The Reserve Bank of India (RBI) cut its key interest rate for the first time in nearly five years on February 7. The Monetary Policy Committee (MPC), which consists of three RBI and three external members, cut the repo rate by 25 basis points to 6.25% after having kept it unchanged for eleven straight policy meetings.
The MPC noted that though growth is expected to recover, it is much lower than the 8.2% in 2023-24 and inflation dynamics have opened space for rate easing, RBI Governor Sanjay Malhotra said in the first policy review since his appointment in December.
Here's the full text of Malhotra's speech:
The Monetary Policy Committee (MPC) met on 5th, 6th and 7th of this month. You are aware that the Governor’s Statement after the MPC meeting contains not only the resolution of the MPC with regard to the policy rate and stance but also other announcements and measures, which have a bearing on the monetary and regulatory policies. The MPC resolution is of course of interest to a large number of people from various walks of life, as it impacts the lives of virtually all citizens of the country. The resolution also provides the rationale and the thought process of the MPC, and is of relevance to businesses, economists, academicians and the finance world. Apart from these MPC related announcements, the Governor’s statement has become an important medium for the Reserve Bank to highlight its priorities on which it would like the regulated entities to focus their energies on. It is an opportunity to point out areas of concern and challenges for the stakeholders to address their attention to. It is an occasion for the Reserve Bank to articulate its views on critical areas of interest. I will continue with this practice of a detailed statement.
2. Before I come to the resolution of the MPC, allow me a moment to reflect on the experience of flexible inflation targeting (FIT) framework, introduced in the year 2016 and reviewed in 2021. I believe that it has served the Indian economy well over these years, including the challenging period since the pandemic. The average inflation has been lower post the introduction of FIT. Moreover, CPI inflation has mostly stayed aligned with the target, barring a few occasions of breaching the upper tolerance band since its inception. We will continue to improve the macroeconomic outcomes in the best interest of the economy using the flexibility embedded in the framework while responding to the evolving growth-inflation dynamics. Moreover, we will strive to further refine the building blocks of this framework by making advances in the use of new data, improving nowcasting and forecasting of key macroeconomic variables and developing more robust models.
3. On the regulatory front, I would like to mention, especially in the context of some of the proposed regulatory changes pertaining to liquidity coverage ratio (LCR), expected credit loss (ECL) framework for provisioning by banks, and the prudential norms governing projects under implementation, that we will continue to strengthen, rationalise and refine the prudential and conduct-related regulatory framework in the overall interest of the economy. The interest of the economy demands financial stability and consumer protection. Our mandate is to enhance both of them. At the same time, economic interest also warrants increasing efficiency, which too is our duty. We recognise that just like there are no free lunches, regulation to enhance stability and consumer protection too is not devoid of costs. There are trade-offs between stability and efficiency. We will keep this trade-off in mind while formulating regulations. It will be our attempt to strike the right balance, keeping in view the benefits and costs of each and every regulation. I also want to reassure all stakeholders that we will continue the consultative process in regulation-making. The suggestions of stakeholders are valuable and we will give serious consideration to them before taking any major decision. We will also ensure that the implementation of such regulations is smooth; we will give sufficient time for transition and where regulations have major implications, the implementation will be done in a phased manner.
4. The global economic backdrop remains challenging. The global economy is growing below the historical average even though high frequency indicators suggest resilience along with continued expansion in trade. Progress on global disinflation is stalling, hindered by services price inflation.
5. With receding expectations on the size and pace of rate cuts in the US, the US dollar has strengthened and bond yields have hardened. Emerging Market Economies (EMEs) have witnessed large capital outflows, leading to sharp depreciation of their currencies and tightening of financial conditions. Divergent trajectories of monetary policy across advanced economies, lingering geopolitical tensions and elevated trade and policy uncertainties have exacerbated financial market volatility. Such an uncertain global environment has posed difficult policy trade-offs for EMEs.
6. The Indian economy, though continuing to remain strong and resilient, also did not remain immune to these global headwinds, with the Indian Rupee coming under depreciation pressure in the recent months. At the Reserve Bank, we have been employing all tools at our disposal to face the multi-pronged challenges.
Decisions of the Monetary Policy Committee (MPC)
7. In this backdrop, the MPC, after a detailed assessment of the evolving macroeconomic and financial developments and the economic outlook, decided unanimously to reduce the policy repo rate by 25 basis points from 6.50 per cent to 6.25 per cent. Consequently, the standing deposit facility (SDF) rate shall be 6.00 per cent and the marginal standing facility (MSF) rate and the Bank Rate shall be 6.50 per cent. The MPC also decided unanimously to continue with the neutral stance and remain unambiguously focussed on a durable alignment of inflation with the target, while supporting growth.
8. I shall state the rationale for the decision in brief. The MPC noted that inflation has declined. Supported by a favourable outlook on food and continuing transmission of past monetary policy actions, it is expected to further moderate in 2025-26, gradually aligning with the target. The MPC also noted that though growth is expected to recover from the low of Q2 of 2024-25, it is much below that of last year. These growth-inflation dynamics open up policy space for the MPC to support growth, while remaining focussed on aligning inflation with the target. Accordingly, the MPC decided to reduce the policy repo rate by 25 basis points to 6.25 per cent.
9. At the same time, excessive volatility in global financial markets and continued uncertainties about global trade policies coupled with adverse weather events pose risks to the growth and inflation outlook. This calls for the MPC to remain watchful. Accordingly, it decided to continue with a neutral stance. This will provide MPC the flexibility to respond to the evolving macroeconomic environment.
Assessment of Growth and Inflation
Growth
10. As per the first advance estimates, real GDP growth for the current year is estimated at 6.4 per cent, a softer expansion after a robust 8.2 per cent growth last year. Going forward, economic activity is expected to improve in the coming year. Agricultural activity remains upbeat on the back of healthy reservoir levels and bright rabi prospects. Manufacturing activity is expected to recover gradually in the second half of this year and beyond. Early corporate results for Q3 indicate a mild recovery in the manufacturing sector. Mining and electricity are rebounding from monsoon related disruptions in Q2. Business expectations remain upbeat, as evidenced from the PMI manufacturing future output index. Services sector activity continues to be resilient. PMI services, however, declined from its recent peak.12
11. On the demand side, rural demand continues to be on an uptrend, while urban consumption remains subdued with high frequency indicators providing mixed signals. Going forward, improving employment conditions, tax relief in the Union Budget, and moderating inflation, together with healthy agricultural activity bode well for household consumption. Government consumption expenditure is expected to remain modest. Higher capacity utilisation levels, robust business expectations and government policy support augur well for growth in fixed investment. Continued buoyancy in services exports will support growth. Global headwinds, however, continue to impart uncertainty to the outlook and pose downward risks. Taking all these factors into consideration, real GDP growth for the next year is projected at 6.7 per cent with Q1 at 6.7 per cent; Q2 at 7.0 per cent; Q3 at 6.5 per cent; and Q4 at 6.5 per cent. The risks are evenly balanced.
Inflation
12. Headline inflation, after moving above the upper tolerance band in October, has since registered a sequential moderation in November and December. Going ahead, food inflation pressures, absent any supply side shocks, should see a significant softening due to good kharif production, winter-easing in vegetable prices and favourable rabi crop prospects. Core inflation is expected to rise but remain moderate. Rising uncertainty in global financial markets coupled with continuing volatility in energy prices and adverse weather events presents upside risks to the inflation trajectory. Taking all these factors into consideration, CPI inflation for the current financial year is projected at 4.8 per cent with Q4 at 4.4 per cent. Assuming a normal monsoon, CPI inflation for the financial year 2025-26 is projected at 4.2 per cent with Q1 at 4.5 per cent; Q2 at 4.0 per cent; Q3 at 3.8 per cent; and Q4 at 4.2 per cent. The risks are evenly balanced.
External Sector
13. Coming to the external sector, India’s current account deficit (CAD) moderated from 1.3 per cent of GDP in Q2 of last year to 1.2 per cent in Q2 of this year. According to the World Bank, India, with an estimated inflow of 129.1 billion US dollars, continues to remain the largest recipient of remittances globally in 2024. The CAD for this year is expected to remain well within the sustainable level. As on 31st January this year, India’s foreign exchange reserves stood at 630.6 billion US dollars, providing an import cover of over 10 months. Overall, India’s external sector remains resilient as key indicators stay robust.
14. I would like to mention here that the Reserve Bank’s exchange rate policy has remained consistent over the years. Our stated objective is to maintain orderliness and stability, without compromising market efficiency. Accordingly, our interventions in the forex market focus on smoothening excessive and disruptive volatility rather than targeting any specific exchange rate level or band. The exchange rate of the Indian Rupee is determined by market forces.
Liquidity and Financial Market Conditions
15. After remaining in surplus from July to November 2024, system liquidity – as measured by the average net position under the liquidity adjustment facility (LAF) – turned into deficit during December 2024 and January 2025. The drainage of liquidity is mainly attributed to advance tax payments in December 2024, capital outflows, forex operations and a significant pickup in currency in circulation in January this year.
16. It has been observed that some banks are reluctant to onlend in the uncollateratised call money market; instead, they are passively parking funds with the Reserve Bank. We urge the banks to actively trade among themselves in the uncollateratised call money market to make it deeper and vibrant for better signal extraction from the weighted average call money rate (WACR).
17. The Reserve Bank is committed to provide sufficient system liquidity. We have taken a number of steps in this regard. We will continue to monitor the evolving liquidity and financial market conditions and proactively take appropriate measures to ensure orderly liquidity conditions.
Financial Stability
18. The system-level financial parameters for Scheduled Commercial Banks (SCBs) continue to be healthy. The Credit Deposit Ratio (CD ratio) for the banking system at the end of January 2025 was at 80.8 per cent, broadly similar to that on 30th September, 2024. Bank liquidity buffers are sufficient. Though the net interest margin (NIM) moderated, return on assets (RoA) and return on equity (RoE) are robust. The system-level parameters for NBFCs too are healthy.
19. The Reserve Bank has been observing Financial Literacy Week annually since 2016 to enhance financial education. Last year, the campaign focused on empowering young adults. This year, recognising the critical and multifaceted role of women in society, the campaign will emphasise on women's role in financial decision-making and household budgeting. I urge all banks to actively participate in the campaign on the theme "Financial Literacy: Women’s Prosperity", starting from 24th of this month.
Additional Measures
20. I shall now announce certain additional measures. Necessary directions and circulars for their implementation shall be issued separately.
Digital security
21. First, the rapid digitalisation of financial services has brought convenience and efficiency but has also increased exposure to cyber threats and digital risks, which are getting sophisticated day by day. The surge in digital frauds is a matter of concern, warranting action by all stakeholders.
22. The Reserve Bank has been taking various measures to enhance digital security in the banking and payments system. Introduction of Additional Factor of Authentication (AFA) for domestic digital payments is one such measure. It is proposed to extend AFA to online international digital payments made to offshore merchants, who are enabled for such authentication.
23. Second, the Reserve Bank shall implement the 'bank.in' exclusive Internet Domain for Indian banks. Registration of this domain name will commence from April this year. This will help avoid banking frauds. This will be followed by the ‘fin.in’ domain for the financial sector.
24. Banks and NBFCs must continuously improve preventive and detective controls to mitigate cyber risks. They must develop robust incident response and recovery mechanisms, reinforced through periodic testing, for operational resilience.
Introduction of forward contracts in Government Securities
25. Third, over the past few years, we have expanded the suite of interest rate derivative products available to market participants to manage their interest rate risks. We shall now include forward contracts in Government securities to this suite. This would facilitate long-term investors such as insurance funds to manage their interest rate risk across interest rate cycles. It will also enable efficient pricing of derivatives that use Government securities as underlying instruments.
Access of SEBI-registered non-bank brokers to NDS-OM
26. Fourth, to enhance access of retail investors to government securities, the Reserve Bank shall expand the access of NDS-OM, the electronic trading platform for secondary market transactions in government securities, to non-bank brokers registered with SEBI.
Review of trading and settlement timings across various market segments
27. Fifth, in view of the various developments in financial markets and market infrastructure over the past few years, we shall set up a working group with representation from various stakeholders to undertake a comprehensive review of trading and settlement timing of markets regulated by the Reserve Bank. The Group shall submit its report by 30th April of this year.
Concluding Remarks
28. To conclude, considering the existing growth-inflation dynamics, the MPC, while continuing with the neutral stance, felt that a less restrictive monetary policy is more appropriate at the current juncture. The MPC will take a decision in each of its future meetings based on a fresh assessment of the macroeconomic outlook.
29. We are committed to conduct monetary policy and take such measures, as appropriate, which are timely, carefully calibrated and clearly communicated, to facilitate conducive macroeconomic conditions that reinforce price stability, sustained economic growth and financial stability.
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