The real GDP growth for the next year is projected at 6.7 per cent: RBI will continue to monitor the evolving liquidity and financial market conditions and proactively take appropriate measures to ensure orderly liquidity conditions; Know the reasons behind the decisions of the Monetary Policy Committee (MPC)
FinTech BizNews Service
Mumbai, February 7, 2025: 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 EMEs. The Indian economy, though continuing to remain strong and resilient, did not remain immune to these global headwinds, with the Indian Rupee coming under depreciation pressure in the recent months. Sanjay Malhotra, Governor, Reserve Bank of India, said while announcing the decisions of the MPC on Friday: “At the Reserve Bank, we have been employing all tools at our disposal to face the multi-pronged challenges. The MPC, after a detailed assessment of the evolving macroeconomic and financial developments and the economic outlook, decided unanimously to reduce the policy repo rate by 25 basis points from 6.50 per cent to 6.25 per cent. Consequently, the standing deposit facility (SDF) rate shall be 6.00 per cent and the marginal standing facility (MSF) rate and the Bank Rate shall be 6.50 per cent. The MPC also decided unanimously to continue with the neutral stance and remain unambiguously focussed on a durable alignment of inflation with the target, while supporting growth.”
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. The MPC also noted that though growth is expected to recover from the low of Q2 of 2024-25, it is much below that of last year. Malhotra further said: “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 decided to reduce the policy repo rate by 25 basis points to 6.25 per cent.”
At the same time, 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. Malhotra added: “Accordingly, it decided to continue with a neutral stance. This will provide MPC the flexibility to respond to the evolving macroeconomic environment.”
Assessment of Growth and Inflation Growth
Following is the part of Mr Malhotra’s statement today:
As per the first advance estimates, real GDP growth for the current year is estimated at 6.4 per cent, a softer expansion after a robust 8.2 per cent growth last year. Going forward, economic activity is expected to improve in the coming year. Agricultural activity remains upbeat on the back of healthy reservoir levels6 and bright rabi prospects.7 Manufacturing activity is expected to recover gradually in the second half of this year and beyond.8 Early corporate results for Q3 indicate a mild recovery in the manufacturing sector.9 Mining and electricity are rebounding from monsoon related disruptions in Q2. Business expectations remain upbeat, as evidenced from the PMI manufacturing future output index.10 Services sector activity continues to be resilient.11 PMI services, however, declined from its recent peak.12
On the demand side, rural demand continues to be on an uptrend, while urban consumption remains subdued with high frequency indicators providing mixed signals.13 Going forward, improving employment conditions,14 tax relief in the Union Budget, and moderating inflation,15 together with healthy agricultural activity bode well for household consumption. Government consumption expenditure is expected to remain modest.16 Higher capacity utilisation levels,17 robust business expectations18 and government policy support augur well for growth in fixed investment.19 Continued buoyancy in services exports will support growth.20 Global headwinds, however, continue to impart uncertainty to the outlook and pose downward risks. Taking all these factors into consideration, real GDP growth for the next year is projected at 6.7 per cent with Q1 at 6.7 per cent; Q2 at 7.0 per cent; Q3 at 6.5 per cent; and Q4 at 6.5 per cent. The risks are evenly balanced.
Inflation
Headline inflation, after moving above the upper tolerance band in October, has since registered a sequential moderation in November and December.21 Going ahead, food inflation pressures, absent any supply side shocks, should see a significant softening due to good kharif production,22 winter-easing in vegetable prices23 and favourable rabi crop prospects. Core inflation is expected to rise but remain moderate. Rising uncertainty in global financial markets coupled with continuing volatility in energy prices and adverse weather events presents upside risks to the inflation trajectory. 24 Taking all these factors into consideration, CPI inflation for the current financial year is projected at 4.8 per cent with Q4 at 4.4 per cent. Assuming a normal monsoon, CPI inflation for the financial year 2025-26 is projected at 4.2 per cent with Q1 at 4.5 per cent; Q2 at 4.0 per cent; Q3 at 3.8 per cent; and Q4 at 4.2 per cent. The risks are evenly balanced.
External Sector
Coming to the 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.25 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 2024.26 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.27 Overall, India’s external sector remains resilient as key indicators stay robust.28
I would like to mention here that the 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.29 We will continue to monitor the evolving liquidity and financial market conditions and proactively take appropriate measures to ensure orderly liquidity conditions.
