On 9th October 2024, the Reserve Bank of India (RBI) Governor addressed the nation, delivering crucial insights into the current state of India’s economy and the decisions made during the 51st meeting of the Monetary Policy Committee (MPC). This meeting held great significance as it marked the inclusion of three new external members and highlighted the evolving dynamics of India’s inflation, growth, and liquidity management amid global and domestic challenges.
Here’s a detailed breakdown of the keynotes from the Governor’s speech.
1. Completion of 8 Years of the Flexible Inflation Targeting Framework
One of the central themes of the speech was the RBI’s Flexible Inflation Targeting Framework introduced in 2016. As it completed eight years, the Governor emphasized how this framework has been a cornerstone in stabilizing inflation in India. By maintaining a quantitatively defined inflation target of 4%, the framework helped bring price stability in the pre-COVID period and served as a critical tool to tackle the global economic volatility that followed the pandemic.
The framework has been lauded for its flexibility, allowing India to adjust its monetary policy stance in response to inflationary pressures without sacrificing growth. The Governor pointed out that it has matured significantly, enabling policymakers to manage inflation through various interest rate cycles.
2. Monetary Policy Committee (MPC) Decisions
The MPC met from the 7th to 9th of October 2024, and after assessing the macroeconomic conditions, it made the following key decisions:
- The policy repo rate remains unchanged at 6.5%.
- Standing Deposit Facility (SDF) rate stays at 6.25%.
- Marginal Standing Facility (MSF) rate and the Bank Rate are maintained at 6.75%.
The Governor highlighted that the MPC’s decision was made with 5 out of 6 members voting in favor of keeping the rates unchanged. Notably, the stance of monetary policy was shifted to neutral, focusing on a durable alignment of inflation with the target while continuing to support growth.
The neutral stance allows the RBI greater flexibility in managing inflation and growth as evolving macroeconomic conditions demand. This signals that while inflation remains a concern, the central bank is ready to adapt to any changes in the economic landscape.
3. Inflation Outlook
Inflation was a prominent focus in the Governor’s speech. He acknowledged that while headline inflation has been on a downward trajectory, its pace of decline has been slow and uneven. Several factors are contributing to this, including base effects and the lingering effects of food price volatility.
- Food inflation pressures could see easing later in the financial year due to strong kharif sowing, adequate buffer stocks, and favorable soil moisture conditions for the rabi season. However, adverse weather events continue to pose risks.
- Core inflation, which excludes food and fuel, appears to have bottomed out.
The Governor provided the following projections for CPI inflation in the coming quarters:
- Q2 FY 2024-25: 4.1%
- Q3 FY 2024-25: 4.8%
- Q4 FY 2024-25: 4.2%
- Q1 FY 2025-26: 4.3%
The RBI remains cautiously optimistic about inflation, but uncertainties such as geopolitical conflicts and volatile commodity prices pose upside risks to the inflation trajectory. The current rise in food and metal prices, as indicated by the FAO (Food and Agriculture Organization) and World Bank price indices, could also put upward pressure on inflation if sustained.
4. Growth Outlook
India’s real GDP growth was another major highlight. The Governor noted that private consumption and investment continue to act as the primary engines of growth. Additionally, rural demand is recovering, while urban demand remains strong, supported by robust services sector growth.
- Real GDP growth for FY 2024-25 is projected at 7.2%.
- Growth projections for the coming quarters are:
- Q2 FY 2024-25: 7%
- Q3 FY 2024-25: 7.4%
- Q4 FY 2024-25: 7.4%
- Q1 FY 2025-26: 7.3%
This strong growth outlook is supported by improving agricultural conditions, government capex expansion, and healthy corporate balance sheets. The Governor emphasized that India’s growth story remains intact with investment demand continuing to pick up momentum. Government expenditure is also expected to gather pace, further supporting growth in the coming quarters.
5. Global and Domestic Economic Conditions
Globally, while manufacturing is showing signs of slowdown, services continue to exhibit resilience. World trade is showing improvement, and inflation is softening across many economies due to lower energy prices.
On the domestic front, India’s economic activity remains steady. Agriculture, manufacturing, and services sectors are resilient, benefiting from above-normal monsoons and improved domestic demand. The PMI for manufacturing and PMI services indicate continued expansion in both sectors.
Despite a slight slowdown in core sector growth, private investment continues to gain steam, supported by expanding non-food bank credit and higher capacity utilization.
6. Liquidity and Financial Markets
The RBI is focused on managing liquidity conditions efficiently:
- Liquidity remained in surplus during August and September, with a brief period of deficit in late September due to tax-related outflows.
- The RBI remains nimble in its liquidity management operations, ensuring that money market interest rates evolve in an orderly manner.
On the external front, India’s foreign exchange reserves have crossed $700 billion, a testament to the resilience of India’s external sector.
7. External Sector and Foreign Inflows
India’s current account deficit (CAD) widened to 1.1% of GDP in Q1 FY 2024-25, driven by a higher trade deficit. However, services exports and remittances continue to support overall growth, keeping the CAD within sustainable levels.
- Foreign Portfolio Investment (FPI) flows turned around from net outflows of $4.2 billion in April-May to net inflows of $19.2 billion from June to October 2024.
- FDI flows remain strong, with both gross and net FDI improving.
8. Announcements and Policy Measures
Several important measures were announced:
- No foreclosure charges or prepayment penalties on loans to micro and small enterprises (MSEs). This widens the scope of consumer protection previously available to individual borrowers.
- The RBI will create a Reserve Bank Climate Risk Information System (RB CRIS) to address climate-related risks to the financial system.
- Enhancements to UPI include:
- Raising the UPI 123Pay transaction limit to ₹10,000.
- Increasing the UPI Lite wallet limit to ₹5,000.
- Introduction of a beneficiary account name lookup facility for RTGS and NEFT systems to reduce fraud and errors during fund transfers.
9. Financial Stability and NBFC Sector
The RBI Governor took a moment to discuss the financial health of banks and NBFCs. While the sector remains resilient, some NBFCs are showing signs of aggressive growth without adequate risk management frameworks. The Governor emphasized that these entities must follow sustainable business practices, particularly in terms of interest rates, fees, and loan targets.
NBFCs have been urged to self-correct, particularly in microfinance and housing finance, and avoid over-leveraging customers, as this could pose systemic risks in the future.
10. Concluding Remarks
In conclusion, the RBI Governor highlighted the strength of India’s economic fundamentals. Growth is well-poised, inflation is on a declining path, and the external sector continues to exhibit resilience with growing forex reserves and stable financial markets. The Governor reiterated that the MPC’s neutral stance will provide the RBI with greater flexibility to navigate future challenges while maintaining inflation alignment with the 4% target.
The Governor closed the speech with a quote from Mahatma Gandhi, emphasizing that when methods are sound, success is inevitable. The RBI remains committed to ensuring that inflation is brought under control without sacrificing the growth momentum that India has built over the years.
