domestic growth has sustained its momentum, with private consumption and investment growing in tandem. Resilient growth gives us the space to focus on inflation so as to ensure its durable descent to the 4 per cent target. In these circumstances, the MPC decided to remain watchful of the evolving inflation outlook in the coming months. Keeping in view the prevailing inflation and growth conditions and the outlook, the MPC considered it appropriate to change the stance to ‘neutral’ and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.

Assessment of Growth and Inflation

Global Growth

6. The global economy has remained resilient since the last meeting of the MPC,³ although downside risks from increasingly intense geopolitical conflicts, geoeconomic fragmentation, financial market volatility and elevated public debt continue to play out. Manufacturing is showing signs of slowdown, while services activity is holding up.⁴ World trade is exhibiting improvement.⁵ Inflation is softening, supported by lower energy prices. Growing divergence in inflation-growth dynamics across countries has resulted in varying monetary policy responses.⁶

Domestic Growth

7. Real gross domestic product (GDP) grew by 6.7 per cent in Q1:2024-25, led by a revival in private consumption⁷ and improvement in investment. The share of investment in GDP reached its highest since 2012-13.⁸ Government expenditure, on the other hand, contracted during the quarter.⁹ On the supply side, gross value added (GVA) expanded by 6.8 per cent surpassing GDP growth, aided by strong industrial and services sector activities.¹⁰

8. High frequency indicators available so far suggest that domestic economic activity continues to be steady. The main components from the supply side – agriculture, manufacturing and services – remain resilient. Agricultural growth has been supported by above normal south-west monsoon rainfall¹¹ and better kharif sowing¹². Higher reservoir levels¹³ with good moisture conditions of soil augur well for the ensuing rabi crop. Manufacturing activity is gaining on the back of improving domestic demand, lower input costs¹⁴ and a supportive policy environment.¹⁵ Eight core industries output fell by 1.8 per cent in August on a high base.¹⁶ Excess rainfall also dampened production in certain sectors such as electricity, coal and cement in August. The purchasing managers’ index (PMI) for manufacturing at 56.5 for September remained elevated. The services sector continues to grow at a strong pace.¹⁷ PMI services at 57.7 in September indicates robust expansion.¹⁸

9. On the demand side, rural demand¹⁹ is trending upwards while urban demand²⁰ continues to hold firm. Government consumption is improving. ²¹ Investment activity remains buoyant,²² with government capex rebounding from a contraction observed in the first quarter. ²³ Private investment continues to gain steam²⁴ on the back of expansion in non-food bank credit,²⁵ higher capacity utilisation²⁶ and rising investment intentions.²⁷ On the external front, services exports is supporting overall growth. ²⁸

10. Looking ahead, India’s growth story remains intact as its fundamental drivers – consumption and investment demand – are gaining momentum. Prospects of private consumption, the mainstay of aggregate demand, look bright on the back of improved agricultural outlook and rural demand. Sustained buoyancy in services would also support urban demand. Government expenditure of the centre and the states is expected to pick up pace in line with the Budget Estimates. Investment activity would benefit from consumer and business optimism, government’s continued thrust on capex and healthy balance sheets of banks and corporates. Taking all these factors into consideration, real GDP growth for 2024-25 is projected at 7.2 per cent, with Q2 at 7.0 per cent; Q3 at 7.4 per cent; and Q4 at 7.4 per cent. Real GDP growth for Q1:2025-26 is projected at 7.3 per cent. The risks are evenly balanced.

Inflation

11. As anticipated, headline CPI inflation softened significantly in July and August ²⁹, with base effect playing a major role in July. Food inflation experienced a certain degree of correction during these two months.³⁰ Considerable divergence, however, was observed within the food sub-groups.³¹ Deflation in fuel group deepened on softening electricity and LPG prices.³² Core inflation, on the other hand, edged up in July and August.³³

12. The CPI print for the month of September is expected to see a big jump due to unfavourable base effects³⁴ and pick up in food price momentum,³⁵ caused by the lingering effects of a shortfall in the production of onion, potato and chana dal (gram) in 2023-24, among other factors.³⁶ The headline inflation trajectory, however, is projected to sequentially moderate in Q4 of this year due to good kharif harvest, ample buffer stocks of cereals and a likely good crop in the ensuing rabi season. Unexpected weather events and worsening of geopolitical conflicts constitute major upside risks to inflation. International crude oil prices have become volatile in October.³⁷ The recent uptick in food and metal prices, as seen in the Food and Agricultural Organisation (FAO) and the World Bank price indices for September, if sustained, can add to the upside risks.³⁸ Taking into account all these factors, CPI inflation for 2024-25 is projected at 4.5 per cent, with Q2 at 4.1 per cent; Q3 at 4.8 per cent; and Q4 at 4.2 per cent. CPI inflation for Q1:2025-26 is projected at 4.3 per cent. The risks are evenly balanced.

What do these Inflation and Growth Conditions mean for Monetary Policy?

13. The developments since the August meeting of the MPC indicate further progress towards realising a durable disinflation towards the target. Despite the near-term upsides to inflation from food prices, the evolving domestic price situation signals moderation in headline inflation thereafter. The agricultural crop outlook is turning out to be favourable, with improving prospects of kharif and rabi output. These factors could lead to an easing of food inflation pressures, but this optimism is subject to weather related shocks, if any. Core inflation is likely to remain broadly contained on continuing transmission of past monetary policy actions unless, of course, there are surprises in global commodity prices.

14. The prevailing and expected inflation-growth balance have created congenial conditions for a change in monetary policy stance to neutral. Even as there is greater confidence in navigating the last mile of disinflation, significant risks – I repeat significant risks – to inflation from adverse weather events, accentuating geopolitical conflicts and the very recent increase in certain commodity prices continue to stare at us. The adverse impact of these risks cannot be underestimated.

15. It is with a lot of effort that the inflation horse has been brought to the stable, i.e., closer to the target within the tolerance band compared to its heightened levels two years ago. We have to be very careful about opening the gate as the horse may simply bolt again. We must keep the horse under tight leash, so that we do not lose control. Going forward, we need to closely monitor the evolving conditions for further confirmation of the disinflationary impulses.

Liquidity and Financial Market Conditions

16. System liquidity remained in surplus during August-September and early October, with a pickup in government spending and decline in currency in circulation.³⁹ Liquidity conditions, however, had turned into deficit for a brief period during the latter half of September with the build-up of government cash balances on account of tax related outflows.⁴⁰ In sync with the shifting liquidity conditions, the Reserve Bank proactively conducted two-way operations⁴¹ to ensure alignment of inter-bank overnight rate with the policy repo rate.⁴²

17. Across the term money market segments, the yields on 3-month treasury bills (T-bills) and commercial papers (CPs) issued by non-banking financial companies (NBFCs) eased, while that on certificates of deposit (CDs) firmed up marginally.⁴³ The 10 year G-Sec yield softened in August-September on global and domestic cues, including policy pivot in the US and in some major economies, improved global investor sentiment, benign domestic inflation and accelerated fiscal consolidation.⁴⁴ The term premium (10 year G-Sec yield minus 3-month T-bill yield) has remained stable in recent months.⁴⁵ Transmission to the credit market has been satisfactory.⁴⁶

18. Moving forward, the Reserve Bank will continue to be nimble and flexible in its liquidity management operations. We will deploy an appropriate mix of instruments to modulate both frictional and durable liquidity so as to ensure that money market interest rates evolve in an orderly manner.

19. During the current financial year (up to October 8), the exchange rate of the Indian rupee (INR) remained largely range-bound.⁴⁷ The INR also continued to be the least volatile among peer EME currencies. This was so even during the high volatility episode, following the unwinding of yen carry trade in early August 2024.⁴⁸ The lower volatility of the INR reflects India’s strong macroeconomic fundamentals and improved external sector outlook.

Financial Stability

20. The health parameters of banks and NBFCs continue to be strong.⁴⁹ There has been some recent commentary on likelihood of stress buildup in a few unsecured loan segments like loans for consumption purposes, micro finance loans and credit card outstandings. The Reserve Bank is closely monitoring the incoming information and will take measures, as may be considered necessary. Banks and NBFCs, on their part, need to carefully assess their individual exposures in these areas, both in terms of size and quality. Their underwriting standards and post-sanction monitoring have to be robust. Continued attention also needs to be given to potential risks from inoperative deposit accounts, cybersecurity landscape, mule accounts, etc.

21. NBFCs, in particular, have registered an impressive growth over the last few years. This has resulted in more credit flow to the remote and underserved segments, bolstering financial inclusion. While the overall NBFC sector remains healthy, I have a few messages to the outliers.

1. First, it is observed that some NBFCs are aggressively pursuing growth without building up sustainable business practices and risk management frameworks, commensurate with the scale and complexity of their portfolio. An imprudent ‘growth at any cost’ approach would be counter productive for their own health.

2. Second, driven by the significant accretion to their capital from both domestic and overseas sources, and sometimes under pressure from their investors, some NBFCs – including microfinance institutions (MFIs) and housing finance companies (HFCs) – are chasing excessive returns on their equity. While such pursuits are in the domain of the Boards and Managements of NBFCs, concerns arise when the interest rates charged by them become usurious and get combined with unreasonably high processing fees and frivolous penalties. These practices are sometimes further accentuated by what appears to be a ‘push effect’, as business targets drive retail credit growth rather than its actual demand. The consequent high-cost and high indebtedness could pose financial stability risks, if not addressed by these NBFCs.

3. Third, the NBFCs may review their prevailing compensation practices, variable pay and incentive structures some of which appear to be purely target driven in certain NBFCs. Such practices may result in adverse work culture and poor customer service.

22. To sum up, it is important that NBFCs, including MFIs and HFCs, follow sustainable business goals; a ‘compliance first’ culture; a strong risk management framework; a strict adherence to fair practices code; and a sincere approach to customer grievances. The Reserve Bank is closely monitoring these areas and will not hesitate to take appropriate action, if necessary. Self-correction by the NBFCs would, however, be the desired option.

External Sector

23. India’s current account deficit (CAD) widened to 1.1 per cent of GDP in Q1:2024-25 on account of a higher trade deficit.⁵⁰ Buoyancy in services exports⁵¹ and strong remittance receipts⁵² are expected to keep CAD within the sustainable level.

24. On the external financing side, foreign portfolio investment (FPI) flows have seen a turnaround from net outflows of US$ 4.2 billion in April-May 2024 to net inflows of US$ 19.2 billion during June-October (till October 7, 2024). Foreign direct investment (FDI) flows remain strong in 2024-25 as both gross and net FDI inflows improved in April-July 2024.⁵³ While external commercial borrowings moderated, non-resident deposits recorded higher net inflows compared to last year.⁵⁴ India’s foreign exchange reserves have already crossed a new milestone of US$ 700 billion. Overall, India’s external sector remains resilient as key external sector vulnerability indicators continue to improve.⁵⁵ We remain confident of meeting our external financing requirements comfortably.

Additional Measures

25. I shall now announce certain additional measures.

Responsible Lending Conduct – Levy of Foreclosure Charges/ Pre-payment Penalties on Loans

26. The Reserve Bank has taken several measures over the years to safeguard consumer’s interest. As part of these measures, Banks and NBFCs are not permitted to levy foreclosure charges/ pre-payment penalties on any floating rate term loan sanctioned to individual borrowers for purposes, other than business. It is now proposed to broaden the scope of these guidelines to include loans to Micro and Small Enterprises (MSEs). A draft circular in this regard shall be issued for public consultation.

Discussion Paper on Capital Raising Avenues for Primary (Urban) Co-operative Banks

27. The Reserve Bank has undertaken several initiatives in recent years to strengthen the Urban Co-operative Banking (UCB) Sector. Such initiatives include issuance of regulatory guidelines in 2022 for issue and regulation of share capital and securities by UCBs. To provide more flexibility and avenues for UCBs to raise capital, a Discussion Paper on Capital Raising Avenues for UCBs will be issued for feedback and suggestions from stakeholders.      

Creation of Reserve Bank Climate Risk Information System (RB-CRIS)

28. Climate change is emerging as a significant risk to the financial system world over. This makes it necessary for regulated entities to undertake robust climate risk assessment, which is sometimes hindered by gaps in high quality climate related data. To bridge these data gaps, the Reserve Bank proposes to create a data repository, namely, the Reserve Bank – Climate Risk Information System (RB-CRIS).

UPI - Enhancement of Limits

29. UPI has transformed India’s financial landscape by making digital payments accessible and inclusive through continuous innovation and adaptation. To further encourage wider adoption of UPI and make it more inclusive, it has been decided to (i) enhance the per-transaction limit in UPI123Pay from ₹5,000 to ₹10,000; and (ii) increase the UPI Lite wallet limit from ₹2,000 to ₹5,000 and per-transaction limit from ₹500 to ₹1,000.

Introduction of Beneficiary Account Name Look-up Facility

30. At present, UPI and Immediate Payment Service (IMPS) provide a facility for the remitter of funds to verify the name of the receiver (beneficiary) before executing a payment transaction. It is now proposed to introduce such a facility for the Real Time Gross Settlement System (RTGS) and the National Electronic Funds Transfer (NEFT) system. This facility will enable the remitter to verify the name of the account holder before effecting funds transfer to him/her through RTGS or NEFT. This will also reduce the possibility of wrong credits and frauds.

Conclusion

31. Today, the Indian economy presents a picture of stability and strength. The balance between inflation and growth is well-poised. India’s growth story remains intact. Inflation is on a declining path, although we still have a distance to cover. The external sector demonstrates the strength of the economy. Forex reserves are scaling new peaks. Fiscal consolidation is underway. The financial sector remains sound and resilient. Global investor optimism in India’s prospects is perhaps at its highest ever. We are, however, not complacent, especially amidst rapidly evolving global conditions.

32. The monetary policy action today reflects the MPC’s assessment that, at the current juncture, it would be appropriate to have greater flexibility and optionality to act in sync with the evolving conditions and the outlook. We stand unambiguously committed to ensure durable alignment of inflation with the target, while supporting growth. In the prevailing macroeconomic conditions and the outlook, Mahatma Gandhi’s words remain highly relevant: “When the method is good, ... Success is bound to come in the end. …”⁵⁶

Thank you. Namaskar. 

(Puneet Pancholy)     
Chief General Manager

Press Release: 2024-2025/1253