RBI’s Bimonthly Monetary Policy – Highlights and Key takeaways

Following are the highlights of the bi-monthly monetary policy announced by the Reserve Bank of India Governor Sanjay Malhotra on 7th February 2025:

• Rate cut of 25 bps to 6.25% to boost growth.
• GDP expected to grow at 6.7% in 2025-26, driven by consumption & investment.
• Inflation projected at 4.2% for 2025-26, barring major shocks.
• Global risks (geopolitics, trade policy, financial volatility) remain key concerns.
• Neutral stance maintained to allow flexibility in response to changing conditions.
• Other Adjustments: Standing Deposit Facility (SDF) rate: 6.00%
• Marginal Standing Facility (MSF) rate & Bank Rate: 6.50%
• India’s Economic Growth (2024-25):GDP Growth Estimate: 6.4% YoY, driven by private consumption recovery; (Quarterly estimates: Q1 - 6.7%, Q2 - 7.0%, Q3 & Q4 - 6.5% each) -

  According to the First Advance Estimates (FAE), India’s real GDP growth for 2024-25 is projected at 6.4%. This growth is fueled by:

  • Recovery in private consumption
  • Strong performance in the services sector
  • Gradual recovery in agriculture
  • Improving industrial growth

  For 2025-26, the real GDP growth is projected at 6.7%, with quarterly estimates as follows:

  • Q1 (April-June 2025) – 6.7%
  • Q2 (July-September 2025) – 7.0%
  • Q3 (October-December 2025) – 6.5%
  • Q4 (January-March 2026) – 6.5%
• Headline Inflation: Declined from 6.2% in Oct 2024 to lower levels in Nov-Dec 2024 due to falling food inflation. This reduction was driven by:
  • Lower food inflation as vegetable prices declined
  • Stable core inflation across goods and services
  • Deflation in the fuel sector
• Projections for 2024-25:CPI Inflation: 4.8% (Q4: 4.4%); Projections for 2025-26:CPI Inflation: 4.2%.
• Aim to smoothen excessive volatility in FX mkt; we don't target a certain level for rupee's exchange rate
• FX policy consistent over the years, will continue
• Bank liquidity buffers sufficient; banks' credit-deposit ratio at end Jan was 80.8%
• To extend two-factor authentication to international online payments
• To introduce 'bank.in' exclusive domain name; Banks to register for exclusive bank.in domain from April
• The minutes of the MPC’s meeting will be published on February 21, 2025.
• The next meeting of the MPC is scheduled during April 7 to 9, 2025.

Rationale for Monetary Policy Decisions

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. Economic Growth Below Last Year’s Levels  -The MPC also noted that though growth is expected to recover from the low of Q2:2024-25, 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 unanimously voted to reduce the policy repo rate by 25 basis points to 6.25 per cent.

At the same time, Global Uncertainties Demand Caution - 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, the MPC unanimously voted to continue with a neutral stance. This will provide MPC the flexibility to respond to the evolving macroeconomic environment.

Important announcements by RBI Governor:

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.

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

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.

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).

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

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.

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 - Necessary directions and circulars for their implementation shall be issued separately.

Digital security

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.

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.

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.

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

 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

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

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.

Impact of Monetary Policy:

Monetary policy impacts the money supply in an economy, which influences interest rates and the inflation rate. It also impacts business expansion, net exports, employment, the cost of debt, and the relative cost of consumption versus saving—all of which directly or indirectly impact aggregate demand. Monetary policy affects growth in the overall demand for goods and services relative to growth in the economy's productive capacity and thus plays a key role in stabilizing inflation and the economy more broadly. Central banks use monetary policy to influence key variables like aggregate demand, real output, the price level, and interest rates.

INDUSTRY Reactions:

Industry reactions are very positive :

-In respect of the introduction of an exclusive ‘fin.in’ domain for financial institutions and the extension of Additional Factor Authentication (AFA) to international digital payments with ‘bank.in’ domain are critical steps toward securing the digital ecosystem.

-Repo rate cut to benefit MSME sector

- It is a positive move for homebuyers and a much-needed relief, especially in premium markets like Delhi-NCR. Much needed boost for Real Sector.

- Overall, this is a well-balanced policy that meets market expectations for the third consecutive time.  While there have been signs of liquidity injection, the ease in policy provides a stable framework for businesses across sectors. The policy has direct impact on liquidity in the banking system, influencing how easily NBFCs can raise capital for lending.

- Rate adjustment highlights the RBI’s commitment to balancing growth with fiscal stability

Source; rbi.org.in, Money Control, News 18, Hindu Business line.