As expected, the Reserve Bank of India (RBI), at its fourth monetary policy committee (MPC) meeting for FY25-26, decided to keep the repo rate, the central bank's rate for short-term loans to banks, by 50bps (basis points) unchanged at 5.5%. Consequently, the standing deposit facility (SDF) rate remains at 5.25%, and the marginal standing facility (MSF) rate and the bank rate are at 5.75%. RBI also increased its real gross domestic product (GDP) growth forecast for FY25-26 to 6.8% from 6.5%. RBI has also proposed expanding free services for basic savings bank deposit account (BABDA) holders to include digital (mobile and internet) banking services, strengthening the internal ombudsman mechanism of banks and revising the RBI Ombudsman Scheme to enhance grievance redressal while bringing rural cooperative banks under its ambit.
RBI governor Sanjay Malhotra, who chaired the MPC meeting, announced the decision of the six-member panel. He says, "Despite an external environment that has deteriorated since the August policy, the Indian economy remains poised to register high growth. The sobering of inflation has given greater leeway for monetary policy to support growth without compromising on the primary mandate of price stability. However, the MPC decided to wait for the cumulative impact of recent policy actions to play out before charting the next course of action."
"As India strives towards achieving Viksit Bharat by the centenary year of its independence, it would need the coordinated support of fiscal, monetary, regulatory and other public policies to attain its goal. The recent rationalisation of goods and services tax (GST) rates by the government is a major step in this direction. Our various policy announcements today will also support the achievement of this goal. In terms of monetary policy actions, we will remain vigilant of the incoming data and stay focused on our objective of maintaining price stability while supporting growth. In pursuit of this objective, we will be proactive, objective and consistent in our communication while backing it up with credible actions," the RBI governor added.
According to the MPC statement issued by RBI, there has been a significant moderation in inflation. "Moreover, the prevailing global uncertainties and tariff-related developments are likely to decelerate growth in the second half (H2) of FY25-26 and beyond. The current macroeconomic conditions and the outlook has opened up policy space for further supporting growth. However, the MPC noted that the impact of the front-loaded monetary policy actions and the recent fiscal measures is still playing out. The trade-related uncertainties are also unfolding. The MPC, therefore, considered it prudent to wait for the impact of policy actions to play out and greater clarity to emerge before charting the next course of action. Accordingly, the MPC unanimously voted to keep the policy repo rate unchanged at 5.5%."
"The MPC also decided to retain the stance at neutral. However, two members - Dr Nagesh Kumar and Professor Ram Singh, were of the view that the stance be changed from neutral to accommodative," it added.
Mr Malhotra also announced 22 additional measures to strengthen the resilience and competitiveness of the banking sector, improve the flow of credit, promote ease of doing business, simplify foreign exchange management, enhance consumer satisfaction and internationalise the Indian rupee.
Enhancing Consumer Satisfaction
Three consumer-centric proposals:
- The bouquet of services offered to basic savings bank deposit account (BSBDA)-holders without levy of minimum balance charges is proposed to be expanded to, inter alia, include digital banking (mobile/internet banking) services.
- The internal ombudsman mechanism is proposed to be strengthened to make grievance redressal by regulated entities more effective.
- The RBI ombudsman scheme is also being revised for improved grievance redressal and rural cooperative banks are being included under the ambit of the scheme.
Strengthening the Resilience and Competitiveness of the Banking Sector
There are four measures for strengthening the resilience and competitiveness of the Indian banks.
The expected credit loss (ECL) framework of provisioning with prudential floors is proposed to be made applicable to all scheduled commercial banks (excluding small finance banks (SFBs), payment banks (PBs), and regional rural banks (RRBs)) and all India financial institutions (AIFIs) with effect from 1 April 2027.
They will be given a glide path (till 31 March 2031) to smoothen the one-time impact of higher provisioning, if any, on their existing books.
Furthermore, it is proposed to make the revised Basel III capital adequacy norms effective for commercial banks (excluding SFBs, PBs, and RRBs) as of 1 April 2027.
In furtherance of this, a draft of the standardised approach for credit risk shall be issued shortly. Under the revised approach, the proposed lower risk weights on certain segments are expected to reduce the overall capital requirements, particularly for MSMEs (micro, small and medium enterprises) and residential real estate (including home loans).
The capital requirements for operational risk were finalised in 2023, whereas the capital requirements for market risk are currently under finalisation following receipt of public comments.
These measures will help align our guidelines with international standards adapted to our national conditions and priorities, and strengthen the capital adequacy framework for banks and AIFIs.
A draft circular on forms of business and prudential regulation for investments was issued in October 2024. It has been finalised after public consultations and will be issued shortly. The proposed regulatory restriction on overlap in the businesses undertaken by a bank and its group entity(ies) is being removed from the final guidelines. The strategic allocation of business streams among group entities will be left to the wisdom of bank boards.
It is further proposed to introduce risk-based deposit insurance premiums with the currently applicable flat rate of premium as the ceiling. This will incentivise sound risk management by banks and reduce premiums to be paid by better-rated banks.
Improving the Flow of Credit
One, to expand the scope of capital market lending by banks, it is proposed to provide an enabling framework for Indian banks to finance acquisitions by Indian corporates.
Two, it is proposed to (a) remove the regulatory ceiling on lending against listed debt securities and (b) enhance limits for lending by banks against shares from Rs20 lakh to Rs1 crore and for initial public offering (IPO) financing from Rs10 lakh to Rs25 lakh per person.
Three, it is proposed to withdraw the framework introduced in 2016 that disincentivised lending by banks to specified borrowers (with a credit limit from the banking system of Rs10,000 crore and above).
While the large exposure framework has been put in place for banks, which addresses credit concentration risk to a particular entity or group at an individual bank level, concentration risk at the banking system level, as and when considered necessary, will be managed through specific macroprudential tools.
Four, to reduce the cost of infrastructure financing by non-banking finance companies (NBFCs), it is proposed to reduce the risk weights applicable to lending by NBFCs to operational, high-quality infrastructure projects.
Five, since 2004, licensing for urban cooperative banks (UCBs) has been paused. Considering the positive developments in the sector during the last two decades and in response to the growing demand from the stakeholders, we propose to publish a discussion paper on the licensing of new UCBs.
Promoting Ease of Doing Business (EoDB)
RBI made seven announcements, including those related to FEMA (Foreign Exchange Management Act).
A large number of circulars and directions totalling about 9000, have been consolidated, subject wise, across 11 types of regulated entities. Drafts of the same shall be issued shortly for public consultation.
It is proposed to provide greater flexibility to banks for opening and maintaining transaction accounts of borrowers (viz. current accounts and CC/overdraft (OD) accounts). This will particularly help borrowers which are regulated by a financial sector regulator. Restrictions with respect to collection accounts are also proposed to be withdrawn.
The export sector is a vital part of India’s economy. To further strengthen the sector and enhance ease of doing business, we shall:
- extend the time period for repatriation from foreign currency accounts of Indian exporters in IFSC, from one month to three months.
- increase the period for forex outlay for merchanting trade transactions, from four months to six months; and
- simplify the process of reconciliation of outstanding entries related to exports and imports in the respective reporting portals (EDPMS/IDPMS).
Simplifying Foreign Exchange Management
Key provisions relating to eligible borrowers, recognised lenders, limits on borrowing, cost of borrowing, end-use and reporting, etc, in ECB (external commercial borrowing) regulations, issued under FEMA, are proposed to be rationalised.
It is proposed to rationalise FEMA regulations regarding non-residents establishing their business presence in India.
Internationalising Indian Rupee (INR)
Three measures are proposed in this regard:
- Permit authorised dealer (AD) banks to lend in Indian Rupees to non-residents from Bhutan, Nepal and Sri Lanka for cross-border trade transactions.
- Establish transparent reference rates for currencies of India’s major trading partners to facilitate INR-based transactions.
- Permit wider use of SRVA (Special Rupee Vostro Account) balances by making them eligible for investment in corporate bonds and commercial papers.
RBI's recent monetary policy keeping the policy rates unchanged is nothing but an admission of the positive and negative changes affecting the economy from the national and international dynamics seen in politics, economics, social and technology areas .While the national scenario offers political stability , favourable economic macro factors in terms of steady economic growth , benign inflationary expectations thanks to favourable Union Budget measures particularly in containing fiscal deficit despite attractive income tax concession and GST 2.0 rationalisation aiming at massive consumption demand to boost the economic growth, the international scenario unfortunately has been highly unpredictable thanks to the geopolitical economic and social scenario thanks to the uncertainties emanating from the USA policies basically having ripple effects on the economic front world over. All said the approach of the Reserve Bank to maintain neutral stance aiming at economic growth keeping the inflation expectation far below the minimum of 4.0% is a wonder facilitating the much needed credit growth innovative and growth oriented. The market sentiments have been kept in tune with the expectations and hope the economy continues to be in growth track as widely expected globally. However, the need to improve the quality of Customer service in almost all banks is becoming not only urgent but very essential to make them as agents of change and support to give a boost to the economy through innovative products and services both in their deposits mobilisation and advances deployment qualitatively and quantitatively. .