As we stand at the threshold of 2025, let me reflect upon the eventful journey of 2024. In line with the trend in the last few years, central banks were once again put to the ultimate test to stabilise their economies against continuous, colossal and complex shocks. Central banks are constantly adapting to the new global economic and financial landscape created by geopolitical conflicts, geoeconomic fragmentation, financial market volatility and continuing uncertainties, all of which are testing the resilience of the global economy. The last mile of disinflation is turning out to be prolonged and arduous, both for advanced and emerging market economies (EMEs). Maintaining macroeconomic and financial stability, and building buffers, continue to be the lodestar for the EMEs.

2. In India, notwithstanding the recent aberration in the growth and inflation trajectories, the economy continues its journey on a sustained and balanced path towards progress. Amidst the reshaping of the global economy, India is well-positioned to benefit from the emerging trends as it forges ahead on a transformative journey.

Decisions and Deliberations of the Monetary Policy Committee (MPC)

3. The Monetary Policy Committee (MPC) met on  4th, 5th  and 6th December, 2024. After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, it decided by a 4 to 2 majority 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. The MPC also decided unanimously to continue with the ‘neutral’ stance and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.

4. I shall now briefly set out the rationale for these decisions. The MPC took note of the recent slowdown in the growth momentum, which translates into a downward revision in the growth forecast for the current year. Going forward into the second half of this year and the next year, the MPC assessed the growth outlook to be resilient, but warranting close monitoring. Inflation, on the other hand, surged above the upper tolerance band of 6.0 per cent in October, driven by a sharp uptick in food inflation. Food inflation pressures are likely to linger in Q3 of this financial year and start easing only from Q4:2024-25, backed by seasonal correction in vegetables prices, kharif harvest arrivals, likely good rabi output and adequate cereal buffer stocks.

5. High inflation reduces the disposable income in the hands of consumers and dents private consumption, which negatively impacts the real Gross Domestic Product (GDP) growth. The increasing incidence of adverse weather events, heightened geo-political uncertainties and financial market volatility pose upside risks to inflation. The MPC believes that only with durable price stability can strong foundations be secured for high growth. The MPC remains committed to restoring the inflation growth balance in the overall interest of the economy. Accordingly, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent in this meeting and continue with the neutral stance of monetary policy as it provides flexibility to monitor and assess the outlook on inflation and growth, and act appropriately.

Assessment of Growth and Inflation

Global Growth

6. The global economy has shown unusual resilience in 2024 despite several headwinds.¹ Inflation is gradually moving towards target from its multi-decadal highs, prompting several central banks to embark on policy pivots.² Global trade remains resilient³ with increasing volumes confined within geopolitical blocs.⁴ Since the last MPC meeting, financial markets have remained edgy amidst rising US dollar and hardening bond yields, resulting in large capital outflows from emerging markets and volatility in equity markets. Going forward, the outlook is clouded by rising tendencies of protectionism which have the potential to undermine global growth and push inflation higher.

Domestic Growth

7. Growth in real GDP in Q2 at 5.4 per cent turned out to be much lower than anticipated.⁵ This decline in growth was led mainly by a substantial deceleration in industrial growth from 7.4 per cent in Q1 to 2.1 per cent in Q2 due to subdued performance of manufacturing companies,⁶ contraction in mining activity and lower electricity demand.⁷ The weakness in the manufacturing sector, however, was not broad-based but was limited to specific sectors such as petroleum products, iron and steel and cement.⁸

8. Going forward, high frequency indicators available so far suggest that the slowdown in domestic economic activity bottomed out in Q2:2024-25, and has since recovered, aided by strong festive demand and pick up in rural activities. Agricultural growth is supported by healthy kharif crop production,⁹ higher reservoir levels¹⁰ and better rabi sowing.¹¹ Industrial activity is expected to normalise and recover from the lows of the previous quarter.¹² The end of the monsoon season and the expected pick up in government capital expenditure may provide some impetus to cement and iron and steel sectors. Mining and electricity are also expected to normalise post the monsoon-related disruptions. The purchasing managers’ index (PMI) for manufacturing at 56.5 for November remained elevated. The supply chain pressures eased in October-November and fell below the historical average.¹³ The services sector continues to grow at a strong pace.¹⁴ PMI services remained steady at 58.4 in November, indicating continued expansion.¹⁵ 

9. On the demand side, rural demand¹⁶ is trending upwards while urban demand shows some moderation on a high base.¹⁷ Government consumption is improving.¹⁸ Investment activity is also expected to improve.¹⁹ On the external front, merchandise exports expanded by 17.2 per cent in October 2024, while services exports continue to post upbeat growth (22.3 per cent in October).²⁰ Taking all these factors into consideration, real GDP growth for 2024-25 is now projected at 6.6 per cent, with Q3 at 6.8 per cent; and Q4 at 7.2 per cent. Real GDP growth for Q1:2025-26 is projected at 6.9 per cent; and Q2 at 7.3 per cent. The risks are evenly balanced.

Inflation

10. Inflation increased sharply in September and October 2024²¹  led by an unanticipated increase in food prices.²² Core inflation, though at subdued levels, also registered a pick-up in October.²³ Fuel group remained in deflation for the 14th consecutive month in October.²⁴ In the near term, despite some softening, lingering food price pressures are likely to keep headline inflation elevated in Q3.

11. Going ahead, a good rabi season would be critical to the softening of the food inflation pressures. Early indications point to adequate soil moisture content and reservoir levels, conducive for rabi sowing. The estimates of a record kharif production should bring relief to the elevated prices of rice and tur dal.²⁵ Vegetable prices are also expected to see a seasonal winter correction. On the upside, the evolving trajectory of domestic edible oil prices, following the hike in import duties and rise in their global prices, need to be closely monitored.²⁶ Manufacturing and services firms surveyed by the Reserve Bank point to firming up of input costs and selling prices in Q4:2024-25.²⁷ Taking all these factors into consideration, CPI inflation for 2024-25 is projected at 4.8 per cent, with Q3 at 5.7 per cent; and Q4 at 4.5 per cent. CPI inflation for Q1:2025-26 is projected at 4.6 per cent; and Q2 at 4.0 per cent.  The risks are evenly balanced.

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

12. The near-term inflation and growth outcomes in India have turned somewhat adverse since the October policy. The medium-term prognosis on inflation suggests further alignment with the target, while growth is expected to pick up its momentum. Persistent high inflation reduces the purchasing power of consumers and adversely affects both consumption and investment demand. The overall implication of these factors for growth is negative. Therefore, price stability is essential for sustained growth. On the other hand, a growth slowdown – if it lingers beyond a point – may need policy support.

13. The Reserve Bank’s anti-inflationary monetary policy stance has been a crucial factor in bringing about a significant disinflation. Going forward, as food price shocks wane, headline inflation is likely to ease and realign with the target as per our projections. At present, it is necessary to draw on the flexibility provided by the neutral stance to wait for and monitor the incoming data for confirmation of the decline in inflation. The gains achieved so far in the broad direction of disinflation, notwithstanding the recent upticks, need to be preserved. At the same time, the growth trajectory and the evolving outlook also need to be monitored closely. At this critical juncture, prudence and practicality demand that we remain careful and sensitive to the dynamically evolving situation with all its complexities and ramifications. A status quo in monetary policy in this meeting of the MPC has thus become appropriate and essential.

Liquidity and Financial Market Conditions

14. System liquidity, as represented by the net position under the Liquidity Adjustment Facility (Net LAF), continued to remain in surplus during October-November²⁸ on account of higher government spending,²⁹ despite a significant increase in currency in circulation during the festive season and capital outflows.³⁰ Given these conditions, the Reserve Bank mainly conducted variable rate reverse repo (VRRR) operations to absorb surplus liquidity.³¹ To alleviate temporary liquidity tightness because of large GST outflows,³² however, fine-tuning variable rate repo (VRR) operations were conducted intermittently during October and November.³³ The two-way liquidity operations  of the Reserve Bank ensured close alignment of the inter-bank overnight rate with the policy repo rate.³⁴  Transmission to the credit market has been satisfactory.³⁵

15. Even as liquidity in the banking system remains adequate, systemic liquidity may tighten in the coming months due to tax outflows, increase in currency in circulation and volatility in capital flows. To ease the potential liquidity stress, it has now been decided to reduce the cash reserve ratio (CRR) of all banks to 4.0 per cent of net demand and time liabilities (NDTL) in two equal tranches of 25 bps each with effect from the fortnight beginning December 14, 2024 and December 28, 2024. This will restore the CRR to 4.0 per cent of NDTL, which was prevailing before the commencement of the policy tightening cycle in April 2022. This reduction in the CRR is consistent with the neutral policy stance and would release primary liquidity of about ₹ 1.16 lakh crore to the banking system.

16. Going forward, the Reserve Bank will continue to be nimble and proactive in its liquidity management operations to ensure that money market interest rates evolve in an orderly manner and the productive requirements of the economy are met.

17. During 2024-25 (April-November), the Indian rupee (INR) depreciated by 1.3 per cent largely due to pressure from strengthening US Dollar and selling pressure by foreign portfolio investors in October and November. Nevertheless, both the depreciation of the INR and its volatility was less as compared to its EME peers, reflecting India’s strong macroeconomic fundamentals and improvement in external sector outlook.³⁶ 

18. The Reserve Bank’s exchange rate policy has remained consistent over the years, and it is market-determined. Its central tenet is to maintain orderliness and stability, without compromising market efficiency. Foreign exchange reserves are deployed judiciously to mitigate undue volatility, maintain market confidence, anchor expectations and preserve overall financial stability. These interventions focus on smoothening excessive and disruptive volatility rather than targeting any specific exchange rate level or band. At the same time, our efforts to deepen and modernise the foreign exchange market have yielded significant results in terms of (i) widening access and participation; and (ii) ensuring efficient price discovery.

19. Our overall approach ensures that forex reserves act as shock absorbers, safeguarding the economy from external spillovers, while supporting competitive and orderly market conditions. The flexible or market determined exchange rate regime is not merely a tool for managing external shocks; it is an important element of our approach to macroeconomic and financial stability. By combining market discipline with prudent intervention, we have created a system that supports stability, resilience and growth.

Financial Stability

20. The financial parameters of banks and NBFCs continue to be strong.³⁷ The incoming data suggests that the gap between growth of credit and deposits of scheduled commercial banks (SCBs) has narrowed with deposits keeping pace with loan growth.³⁸

21. The Reserve Bank’s supervision of the financial sector and its entities continues to be vigilant and proactive. Incipient signs of stress, if any, either at the systemic or entity levels, are monitored closely and proactive action is initiated. The effort is always to resolve the issues non disruptively. Continuous engagement is held over several months with the regulated entities. Only in extreme cases where sufficient corrective action is not visible, the Reserve Bank resorts to imposition of business restrictions as a last resort in the interest of consumers and financial stability.

22. To address the issues of unclaimed deposits, inoperative accounts and frozen accounts due to pendency of KYC updation, banks have been advised³⁹  to take necessary steps urgently to bring down the number of such accounts and make the process hassle free. Further, banks have been advised to segregate the accounts of beneficiaries of various Central/ State Government schemes through direct benefit transfer (DBT) and facilitate uninterrupted credit and utilisation of DBT amounts, without inconveniencing such vulnerable segments of customers. Progress made by individual banks in this regard will be monitored by the Reserve Bank.

External Sector

23. India’s merchandise exports expanded at a 28-month high pace in October. Merchandise imports also increased for the seventh consecutive month.⁴⁰ Services exports sustained buoyancy and posted double-digit growth in Q2:2024-25 as well as in October 2024.⁴¹ The robust services exports, coupled with strong remittance receipts,⁴² are expected to keep the current account deficit (CAD) within sustainable levels during 2024-25.

24. On the external financing side, gross foreign direct investment (FDI) to India increased at a robust pace during the first half of the year. Net FDI, however, moderated during this period due to higher repatriations and rising outward FDI.⁴³ Foreign portfolio investment (FPI) inflows to EMEs have generally declined in October 2024.⁴⁴ Net FPI inflows to India stood at US$ 9.3 billion in 2024-25 so far (April-December 4), supported mainly by inflows in the debt segment. External commercial borrowings and non-resident deposits, on the other hand, witnessed higher net inflows compared to last year.⁴⁵ India’s external sector remains resilient, as reflected in various key indicators where India has been consistently performing well.⁴⁶

25. In order to attract more capital inflows, it has been decided to increase the interest rate ceilings on FCNR(B) deposits. Accordingly, effective from today, banks are permitted to raise fresh FCNR(B) deposits of 1 year to less than 3 years maturity at rates not exceeding the ceiling of overnight Alternative Reference Rate (ARR) plus 400 bps as against 250 bps at present. Similarly, for deposits of 3 to 5 years maturity, the ceiling has been increased to overnight ARR plus 500 bps as against 350 bps at present. This relaxation will be available till March 31, 2025.

Additional Measures

26. I shall now announce certain additional measures.

Expanding the reach of FX-Retail Platform through Linkages with Bharat Connect

27. The FX-Retail platform, which was launched in 2019, is now proposed to be linked with the Bharat Connect platform of NPCI. This would enable users to transact on the FX-Retail platform through mobile apps of banks and non-bank payment system providers. This will expand the reach of FX-Retail platform, enhance user experience and promote fairness and transparency in pricing with adequate safeguards.

Introduction of the Secured Overnight Rupee Rate (SORR) – a Benchmark based on the Secured Money Markets.

28. With a view to further develop the interest rate derivatives market in India and improve the credibility of interest rate benchmarks, the Reserve Bank proposes to introduce a new benchmark - the Secured Overnight Rupee Rate (SORR) - based on all secured money market transactions – overnight market repo as well as TREPS.

‘Connect 2 Regulate’ – An Initiative for Open Regulation

29. As part of the Reserve Bank’s consultative approach in framing regulations, a new programme, namely, ‘Connect 2 Regulate’ will be launched under the ongoing RBI@90 commemorative events. A dedicated section in the Reserve Bank’s website will be made available for stakeholders to share their ideas and inputs on specific topics.

Introduction of Podcast Facility as an Additional Medium of Communication

30. Over the years, the Reserve Bank has expanded its communication toolkit and techniques to enhance transparency and better connect with the people. In continuance of this endeavour, the Reserve Bank proposes to add ‘podcasts’ to its communication toolkit for wider dissemination of information.

Collateral-free Agriculture Loan – Enhancement of Limit

31. The limit for collateral-free agriculture loans was last revised in 2019. Taking into account the rise in agricultural input costs and overall inflation, it has been decided to increase the limit for collateral-free agriculture loans from ₹1.6 lakh to ₹2 lakh per borrower. This will further enhance credit availability for small and marginal farmers. 

Pre-sanctioned Credit Lines through UPI – Extending the Scope to Small Finance Banks

32. Credit line on UPI was launched in September 2023 and was made available through Scheduled Commercial Banks (SCBs). It has now been decided to permit Small Finance Banks also to extend pre-sanctioned credit lines through the UPI. This will further deepen financial inclusion and enhance formal credit, particularly for ‘new to credit’ customers.  

Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the Financial Sector – Setting up of a Committee

33. The financial sector landscape is witnessing rapid transformation, enabled by technologies such as AI, tokenisation, Cloud Computing, etc. In order to harness the benefits from these technologies, while addressing the associated risks such as algorithmic bias, explainability, data privacy, etc., a committee comprising of experts from diverse fields will be set up to recommend a Framework for Responsible and Ethical Enablement of AI (FREE-AI) in the financial sector.

AI Solutions to Identify Mule Bank Accounts – MuleHunter.AITM

34. As part of the Reserve Bank’s continued efforts to prevent and mitigate digital frauds,  an innovative AI / ML based model, namely, MuleHunter.AITM  has been developed by the Reserve Bank Innovation Hub (RBIH), Bengaluru. This will help the banks to deal with the issue of mule bank accounts expeditiously and reduce digital frauds.

Conclusion

35. Let me now conclude. The world today is characterised by intricate complexities and profound uncertainties. As a central bank, our job is that of an anchor of stability and confidence, which would ensure that the economy achieves sustained high growth.

36. Since the last policy, inflation has been on the upside, while there has been a moderation in growth. Accordingly, the MPC has adopted a prudent and cautious approach in this meeting to wait for better visibility on the growth and inflation outlook. At such a critical juncture, prudence, practicality and timing of decisions become even more critical. Our endeavour in the Reserve Bank has always been to implement timely and carefully calibrated measures to derive maximum impact. This will continue to be the guiding principle for all future actions also. As Mahatma Gandhi had said and I quote: “There is nothing that cannot be attained by patience and equanimity”. ⁴⁷         

37. In the last few years, we have traversed one of the most difficult periods in the history of the Indian economy, and perhaps, in the global economy also. It was a period of relentless turbulence and jolts. As a country, we can derive satisfaction that the Indian economy has not just navigated this period of trials successfully but also emerged stronger. As we strive together towards making India a developed economy, I recall what I had said in my statement of February 8, 2023 wherein I had quoted Netaji Subhas Chandra Bose: “……..never lose your faith in the destiny of India”.⁴⁸

Thank you. Namaskar.

(Puneet Pancholy)     
Chief General Manager

Press Release: 2024-2025/1647