Summary of RBI Governor Sanjay Malhotra’s Monetary Policy Statement
The Reserve Bank of India (RBI) Governor, Sanjay Malhotra, delivered the Monetary Policy Committee (MPC) statement, outlining key decisions, economic assessments, and future policy directions. The statement covers a wide range of topics, including the current global and domestic economic environment, inflation and growth projections, liquidity management, financial stability, and regulatory measures. Below is a detailed summary of the key points discussed in the statement.
1. Introduction and Context
The RBI Governor began by emphasizing the importance of the MPC’s resolution, which impacts various stakeholders, including businesses, economists, academicians, and the general public. The MPC’s decisions are based on a forward-looking approach, aiming to balance growth and inflation while ensuring financial stability.
The Governor also highlighted the flexible inflation targeting framework, introduced in 2016 and reviewed in 2021. This framework has been instrumental in maintaining macroeconomic stability, especially during challenging periods like the COVID-19 pandemic. The average inflation has been lower post the introduction of this framework, with the Consumer Price Index (CPI) mostly aligned with the target, barring a few instances of breaching the upper tolerance band.
2. Global Economic Environment
The global economic backdrop remains challenging, with growth below historical averages. Despite some resilience in high-frequency indicators, global disinflation progress has stalled due to persistent services price inflation. The US dollar has strengthened, bond yields have hardened, and emerging market economies have witnessed significant capital outflows, leading to currency depreciation and tighter financial conditions.
Geopolitical tensions, trade uncertainties, and divergent monetary policies across advanced economies have exacerbated financial market volatility. These global headwinds have also impacted India, with the Indian rupee facing depreciation pressures. However, the RBI has been employing various tools to manage these challenges effectively.
3. Monetary Policy Committee Decisions
The MPC met over three days and unanimously decided to reduce the policy repo rate by 25 basis points (bps) from 6.5% to 6.25%. Consequently, the Standing Deposit Facility (SDF) rate was set at 6.0%, and the Marginal Standing Facility (MSF) rate and bank rate were set at 6.5%.
The MPC also decided to maintain a neutral stance, focusing on aligning inflation with the target while supporting growth. The rationale for the rate cut was based on the declining inflation trajectory, supported by favorable food inflation outlook and the transmission of past monetary policy actions. The MPC expects inflation to moderate further in 2025-26, gradually aligning with the target.
However, the MPC remains cautious due to global financial market volatility, uncertain trade policies, and adverse weather events, which pose risks to both growth and inflation. The neutral stance provides the MPC with the flexibility to respond to evolving macroeconomic conditions.
4. Growth and Inflation Assessment
Growth:
- Current Year (2024-25): Real GDP growth is estimated at 6.4%, a slowdown from the robust 8.2% growth in the previous year. This moderation is attributed to global headwinds and domestic factors.
- Outlook for 2025-26: The RBI projects real GDP growth at 6.7%, with quarterly growth rates of 6.7% (Q1), 7% (Q2), 6.5% (Q3), and 6.5% (Q4). The risks to growth are evenly balanced.
Key drivers of growth include:
- Agriculture: Healthy reservoir levels and bright rabi prospects are expected to support agricultural activity.
- Manufacturing: A gradual recovery is anticipated in the second half of the year, supported by early corporate results and improved business expectations.
- Services: The sector remains resilient, although the Purchasing Managers’ Index (PMI) for services has declined from its recent peak.
- Consumption: Rural demand is on an uptrend, while urban consumption remains subdued. Improving employment conditions, tax relief in the Union Budget, and moderating inflation are expected to boost household consumption.
- Investment: Higher capacity utilization, robust business expectations, and government policy support are likely to drive fixed investment growth.
Inflation:
- Current Year (2024-25): Headline inflation has moderated sequentially, standing at 5.2% in December 2023. The RBI projects CPI inflation at 4.8% for the year, with Q4 inflation at 4.4%.
- Outlook for 2025-26: CPI inflation is projected at 4.2%, with quarterly inflation rates of 4.5% (Q1), 4% (Q2), 3.8% (Q3), and 4.2% (Q4). The risks to inflation are evenly balanced.
Food inflation is expected to soften due to good kharif production, easing vegetable prices, and favorable rabi crop prospects. Core inflation is expected to rise but remain moderate. However, upside risks to inflation persist due to global financial market uncertainty, energy price volatility, and adverse weather events.
5. External Sector
India’s external sector remains resilient, with key indicators staying robust. The current account deficit (CAD) moderated from 1.3% of GDP in Q2 of 2023-24 to 1.2% in Q2 of 2024-25. India continues to be the largest recipient of remittances globally, with an estimated inflow of $19.1 billion in 2024.
As of January 31, 2025, India’s foreign exchange reserves stood at over $630 billion, providing an import cover of more than 10 months. The RBI’s exchange rate policy remains consistent, focusing on maintaining orderliness and stability in the forex market without targeting any specific exchange rate level.
6. Liquidity and Financial Market Conditions
System liquidity, which was in surplus from July to November 2024, turned into a deficit in December 2024 and January 2025 due to advanced tax payments, capital outflows, and increased currency in circulation. The RBI has taken several steps to ensure sufficient system liquidity, including proactive measures to manage both transient and durable liquidity.
The Governor urged banks to actively participate in the uncollateralized call money market to make it deeper and more vibrant. The RBI remains committed to monitoring liquidity conditions and taking appropriate measures to ensure orderly market functioning.
7. Financial Stability
The financial system remains healthy, with robust credit growth and strong liquidity buffers. The credit-deposit ratio for the banking system stood at 80.8% at the end of January 2025, broadly similar to the previous quarter. Non-Banking Financial Companies (NBFCs) also continue to exhibit healthy financial parameters.
The RBI has been observing Financial Literacy Week annually since 2016 to enhance financial education. This year’s campaign focuses on empowering women in financial decision-making and household budgeting, recognizing their critical role in society.
8. Regulatory Measures and Digital Security
The RBI announced several regulatory measures to enhance financial stability and digital security:
- Digital Security: The RBI is extending additional authentication factors to online international digital payments to mitigate cyber risks. The introduction of the .bank.in domain for Indian banks and .fin.in for the financial sector aims to prevent banking frauds.
- Interest Rate Derivatives: The RBI will introduce forward contracts in government securities to help long-term investors manage interest rate risks.
- Retail Access to Government Securities: The RBI is expanding access to the NDS-OM platform for retail investors, allowing non-bank brokers registered with SEBI to participate in government securities trading.
- Market Timings Review: A working group will review the trading and settlement timings of markets regulated by the RBI to ensure efficiency and alignment.
9. Conclusion
The RBI Governor concluded by reiterating the MPC’s commitment to maintaining price stability, supporting sustained economic growth, and ensuring financial stability. The MPC will continue to assess the macroeconomic outlook in each meeting and take timely, calibrated measures to address evolving challenges.
The reduction in the repo rate and the neutral stance reflect the RBI’s cautious approach in a volatile global environment. The focus remains on balancing growth and inflation while ensuring that the financial system remains resilient and capable of supporting the economy’s needs.
Key Takeaways:
- Repo Rate Cut: The MPC reduced the repo rate by 25 bps to 6.25%, signaling a shift towards a less restrictive monetary policy.
- Neutral Stance: The MPC maintained a neutral stance, providing flexibility to respond to evolving macroeconomic conditions.
- Growth Projections: Real GDP growth is projected at 6.7% for 2025-26, with risks evenly balanced.
- Inflation Outlook: CPI inflation is expected to moderate to 4.2% in 2025-26, with risks evenly balanced.
- Liquidity Management: The RBI is committed to ensuring sufficient system liquidity and has taken proactive measures to address liquidity deficits.
- Financial Stability: The financial system remains healthy, with robust credit growth and strong liquidity buffers.
- Regulatory Measures: The RBI announced several measures to enhance digital security, improve market efficiency, and expand retail access to government securities.
Overall, the RBI’s monetary policy statement reflects a balanced approach, aiming to support growth while maintaining price stability and financial resilience in a challenging global environment.