This was the 50th meeting of the Monetary Policy Committee (MPC) since its inception in September 2016.1 The flexible inflation targeting (FIT) framework will soon complete eight years of its functioning. The framework has worked well in maintaining macroeconomic stability even during times of extreme stress. Its embedded flexibility has withstood the pandemic-related stress, the spillovers from the war in Ukraine and the continuing geopolitical crisis. Today, while India’s growth remains strong, inflation is broadly on a declining trajectory. Strong macroeconomic fundamentals have led to greater confidence in India’s prospects. Decisions and Deliberations of the Monetary Policy Committee (MPC) 2. The Monetary Policy Committee (MPC) met on 6th, 7th and 8th August 2024. After a detailed assessment of the evolving macroeconomic and financial conditions 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 by a majority of 4 out of 6 members to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth. 3. I shall now briefly set out the rationale for these decisions. Headline inflation, after remaining steady at 4.8 per cent during April and May 2024, increased to 5.1 per cent in June 2024, primarily driven by the food component, which remains stubborn.2 Core inflation (CPI excluding food and fuel) moderated, while the fuel group remained in deflation.3 The expected moderation in headline inflation during the second quarter of 2024-25 on account of favourable base effects is likely to reverse in the third quarter. Domestic growth, however, is holding up well on the back of steady urban consumption and improving rural consumption, coupled with strong investment demand. 4. Amidst this confluence of factors, the MPC judged that it is important for monetary policy to stay the course while maintaining a close vigil on the inflation trajectory and the risks thereof. Resilient and steady growth in GDP enables monetary policy to focus unambiguously on inflation. It must continue to be disinflationary and resolute in its commitment to aligning inflation to the target of 4.0 per cent on a durable basis. Accordingly, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent in this meeting. The commitment of monetary policy to ensure price stability would strengthen the foundations for a sustained period of high growth. Hence, the MPC reiterated the need to continue with the disinflationary stance of withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth. Assessment of Growth and Inflation Global Growth 5. Global economic outlook exhibits steady though uneven expansion.4 Manufacturing is indicating slowdown, while services activity is holding up.5 Notwithstanding sticky services prices, inflation is receding grudgingly across major economies. With varying outlook for growth and inflation across countries, monetary policy is showing signs of divergence across jurisdictions. Several central banks are cautiously moving towards policy pivots through forward guidance and rate cuts; at the same time, there has been tightening by a few central banks.6 Global financial markets are exhibiting volatility. Bond yields and the dollar index have softened since the last meeting. 6. While the near-term outlook looks positive, there are significant challenges to medium-term global growth outlook. Demographic shifts, climate change, geopolitical tensions and fragmentations, rising public debt and new technologies, such as artificial intelligence, pose new sets of challenges. A coherent policy approach in which monetary policy is complemented by other policies to manage the policy trade-offs will be crucial to deal with such multiple challenges. Domestic Growth 7. Domestic economic activity continues to be resilient. On the supply side, steady progress in south-west monsoon,7 higher cumulative kharif sowing,8 and improving reservoir levels9 augur well for the kharif output. The likelihood of La Niña conditions developing during the second half of the monsoon season is likely to have a bearing on agricultural production in 2024-25.10 8. Manufacturing activity continues to gain ground on the back of improving domestic demand. The index of industrial production (IIP) growth accelerated in May 2024. Purchasing managers’ index (PMI) for manufacturing at 58.1 in July remained elevated. Services sector maintained buoyancy as evidenced by the available high frequency indicators.11 PMI services stood strong at 60.3 in July 2024, and is above 60 for seven consecutive months, indicating robust expansion. 9. On the demand side, household consumption is supported by a turnaround in rural demand12 and steady discretionary spending in urban areas.13 Fixed investment activity remained buoyant,14 amid government’s continued thrust on capex15 and other policy support.16 Private corporate investment is gaining steam17 on the back of expansion in bank credit.18 Merchandise exports expanded in June, although at a slower pace. Expansion in non-oil-non-gold imports accelerated reflecting resilience of domestic demand.19 Services exports recorded double digit growth in May 2024 before moderating in June.20 10. Looking ahead, improved agricultural activity brightens the prospects of rural consumption, while sustained buoyancy in services activity would support urban consumption. The healthy balance sheets of banks and corporates; thrust on capex by the government; and visible signs of pick up in private investment would drive fixed investment activity. Improving prospects of global trade are expected to aid external demand.21 The spillovers from protracted geopolitical tensions, volatility in international financial markets and geoeconomic fragmentation, however, pose risks on the downside. Taking all these factors into consideration, real GDP growth for 2024-25 is projected at 7.2 per cent, with Q1 at 7.1 per cent; Q2 at 7.2 per cent; Q3 at 7.3 per cent; and Q4 at 7.2 per cent. Real GDP growth for Q1:2025-26 is projected at 7.2 per cent. The risks are evenly balanced. It may be seen that we have slightly moderated the growth projection for Q1 of the current year in relation to the June 2024 projection. This is primarily due to updated information on certain high frequency indicators which show lower than anticipated corporate profitability, general government expenditure and core industries output.22 Inflation 11. Headline CPI inflation edged up to 5.1 per cent in June 2024 due to higher-than-expected food inflation. Fuel remained in deflation for the tenth consecutive month. Core inflation moderated to a historic low in May and June.23 12. Food inflation, with a weight of around 46 per cent in the CPI basket, contributed to more than 75 per cent of headline inflation in May and June.24 Vegetable prices increased sharply and contributed about 35 per cent to inflation in June.25 High inflation pressures persisted across other major food items also.26 On the other hand, the softening in core inflation continues to be broad-based, with core services inflation touching a new low in the current CPI series during May-June 2024.27 13. The high food price momentum is likely to have continued in July.28 Large favourable base effects may, however, push headline inflation downwards in July.29 The impact of the revision in milk prices30 and mobile tariffs needs to be watched.31 14. A degree of relief in food inflation is expected from the pick-up in the south-west monsoon and healthy progress in sowing. Buffer stocks of cereals continue to be above the norms. Global food prices showed signs of easing in July, after registering increases since March 2024.32 Assuming a normal monsoon, and taking into account the 4.9 per cent inflation print in Q1, CPI inflation for 2024-25 is projected at 4.5 per cent, with Q2 at 4.4 per cent; Q3 at 4.7 per cent; and Q4 at 4.3 per cent.33 CPI inflation for Q1:2025-26 is projected at 4.4 per cent. The risks are evenly balanced. What do these Inflation and Growth Conditions mean for Monetary Policy? 15. As I stated earlier, continuing food price shocks slowed the process of disinflation in Q1:2024-25. There is also considerable divergence between headline and core inflation.34 This has brought to the fore the issue of how much importance should the MPC give to food inflation. Let me dwell upon this in some detail. 16. First and foremost is the fact that our target is the headline inflation wherein food inflation has a weight of about 46 per cent. With this high share of food in the consumption basket, food inflation pressures cannot be ignored. Further, the public at large understands inflation more in terms of food inflation than the other components of headline inflation. Therefore, we cannot and should not become complacent merely because core inflation has fallen considerably. 17. Second and equally important is the reality that high food inflation adversely affects household inflation expectations, which have a significant impact on future trajectory of inflation. Household inflation expectations, after witnessing a moderating trend between May 2022 and September 2023, have edged up on the back of high food inflation since November 2023.35 Persistently high food inflation and unanchored inflation expectations – if they materialise – could lead to spillovers to core inflation through pick-up in wages on cost-of-living considerations. This, in turn, could be passed on by firms in the form of higher prices for services as well as goods, especially in a scenario of strong aggregate demand. Third, these behavioural changes can then result in overall inflation becoming sticky, even after food inflation recedes. 18. The MPC may look through high food inflation if it is transitory; but in an environment of persisting high food inflation, as we are experiencing now, the MPC cannot afford to do so. It has to remain vigilant to prevent spillovers or second round effects from persistent food inflation and preserve the gains made so far in monetary policy credibility. Liquidity and Financial Market Conditions 19. System liquidity transited from deficit in June to surplus conditions in July.36 In tune with the changing liquidity conditions, the Reserve Bank conducted two-way operations under the LAF37 to ensure that the inter-bank overnight rate remained closely aligned to the policy repo rate.38 20. Mirroring the liquidity dynamics, the weighted average call rate (WACR), on an average, remained close to the middle of the LAF corridor.39 Across the term money market segment, the yields on certificates of deposit (CDs) and 3-month treasury bills (T-bills) eased, while the yields on commercial papers (CPs) remained stable.40 The 10-year G-Sec yield softened in June-July and in August so far.41 The term premium has remained steady in recent months.42 Transmission in the credit market remains ongoing.43 21. Going forward, the Reserve Bank will continue to be nimble and flexible in its liquidity management operations keeping in view the evolving liquidity conditions to ensure that money market interest rates evolve in an orderly manner. 22. During 2024-25 (up to August 7), the Indian rupee (INR) remained largely range-bound.44 The lower volatility of the INR bears testimony to India’s macroeconomic and financial stability, and an improving external sector outlook. 23. In the last few days, global financial markets have seen turmoil on concerns of growth slowdown in a major economy, flare up in geopolitical tensions in the Middle East and the unwinding of the carry trade. These developments have implications for emerging market economies. In this context, it would be important for market participants to keep in mind the strength of India’s macroeconomic fundamentals, which remain robust. India has built strong buffers that impart resilience to the domestic economy from such global spillovers. The Reserve Bank remains committed to ensure orderly evolution of financial markets in its regulatory domain. Financial Stability 24. The Indian financial system remains resilient and is gaining strength from broader macroeconomic stability. Its well-capitalised and unclogged balance sheet is reflective of higher risk absorption capacity.45 The NBFC sector and the Urban Cooperative Banks also continue to show improvements.46 25. Even in such stable financial sector conditions, the emphasis cannot shift away from proactive identification of potential risks and challenges, if any. In the current context, there are four issues which I would like to highlight. First, it is observed that alternative investment avenues are becoming more attractive to retail customers and banks are facing challenges on the funding front with bank deposits trailing loan growth. As a result, banks are taking greater recourse to short-term non-retail deposits and other instruments of liability to meet the incremental credit demand. This, as I emphasised elsewhere, may potentially expose the banking system to structural liquidity issues. Banks may, therefore, focus more on mobilisation of household financial savings through innovative products and service offerings and by leveraging fully on their vast branch network. 26. Second, it is observed that the sectors in which pre-emptive regulatory measures were announced by the Reserve Bank in November last year have shown moderation in credit growth.47 However, certain segments of personal loans continue to witness high growth.48 Excess leverage through retail loans, mostly for consumption purposes, needs careful monitoring from macro-prudential point of view. It calls for careful assessment and calibration of underwriting standards, as may be required, as well as post-sanction monitoring of such loans. 27. The third issue that is attracting our attention is home equity loans, or top-up housing loans as they are called in India, which have been growing at a brisk pace. Banks and NBFCs have also been offering top-up loans on other collateralised loans like gold loans. It is noticed that the regulatory prescriptions relating to loan to value (LTV) ratio, risk weights and monitoring of end use of funds are not being strictly adhered to by certain entities. I repeat certain entities. Such practices may lead to loaned funds being deployed in unproductive segments or for speculative purposes. Banks and NBFCs would, therefore, be well-advised to review such practices and take remedial action. 28. Fourth, recently there was an unprecedented IT outage globally, which affected businesses in many countries. The outage demonstrated how a minor technical change, if it goes haywire, can wreak havoc on a global scale. It also showed the fast-growing dependence on big-techs and third-party technology solution providers. In this background, it is necessary that banks and financial institutions build appropriate risk management frameworks in their IT, Cyber security and third-party outsourcing arrangements to maintain operational resilience. The Reserve Bank has time and again emphasised the importance of robust business continuity plans (BCP) to deal with such incidents. External Sector 29. India’s current account deficit (CAD) moderated to 0.7 per cent of GDP in 2023-24 from 2.0 per cent of GDP in 2022-23 due to a lower trade deficit and robust services and remittances receipts. In Q1:2024-25, merchandise trade deficit widened as imports grew faster than exports. Buoyancy in services exports49 and strong remittance receipts are expected to keep CAD within sustainable level in Q1:2024-25. We expect CAD to remain eminently manageable during the current financial year. 30. On the external financing side, foreign portfolio investors turned net buyers in the domestic market from June 2024 with net inflows of US$ 9.7 billion during June-August (till August 6) after witnessing outflows of US$ 4.2 billion in April and May. Foreign direct investment (FDI) flows picked up in 2024-25 as gross FDI rose by more than 20 per cent during April-May 2024, while net FDI flows doubled during this period compared to the corresponding period of the previous year.50 External commercial borrowings moderated during April-June 2024-25, while non-resident deposits recorded higher net inflows during April-May compared to the previous year.51 India’s foreign exchange reserves reached a historical high of US$ 675 billion as of August 2, 2024.52 Overall, India’s external sector remains resilient as key indicators continue to improve.53 We remain confident of meeting our external financing requirements comfortably. Additional Measures 31. I shall now announce certain additional measures. Public Repository of Digital Lending Apps 32. The Reserve Bank has taken several measures54 for the orderly development of the digital lending ecosystem in India. As a further measure in this direction and to address the problems arising from unauthorised digital lending apps (DLAs), the Reserve Bank proposes to create a public repository of DLAs deployed by its regulated entities. The regulated entities (REs) will report and update information about their DLAs in this repository. This measure will help the consumers to identify the unauthorised lending apps. Frequency of Reporting of Credit Information to Credit Information Companies 33. The availability of accurate credit information is vital for both lenders and borrowers. At present, lenders are required to report credit information to credit information companies (CICs) on a monthly basis or at such shorter intervals as may be agreed between the lenders and the CICs. It is proposed to increase the frequency of reporting of credit information to a fortnightly basis or at shorter intervals. Consequently, borrowers will benefit from faster updation of their credit information, especially when they repay their loans. The lenders, on their part, will be able to make better risk assessment of borrowers. Enhancing Transaction Limit for Tax Payments through UPI 34. Currently, the transaction limit for UPI is ₹1 lakh except for certain category of payments which have higher transaction limits. It has now been decided to enhance the limit for tax payments through UPI from ₹1 lakh to ₹5 lakh per transaction. This will further ease tax payments by consumers through UPI. Introduction of ‘Delegated Payments’ through UPI 35. It is proposed to introduce a facility of "Delegated Payments" in UPI. This would enable an individual (primary user) to allow another individual (secondary user) to make UPI transactions up to a limit from the primary user’s bank account without the need for the secondary user to have a separate bank account linked to UPI. This will further deepen the reach and usage of digital payments. Continuous Clearing of Cheques 36. At present, cheque clearing through Cheque Truncation System (CTS) operates in a batch processing mode and has a clearing cycle of up to two working days. It is proposed to reduce the clearing cycle by introducing continuous clearing with 'on-realisation-settlement’ in CTS. This means that cheques will be cleared within a few hours on the day of presentation. This will speed up cheque payments and benefit both the payer and the payee. Conclusion 37. Under the current monetary policy setting, inflation and growth are evolving in a balanced manner and overall macroeconomic conditions are stable. Growth remains resilient, inflation has been trending downward and we have made progress in achieving price stability; but we have more distance to cover. The progress towards our goal of price stability has been uneven due to large and persistent supply side shocks, especially in food items. We, therefore, need to remain vigilant to ensure that inflation moves sustainably towards the target, while supporting growth. This approach would be net positive for sustained high growth. 38. We recognise the challenges along the way, but we have to be patient to finish the job at hand. In the current context, the following words of Mahatma Gandhi are highly relevant: “The slightest error of judgment, a hasty action or a hasty word may put back the hands of the clock of progress. Policies have, therefore, to be cautiously evolved…”55 Thank you. Namaskar.
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