Good morning and Namaskar. Every two months, I have been presenting the monetary policy statement on behalf of the Monetary Policy Committee and the Reserve Bank of India before you. In fact, presenting a detailed, elaborate statement before all of you is a practice which we started during the period of the COVID when there were lockdowns and restrictions. We considered that this was the most appropriate way of communicating with the people and with every stakeholder in the economy. Monetary policy is important because it affects the life of people. It affects each and every segment of the economy, however small or big. It affects the vegetable vendors, it affects the big corporates, it affects the middle class. I think it also affects the farmers, the industry, the business. So it has wide-ranging impact on the economy, and that is why, I'm sure, that is the reason why most of you are listening to the Governor's statement.
Our effort is to follow the flexible inflation targeting framework as provided in the Reserve Bank of India Act. The Act provides that the Reserve Bank, that is the Monetary Policy Committee, is expected to maintain price stability. In fact, it is a mandate. The mandate given to the Reserve Bank of India is to maintain price stability while supporting or keeping in mind the objective of growth. Price stability is important for the people because it affects their purchasing power. It is important for stability of businesses. It is important for exporters and importers. It is important for every segment of the economy. So price stability is important. At the same time, growth is also very important. As an economy, India has been growing in the last three years at more than 8% growth. That is the GDP growth. The growth of the gross domestic product is also very important. And as provided in the law, it is always our effort at the Reserve Bank of India, it is also the effort of the Monetary Policy Committee, to follow the provision of the law as embedded, as provided for in the Reserve Bank of India, in letter and spirit.
So with these opening remarks, I present before you the monetary policy statement of today. And this is how it goes. As we stand at the threshold of 2025, let me reflect upon the eventful journey of 2024. In line with the trend in the last few years, central banks were once again put to the ultimate test to stabilize their economies against continuous, colossal, and complex shocks. Central banks are constantly adapting to the new global economic and financial landscape created by geopolitical conflicts, geoeconomic fragmentation, financial market volatility, and continuing uncertainties, all of which are testing the resilience of the global economy. The last mile of disinflation is turning out to be prolonged and arduous, both for the advanced economies as well as the emerging market economies, that is the EMEs. Maintaining macroeconomic and financial stability and building buffers continue to be the lodestar, especially for the emerging market economies.
In India, notwithstanding the recent aberration in growth and inflation trajectories, the economy continues its journey on a sustained and balanced path towards progress. Amidst the reaping of the global economy, India is well positioned to benefit from the emerging trends as it forges ahead on a transformative journey. Let me now turn to the decisions and deliberations of the Monetary Policy Committee, which met on 4th, 5th, and today, 6th December. After detailed assessment of the evolving macroeconomic and financial developments and the outlook, because monetary policy is forward-looking so we have to always look at the outlook, the Monetary Policy Committee decided by a majority of 4 is to 2 to keep the policy repo rate unchanged at 6.5%. Consequently, the Standing Deposit Facility, that is SDF rate, remains at 6.25%, and the Marginal Standing Facility, that is the MSF rate, and the Bank Rate at 6.75%. The MPC also decided unanimously to continue with the neutral stance and to remain unambiguously focused on a durable alignment of inflation with the target while supporting growth. I shall now briefly set out the rationale for these decisions.
The MPC took note of the recent slowdown in the growth momentum, which translates into a downward revision in the growth forecast for the current year. Going forward into the second half of this year and the next year, the MPC assessed the growth outlook to be resilient but warranting close monitoring. Inflation, on the other hand, surged above the upper tolerance band of 6% in October, driven by a sharp uptake in food inflation. Food inflation pressures are likely to linger in Q3 of the current financial year and start easing only from the Q4 of the current financial year, that is from January to March. And we expect that this is the trend and it will be backed by seasonal correction in vegetable prices, Kharif harvest arrivals, likely good Rabi output, and adequate cereal buffer stocks. High inflation reduces the disposable income in the hands of consumers and dents private consumption, which negatively impacts the real GDP growth. The increasing incidence of adverse weather events, heightened geopolitical uncertainties, and financial market volatility pose upside risks to inflation. The MPC believes that only with durable price stability can strong foundations be secured for high growth. The MPC remains committed to restoring the inflation-growth balance. I repeat, the MPC remains committed to restoring the inflation-growth balance in the overall interest of the economy. Accordingly, the MPC decided to keep the policy repo rate unchanged at 6.5% in this meeting and also to continue with the neutral stance of monetary policy, as it provides flexibility to monitor and assess the outlook on inflation and growth and then go on to act appropriately.
I would now like to provide an assessment of growth and inflation, and I would like to begin with the global growth scenario. The global economy has shown unusual resilience in 2024 despite several headwinds. Inflation is gradually moving towards the target from its multi-decadal highs, prompting several central banks to embark on policy pivots. Global trade remains resilient with increasing volumes confined within geographical blocks. Since the last MPC meeting, financial markets have remained edgy amidst rising US dollar and hardening bond yields, resulting in large capital outflows from emerging markets and also in volatility in equity markets. Going forward, the outlook is clouded by rising tendencies of protectionism. I'm talking about the global economy. Going forward, the outlook is clouded by rising tendency of protectionism, which have the potential to undermine global growth and also push inflation higher.
Let me now turn to the domestic growth situation. Growth in real GDP in the second quarter of this year at 5.4% turned out to be much lower than anticipated. This decline in growth was led by, it was caused mainly by, a substantial deceleration in the industrial growth from 7.4% in the first quarter to 2.1% in the second quarter due to subdued performance of manufacturing companies, contraction in mining activity, and lower electricity demand. The weaknesses in the manufacturing sector, however, was not broad-based but was limited to specific sectors such as petroleum products, iron and steel, and cement. Going forward, high-frequency indicators available so far suggest that the slowdown in domestic economic activity bottomed out in the second quarter of this year and it has since recovered, aided by strong festive demand and pickup in rural activities. Agricultural growth is supported by healthy Kharif crop production, higher reservoir levels, and better Rabi sowing. Industrial activity is expected to normalize and recover from the lows of the previous quarter. The end of the monsoon season and the expected pickup in government capital expenditure may also provide some impetus to cement as well as iron and steel sectors. Mining and electricity are also expected to normalize post the monsoon-related disruptions. I specifically commented on these sectors, that is on manufacturing, on electricity, and also on mining and iron and steel as well as on cement, because these were the sectors, particularly in manufacturing, mining, and electricity demand, which were the principal factors which pulled down the GDP number in the second quarter. So that's why I focused on how these three sectors are expected to behave in the current quarter as well as in the next quarter.
The Purchasing Managers Index, that is PMI, for manufacturing at 56.5 for November remained elevated. The supply chain pressures eased in October-November and fell below the historical average. The services sector continues to grow at a strong pace. PMI Services remained steady at 58.4 in November, indicating continued expansion. On the demand side, rural demand is trending upwards while urban demand shows some moderation on a high base. Government consumption is improving. Investment activity is also expected to improve. On the external front, merchandise exports expanded by 17.2% in October while services exports continued to post upbeat growth at 22.3% in October. Taking all these factors into consideration, real GDP growth for 2024-25, that is the current year, is now projected at 6.6%, with Q3 at 6.8% and Q4 at 7.2%. Real GDP growth for the first quarter of 2025-26 is projected at 6.9% and the second quarter of 2025-26 at 7.3%. The risks are evenly balanced.
I would now like to focus on inflation. Inflation increased sharply in September and October 2024, led by an unanticipated increase in food prices. Core inflation, though at subdued levels, also registered a pickup in October. Fuel group remained in deflation for the 14th consecutive month in October. In the near term, despite some softening, lingering food price pressures are likely to keep headline inflation elevated in the third quarter, that is in the quarter October to December. Going ahead, a good Rabi season would be critical to the softening of food inflation pressures. Early indications point to adequate soil moisture content and reservoir levels conducive for Rabi sowing. The estimates of record Kharif production should bring relief to elevated prices of rice and pulses in particular. Vegetable prices are also expected to see a seasonal winter correction. On the upside, the evolving trajectory of domestic edible oil prices following the hike in import duties and rise in their global prices need to be monitored closely. Manufacturing and services firms surveyed by the Reserve Bank point to firming up of input costs and selling prices in the fourth quarter of the current financial year, that is in the quarter January to March. Taking all these factors into consideration, CPI inflation for the current financial year, that is 2024-25, is projected at 4.8%, with Q3 at 5.7%, Q4 at 4.5%. Going into the next financial year, CPI inflation for the first quarter of 2025-26 is projected at 4.6% and Q2 at 4%. The risks are evenly balanced.
Now, what do these inflation and growth conditions mean for monetary policy? I have described the growth conditions, I have described the inflation conditions. Now, what do all these factors mean for monetary policy? And that is what I would like to now highlight. The near-term inflation and growth outcomes in India have turned somewhat adverse since the last monetary policy in October. The medium-term prognosis on inflation suggests further alignment with the target, while growth is expected to pick up its momentum. Persistent high inflation reduces the purchasing power of consumers and adversely affects both consumption and investment demand. The overall implication of these factors for growth is negative. Therefore, price stability is essential for sustained growth. On the other hand, a growth slowdown, if it lingers beyond a point, may need policy support. The Reserve Bank's anti-inflationary monetary policy stance has been a crucial factor in bringing about a significant disinflation. Going forward, as food price shocks wane, headline inflation is expected to ease and realign with the target as per our projections which I just read out. At present, it is necessary to draw on the flexibility provided by the neutral stance of monetary policy to wait for and monitor the incoming data for confirmation of the decline in inflation. The gains achieved so far in the broad direction of disinflation, notwithstanding the recent upticks, need to be preserved. At the same time, the growth trajectory and the evolving outlook also need to be monitored very closely. At this critical juncture, prudence and practicality demand that we remain careful and sensitive to the dynamically evolving situation with all its complexities and ramifications. A status quo in monetary policy in this meeting of the MPC has thus become appropriate and essential.
I would now like to turn to liquidity and financial market conditions. System liquidity, as represented by the net position under the LAF, that is net LAF, that is net Liquidity Adjustment Facility, it continued to remain in surplus during October and November on account of higher government spending despite a significant increase in currency in circulation during the festive season and capital flows. Of course, towards the end of November for a few days the liquidity became tight, but overall I think there was adequate liquidity both in October and November and it remained surplus. Given these conditions, the Reserve Bank mainly conducted variable rate reverse repo operations, that is VRRR operations, to absorb surplus liquidity. To alleviate temporary liquidity tightness because of large GST outflows, however, fine-tuning variable rate repo operations, that is VRR operations, were conducted intermittently during October and November. The two-way liquidity operations of the Reserve Bank ensured close alignment of the interbank overnight rate with the policy repo rate. Transmission to the credit market has been satisfactory. As you would have noticed, as in the previous monetary policy statements, lot of data is given in the footnotes. So those of you who are interested may have a look at the footnotes because the data in the footnotes justify and back up whatever I am saying as a part of my statement.
Now, even as liquidity in the banking system remains adequate, system liquidity may tighten in the coming months due to tax outflows, increase in currency in circulation, and volatility in capital flows. To ease the potential liquidity stress, it has now been decided to reduce the Cash Reserve Ratio, that is to reduce the CRR of all banks to 4% of net demand and time liabilities, that is NDTL. And this will be done in two tranches, two equal tranches of 25 basis points each, with effect from the fortnight beginning December 14th and December 28th. This will restore the CRR to 4% of NDTL, which was in fact the prevailing rate before commencement of the policy tightening cycle in April 2022. The reduction in CRR is consistent with the neutral policy stance and would increase primary liquidity of about Rs 1.16 lakh crore, that is 1 lakh 16,000 crore, to the banking system. Going forward, the Reserve Bank will continue to be nimble and proactive in its liquidity management operations to ensure that money market interest rates evolve in an orderly manner and the productive requirements of the economy are met.
During 2024, that is from the period April to November, the Indian rupee depreciated by 1.3%, largely due to pressure from strengthening US dollar and selling pressure by foreign portfolio investors, especially in October and November. Nevertheless, both the depreciation of the Indian rupee and its volatility was less compared to its EME peers, and this reflects India's strong macroeconomic fundamentals and improvement in the external sector outlook. The Reserve Bank's exchange rate policy has remained consistent over the years and it is market-determined. Its central tenet is to maintain orderliness and stability without compromising market efficiency. Foreign exchange reserves are deployed judiciously to mitigate undue volatility, maintain market confidence, anchor expectations, and preserve overall financial stability. These interventions focus on smoothening excessive and disruptive volatility rather than targeting any specific exchange rate level or band. At the same time, our efforts to deepen and modernize the foreign exchange market have also yielded significant results in terms of, first, widening access and participation, and second, ensuring efficient price discovery. Our overall approach ensures that forex reserves act as shock absorbers, safeguarding the economy from external spillovers while supporting competitive and orderly market conditions. The flexible or market-determined exchange rate regime is not merely a tool for managing external shocks; it is an important element of our approach to macroeconomic and financial stability. By combining market discipline with prudent intervention, we have created a system that supports stability, resilience, and growth.
Let me now focus on financial stability. The financial parameters of banks and NBFCs continue to be strong. The incoming data suggest that the gap between growth of credit and deposits of scheduled commercial banks has narrowed, with deposits keeping pace with loan growth. In fact, on the financial sector, I can say with confidence that I think the health of the financial sector today is perhaps at one of its best in a long time. The Reserve Bank's supervision of the financial sector and its entities continues to be vigilant and proactive. Incipient signs of stress, if any, either at the systemic or entity levels, are monitored closely and proactive action is initiated. The effort is always to resolve the issues non-disruptively. Continuous engagement is held over several months, sometimes even exceeding one year, with the regulated entities. Only in extreme cases where sufficient corrective action is not visible, the Reserve Bank resorts to imposition of business restrictions as a last resort in the interest of consumers and financial stability. In fact, there are a large number of entities where the corrective action is taken and where we simply do not take any action because the response by the regulated entities is found to be very proactive and responsive. And so in many cases, without imposing any restrictions on their business or other kinds of activities, the problem gets resolved. Obviously, the list is not known outside. That list is much longer. And the total number of entities, I'm not being defensive about it or in any way, why I am emphasizing on this is that this is something which we have to do in the interest of stability of the system as well as the stability and health of the individual entities. So only in extreme cases where sufficient corrective action is not visible, the Reserve Bank resorts to imposition of business restrictions as a last resort in the interest of consumers and financial stability.
To address the issues of unclaimed deposits in operative accounts and frozen accounts due to pendency of KYC updation, banks have been advised very recently once again to take necessary steps urgently to bring down the number of such accounts and make the process hassle-free. Further, banks have been advised to activate the accounts of beneficiaries of various central and state government schemes through Direct Benefit Transfer, that is DBT, and facilitate uninterrupted credit of the DBT amounts into their accounts and also utilization of the DBT amounts by the account holders. And we have advised the banks to do it without inconveniencing such vulnerable segments of customers because the DBT beneficiaries are usually, and they are, the vulnerable sections of the society. So being fully mindful of that, we have emphasized that there should be a kind of a seamless and smooth flow of DBT amounts into the bank accounts of such individuals so that it facilitates the individuals to withdraw the money to meet their various requirements. Progress made by individual banks in this regard will be monitored by the Reserve Bank.
I would now like to turn to the external sector. The statement today is a bit, you know, because we have too many announcements, so I request your continued patience. External sector: India's merchandise exports expanded at a 28-month high pace in October. Merchandise imports also increased for the seventh consecutive month. Services exports sustained buoyancy and posted double-digit growth in the second quarter as well as in October 2024. The robust services exports together with strong remittance receipts are expected to keep the current account deficit within sustainable levels during 2024-25. On the external financing side, gross FDI to India increased at a robust pace. I'm talking about gross. The gross FDI to India increased at a robust pace during the first half of the year. Net FDI, however, moderated during this period due to higher repatriations and rising outward FDI. Foreign portfolio investment, that is FPI, inflows to EMEs have generally declined. In October, net FPI inflows to India stood at US$ 9.3 billion so far in the current year, that is from April to December 4th, and this was supported mainly by inflows in the debt segment. External commercial borrowings and non-resident deposits, on the other hand, witnessed higher net inflows compared to the last year. India's external sector remains resilient as reflected in various key indicators where India has been consistently performing well, and the key indicators and the data is given in the footnote.
In order to attract more capital inflows, it has been decided to increase the interest rate ceilings on FCNR-B deposits. Accordingly, effective from today, banks are permitted to raise FCNR-B deposits of one year to less than three years maturity at rates not exceeding the ceiling of overnight Alternate Reference Rate, that is overnight ARR, plus 400 basis points, as against 200 basis points at present. So, in addition to the overnight ARR, currently the banks are allowed a spread of 250 basis points, that is being increased to 400 basis points. Similarly, for deposits of three to five years maturity, the ceiling has been increased to overnight ARR plus 500 basis points, as against 300 basis points at present. This relaxation will be available till 31st March 2025.
I shall now announce certain additional measures. I again request your patience because the additional measures, they're very important. The first one relates to the FX Retail Platform. And this is how it is: the FX Retail Platform, which was launched in 2019, is now proposed to be linked with the BHIM Connect platform of the NPCI. This would enable users to transact on the FX Retail Platform through mobile apps of banks and non-bank payment system providers. This will expand the reach of FX Retail Platform, enhance user experience, and promote fairness and transparency in pricing with adequate safeguards. The second announcement relates to introduction of Secured Overnight Rupee Rate, SORR, a benchmark based on secured money markets. With a view to further develop the interest rate derivative market in India and improve the credibility of interest rate benchmarks, the Reserve Bank proposes to introduce a new benchmark, namely Secured Overnight Rupee Rate, that is SORR, which is based on all secured money market transactions, that is overnight market repo as well as TREPS. The third announcement relates to Connect to Regulate, an initiative for open regulation. As part of the Reserve Bank's consultative approach in framing regulations, a new program, namely Connect to Regulate, will be launched under the ongoing RBI at 90 commemorative events. A dedicated section in the Reserve Bank's website will be made available for stakeholders to share their ideas and inputs on specific topics. So we will give out a specific topic. On that, we are not going to upload a discussion paper or anything, but we will just mention the topic and we would like all stakeholders to give their opinion, suggestion, and thoughts to the RBI. So that makes our process of consultation much wider and much more flexible, which has been our approach over the last few years.
Next announcement is introduction of podcast facility as an additional medium of communication. Over the years, the Reserve Bank has expanded its communication toolkit and techniques to enhance transparency and better connect with the people. In continuance of this endeavor, the Reserve Bank proposes to add podcasts to its communication toolkit for wider dissemination of information. And the next announcement, which I'm going to read out, is very important for the agricultural sector, especially for small farmers, and that relates to collateral-free agricultural loan enhancement of limit. The limit for collateral-free agricultural loans was last revised in 2019. Taking into account the rise in agriculture input costs and overall inflation, it has been decided to increase the limit for collateral-free agriculture loans from Rs 1.6 lakh per borrower to Rs 2 lakh per borrower. This will further enhance credit availability for small and marginal farmers.
The next announcement relates to UPI. A credit line on UPI was launched in September 2023 and was made available through scheduled commercial banks. It has now been decided to permit small finance banks also to extend pre-sanctioned credit lines through the UPI. This will further deepen financial inclusion and enhance formal credit, particularly for the new-to-credit customers. Next announcement relates to artificial intelligence, its deployment in a very prudent manner. The financial sector landscape is witnessing rapid transformation enabled by technologies such as AI, tokenization, cloud computing, etc. In order to harness the benefits from these technologies while addressing the associated risks such as algorithmic bias, explainability, data privacy, etc., a committee comprising of experts from diverse fields will be set up to recommend a framework for responsible and ethical enablement of AI. I repeat, a framework for responsible and ethical enablement of AI, and the acronym is FREE-AI in the financial sector. The last announcement relates to dealing with mule accounts. As part of the Reserve Bank's continued efforts to prevent and mitigate digital frauds, an innovative AI/ML-based model, namely the MuleHunter, has been developed by the Reserve Bank Innovation Hub at Bengaluru. This will help the banks to deal with the issue of mule accounts expeditiously and reduce digital frauds.
Let me now conclude. The world today is characterized by intricate complexities and profound uncertainties. As a central bank, our job is that of an anchor of stability and confidence, which would ensure that the economy achieves sustained high growth. Since the last policy, that is since the October policy, inflation has been on the upside while there has been a moderation in growth. Accordingly, the MPC has adopted a prudent and cautious approach in this meeting to wait for better visibility on the growth and inflation outlook. At such a critical juncture, prudence, practicality, and timing of decisions become even more critical. Our endeavor in the Reserve Bank has always been to implement timely and carefully calibrated measures to derive the maximum impact. This will continue to be the guiding principle for all future actions. Also, as Mahatma Gandhi had said, and I quote, 'There is nothing that cannot be attained by patience and equanimity.' In the last few years, we have traversed one of the most difficult periods in the history of the Indian economy and perhaps in the global economy. And this has been a very difficult period in the economic history, in the history of Indian economy and the global economy. Just as I pointed out, it was a period of relentless turbulence and jolts. As a country, we can derive satisfaction that the Indian economy has not just navigated this period of trials successfully but has emerged stronger. As we strive together towards making India a developed economy, I recall what I had said in my statement of February 8, 2023, wherein I had quoted Netaji Subhas Chandra Bose: 'Never lose your faith in the destiny of India.' Thank you. Namaskar.
