In a highly anticipated announcement, Shri Sanjay Malhotra, the Governor of the Reserve Bank of India (RBI), delivered the latest monetary policy statement, outlining key measures to steer the Indian economy towards stability and growth. He delivered the much-anticipated Monetary Policy Statement, outlining key decisions on interest rates, inflation control, and economic growth.
With a focus on inflation control, interest rates, and overall economic outlook, the statement is poised to have a significant impact on the financial landscape, both domestically and globally. This strategic move underscores the RBI's commitment to ensuring financial stability amid evolving economic challenges.
We are all aware that the Governor's statement after the MPC meeting contains the resolution of the MPC with regard to the policy rate and stance. It also contains announcements and measures which have a bearing on the monetary and regulatory policies. The Monetary Policy Committee resolution is of interest to a large number of people from various walks of life. 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 therefore 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 its 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.
The inflation framework was put in place in the year 2016 and it was reviewed in the year 2021. This is a monumental change in the monetary policy history of our country, and it is important to reflect on the experience of the Flexible Inflation Targeting Framework. It has served the Indian economy very well over these years, including the very challenging period since the pandemic.
The average inflation has been lowered post the introduction of this framework. Moreover, CPI has mostly stayed aligned with the target given under this framework, barring a few occasions of breaching the upper tolerance band since its inception. The Reserve Bank and the Monetary Policy Committee will continue to improve the macro economic outcomes in the best interest of the economy, using the flexibility which is embedded in the framework, while responding to the evolving growth inflation dynamics.
Moreover, they will strive to further refine the building blocks of this framework by making advances in the use of new data, improving now-casting and forecasting of key macroeconomic variables. They would forecast growth, inflation, etc. since this is a forward-looking policy and would continue to do that and develop more robust models.
On the regulatory front, there has been a lot of media attention with regard to some of the proposed regulatory changes pertaining to liquidity coverage ratio, expedited credit loss framework for provisioning by banks, the prudential norms governing projects under implementation. They would continue to strengthen, rationalize and refine the prudential and conduct-related framework.
This is very important in the overall interest of the Indian economy. The interest of the economy demands financial stability and consumer protection and the mandate in the RBI is to enhance both of these.
However, at the same time, it is important to emphasize that the economic interest also warrants increasing efficiency in the economy. The RBI recognizes 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. This trade-off will be kept in mind while formulating each and every regulation and it will be the RBI’s attempt to strike the right balance keeping in view the benefits and costs of regulation.
All stakeholders were also reassured that the RBI will continue with the consultative process which it has been doing over the years in this regulation making process.
The suggestions of the stakeholders are very valuable and hence the RBI will continue to give serious consideration to them before taking any major decision. It will also ensure that the implementation of such regulations is smooth and will give sufficient time for transition and where regulations have major implications, the implementation will be done in a phased manner.
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.
With receding expectations on the size and pace of rate cuts in the US, the US dollar has strengthened, bond yields have hardened, emerging market economies 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 emerging market economies. The Indian economy, though continuing to remain strong and resilient, also did not remain immune to these global handwinds, with the Indian rupee coming under depreciation pressure as you would have noticed in the recent months.
After a detailed assessment of the evolving macroeconomic and financial developments and the economic outlook, the RBI is forward looking, the MPC decided unanimously to reduce the policy rate by 25 basis points from 6.5% to 6.25%. The MPC unanimously decided to reduce the policy rate by 25 basis points from 6.5% to 6.25%. Consequently, the Standing Deposit Facility, SDF, the SDF rate shall be at 6.0% and the Marginal Standing Facility Rate, also called the MCF rate and the Bank Rate shall be 6.5%. The MPC also decided unanimously again to continue with a neutral stance and remain unambiguously focused on a durable alignment of inflation with the target while supporting growth.
The MPC noted that inflation has declined, supported by favourable outlook on food and continuing transmission of past monetary policy action. 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 this year, it is much below that of last year which everyone is aware of, and it was 8.2%. This growth inflation dynamics opens up policy space for the MPC to support growth while remaining focused on aligning inflation with the target.
Accordingly, the MPC decided to reduce the policy rate by 25 basis points to 6.25%. At the same time, the MPC felt that 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 with the flexibility to respond to evolving macroeconomic environment.
As per the first advance estimates, real GDP growth for the current year is estimated at 6.4%. This is a softer expansion after a robust 8.2% growth last year. Going forward, economic activity is expected to improve in the coming year. Manufacturing activity is expected to recover gradually in the second half of this year and beyond. Early corporate results for Q3 and we have more than 50% of the results now as we speak.
It indicates a mild recovery in the manufacturing sector. Mining and electricity are rebounding from monsoon related disruptions in Q2. Business expectations remain upbeat as evident from the PMI Manufacturing Future Output Index.
Services sector activity continues to be resilient. PMI services, however, declined from its recent peak. 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, moderating inflation, together with healthy agricultural activity, bode well for household consumption. Government consumption expenditure is expected to remain modest.
Higher capacity utilization levels, robust business expectations, and government policy support augur well for growth in fixed investment. Continued buoyancy in services export will support growth. Global headwinds, however, continue to impact uncertainty to the outlook and pose downward risks.
Taking all these factors into consideration, the RBI has estimated that real GDP growth for the next year to be at about 6.7%. Q1 at 6.7%, Q2 at 7%, Q3 at 6.5%, and Q4-2 at 6.5%. The risks are evenly balanced.
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