The sources detail the Reserve Bank of India’s (RBI) monetary policy decisions and banking regulatory actions in October 2025, set against a backdrop of resilient domestic growth drivers—chiefly fiscal stimulus—and persistent global economic uncertainty driven by US tariffs and geopolitical tensions.
I. Monetary Policy Decisions and Economic Outlook (Oct 2025)
The RBI’s Monetary Policy Committee (MPC) opted to maintain the status quo, keeping the repo rate unchanged at 5.5% for the second consecutive time. The monetary policy stance was retained as neutral.
Context of the Decision:
- Growth Outlook: The RBI raised its GDP growth estimate for FY26 to 6.8% from 6.5%, citing the economy's resilience. However, this adjustment was mainly driven by the strong 7.8% GDP growth in the first quarter (April-June).
- Inflation Outlook: The inflation estimate for 2025-26 was significantly lowered to 2.6% from 3.1%. This more benign outlook is attributed to a favorable monsoon and the recent big-bang cuts in Goods and Services Tax (GST).
- Future Rate Action (Firepower Preservation): Governor Sanjay Malhotra hinted that the falling inflation has "created space for a rate cut" potentially in December. However, the central bank chose not to ease rates immediately, preferring to preserve its firepower for use if growth risks materialize. Rate cuts are contingent on the outcome of the US-India trade deal and how domestic consumption responds to the GST reduction.
- Monetary Transmission: The policy rate is described as primarily a signaling mechanism. Sources note the persistence of the monetary transmission problem: despite the RBI having lowered the repo rate by 100 basis points and cutting the Cash Reserve Ratio (CRR) in phases, commercial banks have only passed on rate cuts partially and bond yields have actually risen.
II. RBI Banking and Regulatory Actions
Alongside the rate decision, the RBI introduced several measures designed to bolster credit flow, enhance banking competitiveness, and strengthen the resilience of the banking system.
1. Bolstering Credit Flow and Capital Markets:
- Financing Acquisitions: The RBI proposed an enabling framework to allow banks to finance acquisitions by Indian corporates. This move could deepen banks’ role in capital markets and make large domestic acquisitions viable using bank debt, reducing reliance on expensive offshore leverage or non-bank financing.
- Easing Large Corporate Exposure Norms: The central bank proposed withdrawing the August 2016 framework that capped lending to large borrowers through market instruments. This withdrawal is based on the RBI's assessment that concentration risk is mitigated by other existing frameworks and the fact that the share of corporates in total bank exposure has decreased over the past decade.
- Lending Against Securities: The RBI proposed raising limits for lending against shares and units of Real Estate/Infrastructure Investment Trusts (REITs/InvITs). It also plans to remove the cap on lending against listed debt securities.
2. Enhancing Banking Structure and Stability:
- Expected Credit Loss (ECL) Framework: The RBI proposed rolling out the ECL framework, which mandates anticipating loan losses, in a staggered manner to provide banks sufficient time for the transition and to smoothen the impact of higher provisioning. This approach aligns with the Basel framework.
- Deposit Insurance Premium: A new risk-based model for levying deposit insurance premiums was proposed, moving away from the current uniform rate. Under this model, financially robust banks will pay less, while weaker ones pay relatively more, creating a better alignment of incentives. The deposit insurance cover of ₹5 lakh per depositor remains unchanged.
- Overlapping Businesses: The RBI provided relief to banks, particularly private ones (like HDFC Bank, Axis Bank, and ICICI Bank), by dropping an earlier plan that would have restricted them from having overlapping businesses with their group entities, allowing non-bank subsidiaries (NBFCs) to operate in similar lines of business.
3. Internationalization of the Rupee (Global Rupee): The RBI is accelerating efforts to internationalize the rupee:
- It authorized Indian banks and their overseas branches to lend in rupees to residents and banks in Bhutan, Nepal, and Sri Lanka to facilitate cross-border trade transactions.
- It plans to include select currencies of India’s major trading partners in the list of reference rates published by Financial Benchmarks India Pvt. Ltd, intending to deepen the onshore forex market.
III. Global and Domestic Economic/Policy Context
Global Headwinds:
- US Tariffs and Trade Uncertainty: The growth outlook is clouded by the headwinds of the US’s steep tariffs (50% on Indian merchandise exports). The RBI projects that this external risk will outweigh the positive domestic policy impacts in the second half of FY26. Ongoing negotiations for a Bilateral Trade Agreement (BTA) between India and the US aim to reduce tariffs to 25%, making the success of this deal a key factor for future rate cuts.
- US Shutdown and Gold Prices: A US government shutdown—due to Congress failing to approve federal funding—combined with expectations of imminent interest rate cuts by the US Federal Reserve, led to gold prices rallying significantly, reaching a peak of ₹1,21,100 per 10g in the national capital.
- FII Withdrawals: Foreign Portfolio Investors (FPIs) were net sellers for the third consecutive month, withdrawing $2.7 billion in September. FIIs have pulled ₹3.5 trillion from the secondary market over the past year, attributing their pullback partly to high valuations and weak corporate earnings, compounded by global economic uncertainty driven by US tariffs and recession fears.
Domestic Stimuli and Growth Drivers:
- GST Rate Cuts: The government's GST rate rationalization (GST 2.0), effective 22 September, is viewed as a significant consumption stimulus estimated at ₹2 trillion. This spurred massive demand, notably powering up auto sales in September, leading to record monthly sales for several manufacturers like Tata Motors, Mahindra, and Maruti.
- Fiscal Measures: The government announced a ₹1.2 trillion push ahead of the festive season, including a 3% hike in Dearness Allowance (DA) for employees and increased Minimum Support Prices (MSPs) for key crops. This action is intended to boost consumer demand.
- Currency Movement: The rupee recovered 9 paise to settle at 88.71 against the US dollar following the RBI’s monetary policy announcement, aided by the measures to support exporters and the decline in crude oil prices. This recovery followed the rupee hitting an all-time low of 88.80 against the dollar the previous day.
No comments:
Post a Comment