Monetary Policy Report - April 2025

Published under Section 45ZM of the Reserve Bank of India Act, 1934 Monetary Policy Report APRIL 2025 Reserve Bank of India MumbaiContents Chapter I: Macroeconomic Outlook 1 I.1: Key Developments since the October 2024 MPR 1 I.2: The Outlook for Inflation 5 I.3: The Outlook for Growth 9 I.4: Balance of Risks 11 I.5: Conclusion 13 Box I.1: What Affects Inflation Expectations of Economic Agents? 6 Chapter II: Prices and Costs 15 II.1: Consumer Prices 16 II.2: Drivers of Inflation 19 II.3: Costs 32 II.4: Conclusion 36 Box: II.1: Spatial Inflation Convergence in India 17 Chapter III: Demand and Output 37 III.1: Aggregate Demand 37 III.2: Aggregate Supply 50 III.3: Conclusion 58 Box III.1: Unravelling the Consumption Puzzle: Long-run Relationship and Post-shock Convergence with GDP 39 Box III.2: Investment Dynamics through the Lens of Capacity Utilisation 42 Chapter IV: Liquidity Conditions and Financial Markets 59 IV.1: Liquidity Conditions and the Operating Procedure of Monetary Policy 59 IV.2: Domestic Financial Markets 63 IV.3: Monetary Policy Transmission 83 IV.4: Conclusion 88 Box IV.1: What Drives Yields and Spreads - Liquidity or Uncertainty? 63 Chapter V: External Environment 89 V.1: Global Economic Conditions 89 V.2: Commodity Prices and Inflation 93 V.3: Monetary Policy Stance 96 V.4: Global Financial Markets 99 V.5: Conclusion 104 Box V.1: Geopolitical Spillover Shocks on Financial Markets of EMEs 100 iABBREVIATIONS A - Actuals CFPP - Central Food Grains Procurement Portal ADB - Asian Development Bank CGA - Controller General of Accounts AE - Advance Estimates CI - Confidence Interval AEs - Advanced Economies CiC - Currency in Circulation AI - Artificial Intelligence CII - Confederation of Indian Industry APP - Asset Purchase Programme CLI - Composite Leading Indicator ASEAN - Association of Southeast Asian Nations CMIE - Centre for Monitoring Indian Economy ATF - Aviation Turbine Fuel CoV - Coefficient of Variation ATM - At-the-money COVID-19 - Coronavirus Disease 2019 bbl - Barrel CPs - Commercial Papers BE - Budget Estimates CPB - Central Planning Bureau BIES - Business Inflation Expectations CPI - Consumer Price Index Survey CPI-AL - Consumer Price Index for BIS - Bank for International Settlements Agricultural Labourers BoE - Bank of England CPI-IW - Consumer Price Index for Industrial BoJ - Bank of Japan Workers BoK - Bank of Korea CPI-RL - Consumer Price Index for Rural Labourers BoP - Balance of Payment CRR - Cash Reserve Ratio bps - Basis points CU - Capacity Utilisation BRICS - Brazil, Russia, India, China and South Africa DoCA - Department of Consumer Affairs BSE - Bombay Stock Exchange DFR - Deposit Facility Rate CACP - Commission for Agricultural Costs DFM - Dynamic Factor Model and Prices DGCA - Directorate General of Civil Aviation CAD - Current Account Deficit DGCI&S - Directorate General of Commercial CAG - Comptroller and Auditor General Intelligence and Statistics DI - Diffusion Index CASA - Current Account and Savings Account DII - Domestic Institutional Investor CCIL - Clearing Corporation of India EBIT - Earnings Before Interest and Taxes Limited EBLR - External Benchmark - based Lending CDs - Certificates of Deposit Rate CDS - Credit Default Swap ECB - European Central Bank CE - Cointegrating Equation ECI - Eight Core Industries CEA - Central Electricity Authority EIA - Energy Information Administration iiiiiiMonetary Policy Report April 2025 EM - Emerging market GDP - Gross Domestic Product EMBI - Emerging Market Bond Index GFCE - Government Final Consumption Expenditure EMDEs - Emerging Market and Developing Economies GFCF - Gross Fixed Capital Formation EMEs - Emerging Market Economies GFD - Gross Fiscal Deficit EMGBI - Emerging Market Government Bond GNDI - Gross National Disposable Income Index GoI - Government of India EMLCI - Emerging Market Local Currency GPR - Geopolitical Risks Index G-Secs - Government Securities EPFO - Employees’ Provident Fund GST - Goods and Services Tax Organisation GVA - Gross Value Added ER - Employment Rate H1 - First Half of the Financial Year (April- EWMA - Exponential Weighted Moving September) Average H2 - Second Half of the Financial Year FAE - First Advance Estimates (October-March) FAO - Food and Agriculture Organization of HFIs - High Frequency Indicators the United Nations HSBC - Hong Kong and Shanghai Banking FBIL - Financial Benchmarks India Pvt. Ltd Corporation FCI - Financial Conditions Index HSD - High-Speed Diesel FCNR - Foreign Currency Non-Resident ICICI - Industrial Credit and Investment FDI - Foreign Direct Investment Corporation of India (Bank) Fed - Federal Reserve ICR - Interest Coverage Ratio FIs - Financial Institutions IIF - Institute of International Finance FICCI - Federation of Indian Chambers of IIP - Index of Industrial Production Commerce and Industry IMF - International Monetary Fund FIMMDA - Fixed Income Money Market and INR - Indian Rupee Derivatives Association of India IOCL - Indian Oil Corporation Limited FIT - Flexible Inflation Targeting IOS - Industrial Outlook Survey FMCG - Fast Moving Consumer Goods IPO - Initial Public Offering FOMC - Federal Open Market Committee IRDAI - Insurance Regulatory and FPI - Foreign Portfolio Investment/Investor Development Authority FPO - Follow on Public Offer IRF - Impulse Response Function FRE - First Revised Estimate IRFCL - International Reserves and Foreign Currency Liquidity F-TRAC - FIMMDA Trade Reporting and Confirmation System IT - Information Technology FTSE - Financial Times Stock Exchange JSE - Johannesburg Stock Exchange FY - Financial Year LAF - Liquidity Adjustment Facility iivvAbbreviations LCR - Liquidity Coverage Ratio NSDL - National Securities Depository Limited LFPR - Labour Force Participation Rate NSE - National Stock Exchange LMV - Light Motor Vehicle NSO - National Statistical Office LPG - Liquefied Petroleum Gas NSSO - National Sample Survey Office LPR - Loan Prime Rate OBICUS - Order Books, Inventories and MCLR - Marginal Cost of Funds Based Capacity Utilisation Survey Lending Rate OECD - Organisation for Economic Co- MFs - Mutual Funds operation and Development MGNREGA - Mahatma Gandhi National Rural Employment Guarantee Act OIRFs - Orthogonalized Impulse Response Functions mmbtu - Metric Million British Thermal Unit OLS - Ordinary Least Square MMRP - Modified Mixed Reference Period OMOs - Open Market Operations MoA&FW - Ministry of Agriculture and Farmers’ Welfare OMSS - Open Market Sale Scheme MoC&F - Ministry of Chemicals and Fertilisers OPEC - Organization of the Petroleum Exporting Countries MoF - Ministry of Finance PA - Provisional Accounts M-o-M - Month-on-Month PADO - Public Administration, Defence and MoRD - Ministry of Rural Development Other services MoSPI - Ministry of Statistics and Programme PCE - Personal Consumption Expenditure Implementation PE - Provisional Estimates MPC - Monetary Policy Committee PEPP - Pandemic Emergency Purchase MPR - Monetary Policy Report Programme MSCI - Morgan Stanley Capital International PFCE - Private Final Consumption MSF - Marginal Standing Facility Expenditure MSME - Micro, Small and Medium PLFS - Periodic Labour Force Survey Enterprises PMI - Purchasing Managers’ Index NBFCs - Non-Banking Financial Companies POL - Petroleum, Oil and Lubricants NCAER - National Council of Applied Economic Research POSOCO - Power System Operation Corporation Limited NDS-OM - Negotiated Dealing System-Order Matching PPAC - Petroleum Planning and Analysis Cell NDTL - Net Demand and Time Liabilities PPP - Purchasing Power Parity NIMs - Net Interest Margins PSBs - Public Sector Banks NPA - Non-Performing Asset PSUs - Public Sector Undertakings NRE - Non-Resident External PVBs - Private Sector Banks NRO - Non-Resident Ordinary Q1 - First Quarter NSC - National Savings Certificate Q2 - Second Quarter vvMonetary Policy Report April 2025 Q3 - Third Quarter TREPS - Tri-party Repo Q4 - Fourth Quarter UAE - United Arab Emirates QIP - Qualified Institutional Placement UK - United Kingdom q-o-q - Quarter-on-Quarter UNCTAD - United Nations Conference on Trade RBI - Reserve Bank of India and Development RBNZ - Reserve Bank of New Zealand US - United States RE - Revised Estimates USD - US Dollar RECO - Revenue Expenditure to Capital USA - United States of America Outlay UT - Union Territory REER - Real Effective Exchange Rate VAR - Vector Auto Regression RHS - Right Hand Side VAT - Value Added Tax RM - Reserve money VECM - Vector Error Correction Model RMG - Readymade Garments VIX - Volatility Index S&P - Standard and Poor’s VRR - Variable Rate Repo SAAR - Seasonally Adjusted Annualised Rate VRRR - Variable Rate Reverse Repo SAE - Second Advance Estimate WAC - Weighted Average Coupon SCBs - Scheduled Commercial Banks SDF - Standing Deposit Facility WACR - Weighted Average Call Rate SEBI - Securities and Exchange Board of WADR - Weighted Average Discount Rate India WADTDRs - Weighted Average Domestic Term SGS - State Government Securities Deposit Rates SGST - State Goods and Services Tax WALRs - Weighted Average Lending Rates SIAM - Society of Indian Automobile WAM - Weighted Average Maturity Manufacturers WAMMR - Weighted Average Money Market SLF - Standing Liquidity Facility Rate SLR - Statutory Liquidity Ratio WAY - Weighted Average Yield SME - Small and Medium Enterprises WEO - World Economic Outlook SPD - Standalone Primary Dealers WMA - Ways and Means Advances SSE - Shanghai Stock Exchange WPI - Wholesale Price Index SVAR - Structural Vector Auto Regression WTI - West Texas Intermediate TBs/T-Bill - Treasury Bills WTO - World Trade Organization TMA - Tractor and Mechanization Association YCC - Yield Curve Control TOP - Tomato, Onion and Potato Y-o-Y - Year-on-Year vviiChapter I Macroeconomic Outlook I. Macroeconomic Outlook The domestic economic outlook remains resilient supported by improved consumption demand and strong macroeconomic fundamentals. Inflation is expected to align with the target on account of favourable food inflation outlook. Heightened trade tensions, volatile financial markets, geopolitical strife, and climate risks weigh heavily on the outlook. Monetary policy aims to facilitate conducive macroeconomic conditions that reinforce price stability and sustained economic growth. I.1 Key Developments since the October 2024 MPR but has retreated since mid-January 2025 amidst weaker growth expectations and heightened trade Since the release of the Monetary Policy Report (MPR) policy uncertainty. Global commodity prices softened in October 2024, global economic activity has remained somewhat in Q4:2024 but increased sharply in Q1:2025, resilient in 2024 although below historical average, largely on account of metals and agricultural prices. with high frequency indicators hinting at slowdown in Brent crude oil prices rose sharply from late December growth momentum in 2025. Escalating trade tensions 2024 till mid-January 2025, reflecting sanctions on led by a slew of tariff impositions impart uncertainty Russia's energy sector, threats of tariff imposition, and to the growth outlook. Headline inflation though cold weather conditions. It has softened since then decelerating, has remained above the target in many following a moderation in geopolitical risk premium economies owing to the lacklustre and uneven pace and improved supply response from Organization of of disinflation. The decline in headline inflation on the Petroleum Exporting Countries plus (OPEC+). Of account of subdued core inflation (i.e., CPI excluding late, energy and metal prices have softened after the food and fuel) augurs well, although persistent high tariff imposition owing to uncertain global economic services inflation weighs heavily on the outlook. outlook. The divergence in monetary policy pathways across countries has continued. As compared to the highly Turning to the domestic economy, the second advance synchronous tightening phase, there is now a hesitant estimates (SAE) released by the national statistical and guarded rate cut cycle under progress. office (NSO) estimated real gross domestic product (GDP) growth at 6.5 per cent year-on-year (y-o-y) in Financial markets have been on edge due to shifting 2024-25 on the back of robust growth in private final expectations of monetary policy and fears of tariff consumption expenditure. On the supply side, real wars. Geopolitical uncertainties, ratcheting up of gross value added (GVA) expanded by 6.4 per cent, trade tensions and withdrawal of portfolio investors y-o-y, driven by agriculture and services sectors. Real caused retreat in equities from the highs in January GDP growth for Q3:2024-25 was placed at 6.2 per 2025. The sell off further intensified since March cent y-o-y, driven by robust private and government due to fears of trade war. Sovereign bond yields in consumption expenditure. advanced economies (AEs) hardened in Q4:2024 but have softened thereafter due to growth slowdown Headline consumer price index (CPI) inflation, which concerns. Gold prices continued to strengthen and averaged 4.6 per cent during H1:2024-25, increased to reached new heights every month in 2025 till March. 6.2 per cent in October 2024 but has since been easing The US dollar index firmed in Q4:2024 due to delayed with February 2025 inflation print at a seven month expectations of rate easing by the US Federal Reserve low of 3.6 per cent, driven by sharp decline in vegetable and anticipated policies of the new US administration prices inflation. Core inflation which averaged 3.3 per 11Monetary Policy Report April 2025 cent in H1:2024-25, however, inched up to an average in fuel further deepened but core inflation edged up. of 3.8 per cent in H2:2024-25 (up to February). On the After a transient spike in the near term, headline contrary, food inflation which remained elevated at inflation was expected to moderate. Considering the an average of 8.5 per cent during October- December major upside risks on account of unexpected weather 2024, decelerated to 3.8 per cent in February 2025. events and worsening of geopolitical conflicts, the The deflation in fuel inflation, however, moderated. projection of CPI inflation for 2024-25 was retained at 4.5 per cent. By a majority of 5-1, the MPC decided After retaining the policy repo rate at 6.5 per cent to keep the policy repo rate unchanged at 6.5 per since February 2023, the Monetary Policy Committee cent emphasising the need to remain vigilant of the (MPC) has embarked on monetary easing in H2:2024- evolving inflation outlook. Keeping in view the well- 25. It changed the stance from withdrawal of balanced growth-inflation dynamics, the MPC also accommodation to neutral in October 2024, and cut unanimously decided to change the stance from the policy repo rate by 25 basis points (bps) to 6.25 per ‘withdrawal of accommodation’ to ‘neutral’ to provide cent in its February 2025 meeting. In December 2024, flexibility to monitor and assess the outlook on the Reserve Bank reduced the cash reserve ratio (CRR) inflation and growth and act in accordance with the maintained by banks by 50 bps. evolving situation while remaining unambiguously Monetary Policy Committee Meetings: October 2024 focused on achieving a durable alignment of inflation - March 2025 with the target, while supporting growth. When the MPC met in October 2024, the global economy At the time of the December 2024 meeting, the global exhibited resilience, although intense geopolitical economy was steady even as inflation was easing. conflicts, geoeconomic fragmentation, financial However, geopolitical risks and policy uncertainty, market volatility and elevated public debt continued particularly trade policies, resulted in heightened to pose downside risks. Inflation was softening but volatility in financial markets. On the domestic front, the growing divergence in growth-inflation dynamics real GDP growth of 5.4 per cent in Q2:2024-25 was across countries resulted in varying monetary policy much lower than expected as expansion in private responses. Domestically, real GDP registered a growth consumption and investment decelerated, although of 6.7 per cent, y-o-y, in Q1:2024-25, mainly driven by government spending recovered during the quarter, private consumption and investment. The outlook Real GVA growth was tempered by deceleration for agriculture remained positive, with above average in growth of industrial activity reflecting subdued rainfall, better kharif sowing and healthy reservoir performance of manufacturing companies, contraction levels. Manufacturing activity gained momentum in mining activity and lower electricity demand. Real due to improved domestic demand, lower input costs GDP growth for 2024-25 was projected at 6.6 per cent. and a supportive policy environment while services Headline CPI inflation increased to 6.2 per cent in sector growth remained robust. Investment activity October breaching the upper tolerance band, driven was expected to stay buoyant due to resilient bank by an unanticipated rise in food prices. Core inflation credit growth, higher capacity utilisation, healthy also registered an uptick in October. CPI inflation balance sheet of banks and government’s thrust on projection for 2024-25 was revised upwards to 4.8 infrastructure spending. Real GDP growth for 2024-25 per cent. The MPC emphasised on the importance of was projected at 7.2 per cent. Headline inflation fell maintaining price stability as a foundation for long- sharply from 5.1 per cent in June to 3.6 per cent and term high economic growth and remained committed 3.7 per cent in July and August, respectively. Deflation towards restoring the growth-inflation balance in 2Chapter I Macroeconomic Outlook the overall interest of the economy. It decided by a Table I.1 Monetary Policy Committee Meetings majority of 4-2 to keep the policy repo rate unchanged and Policy Rate Voting Patterns at 6.5 per cent and voted unanimously to continue Country Policy Meetings: October 2024 - March 2025 with the neutral stance. Total Meetings Meetings Variation meetings with full without in policy In the run up to the February 2025 meeting, the global consensus full rate (basis consensus points) economic landscape remained challenging with global Brazil 4 4 0 350 growth being below the historical average although Chile 4 4 0 -50 high frequency indicators showed signs of resilience Colombia 4 0 4 -75 along with expansion in world trade. The pace of Czech Republic 4 2 2 -50 Hungary* 6 3 2 0 disinflation was marred by services price inflation. India 3 1 2 -25 Strengthening dollar exerted pressure on emerging Japan 4 2 2 25 market currencies and imparted volatility in financial South Africa 3 1 2 -50 Sweden 4 4 0 -100 markets. On the domestic front, real GDP growth, Thailand 3 1 2 -50 as per the first advance estimates (FAE) of the NSO, UK 4 0 4 -50 US 4 3 1 -50 was estimated to grow at 6.4 per cent in 2024-25, Note: *: Total number of meetings happened is six. However, the minutes underpinned by a recovery in private consumption. of last meeting (March 25, 2025) is not published to date. Looking ahead, improved rabi prospects and recovery Sources: Central bank websites. in industrial activity was expected to support growth in continue with the neutral stance so as to retain the 2025-26. Real GDP growth for 2025-26 was projected at flexibility to respond to the evolving macroeconomic 6.7 per cent. Headline inflation softened sequentially environment. in November and December from its October high The MPC’s voting pattern reflects the diversity in driven by the moderation in food inflation, which individual members’ assessments, expectations and was aided by easing of vegetable prices. Core inflation policy preferences - a characteristic also reflected in remained subdued and fuel deflation continued. voting patterns of other central banks (Table I.1). While Inflationary pressures were expected to moderate in most AEs and emerging market economies (EMEs) the near term, due to good kharif production, easing undertook policy easing, concerns on slower pace of in vegetable prices and favourable rabi crop prospects disinflation compounded by developments on the while continued uncertainty in global financial geopolitical front and trade fragmentation suggested markets, volatility in energy prices and adverse weather events posed upside risks. CPI inflation projection for shallow rate cut cycle amidst policy uncertainties. Few 2024-25 was retained at 4.8 per cent. Also, assuming exceptions like Japan and Brazil which continued with a normal monsoon next year, CPI inflation for 2025- monetary tightening to keep inflation around their 26 is projected at 4.2 per cent. The MPC noted that respective targets. inflation is on a declining trajectory largely due to Macroeconomic Outlook favourable outlook on food prices and impact of past Chapters II and III analyse macroeconomic monetary policy measures and is further expected to moderate in 2025-26, gradually aligning with the target. developments relating to inflation and economic Therefore, the evolving growth-inflation dynamics activity during H2:2024-25 (October 2024 - March opened up space to support growth. Accordingly, the 2025). Turning to the baseline assumptions, MPC unanimously voted to reduce the policy repo rate international crude prices exhibited declining pattern by 25 bps to 6.25 per cent. The MPC also decided to during October-December 2024, hovering around US$ 33Monetary Policy Report April 2025 non-OPEC countries. Anxiety over the impact of Table I.2: Baseline Assumptions for Projections sanctions over Russia and speculation of increased Indicator MPR October 2024 MPR April 2025 restrictions on Iran, along with fears of potential Crude Oil (Indian Basket) US$ 80 per barrel US$ 70 per barrel during H2: 2024-25 during 2025-26 supply disruptions, triggered an upswing in prices in Exchange rate ₹ 83.50/US$ during ₹ 86/US$ during early January to around US$ 84 per barrel. Since then, H2: 2024-25 2025-26 prices gradually declined in February and fell to its Monsoon Normal for 2025-26 Normal for 2025-26 Global growth 3.2 per cent in 2024 3.1 per cent in 2025 lowest levels in recent times in March 2025 primarily 3.3 per cent in 2025 3.0 per cent in 2026 due to announcement of production increase by Fiscal deficit To remain within BE To remain within BE OPEC along with reduced geopolitical risk premiums (per cent of GDP) 2024-25 2025-26 Centre: 4.9 Centre: 4.4 and adequate inventory. Geopolitical developments Combined:7.3 Combined: 7.1 continue to impart significant uncertainty to the Domestic macroeconomic/ No major change No major change structural policies during outlook (Charts I.1a and I.1b). The spread between the forecast period global petroleum product prices and crude prices Notes: 1. The Indian basket of crude oil represents a derived numeraire softened (Chart I.1c). Considering these factors, the comprising sour grade (Oman and Dubai average) and sweet grade (Brent) crude oil. baseline assumption for crude price (Indian basket) 2. The exchange rate path assumed here is for the purpose of is reduced to US$ 70 per barrel during 2025-26 generating the baseline projections and does not indicate any ‘view’ on the level of the exchange rate. The Reserve Bank is (Table I.2). guided by the objective of containing excess volatility in the foreign exchange market and not by any specific level of and/or Second, the nominal exchange rate of the Indian band around the exchange rate. 3. BE: Budget estimates. rupee (₹) saw two-way movements in the range of 4. Combined fiscal deficit refers to that of the Centre and States ₹83.8-87.6 per US dollar during H2:2024-25 with taken together. Sources: RBI estimates; Budget documents; International Monetary Fund a depreciating bias in 2025 till early March. The (IMF); and Organisation for Economic Cooperation and Development strengthening of US dollar since early October 2024 (OECD). 74 per barrel on account of relatively modest growth resulted in depreciation of EME currencies including in global oil demand as well as robust supply from rupee and increased volatility in financial markets. Chart I.1: Crude Oil Prices Sources: Bloomberg; US Energy Information Administration (EIA); and Petroleum Planning & Analysis Cell. 4 lerrab rep $SU a: Brent Prices b: World Oil Production, Consumption and Change in Stock Spot price Futures - October 3, 2024 Futures - March 31, 2025 yad rep slerrab noilliM yad rep slerrab noilliM c: Global Crude and Product Prices lerrab rep $SU 115 105 95 85 75 65 55 45 35 25 Petrol Crude oil (Indian basket) Diesel 22-raM 22-luJ 22-voN 32-raM 32-luJ 32-voN 42-raM 42-luJ 42-voN 52-raM 52-luJ 52-voN 110 1 108 0.5 106 104 0 102 100 -0.5 98 -1 96 94 -1.5 92 90 -2 Production Consumption Stock Drawdown (RHS) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 180 160 140 120 100 83.1 80 79.6 72.5 60 40 2022 2023 2024 2025 22-raM 22-yaM 22-luJ 22-peS 22-voN 32-naJ 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raMChapter I Macroeconomic Outlook Since mid-January, however, the dollar has retreated 3.2 per cent in 2025 before rebounding to 3.3 per cent with high frequency indicators pointing towards in 2026. The recent reciprocal tariff announcements lacklustre growth and elevated policy uncertainty. by the US administration and associated policy Accordingly, EME currencies have recovered, albeit uncertainty, however, poses headwinds to global not fully. Taking into consideration the uncertainty growth and inflation. around US dollar movements, fluctuations of global I.2 The Outlook for Inflation capital flows and international crude oil prices, the In H2:2024-25 so far (up to February), headline baseline assumption for the exchange rate is revised inflation breached the upper tolerance band briefly to ₹86 per US dollar as against ₹83.50 in the October in October 2024, but has since eased on the back of 2024 MPR. declining food inflation. In the March 2025, round Third, global growth was projected at 3.1 per cent in of the Reserve Bank’s households survey1, the three 2025 and 3.0 per cent in 2026 by the Organisation months and one year ahead inflation expectations of for Economic Cooperation and Development (OECD) urban households’ decreased by 40 bps and 50 bps, in its Economic Outlook Interim Report released reaching 8.9 per cent and 9.7 per cent, respectively, as in March 2025. The global disinflation continues, compared to the January 2025 round. The proportion with inflation expected to decline to 4.2 per cent of respondents expecting the general price level to in 2025 and to 3.5 per cent in 2026, according to increase by more than the current rate declined for World Economic Outlook in its January 2025 update both horizons vis-à-vis the previous round (Chart I.3). by International Monetary Fund (IMF) (Chart I.2). In this context, it is pertinent to note that various Global trade growth (goods and services combined) is economic agents form their inflation expectations projected to decelerate from 3.4 per cent in 2024 to based on different factors (Box I.1). Chart I.2: IMF and OECD Projections for Growth and Inflation Note: OECD inflation projections are for G-20 countries Sources: Economic Outlook Interim Report March 2025 Update, OECD; World Economic Outlook January 2025 update, IMF. 1 The Reserve Bank’s inflation expectations survey of households is being conducted in 19 cities since March 2021 (18 cities in the previous rounds) and the results of the March 2025 round are based on responses from 6,091 households. 55 )tnec reP( noitcejorP Chart I.3: Inflation Expectations of Households 6.0 5.7 5.5 5.3 5.0 4.5 4.2 4.0 3.8 3.5 3.5 3.23.33.3 3.23.13.0 3.2 3.0 2.5 2.0 1.5 1.0 0.5 0.0 IMF OECD IMF OECD GDP Inflation 2024 2025 2026 Source: Inflation Expectations Survey of Households, RBI. )tnec reP( etar noitalfnI )tnec reP( stnednopser fo noitroporP 13 80 12 70 11 10 60 9 50 8 7 40 6 30 5 4 20 Three months ahead (Median) One year ahead (Median) Three months ahead price increase more than the current rate (RHS) One year ahead price increase more than the current rate (RHS) 22-raM 22-yaM 22-luJ 22-peS 22-voN 32-naJ 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raMMonetary Policy Report April 2025 Box I.1: What Affects Inflation Expectations of Economic Agents? Anchoring inflation expectations is paramount in monetary policy formulation, particularly in an inflation- Table 1: Long Run Estimates of VEC Model targeting framework. Empirical evidence suggests Variable Financial Daily Self that positive changes in interest rates cause inflation sector workers employed expectations to decline (Goncalves et al., 2025). However, employees monetary responses of different agents vary, i.e., wacr(-1) -0.297* -0.260 -0.407* different categories of respondents respond differently (0.113) (0.136) (0.121) to changes in monetary policy. An increase in the repo inflation(-1) 0.443** 0.529*** 0.526*** rate was found to have a sobering impact on inflation (0.095) (0.115) (0.102) expectations of the financial and business sector agents govt_share(-1) 0.053 -0.229** -0.059 but have a contrary impact for trade unions (Mlangeni (0.056) (0.067) (0.060) and Buthelezi, 2023). ln_crude_oil 1.248 4.127*** 3.901*** (0.509) (0.617) (0.546) To examine this phenomenon in the Indian context, constant 2.451 -5.017 -5.977 a vector error correction model (VECM) is used to (1.987) (2.409) (2.131) explore the relationship between key indicators and Error Correction, -0.904** -0.278* -0.417* inflation expectations of different economic agents (0.132) (0.094) (0.125) such as financial sector employees, daily workers, and α R-squared 0.503 0.158 0.193 self-employed workers, using the bi-monthly inflation Johansen cointegration 2 2 2 expectations data from January 2017 to January 2025 with test for no. of C.E. the following specification: Observations 49 49 49 Standard errors in parentheses. where α βt * p < 0.10, ** p < 0.05, *** p < 0.01 C.E. denotes cointegrating equations where x t is Δt xhte = v Γe *ct xot-r1 +o f ϵ te , n d o genou s Γ v =a ria *bles, is the Source: RBI staff estimates. adjustment coefficient and βt is the cointegrating vector (which defines the long-term relationship betwαeen the employed. Also, financial sector employees are found to variables) and ϵ is the error term. have a higher adjustment factor as compared to other t groups, which suggest faster reaction to any deviation The model is defined as follows: in actual inflation from the long-run steady state. Past ( wacr inflation govt_ inflation impacts positively in the formation of inflation share ln_crude_oil ) expectations for all groups suggesting persistence. In ΔYt+1 = α*Yt + β1* t-1 + β2* t-1 + β3* contrast, crude oil prices are found to impact inflation where is one t-y1e +a r β 4a *head inflatito +n c e +x p ϵetctations of expectations of self-employed and daily workers only financial sector employees, daily workers, and the self-emYpt loyed, wacr is the weighted average call rate (Table 1). Overall, the findings suggest that the formation of inflation expectations of different economic agents are representing monetary policy; inflation is CPI inflation; governed by diverse factors corroborating cross-country govt_share is the share of government expenditure in experience. GDP and ln_crude_oil represents natural logarithm of global crude oil prices which is an average of Brent, West References: Texas Intermediate (WTI) spot and Dubai Fateh. The 1. Goncalves, M., Rodrigues, M., and Genta, F (2025). unit root test suggests that all variables are integrated of “Monetary Policy and Inflation Expectations: High- order 1. Using appropriate lag length criteria, Johansen Frequency Evidence from Brazil”, IMF Working Cointegrating test finds a cointegrating relationship among the variables. Paper WP/25/48. The results suggest that monetary policy changes have a 2. Mlangeni, T., and Buthelezi, E. M (2023). “Monetary differential impact on inflation expectations of various policy and inflation expectations: impact and groups. Inflation expectations are found to be negatively causal analysis of heterogeneous economic agents’ associated with the change in the policy interest rate in expectations in South Africa”, Journal of Applied the long-run for financial sector employees and the self- Economics, 27:1. 6Chapter I Macroeconomic Outlook Chart I.4: Expectations about Cost of Raw Materials/Inputs and Selling Prices Manufacturing firms polled in the January-March 2025 and intoxicants, and fuel and light) is expected to round of the Reserve Bank’s industrial outlook survey be at 4.0 per cent during Q4:2024-25, thereafter, expect pressures from cost of raw materials to ease it is expected to remain around 4.2-4.3 per cent till Q3:2025-26 and at 4.5 per cent in Q4. and growth in selling price to moderate in Q1:2025- 26 vis-à-vis the previous quarter (Chart I.4a).2 Both Long-run inflation expectations of professional services sector companies and infrastructure firms forecasters – measured by their 5 and 10 years ahead expect higher input cost pressures and higher output expectations – are at 4.5 per cent and 4.3 per cent, prices in Q1:2025-26 (Charts I.4b and I.4c).3 In the respectively, in the current round (Chart 1.5 b). Purchasing Managers Index (PMI) surveys for March Looking ahead, the inflation outlook will be 2025, input prices increased for manufacturing firms conditioned by several factors, both global and and declined for services firms vis-à-vis the previous domestic. Food inflation may continue to ease due month while output prices declined for both. to robust kharif harvest arrivals which, coupled with promising rabi crop, bode well for inflation Professional forecasters surveyed by the Reserve outlook. The Union Budget proposals on agriculture Bank in March 2025 projected CPI inflation to decline and the commitment to fiscal consolidation further from 5.6 per cent in Q3:2024-25 to 3.9 per cent in Q4. strengthens the inflation outlook. However, lingering They expect it to remain around 3.9-4.0 per cent till uncertainty in global financial markets, volatility in Q3 of 2025-26 before increasing to 4.5 per cent in energy prices, adverse weather events, rising global Q4:2025-26 (Chart I.5a and Table I.3).4 Core inflation supply chain pressures and continuing geopolitical (i.e., CPI excluding food and beverages, pan, tobacco strife remain key risks. 2 The results of the January-March 2025 round of the industrial outlook survey are based on responses from 1,310 companies. 3 Based on 725 services companies and 154 infrastructure firms polled in the January-March 2025 round of the services and infrastructure outlook survey. 4 45 panellists participated in the March 2025 round of the Reserve Bank’s survey of professional forecasters. 77 )tnec reP( esnopser teN a: Manufacturing Firms b: Services Firms c: Infrastructure Firms Cost of raw materials Selling price )tnec reP( esnopser teN )tnec reP( esnopser teN 80 60 40 20 12.5 0 -20 -40 -40.1 -60 -80 -100 Cost of inputs Selling price Cost of inputs Selling price Note: Net response is the difference between the share of respondents reporting optimism and those reporting pessimism. The range is -100 to 100. A positive/ negative value of net response is considered as optimistic/pessimistic from the view point of respondent firms. Therefore, higher positive values of selling prices indicate increase in output prices while lower values for the cost of raw materials/cost of inputs indicate higher input price pressures and vice versa. Sources: Industrial Outlook Survey and Services and Infrastructure Outlook Survey, RBI. 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 80 60 55.8 40 20 0 -20 -40 -60 -69.2 -80 -100 2022-23 2023-24 2024-25 2025- 26 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 80 60 62.1 40 20 0 -20 -40 -60 -71.1 -80 -100 2022-23 2023-24 2024-25 2025- 26 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2022-23 2023-24 2024-25 2025- 26Monetary Policy Report April 2025 Taking into account the initial conditions, signals time-series and structural models5, CPI inflation from forward-looking surveys and estimates from is projected to average 4.0 per cent in 2025-26 – 3.6 per cent in Q1, 3.9 per cent in Q2, 3.8 per cent in Q3 Table I.3: Projections - Reserve Bank and and 4.4 per cent in Q4, with risks evenly balanced Professional Forecasters (Per cent) (Chart I.6 and Table I.3). The 50 per cent and the 70 2024-25 2025-26 2026-27 per cent confidence intervals for headline inflation Reserve Bank’s Baseline Projections in Q4:2025-26 are 2.8-6.0 per cent and 1.9-6.9 per Inflation 4.7* 4.0 4.3 cent, respectively. For 2026-27, assuming a normal Real GDP growth 6.5@ 6.5 6.7 Median Projections of Professional Forecasters monsoon, and no further exogenous or policy shocks, Inflation, Q4 (y-o-y) 3.9 4.5 - structural model estimates indicate that inflation Real GDP growth 6.4 6.5 6.6 Gross domestic saving (per cent of GNDI) 30.2 30.4 30.3 will average 4.3 per cent with 4.5 per cent in Q1, 4.3 Gross capital formation (per cent of GDP) 31.0 30.7 31.1 per cent in Q2, 4.4 per cent in Q3 and 4.3 per cent in Credit growth of scheduled commercial banks 11.5 12.3 13.5 Combined gross fiscal deficit (per cent of GDP) 7.8 7.4 7.1 Q4. The 50 per cent and the 70 per cent confidence Central government gross fiscal deficit (per 4.8 4.4 4.3 intervals for headline inflation in Q4:2026-27 are 2.6- cent of GDP) Repo rate (end-period) 6.25 5.75 - 6.0 per cent and 1.7-6.9 per cent, respectively. Yield on 91-days treasury bills (end-period) 6.5 6.0 6.4 Yield on 10-year central government The baseline forecasts are subject to several upside 6.6 6.4 6.5 securities (end-period) and downside risks. The upside risks emanate from Overall balance of payments (US$ billion) 4.1 17.0 24.1 Merchandise exports growth -0.2 3.5 5.0 continuing geopolitical conflicts and resultant supply Merchandise imports growth 4.6 4.5 5.5 disruptions; volatility of energy prices; and adverse Current account balance (per cent of GDP) -0.8 -1.0 -1.0 weather events. The downside risks could emanate Notes: GNDI: Gross National Disposable Income. @: NSO Second Advance Estimates; from an early resolution of geopolitical conflicts; *: Average CPI Inflation in 2024-25 (up to February). Sources: RBI staff estimates; and Survey of Professional Forecasters adherence to fiscal consolidation and debt path; further (March 2025). 5 Joice John, Deepak Kumar, Asish Thomas George, Pratik Mitra, Muneesh Kapur and Michael Debabrata Patra (2023), “A Recalibrated Quarterly Projection Model (QPM 2.0) for India”, Reserve Bank of India Bulletin, February, Volume LXXVII(2), pp.59-77. 8 tnec reP )tnec reP( etar noitalfnI Chart I.5: Inflation Expectations of Professional Forecasters a: CPI Inflation Expectations : Short-run* b: CPI Inflation Expectations: Long-run 8 7 6 5.6 5 4.5 4.0 4.0 3.9 4 3.9 3 2 1 2022-23 2023-24 2024-25 2025-26 Actual Median projection Survey Round *: Four quarters ahead expectations in March 2025. Five years ahead Ten years ahead Sources: Survey of Professional Forecasters, RBI; and National Statistical Office. 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 6 5 4 3 61-raM 61-luJ 61-voN 71-raM 71-luJ 71-voN 81-raM 81-luJ 81-voN 91-raM 91-luJ 91-voN 02-raM 02-luJ 02-voN 12-raM 12-yluJ 12-voN 22-raM 22-luJ 22-voN 32-raM 32-luJ 32-voN 42-raM 42-luJ 42-voN 52-raMChapter I Macroeconomic Outlook Chart I.7: Consumer Confidence Source: Consumer Confidence Survey, RBI. correction in global crude and commodity prices in future expectations index, strengthened further and case of slowing global demand; and improvement in maintained its resilience in the optimistic territory supply conditions. (Chart I.7). I.3 The Outlook for Growth Reserve Bank's industrial outlook survey results reveal that business optimism in the manufacturing sector Domestic economic activity remains strong supported for Q1:2025-26 moderated marginally, which is partly by revival in consumption as well as government’s seasonal (Chart I.8a). The services and infrastructure capex push. Pick up in private consumption, upturn in agricultural activity, continuing resilience of the companies, on the other hand, remained optimistic services sector, high capacity utilisation, healthy about the overall business situation in Q1:2025-26 balance sheets of banks and corporates, and (Charts I.8b and I.8c). government’s continued thrust on capital expenditure Recent surveys by other agencies indicate a mixed augur well for the growth outlook. Uncertainty about picture on business expectations relative to the global trade owing to rising protectionist measures, previous round (Table I.4). In the PMI surveys for persistent geopolitical tensions, rising supply chain March 2025, manufacturing firms remained upbeat pressures, and volatile global financial conditions, about the year ahead though sentiments moderated however, render the outlook uncertain. for services firms. Turning to the key messages from forward-looking Professional forecasters polled in the March 2025 surveys, consumer confidence (the current situation round of the Reserve Bank’s survey expected real index) improved in the pessimistic territory in March 2025 vis-à-vis the previous round, driven by improved GDP growth at 7.0 per cent during the last quarter of sentiments across all survey parameters6. Consumers’ 2024-25. Growth is expected at 6.5-6.7 per cent during optimism for the year ahead, measured by the Q1-Q4:2025-26 (Chart I.9 and Table I.3). 6 The Reserve Bank’s consumer confidence survey is being conducted in 19 cities since March 2021 (13 cities in the previous rounds) and the results of the March 2025 round are based on responses from 6,021 respondents. 99 xednI 130 122.4 120 110 100 95.5 90 80 70 60 50 40 Current situation Future expectations 22-raM 22-yaM 22-luJ 22-peS 22-voN 32-naJ 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raM Chart I.6: Projection of CPI Inflation (y-o-y) tnec reP 10 8 6 4 2 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2023-24 2024-25 2025-26 2026-27 50 per cent CI 70 per cent CI 90 per cent CI CI-Confidence Interval Note: The fan chart depicts uncertainty around the baseline projection path. The baseline projections are conditioned upon the assumptions set out in Table I.2. The thick red shaded area represents 50 per cent confidence interval, implying that there is 50 per cent probability that the actual outcome will be within the range given by the thick red shaded area. Likewise, for 70 per cent and 90 per cent confidence intervals, there is 70 per cent and 90 per cent probability, respectively, that the actual outcomes will be in the range represented by the respective shaded areas. Source: RBI staff estimates.Monetary Policy Report April 2025 Chart I.8: Business Assessment and Expectations a: Manufacturing Firms b: Services Firms c: Infrastructure Firms Assessment Expectations Assessment Expectations Assessment Expectations Sources: Industrial Outlook Survey and Services and Infrastructure Outlook Survey, RBI. Real GDP growth was higher at 6.2 per cent in cent in Q4 – with risks evenly balanced around this Q3:2024-25 as compared with 5.6 per cent in Q2. baseline path (Chart I.10 and Table I.3). Assuming a Taking into account the baseline assumptions, survey normal monsoon and no major exogenous or policy indicators and model forecasts, real GDP growth is shocks, structural model estimates for 2026-27 expected at 6.5 per cent in 2025-26 – 6.5 per cent in indicate real GDP growth at 6.7 per cent, with Q1 at Q1; 6.7 per cent in Q2; 6.6 per cent in Q3 and 6.3 per 6.5 per cent, Q2 at 6.4 per cent, Q3 at 6.8 per cent and Q4 at 6.8 per cent. Table I.4: Business Expectations Surveys Item NCAER FICCI Dun and CII Business Overall Bradstreet Business Confidence Business Composite Confidence Index Confidence Business Index (January Index Optimism (March 2025) (November Index 2025) 2024) (April 2025) Current level of 138.4 62.5 120.2 63.7 the index Index as per 134.3 67.3 114.4 66.2 previous survey % change (q-o-q) 3.0 -7.1 5.1 -3.8 sequential % change (y-o-y) 8.5 -6.6 11.2 -6.8 Notes: 1. NCAER: National Council of Applied Economic Research. 2. FICCI: Federation of Indian Chambers of Commerce & Industry. 3. CII: Confederation of Indian Industry. 4. Dun and Bradstreet Composite Business Optimism Index is for Q1:2025-26, CII Business Confidence Index is for Q4:2024- 25, FICCI Overall Business Confidence Index is for Q2:2024-25, and NCAER Business Confidence Index is for Q3:2024-25 Sources: NCAER, FICCI, CII and Dun & Bradstreet Information Services India Pvt. Ltd. 10 xednI no esnopseR teN )tnec reP( noitautiS ssenisuB llarevO no esnopseR teN )tnec reP( noitautiS ssenisuB llarevO 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2022-23 2023-24 2024-25 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 62-5202 2022-23 2023-24 2024-25 62-5202 140 80 80 69.6 68.9 130 60 60 120 40 40 37.9 117.5 34.9 110 20 20 110.4 100 0 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2022-23 2023-24 2024-25 62-5202 Chart I.9: Professional Forecasters' Projection of Real GDP Growth Sources: Survey of Professional Forecasters, RBI; and National Statistical Office. tnec reP 14 12 10 8 6.2 7.0 6.6 6.7 6.5 6.5 6 4 2 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2022-23 2023-24 2024-25 2025-26 Actual Median projectionChapter I Macroeconomic Outlook owing to protectionist trade policies adopted by Chart I.10: Projection of Growth in major economies, prolonged geopolitical conflicts, Real GDP (y-o-y) volatility in global financial and commodity markets and possibility of adverse climate events. Against this backdrop, this section explores the plausible alternative scenarios to assess the balance of risks around the baseline projections of inflation and growth. (i) Global Growth Uncertainties Global economic activity remained steady in H2:2024, albeit marred by sluggish growth recorded by some Asian and European economies as weakness in manufacturing and trade exports offset the robust growth momentum in the United States. Going forward, however, global growth is prone There are upside and downside risks to this to considerable uncertainties. Trade tensions and baseline growth path. The upside risks emanate geopolitical conflicts between major economies are from revival in corporate investment cycle; bound to create uncertainties in global financial improving business sentiments; faster global markets, trigger a slowdown in global trade and disinflation; quick resolution of global trade related create disruptions in supply chains. Additionally, issues; continued softening of global commodity protectionist trade policies including reciprocal prices; and an early resolution of the geopolitical tariffs will further fragment global trade and have conflicts. On the contrary, increasing trade an adverse impact on growth prospects leading to fragmentation due to protectionist policies including potential increase in input costs for businesses. higher tariffs; further escalation in geopolitical Major central banks could also diverge in the tensions; volatility in international financial pace and direction of monetary policy actions in markets; frequent weather-related disturbances; and achieving the last mile of disinflation, inducing supply chain disruptions pose downside risks to the higher volatility in global financial markets with baseline growth path. spillover effects on EMEs. Global economic outlook is also subject to headwinds from fiscal sustainability I.4 Balance of Risks concerns, occurrence of extreme weather events and The baseline projections of growth and inflation are technological disruptions. If some of these scenarios based on the set of assumptions related to the likely materialise, and if global growth turns out to be 100 path of key domestic and global macroeconomic bps lower than assumed in the baseline, domestic variables which are set out in Table 1.2. These baseline growth and inflation could be lower by around 30 assumptions are, however, subject to uncertainties bps and 15 bps, respectively, in comparison with the emanating from reciprocal and retaliatory tariffs baseline projections. However, if there is a faster 1111 tnec reP 15 10 5 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2023-24 2024-25 2025-26 2026-27 50 per cent CI 70 per cent CI 90 per cent CI CI-Confidence Interval Note: The fan chart depicts uncertainty around the baseline projection path.(cid:31)The baseline projections are conditioned upon the assumptions set out in Table I.2. (cid:31)The thick green shaded area represents 50 per cent confidence interval, implying that there is 50 per cent probability that the actual outcome will be within the range given by the thick green shaded area. Likewise, for 70 per cent and 90 per cent confidence intervals, there is 70 per cent and 90 per cent probability, respectively, (cid:31)that the actual outcomes will be in the range represented by the respective shaded areas.(cid:31) Source: RBI staff estimates.Monetary Policy Report April 2025 recovery in global trade owing to quicker resolution growth. In contrast, recovery in global demand, and of trade related issues between the major economies restriction in oil supplies due to continuation of geo- and synchronised accommodative monetary policy political tensions may put upward pressure on crude due to benign inflation outlook going forward, global oil prices. In a scenario, when crude oil prices are growth prospects may improve. If global growth is higher by 10 per cent than the baseline assumption, higher by 50 bps relative to the baseline, domestic domestic inflation may turn out to be higher by 30 growth and inflation could turn out to be higher bps and growth may be weaker by around 15 bps. by around 15 bps and 7 bps, respectively (Charts (Charts I.11a and I.12a). I.11a and I.12a). (iii) Exchange Rate (ii) International Crude Oil Prices The Indian Rupee depreciated vis-à-vis the US dollar Global crude oil prices have exhibited a declining during October 2024-March 2025, primarily reflecting trend with Brent crude falling from a high of US$ the uncertainties due to disruptions in global trade, 82 per barrel in early-October 2024 to an average of strengthening of the US dollar and capital outflows US$73 per barrel in March 2025. Weak global demand reflecting ‘flight to safety’. Going ahead, restrictive conditions, sustained supply increase from OPEC+ monetary policy by the US Federal Reserve than and non-OPEC countries and orderly resolution of what has been currently factored in by the financial geo-political conflicts will have a potential dampening markets could further lower the attractiveness of impact on crude oil prices. In this scenario, if crude EME assets. Rising trade protectionism, currency war oil prices drop by 10 per cent relative to the baseline, threats, and higher international crude oil prices are and in case of its full pass-through to domestic also some of the factors that may exert downward product prices, inflation could be lower by around pressure on the Indian rupee. In this scenario, if INR 30 bps with a boost of 15 bps to India’s real GDP depreciates by 5 per cent over the baseline, inflation 12 tnec reP tnec reP Chart 1.11: Impact of Risk Scenarios on the Baseline Inflation Path a. Crude Oil Prices and Global Demand Shocks b. Exchange Rate and Food Price Shocks 6.0 5.0 4.0 3.0 2.0 Source: RBI staff estimates. 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 6.0 5.0 4.0 3.0 2.0 2024-25 2025-26 2026-27 Higher crude price Lower crude price Global growth recovery Global growth slowdown Baseline 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2024-25 2025-26 2026-27 Exchange rate depreciation Exchange rate appreciation Higher food inflation Lower food inflation BaselineChapter I Macroeconomic Outlook could rise by around 35 bps while GDP growth could rabi arrivals. In such a scenario, headline inflation benefit by around 25 bps through the trade channel may moderate by around 50 bps over the baseline. in the short term. On the other hand, the Indian On the other hand, sudden reversal in the prices of economy exhibits continued resilience in growth perishable food items and reduction of agricultural with a stable inflation outlook and is expected to yields due to adverse climatic conditions may exert upward pressure on food prices. These factors contribute to revival of global demand conditions. could lead to higher headline inflation by 50 bps as These developments, along with faster resolution compared to the baseline (Charts I.11b and I.12b). of trade protectionism and quicker than anticipated monetary policy easing by major economies, would I.5 Conclusion lead to strengthening of the Indian Rupee. In this Domestic economic activity is on a recovery path scenario, if the INR appreciates by 5 per cent relative and is expected to remain resilient backed by to the baseline, inflation and GDP growth could consumption demand. It needs to be recognised moderate by around 35 bps and 25 bps, respectively that India’s forte is its high growth potential and (Charts I.11b and I.12b). robust macroeconomic fundamentals. Government's push for consumption and capex, resilient services (iv) Food Inflation sector, robust outlook of agricultural sector aided by Food inflation witnessed moderation in H2:2024-25 strong corporate and bank balance sheets provide after scaling its peak in October 2024, primarily driven impetus to the growth momentum, going forward. by sharp seasonal correction in vegetable prices, lower The measures announced in the Union Budget 2025- cereals and pulses inflation and deflation in spices. 26 augur well for improving domestic consumption. Going ahead, food prices may soften faster supported Moreover, the adherence to fiscal consolidation and by robust kharif crop production and likely bumper debt path without compromising on the quality 1133 tnec reP tnec reP Chart 1.12: Impact of Risk Scenarios on the Baseline Growth Path a. Crude Oil Prices and Global Demand Shocks b. Exchange Rate and Food Price Shocks 8.0 8.0 7.0 7.0 6.0 6.0 5.0 5.0 4.0 4.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2024-25 2025-26 2026-27 2024-25 2025-26 2026-27 Higher crude price Lower crude price Exchange rate appreciation Exchange rate depreciation Global growth recovery Global growth slowdown Higher food inflation Lower food inflation Baseline Baseline Source: RBI staff estimates.Monetary Policy Report April 2025 of expenditure will help in improving sovereign by US administration have hightened policy ratings, attracting capital inflows, easing financial uncertainty posing new headwinds for global conditions, and improving overall sentiment and growth and inflation. While India cannot remain outlook. Well-coordinated fiscal and monetary policy immune to these developments, the progress working in tandem could undoubtedly generate achieved on the disinflation front gives headroom to improved outcomes in terms of better growth- monetary policy to focus on balancing the growth- inflation balance. The recent tariff announcements inflation outcome. 14Chapter II Prices and Costs II. Prices and Costs Headline inflation has been marked by considerable volatility during H2:2024-25, engendered by overlapping food price shocks. As the impact of shocks receded, a sharp correction followed, resulting in headline inflation declining below the target rate of 4 per cent by February 2025. Core inflation pressures were muted in H2, though February saw a notable pick-up. Industrial and farm input costs remained subdued. Nominal rural wage growth stayed elevated, driven by agricultural wages, while the organised sector staff cost growth decelerated. Movements in headline consumer price index and explain the underlying reasons thereof. The (CPI) inflation1 since August 2024 were marked by October 2024 MPR had projected inflation at 4.8 per considerable volatility engendered by overlapping cent in Q3:2024-25 and 4.2 per cent in Q4:2024-25 food price shocks that pushed up headline inflation (Chart II.2). The deviations of the actual inflation above the upper tolerance threshold of 6 per cent outcomes from the projections were bi-directional in October 2024. As the impact of shocks receded, – with inflation being higher than projections in a sharp correction followed, resulting in headline Q3:2024-25 and lower than projections in Q4. The inflation declining below the target rate of 4 per cent undershoot of projections by 80 basis points in Q3 by February 2025. arose primarily from an unanticipated transitory spike in prices of tomatoes due to weather disruptions and Headline CPI inflation surged from 3.7 per cent in a rapid pick-up in domestic edible oil prices due to August to 6.2 per cent by October 2024, propelled by higher costs of imports. Thereafter, with vegetables a jump in food inflation owing to a spike in prices of prices registering a sharper than anticipated winter vegetables, and oils and fats. In the ensuing months, season price correction during January and February as food inflation eased on correction in vegetable 2025, realised headline inflation at 3.9 per cent in Q4 prices, headline inflation softened successively to 4.3 per cent in January 2025 and further to 3.6 per Chart II.1: CPI Inflation (y-o-y) cent in February. Reflecting the volatility in food inflation, the contribution of the food and beverages group (with a weight of around 46 per cent in the CPI basket) to headline inflation fell from an elevated 74 per cent in October 2024 to 50 per cent in February 2025. Deflation in the fuel group persisted, though the rate of deflation moderated from (-)5.3 per cent in August 2024 to (-)1.3 per cent in February 2025. Core (CPI excluding food and fuel) inflation2 remained muted, moving in a range of 3.5-3.8 per cent during September 2024 to January 2025, before firming up to 4.1 per cent in February 2025 (Chart II.1). The Reserve Bank of India (RBI) Act, 1934 (amended in 2016) enjoins the RBI to set out deviations of actual inflation outcomes from projections, if any, 1 Headline inflation is measured by year-on-year (y-o-y) changes in the all-India consumer price index (CPI) produced by the National Statistical Office (NSO). 2 Core CPI, i.e., CPI excluding food and fuel is worked out by eliminating the groups ‘food and beverages’ and ‘fuel and light’ from the headline CPI. 1155 tnec reP 14 12 10 8 6 4.1 4 3.8 3.6 2 0 -1.3 -2 -4 -6 Headline Food and beverages Fuel and light CPI excluding food and fuel Target Tolerance band Sources: National Statistical Office (NSO); and RBI staff estimates. 32-beF 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beFMonetary Policy Report April 2025 II.1 Consumer Prices The surge in headline inflation by 1.8 percentage points from 3.7 per cent in August 2024 to 5.5 per cent in September came from an uptick in price momentum3 along with sharp unfavourable base effects (1.1 percentage points). The headline CPI momentum quickened pace in October – primarily coming from a sharp increase in food prices – that firmed up headline inflation to 6.2 per cent, breaching the upper tolerance threshold, notwithstanding significant favourable base effects. Thereafter, with a sharp correction in the food price momentum, headline momentum began to register consecutive declines during November 2024-February 2025, resulting in a softening of headline inflation by 2.6 percentage points during this period to touch a low of 3.6 per cent in February. This decline so far (up to February) turned out to be 25 bps lower was despite a sharp pick-up in core (CPI excluding food than the projections set out in the October 2024 MPR. and fuel) momentum in February (Chart II.3). Chart II.3: CPI Inflation – Momentum and Base Effects a: CPI Headline M-o-m change Base effect Monthly change in y-o-y inflation Sources: NSO; and RBI staff estimates. 3 A change in CPI year-on-year (y-o-y) inflation between any two months is the difference between the current month-on-month (m-o-m) change in the price index (momentum) and the m-o-m change in the price index 12 months earlier (base effect). For more details, see Box I.1 of the MPR, September 2014. 16 stniop egatnecreP stniop egatnecreP b: CPI Food and Beverages stniop egatnecreP c: CPI Fuel and Light stniop egatnecreP 2.0 1.0 0.0 -0.2 -0.5 -1.0 -0.7 -2.0 -3.0 d: CPI excluding Food and Fuel 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 4.0 2.0 0.0 -0.1 -1.6 -2.0 -1.8 -4.0 -6.0 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 5.0 4.0 3.0 2.0 1.0 0.1 0.2 0.0 0.1 -1.0 -2.0 -3.0 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 0.8 0.7 0.6 0.4 0.4 0.2 0.0 -0.2 -0.3 -0.4 -0.6 -0.8 tnec reP 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF Chart II.2: CPI Inflation (y-o-y): Projection versus Actual 8 7 6 5.6 5 4.8 4.1 4.2 4.2 3.9 4 3 2 1 0 Q2:2024-25 Q3:2024-25 Q4:2024-25* October 2024 MPR Path Actuals *:Projections for entire Q4:2024-25 vis-à-vis actual average inflation for January-February 2025. Sources: NSO; and RBI staff estimates.Chapter II Prices and Costs The distribution of CPI inflation in 2024-25 so far in inflation across a few sub-groups. The pullback (April 2024-February 2025) vis-à-vis 2023-24 indicates in inflation pressures across these sub-groups since high positive skew and relatively higher standard December was also followed by a narrowing of the deviation, pointing to the outsized impact of inflation divergence across quantiles (Chart II.5). An continuing sectoral supply side shocks in engendering analysis of spatial inflation dynamics shows that the persistence of headline inflation (Chart II.4). The even with sharp swings in inflation due to supply pick-up in inflation during September-October was shocks, inflation across states has tended to converge also marked by widening of inflation divergence to the national average during the Flexible Inflation across CPI sub-groups, reflecting the sharp increase Targeting (FIT) period (Box II.1). Box II.1: Spatial Inflation Convergence in India The period since the 2020s has been characterised Combined Index as the measure of inflation across by persistent inflationary pressures due to multiple 35 Indian states and union territories spanning overlapping shocks. It has also raised concerns about October 2016 to December 20244 are used for the whether they have fundamentally altered spatial analysis. It is observed that the headline inflation dispersion across states has moderated over time inflation dynamics in India – in terms of its volatility and (Chart II.1.1). convergence over time – with its attendant implications for monetary policy and the credibility of the 4 per cent The spatial convergence properties are further examined CPI headline inflation target. by (a) panel unit root tests such as Levin-Lin-Chu and Against this backdrop, spatial convergence properties Im-Pesaran-Shin for stationarity, and (b) the beta (β) of overall CPI inflation since the implementation of FIT convergence analysis to ascertain whether states with in 2016 are examined, with a focus on the post-COVID higher initial differentials with the national inflation period. Monthly year-on-year (y-o-y) changes in the CPI level experienced a faster decline in inflation over time, (Contd.) 4 Data for April to June 2020 were front-filled using past CPI values to account for missing observations due to COVID-19 lockdowns. 1177 ytisneD Chart II.4: Average CPI Inflation (y-o-y) (Kernel Density Estimates) 0.16 0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00 -20 -15 -10 -5 0 5 10 15 20 25 30 Inflation (per cent) Average (2017-18 to 2019-20) 2022-23 2023-24 2024-25 (Apr-Feb) Sources: NSO; and RBI staff estimates. tnec reP Chart II.5: CPI Sub-Group/Group Inflation Range (y-o-y) 12 10 8 6 4 2 0 -2 10th to 90th Percentile CPI Headline Target Sources: NSO; and RBI staff estimates. 32-beF 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beFMonetary Policy Report April 2025 Chart II.1.1: Trend in Dispersion of CPI-Combined (y-o-y) Inflation across States Note: The imputed CPI prints for April and May 2020 have been regarded as a break in the CPI series. Sources: NSO; and RBI staff estimates. i.e., convergence to a common steady state. Accordingly, stationarity, i.e., supporting inflation convergence across a panel regression framework is used with the following states. Similarly, the results of the β-convergence test specification (1). using a pooled ordinary least square (OLS)6 regression framework show negative and statistically significant α β (1) it it–1 it beta coefficients for both FIT and post-COVID periods, WΔπhdeirfef = + iπ t diisff th +e εr ate of change in inflation confirming the existence of spatial inflation convergence differential of state i in period t with respect to the to the national level. Furthermore, the -convergence Δπdiff national level in the same period, is the one- it–1 test, which involves regressing the standard deviation period lagged inflation differential, β is the coefficient σ of inflation across states on a time trend, yields a πdiff measuring speed of convergence, and α and are the negative and significant coefficient, implying a decline in constant and error terms, respectively. Additionally, inflation dispersion over time, including the post-COVID ε the analysis performs (c) sigma ( )-convergence test, for period. The Phillips and Sul log-t test also indicates a testing the movements of the cross-sectional dispersion convergence for the FIT period, with the club convergence σ (standard deviation) of inflation5 over time; and (d) the test confirming the presence of a single club containing log-t and convergence club tests, for checking whether all all 35 states (Table II.1.1). These findings indicate an units converge to a single equilibrium or whether they ongoing convergence of inflation across states towards are divided into clusters or ‘clubs’ (presence of multiple the national average with lower dispersion despite the equlibria). impact of multiple adverse supply side shocks since The results for both panel unit root tests reject the early 2020, thereby indicating economic integration and null hypothesis of ‘panels contain unit roots’, implying anchoring of inflation expectations during FIT. (Contd.) 5 The standard deviation of inflation measure is constructed as , where is the inflation rate of state i in period t and is the national level headline inflation. 6 The Breusch and Pagan Lagrange Multiplier (LM) test for random effects fails to reject the nul l hypothesis that the variance of the panel-level effect across states is zero (p = 0.116), indicating that a pooled OLS regression is more appropriate. Robust and clustered standard errors are used to account for potential heteroskedasticity and serial autocorrelation. 18 tnec reP 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 41-naJ 41-nuJ 41-voN 51-rpA 51-peS 61-beF 61-luJ 61-ceD 71-yaM 71-tcO 81-raM 81-guA 91-naJ 91-nuJ 91-voN 02-rpA 02-peS 12-beF 12-luJ 12-ceD 22-yaM 22-tcO 32-raM 32-guA 42-naJ 42-nuJ 42-voNChapter II Prices and Costs Table II.1.1: Results of Spatial Convergence Tests a. Panel Unit Root Tests Tests Statistic Null Hypothesis Levin–Lin–Chu unit-root test -12.021*** Panels contain unit roots Im–Pesaran–Shin unit-root test -11.634*** All panels contain unit roots b. Beta-convergence analysis Explanatory Variables FIT Post-COVID (October 2016 - December 2024) (June 2020 - December 2024) Lagged Inflation Differential -0.040*** -0.060*** (0.011) (0.009) Constant -0.083 -0.001 (0.247) (0.358) c. Sigma-convergence analysis Time Trend -0.002*** -0.007*** (0.0003) (0.0009) Constant 3.224*** 6.769*** (0.266) (0.656) d. Phillips and Sul log-t test log(t) -0.878 (0.829) t-stat -1.059 No. of clubs identified 1 (containing all 35 states) Note: Figures in parentheses indicate robust standard errors. *** and ** denote significance at 1% and 5% levels, respectively. Reference: Ray, S., Suganthi, D., Bhatia, S., & George, A. T. (2025). Spatial Inflation Convergence in India, mimeo CPI diffusion indices (DIs)7 strengthened while – for price increases in excess of 4 per cent as well as remaining in the expansionary zone from September 6 per cent on a month-on-month seasonally adjusted to December 2024. Following a dip in August, annualised rate (m-o-m saar) basis – continued to the headline CPI DI saw a steady sequential rise remain well below the 50-level mark, indicating that from September, largely driven by the goods sub- the extent of price increases across a majority of the component. Although remaining in the expansionary CPI items continued to remain muted (Chart II.6b). zone in January-February 2025, the headline CPI DI II.2 Drivers of Inflation declined sharply, signalling a slowdown in incidence A historical decomposition of inflation using a vector of price increases in the CPI basket. This moderation autoregression (VAR)9 model indicates that the was primarily led by movements in CPI goods, while CPI services edged up (Chart II.6a). Threshold DIs8 sharp moderation in inflation in Q4:2024-25 came 7 The CPI diffusion index, a measure of dispersion of price changes, categorises items in the CPI basket according to whether their m-o-m seasonally adjusted prices have risen, remained stagnant or fallen over the previous month. The higher the reading above 50, the broader is the expansion or generalisation of price increases; the further is the reading below 50, the broader is the price decline across items. 8 Threshold diffusion indices capture the dispersion of price increases in CPI basket beyond the specified month-on-month saar thresholds of 4 per cent and 6 per cent. 9 Historical decomposition estimates the contribution of each shock to the movements in inflation over the sample period (Q4:2010-11 to Q4:2024-25) based on a vector autoregression (VAR) with the following variables (represented as the vector Y) – crude oil prices (US$ per barrel); exchange rate (INR t per US$), asset price (BSE Sensex), CPI; the output gap; rural wages; the policy repo rate; and money supply (M). All variables other than policy repo rate 3 are y-o-y growth rates. The VAR can be written in reduced form as: Y c AY e; where et represents a vector of shocks. Using Wold decomposition, t t t Y can be represented as a function of its deterministic trend and sum of all the shocks e. This formulation facilitates decomposition of the deviation of int flation from its deterministic trend into the sum of contributions f r=o m + v ar iou–1 s + s hocks.t 1199Monetary Policy Report April 2025 Chart II.6: CPI Diffusion Indices (m-o-m seasonally adjusted) from the reversal of supply side shocks seen in Q3 contribution of semi-perishables (non-durable goods (Chart II.7a). with a 30-day recall) to overall inflation declined in Q3 – driven primarily by softening of inflation in pulses Goods inflation (with a weight of 76.6 per cent and sugar even as personal care items remained sticky in overall CPI) contributed around 85 per cent of – it started firming up again in January-February 2025. headline inflation, on average, between September The contribution of durable items (goods with a 365- 2024 and January 2025, and services (with a weight of day recall) to overall inflation also edged up in January- 23.4 per cent) the remaining 15 per cent. In February February 2025 after remaining mostly steady during 2025, however, the contribution of goods to overall September-December 2024, reflecting the rising and inflation fell sharply to around 76 per cent following elevated price inflation in gold and silver. the large decline in CPI food inflation, while services contribution edged up (Chart II.7b). The contribution The contribution of imported components11 to of perishable items (non-durable with a 7-day recall10) headline inflation registered a sequential increase – which include vegetables, spices, fruits, and other since October and was at 21 per cent in February 2025 food items such as milk, meat and fish, and prepared (a contribution of 0.8 percentage points to the headline meals – jumped up in Q3:2024-25, contributing to inflation rate of 3.6 per cent) driven primarily by a the stickiness in headline inflation, before falling in pick-up in international prices of gold and silver, and January-February 2025. On the other hand, after the the depreciation of the rupee (Chart II.7c). 10 The CPI weighting diagrams use the modified mixed reference period (MMRP) data based on the 2011-12 Consumer Expenditure Survey conducted by the National Sample Survey Office (NSSO). Under MMRP, data are collected on expenditure incurred during the last seven days for frequently purchased items like edible oil, eggs, fish, meat, vegetables, fruits, spices, beverages, processed foods, pan, tobacco and intoxicants; expenditure incurred during the last 365 days for items like clothing, bedding, footwear, education, medical (institutional), durable goods; and expenditure incurred in the last 30 days for all other food, fuel and light, miscellaneous goods and services including non-institutional medical services, rents and taxes. 11 Global commodities that drive domestic prices include petroleum products; coal; electronic goods; gold; silver; chemical products; metal products; textiles; cereals; milk products, and vegetable oils – these together have a weight of 36.4 per cent in the CPI basket. 20 xednI a: CPI Headline, Goods and Services CPI Headline CPI goods CPI services xednI b: CPI Headline by Thresholds 100 90 80 70 60 50 40 30 20 10 0 More than 4 per cent More than 6 per cent Sources: NSO; and RBI staff estimates. 32-beF 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 100 90 80 70 60 50 40 30 20 10 0 32-beF 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beFChapter II Prices and Costs Chart II.7: Drivers of CPI Inflation Sources: NSO; and RBI staff estimates. CPI Food Group with easing of price pressures in pulses, led to a substantial softening of food inflation to 3.8 per cent Food and beverages (weight of 45.9 per cent in the CPI by February 2025 (Chart II.8). basket) group exhibited high volatility in H2:2024-25 of 2024-25 so far. The month of September witnessed The food price build-up in 2024-25 so far (up to a resurgence of price pressures, which got further February) has been significantly lower than last year accentuated in October. Tight supply of vegetables and the historical levels. The drivers of food price caused by adverse weather conditions, along with build-up this year, however, have changed since last price pressures in oils and fats due to increased year. While oils and fats, fruits, prepared meals and import duties on crude and refined edible oils non-alcoholic beverages registered a higher price combined with rising international prices, led to the build-up, those in pulses, cereals, sugar and eggs surge in food inflation. Vegetable prices corrected were noticeably lower than last year. In contrast to sharply from November onwards with fresh crop last year, spices and vegetable prices, on average, arrivals and seasonal winter easing, which, along registered a substantial decline, although vegetables 2211 stniop egatnecreP b: Contribution of Goods and Services stniop egatnecreP c: Contribution of Imported Inflation Domestically generated inflation Imported inflation CPI headline inflation (y-o-y, per cent) stniop egatnecreP )tnec rep( noitalfnI a: Decomposition of CPI Inflation* Oil price shock Exchange rate shock Asset price shock Supply shock Demand shock Policy rate shock Money supply shock Wage shock Inflation (y-o-y) (right scale) * Deviation from deterministic trend. Note: Estimated using a vector autoregression (see footnote 9 for details). Q4:2024-25 pertains to January-February 2025. Sources: NSO; RBI; Petroleum Planning & Analysis Cell (PPAC); BSE; Labour Bureau; and RBI staff estimates. 8 7 6 5 4 3.6 3 0.9 2 0 0. .7 9 1 1.2 0 -1 Services (23.4) Durable (10.5) Non-durable 30 days recall (31.3) Others* Non-durable 7 days recall (34.8) CPI headline inflation (y-o-y, per cent) * Represent balancing term between CPI item indices aggregated vertically and the published overall CPI index. Note: Figures in parentheses indicate weights in CPI. 32-beF 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 10 8 6 4 3.6 2 2.8 0 0.8 -2 -4 32-beF 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 4 8 3 7 2 6 1 5 0 4 -1 3 -2 2 -3 1 -4 0 61-5102:2Q 61-5102:3Q 61-5102:4Q 71-6102:1Q 71-6102:2Q 71-6102:3Q 71-6102:4Q 81-7102:1Q 81-7102:2Q 81-7102:3Q 81-7102:4Q 91-8102:1Q 91-8102:2Q 91-8102:3Q 91-8102:4Q 02-9102:1Q 02-9102:2Q 02-9102:3Q 02-9102:4Q 12-0202:1Q 12-0202:2Q 12-0202:3Q 12-0202:4Q 22-1202:1Q 22-1202:2Q 22-1202:3Q 22-1202:4Q 32-2202:1Q 32-2202:2Q 32-2202:3Q 32-2202:4Q 42-3202:1Q 42-3202:2Q 42-3202:3Q 42-3202:4Q 52-4202:1Q 52-4202:2Q 52-4202:3Q 52-4202:4QMonetary Policy Report April 2025 witnessed large intra-year price volatility. A softer cent in October 2024 to 6.1 per cent in February 2025 price build-up was also observed in meat and fish, (Chart II.10). This softening primarily came from rice due to improved supply conditions as reflected and milk (Chart II.9). in higher production (6.7 per cent as per the second Cereals inflation (weight of 9.7 per cent in the CPI advance estimate (AE) 2024-25 over 2023-24) and and 21.1 per cent in the food and beverages group) higher mandi arrivals compared to the previous year, remained elevated, though it moderated from 6.9 per despite easing of export restrictions during September- 22 tnec reP Chart II.9: Financial Year Price Build-up (February over March) 30 27.9 20 16.4 15.8 18.4 12.7 13.4 10 0 5.1 1.13.95.88. 41 .93. 39 .36.7 3.72.84.42.77.8 2.82.3 5.26.4 1.8 7.9 0.5 7.07.1 0.2 6.4 7.8 5.23.67.55.8 -1.4 -10 -4.2 -11.7 -20 2024-25 2023-24 Average (2011-12 to 2019-20) Note: Figures in parentheses indicate weights in CPI - food and beverages. Sources: NSO; and RBI staff estimates. )8.7( staf dna sliO )3.6( stiurF )1.12( slaereC )1.21( skcans ,slaem deraperP )7.2( segareveb cilohocla-noN )0.3( yranoitcefnoc dna raguS )4.41( kliM )9.0( ggE )9.7( hsif dna taeM )2.5( stcudorp dna sesluP )2.31( selbategeV )5.5( secipS segareveb dna dooF tnec reP Chart II.10: Cereals Inflation (y-o-y) 30 25 20 15 10 9.2 6.1 5 5.3 0 -5 -10 Cereals and products (9.7) Rice (4.4) Wheat/Atta (2.6) Note: Figures in parentheses indicate weights in CPI. Sources: NSO; and RBI staff estimates. 71-beF 71-guA 81-beF 81-guA 91-beF 91-guA 02-beF 02-guA 12-beF 12-guA 22-beF 22-guA 32-beF 32-guA 42-beF 42-guA 52-beF Chart II.8: CPI Food Inflation a: Drivers of CPI Food Inflation *: Includes meat & fish, egg, milk and pulses. **: Includes fruits, sugar, non-alocoholic beverages and prepared meals. Note: Figures in parentheses indicate weights in CPI food and beverages. Sources: NSO; and RBI staff estimates. stniop egatnecrep ni noitubirtnoC b: Drivers of CPI Food Momentum 12 10 8 6 4 3.8 2 0 -2 -4 Cereals and products (21.1) Protein-based food* (28.4) Vegetables (13.2) Others**(24.1) Oils and fats (7.8) Spices (5.5) CPI food and beverages (per cent, y-o-y) CPI food and beverages (per cent, m-o-m) 32-beF 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 6 5 4 3 2 1 0 -1 -1.6 -2 -3 stniop egatnecrep ni noitubirtnoC 32-beF 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beFChapter II Prices and Costs October 2024. The comfortable buffer stocks of rice Chart II.11: Drivers of Vegetables Inflation (y-o-y) (8.7 times the norm as on March 16, 2025), along with the direct sale of rice to state governments, other government agencies, and continued retail sales, have aided in easing supply conditions and containing price pressures. Wheat inflation, on the other hand, hardened from 6.7 per cent in September 2024 to 9.2 per cent in February 2025 on tight supply conditions as reflected in lower mandi arrivals and low buffer stocks (0.9 times the norm as on March 16, 2025). In order to contain price pressures, supply management measures were implemented by the Potato (16.3) Onion (10.7) government, including the sale of 2.5 million tonnes Tomato (9.5) Garlic (5.1) of wheat through e-auctions under the Open Market Cabbage and cauliflower (7.1) Other vegetables (51.3) Vegetables (y-o-y, per cent) Sale Scheme (OMSS) till March 2025 at a fixed reserve Note: Figures in parentheses indicate items' weights in CPI-vegetables. price, downward revision of the existing stock limit Sources: NSO; and RBI staff estimates. in December 2024 and further in February 2025, and in February 2025 from 66.1 per cent in September continued restrictions on wheat exports. Second AE 2024 – due to higher production (18.9 per cent as of 2024-25 agricultural production shows improved per the first AE 2024-25 over 2023-24) and increased rabi wheat production (1.9 per cent increase over late kharif arrivals even as export restrictions were 2023-24). relaxed. To contain price pressures, the government Vegetables (weight of 6.0 per cent in the CPI and released onions from its buffer stocks through 13.2 per cent in the food and beverages group) open market sales at a subsidised rate of ₹35 per inflation reached a peak at 42.2 per cent in October kg across major consumption centres in September 2024, induced by multiple and overlapping weather 2024. Furthermore, a special train, Kanda Express, shocks, marking another year of volatile and elevated was initiated in October 2024 for faster distribution inflation. Thereafter, vegetables inflation declined from surplus to deficit states. Tomato prices, after sharply to (-)1.1 per cent by February 2025, aided by increasing sharply by 161 per cent on a y-o-y basis an unusually strong winter price correction during in October 2024 from a deflation of (-)47.9 per cent November 2024-February 2025 on account of robust in August 2024 on the back of lower mandi arrivals production and fresh market arrivals (Chart II.11). in southern states induced by unseasonal rainfall, corrected sharply recording a deflation of (-)28.5 per Among key vegetables, potato prices increased (on cent in February 2025 with improved supply. y-o-y basis) by an average of around 66.2 per cent during September-December 2024 on account of lower Within vegatables excluding TOP (tomato, onion, production in 2023-24 [(-)5.0 per cent over 2022-23]. and potato), garlic experienced persistently elevated The steep price build-up due to lower production last inflation, averaging around 75 per cent during year, however, was corrected subsequently in January- September-December 2024 due to modest production February 2025, with increased production for 2024-25 growth in 2023-24 (2.3 per cent over 2022-23, (4.4 per cent as per the first AE 2024-25 over 2023-24) following a decline of (-)8.1 per cent in 2022-23 and higher market arrivals. Onion price increases also over 2021-22). Inflationary pressures in non-TOP moderated sharply on a y-o-y basis– to 30.4 per cent vegetables, thereafter, eased by February 2025, led 2233 stniop egatnecrep ni noitubirrtnoC 45 35 25 15 5 -1.1 -5 -15 32-beF 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beFMonetary Policy Report April 2025 Chart II.12 : Price build-up in CPI Vegetables by a sharp moderation in garlic prices on the back imports towards the end of the apple marketing of improved production (3.2 per cent growth as per season in India. After moderating during September- the first AE 2024-25 over 2023-24). Consequently, the December 2024, banana inflation increased sharply price build-up in both TOP and non-TOP categories in February 2025, largely reflecting an unfavourable remained higher than the historical pattern until base effect. Groundnut prices, however, remained December 2024. Thereafter, a sharp broad-based in deflation since August 2024 on account of higher kharif production (20.4 per cent as per the second AE correction in vegetable prices resulted in a marked 2024-25 over 2023-24). fall in the price build-up across TOP and non-TOP categories (Chart II.12). Inflation in fruits (weight of 2.9 per cent in the CPI and 6.3 per cent within the food and beverages group) remained elevated since August 2024. In February 2025, it surged to 14.8 per cent, the highest print since October 2014, driven by a pick-up in price pressures, compounded by an unfavourable base effect. The price build-up in fruits this year has been substantially higher than last year and its historical trend (Chart II.13). The price pressures were primarily driven by coconut on the back of tight supply conditions attributed to lower production across major coconut-growing states, coupled with high festive demand. Since December 2024, apple prices have also hardened, reflecting declining 24 tnec reP a: CPI TOP* 2023-24 2024-25 Average (2015-16 to 2021-22) 2023-24 2024-25 Average (2015-16 to 2021-22) *: TOP denotes tomato, onion and potato. Sources: NSO; and RBI staff estimates. tnec reP b: CPI Vegetables excluding TOP 110 90 70 50 30 10 19.5 -10 rpA yaM nuJ luJ guA peS tcO voN ceD naJ beF raM 35 30 25 20 15 10 5 0 -5 -4.1 -10 tnec reP rpA yaM nuJ luJ guA peS tcO voN ceD naJ beF raM Chart II.13: Price build-up in CPI Fruits 14 12.2 12 10 8 6 4 2 0 Sources: NSO; and RBI staff estimates. rpA yaM nuJ luJ guA peS tcO voN ceD naJ beF raM 2022-23 2023-24 2024-25 Average (2015-16 to 2021-22)Chapter II Prices and Costs Pulses, the primary source of plant-based protein Prices of animal-based protein items increased (weight of 2.4 per cent in the CPI and 5.2 per cent marginally during H2:2024-25, driven by milk and in the food and beverages group), which registered products, and eggs. On a y-o-y basis, price inflation in double digit inflation during April-August 2024, meat and fish (weight of 3.6 per cent in CPI and 7.9 witnessed sustained softening thereafter to (-)0.3 per cent in CPI food and beverages group) increased sequentially to an average of 5.3 per cent during per cent in February 2025 on higher production (2.8 December 2024-January 2025 before moderating to per cent for tur and 28 per cent for moong as per the 2.1 per cent in February 2025 on account of reduced second AE 2024-25 over 2023-24) and robust imports. demand for chicken due to bird flu in some states. Inflation in gram, however, remained elevated despite Eggs (weight of 0.4 per cent in CPI and 0.9 per cent in improved rabi production [4.5 per cent in 2024-25 the CPI food and beverages group) exhibited elevated as per the second AE over 2023-24 following (-)10.0 and volatile price movements, from an average of 6.5 per cent in 2023-24 over 2022-23]. On the whole, the per cent during April-September 2024 to 4.8 per cent price build-up in pulses remained lower during April in November 2024 before increasing to 6.9 per cent in 2024-February 2025 as compared to the previous year, December on account of strong winter demand and reflecting government interventions towards easing increased feed costs. In January-February 2025, egg supply conditions through the retail sale of subsidised inflation moderated on account of a sharp correction chana, moong and masur dals under the brand name in prices due to a mild winter and bird flu concerns Bharat dal and the extension of free import of yellow that reduced demand, coupled with a favourable base peas in stages till May 31, 2025, and tur till March 31, effect. Inflation in milk and products (weight of 6.6 2026 (Chart II.14). Relatedly, the stock-to-use ratio of per cent in the CPI and 14.4 per cent within the food 6.3 during September 2024-March 2025, in contrast to and beverages group) remained subdued at around 5.9 over the same period in 2023-24, is indicative of 2.9 per cent during September 2024-February 2025 on improving supply conditions of pulses (Chart II.15). account of lower input costs (Chart II.16). Chart II.15: Pulses Inflation and Stock-Use Ratio Sources: MOSPI; DGCI&S; CACP; Ministry of Agriculture; and RBI staff estimates. 2255 tnec reP sennot hkaL 40 300 30 200 20 100 10 0 0 -100 -10 -200 -20 -30 -300 Stocks-to-use ratio Stock (right scale) CPI pulses inflation (per cent, y-o-y) 71-beF 71-guA 81-beF 81-guA 91-beF 91-guA 02-beF 02-guA 12-beF 12-guA 22-beF 22-guA 32-beF 32-guA 42-beF 42-guA 52-beF tnec reP Chart II.14: CPI Pulses and Products (Cumulative Financial Year Price Build-up) 20 15 10 5 0.4 0 2022-23 2023-24 2024-25 Average (2011-12 to 2017-18) Sources: NSO; and RBI staff estimates. rpA yaM nuJ luJ guA peS tcO voN ceD naJ beF raMMonetary Policy Report April 2025 Chart II.17: Edible Oil Prices: Domestic and Global CPI oils and fats Global oils and meals (right scale) Global palm oil (right scale) Sources: World Bank Pink Sheet; NSO; and RBI staff estimates. After recording 19 consecutive months of deflation, cane crushing season. However, lower estimated oils and fats (weight of 3.6 per cent in the CPI and 7.8 kharif production [(-)4.0 per cent as per the second AE per cent within the food and beverages group) price 2024-25 over 2023-24] and partial removal of export inflation increased from 2.5 per cent in September restrictions, along with removal of restrictions on 2024 to 16.4 per cent by February 2025. The sharp sugar diversion for ethanol production in August pick-up in edible oil prices was triggered by a hike in 2024, pose upward risks to sugar prices. basic customs duty on crude and refined edible oils Among other food items, deflation in spices deepened by 20 percentage points in September 2024, along from (-)1.4 per cent in July 2024 to an average of with an uptick in international edible oil prices. (-)7.4 per cent during November and December 2024, On a month-on-month basis, however, the rate of primarily driven by jeera and dry chillies, before price increases has softened since November 2024, narrowing to (-)5.8 per cent in February 2025. Inflation reflecting improved supply conditions on account in prices of prepared meals has witnessed a sequential of higher domestic production of oilseeds (8.4 per pick-up in H2 so far, though it remains contained. cent as per the second AE 2024-25 over 2023-24) and easing of global edible oil prices (Chart II.17). Within Retail Margins the oils and fats sub-group, ghee and butter price The absolute retail price margins, defined as the inflation remained broadly moderate, indicative of difference between retail and wholesale prices12 in the transmission of lower milk inflation. the case of cereals, remained steady during October Sugar and confectionery (weight of 1.4 per cent in 2024-January 2025 before witnessing a marginal the CPI and 3.0 per cent in the food and beverages deceleration in February-March 2025, reaching group) inflation moderated in 2024-25 so far on the ₹4.2 per kg, the lowest since December 2020. Retail back of higher stocks and fresh arrivals during the price margins of pulses edged up during October- 12 Item-level retail and wholesale prices are aggregated at respective subgroups using item-level CPI weights. Data for January-March 2021 have been excluded due to the changes in price collection mechanism and item varieties by DoCA. 26 tnec rep ,y-o-Y tnec rep ,y-o-Y 20 80 15 60 10 40 5 20 0 0 -5 -20 -10 -40 -15 -60 -20 -80 32-beF 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF Chart II.16: Drivers of Animal Protein Inflation (H2:2024-25 over H2:2023-24) stniop egatnecrep ni noitubirtnoC 0.3 0.2 0.7 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4 0.3 -0.5 -0.6 -0.7 -0.8 -0.8 Meat and Egg (4) Milk and Animal fish (34) products (62) protein Note: Figures in parentheses indicate weights in CPI-animal protein group. H2:2024-25 refers to October 2024-February 2025. Sources: NSO; and RBI staff estimates.Chapter II Prices and Costs Chart II.18: Retail, Wholesale Prices and Margin Sources: Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution; and RBI staff estimates. November 2024 but thereafter declined, hovering urban food inflation decreasing more than rural food around ₹9.2 per kg till February 2025 before a inflation (Chart II.19). marginal uptick to ₹9.3 per kg in March 2025. The retail price margins of edible oils witnessed a gradual uptick during October 2024-February 2025 due to firming up in the margins of all edible oils – soybean, sunflower, mustard, and refined oils. Thereafter, retail margins declined to ₹10.1 per kg in March 2025, with moderation in retail and wholesale prices of edible oils. In case of TOP vegetables, retail price margins registered a sequential decline since October 2024 and reached ₹5.7 per kg in March 2025, primarily driven by tomato and potato (Chart II.18). Sectoral and Spatial Distribution of Food Inflation The CPI food inflation pressures eased across both rural and urban areas since November 2024 with 2277 )margolik rep ₹( ecirP )margolik rep ₹( nigraM c: Vegetables d: Edible Oils (Packed) Retail price margin (right scale) Retail price Wholesale price )margolik rep ₹( ecirP b: Pulses )margolik rep ₹( ecirP )margolik rep ₹( nigraM a: Cereals )margolik rep ₹( ecirP )margolik rep ₹( nigraM )margolik rep ₹( nigraM 45 6 42 39 5 36 33 4 30 27 3 24 21 2 18 15 1 71-raM 71-voN 81-luJ 91-raM 91-voN 02-luJ 12-raM 12-voN 22-luJ 32-raM 32-voN 42-luJ 52-raM 140 16 14 120 12 100 10 80 8 60 6 40 4 71-raM 71-voN 81-luJ 91-raM 91-voN 02-luJ 12-raM 12-voN 22-luJ 32-raM 32-voN 42-luJ 52-raM 50 12 40 10 30 8 20 6 10 4 0 2 71-raM 71-voN 81-luJ 91-raM 91-voN 02-luJ 12-raM 12-voN 22-luJ 32-raM 32-voN 42-luJ 52-raM 200 12 180 11 160 10 140 9 120 8 100 7 80 6 60 5 tnec reP 71-raM 71-voN 81-luJ 91-raM 91-voN 02-luJ 12-raM 12-voN 22-luJ 32-raM 32-voN 42-luJ 52-raM Chart II.19: CPI Food Inflation (y-o-y): Urban and Rural 12 10 8 6 4.0 4 3.4 2 0 Rural Urban Sources: NSO; and RBI staff estimates. 32-beF 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beFMonetary Policy Report April 2025 20 in the corresponding period a year ago. Sequentially, Table II.1: Distribution of food inflation across States/UTs: Number of states# however, there has been a considerable softening in food inflation pressures across states, with the Food Inflation Range 2023-24 2024-25 (Apr-Feb) (Apr-Feb) number of states experiencing food inflation in excess Less than 2 per cent 1 1 of 6.0 per cent reducing significantly – from a peak of Between 2 to 4 per cent 4 0 32 states in November 2024 to 05 states in February Between 4 to 6 per cent 11 12 2025 (Table II.1). Greater than 6 per cent 20 23 #Accounted for the unification of Daman and Diu with Dadra & Nagar CPI Fuel Group Haveli and the formation of Ladakh as a Union Territory (UT). Sources: NSO; and RBI staff estimates. CPI fuel remained in deflation in H2:2024-25 so far, Food inflation pressures during April 2024-February although the deflation moderated sharply from (-)5.3 2025 seem to have strengthened spatially, with the per cent in August 2024 to an average of (-)1.5 per cent number of states/UTs experiencing food inflation during September 2024-February 2025. Softer deflation above 6.0 per cent on an average rising to 23 vis-à-vis in LPG due to unfavourable base effects, and that of Chart II.20: CPI Fuel Group Inflation Notes: 1. The international price for LPG is based on spot prices for Saudi Butane and Propane, combined in the ratio of 60:40 respectively. These international product prices are indicative import prices. Further details are available at www.ppac.org.in. 2. The indicative international price for kerosene is the Singapore Jet Kero spot price. 3. The domestic prices of LPG and kerosene represent the average prices of four and three metros, respectively, as reported by Indian Oil Corporation Limited (IOCL). 4. Figures in parentheses indicate item’s weights in CPI-fuel group. Sources: NSO; Bloomberg; IOCL; and RBI staff estimates. 28 )gk 2.41( rednilyc rep ₹ c: LPG: Domestic and International Prices LPG - International LPG - Domestic ertil rep ₹ b: Kerosene: Domestic and International Prices Kerosene - International Kerosene - Domestic (subsidised) tnec reP a: Fuel Inflation (y-o-y) LPG (excl. conveyence) (18.8) Kerosene (8.0) Firewood, chips and dung cake (36.7) Electricity (33.0) (right scale) CPI fuel and light (right scale) 85 75 65 55 45 35 25 15 5 32-naJ 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raM 1200 1000 800 600 400 200 0 tnec reP 32-naJ 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raM 100 25 80 20 60 15 40 10 20 5 0 0 -20 -1.3 -5 -40 -10 32-naJ 32-beF 32-raM 32-rpA 32-yaM 32-nuJ 32-luJ 32-guA 32-peS 32-tcO 32-voN 32-ceD 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beFChapter II Prices and Costs kerosene due to a sharp pickup in price momentum Table II.2: Exclusion-based Measures of in December, along with a pick-up in firewood and Inflation (y-o-y) chips prices on a y-o-y basis, led to the narrowing of Period CPI excluding CPI excluding CPI excluding food deflation in CPI fuel in H2. The movement of domestic food and fuel food fuel petrol fuel petrol diesel (47.3) diesel (45.0) gold silver (43.8) kerosene prices largely mirrored international price Jan-24 3.5 3.7 3.4 movements. Domestic retail prices of LPG, however, Feb-24 3.4 3.5 3.3 remained unchanged during H2, despite a pick-up in Mar-24 3.3 3.4 3.2 international prices, contributing to its continuing Apr-24 3.2 3.4 3.0 deflation. Electricity prices, on a y-o-y basis, moved May-24 3.1 3.3 2.8 Jun-24 3.1 3.3 2.8 in a range-bound manner – rising to 5.4 per cent in Jul-24 3.4 3.6 3.1 September-October from 4.9 per cent in August – Aug-24 3.3 3.5 3.0 before edging down to 5.3 per cent in February 2025 Sep-24 3.5 3.8 3.2 (Chart II.20). Oct-24 3.8 4.0 3.3 Nov-24 3.7 3.9 3.3 Core CPI (CPI excluding Food and Fuel) Dec-24 3.6 3.9 3.3 Jan-25 3.6 3.9 3.2 Core inflation (CPI excluding food and fuel) edged up Feb-25 4.1 4.3 3.4 from a low of 3.3 per cent in August 2024 to 3.8 per Notes: 1. Figures in parentheses indicate weights in CPI. cent in October and remained steady around 3.6 - 3.7 2. Derived as residual from headline CPI. Sources: NSO; and RBI staff estimates. per cent during November 2024-January 2025. In February 2025, core inflation picked-up to 4.1 per cent Core inflation across April 2024-February 2025 – the highest print in 15 months – driven primarily exhibited some signs of higher inflation variability by a sharp increase in gold prices. Exclusion-based when compared to the previous year, but the level measures of underlying inflation, which remove of inflation and its variability were much lower than volatile items such as petrol and diesel, gold and other post-COVID years (Chart II.22). Core inflation silver in addition to food and fuel, also remained pressures in 2024-25 so far, on an average, were muted till January before witnessing a notable uptick muted and broad-based, covering both core goods and in February, though of a lower magnitude (Table II.2). Exclusion-based CPI threshold DIs during September 2024-February 2025 point to the continuation of muted price pressures across the core CPI basket. CPI excluding food, fuel, petrol, diesel, gold and silver DI for price increases of greater than 4 per cent (m-o-m saar) remained in the contraction zone throughout H2, indicating that a majority of items exhibited price increases at a m-o-m saar of less than 4 per cent. The DI for price increases of greater than 6 per cent (m-o-m saar) also remained deep in the contractionary zone during September 2024-February 2025, indicating that most of the items in CPI core exhibited price increases below the 6 per cent m-o-m saar threshold during this period (Chart II.21). Though still in contraction zone, the month of February saw a notable uptick in threshold DIs. 2299 xednI Chart II.21: CPI excluding Food, Fuel, Petrol, Diesel, Gold and Silver: Diffusion Indices by Thresholds (m-o-m seasonally adjusted) 100 90 80 70 60 50 40 30 20 10 0 More than 0 per cent More than 4 per cent More than 6 per cent Sources: NSO; and RBI staff estimates. 32-beF 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beFMonetary Policy Report April 2025 The pick-up in core inflation between August 2024 and Chart II.22: CPI Inflation excluding Food February 2025 was largely contributed by the personal and Fuel: Persistence care and effects sub-group reflecting the spike in gold and silver prices. Notably, a significant portion of the increase also stemmed from the balancing item that accounts for statistical discrepancy13. Adjusted for the pick-up in gold and silver prices, and statistical discrepancies, the increase in core inflation has been low, with the modest contribution of housing, household goods and services, transport and communication, recreation and amusement, and health, somewhat offset by the decline in contribution 2020-21 (Jun-Feb) 2021-22 (Jun-Mar) 2022-23 (Apr-Mar) 2023-24 (Apr-Mar) of education, pan, tobacco and intoxicants and clothing 2024-25 (Apr-Feb) and footwear to overall core inflation (Chart II.24). Sources: NSO; and RBI staff estimates. Goods inflation arrived at by decomposing CPI excluding food, fuel, petrol, diesel, gold, and silver services categories. Contribution of all sub-groups/ groups (barring transport and communication, and inflation into its goods (with a weight of 20.7 per cent personal care and effects) were lower compared to in the headline CPI) and services (weight of 23.0 per previous years and pre-COVID patterns (Chart II.23). cent) components, remained broadly steady in H2 so 13 Due to divergence in CPI core computed as a residual from CPI headline net of CPI food and CPI fuel and those derived from an aggregation of CPI core sub-group indices. For further discussions on it see: Das and George (2023), ‘The aggregation method matters’, RBI Bulletin, March. 30 noitaived dradnats lanoitces-ssorC 18 16 14 12 10 8 6 4 2 0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 Inflation (y-o-y, per cent) Chart II.23: Contribution to CPI Inflation Chart II.24: Increase in CPI Core Inflation excluding Food Fuel (Percentage points) (Feb-25 over Aug-24): Contributions CPI excluding food fuel 4.8 (y-o-y, per cent) 3.5 4.3 of which Transport and communication 0.6 (18.2) 00 .. 43 Health (12.5) 00 .. 77 0.5 Clothing and footwear (13.8) 0.5 0.7 0.4 Housing (21.3) 0.8 1.3 0.6 Household goods and 0.3 0.3 services (8.0) 0.2 Personal care and effects (8.2) 0.4 0.6 0.8 Education (9.4) 00 .. 55 0.4 Others* (8.6) 00 .3.5 0.3 Memo 2.1 Core goods (51.3) 2.5 1.9 Core services (48.7) 1.8 2.6 1.6 Average (2017-18 to 2019-20) 2023-24 2024-25 (Apr-Feb) * Others include Pan, tobacco and intoxicants; and Recreation and amusement. * Others include the balancing item that accounts for statistical discrepancy. Note: Figures in parentheses indicate weights in CPI excluding food and fuel. Sources: NSO; and RBI Staff estimates. Sources: NSO; and RBI Staff estimates. stniop egatnecreP 0.21 4.08 0.48 0.05 0.03 0.02 0.01 0.01 0.00 0.00 -0.02 3.28 42-guA- )tnec rep ,y-o-y( leuf doof lcxe IPC stceffe dna erac lanosreP gnisuoH secivres dna sdoog dlohesuoH noitacinummoc dna tropsnarT tnemesuma dna noitaerceR htlaeH noitacudE raewtoof dna gnihtolC stnacixotnI dna occaboT ,naP )seicnapercsiD( *srehtO 52-beF- )tnec rep ,y-o-y( leuf doof lcxe IPC 4.3 4.1 3.9 3.7 3.5 3.3 3.1 2.9 2.7 2.5Chapter II Prices and Costs Chart II.25: Contributions to CPI Inflation excluding Food, Fuel, Petrol, Diesel, Gold and Silver far (up to February 2025), albeit showing a marginal Other Measures of Inflation softening from 2.9 per cent in August-September CPI inflation for agricultural labourers (CPI-AL) 2024 to 2.8 per cent in October 2024, where it and rural labourers (CPI-RL) registered sequential remained steady at that level till February 2025. The moderation since September 2024. Moreover, the gap contribution of all sub-groups was also unchanged during this period (Chart II.25a). Core services Table II.3: Trimmed Mean Measures of Inflation inflation firmed up from 3.4 per cent in August 2024 (y-o-y) to 3.7 per cent in February 2025. A significant part of Month 5% 10% 25% Weighted trimmed trimmed trimmed Median the increase can be attributed to statistical aggregation Jan-24 4.7 4.5 3.9 3.7 effects14. Abstracting this, the pick-up in core services Feb-24 4.6 4.4 3.7 3.6 inflation was primarily driven by housing (house rent, Mar-24 4.7 4.4 3.6 3.3 Apr-24 4.6 4.2 3.5 3.0 residential building and land, water charges), health, May-24 4.5 4.2 3.4 2.9 household and transport and communication services Jun-24 4.3 3.9 3.4 2.9 Jul-24 3.8 3.7 3.3 3.0 (Chart II.25b). Aug-24 3.9 3.7 3.3 3.0 Trimmed mean measures15 of inflation remained Sep-24 4.4 3.9 3.5 3.0 Oct-24 4.6 4.1 3.5 3.0 muted in H2. While there were variations across Nov-24 4.6 4.1 3.5 3.2 months, all trimmed mean measures of inflation Dec-24 4.5 4.1 3.5 3.1 Jan-25 4.1 3.7 3.4 2.9 gradually softened from October 2024 to February Feb-25 3.7 3.5 3.2 2.9 2025 (Table II.3). Sources: NSO; and RBI staff estimates. 14 See footnote 13 for further details. 15 While exclusion-based measures drop a fixed set of volatile items (for example, food and fuel) in each period, trimmed measures exclude items located in the tails of the inflation distribution - items displaying changes more than the specified threshold in prices each month are excluded, and the items dropped differ from month to month. 3311 stniop egnatnecrep ni noitubirtnoC a: Goods b: Services Personal care and effects Recreation and amusement Clothing and footwear Household goods and services Health Transport and communication Education Pan, tobacco and intoxicants Housing Others* Goods inflation (y-o-y, per cent) (20.7) Services inflation (y-o-y, per cent) (23.0) stniop egnatnecrep ni noitubirtnoC 8 7 6 5 4 3 2.8 2 1 0 -1 * Represent balancing item to reconcile divergence in CPI index between CPI items indices aggregated vertically, across items and the published sub-group/group/overall CPI index. Note: Figures in parentheses indicate weights in CPI. Sources: NSO; and RBI staff estimates. 32-beF 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 8 7 6 5 3.9 4 3 2 1 0 -1 32-beF 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beFMonetary Policy Report April 2025 between CPI-AL (and RL) with respect to CPI headline gross domestic product (GDP) picked up. GDP deflator inflation narrowed vis-à-vis last year on significant rose to 3.5 per cent in Q3 from 2.5 per cent in Q2 and moderation in food inflation in both CPI-AL and RL. CPI GVA deflator rose to 3.8 per cent in Q3 from 2.3 per inflation for industrial workers (CPI-IW), on the other cent in Q2 (Chart II.26a). hand, was below the headline CPI inflation during the Similar sub-groups/items across CPI and WPI also same period, primarily due to lower food inflation exhibited diverse inflation movements. While WPI and steeper fuel deflation in CPI-IW vis-à-vis headline inflation in food sub-groups such as cereals, pulses, CPI. Wholesale price index (WPI) inflation, year-on- fruits, oils and fats, and vegetables ruled above year, accelerated to 2.8 per cent in October 2024, corresponding CPI groups/subgroups, those in sugar, with food inflation touching a record peak of 12.1 per milk and egg prices were higher in the CPI than in the cent in more than a decade. Thereafter, following the WPI. Similarly, inflation in clothing, and pan, tobacco moderation in food inflation, WPI inflation softened and intoxicants was higher in the CPI measure vis- to 2.2 per cent in November. After registering an uptick à-vis the WPI. On the other hand, fuel and light to 2.6 per cent in December, WPI inflation has since recorded a deflation in both CPI and WPI, with CPI then moderated and remained within a narrow range showing a lower rate of decline. Likewise, petrol and of 2.3 to 2.4 per cent during January-February 2025, diesel recorded a lower rate of deflation in the CPI vis- as the softening in food inflation was offset by a pick- a-vis WPI (Chart II.26b). up in non-food manufactured products inflation and a II.3 Costs narrowing of deflation in the fuel group. With overall WPI recording a pick-up during Q3:2024-25, inflation Costs, as measured by WPI inflation in industrial measured by deflators for gross value added (GVA) and raw materials and farm inputs, stayed largely in Chart II.26: Alternative Measures of Inflation Sources: NSO; Labour Bureau; Office of Economic Adviser; and RBI staff estimates. 32 tnec reP stniop egatnecreP a: Various Measures of Inflation (y-o-y) b: CPI-WPI Divergence : Select Commodities 10 10 (Average during Sep 2024-Feb 2025) 8 8 6 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 CPI-WPI gap (right scale) WPI CPI-IW CPI-AL Per cent CPI-RL CPI GVA deflator GDP deflator CPI WPI 32-beF 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF Vegetables 24.1 28.7 Oils and fats 12.0 27.9 Fruits 9.9 13.1 Cereals and products 6 7.6 .5 Pulses and products 4. 68 .2 Egg 3.5 0.3 Milk and products 2.9 2.4 Clothing 2.8 1.7 Pan, tobacco and intoxicants 2.4 2.2 Footwear 12 .. 61 Sugar and confectionery 01 .9.7 Fuel and light -1.5 -3.0 Petrol -5.7-1.9 Diesel -2.0 -4.7 Spices -6.8 -5.2 -20 0 20 40Chapter II Prices and Costs other contributory factors were non-food articles – particularly raw cotton and oilseeds – whose prices were mostly in deflation during this period. Mineral oils also remained in deflation, driven majorly by HSD, ATF, kerosene and petrol. In February 2025, however, industrial input costs increased and deflation in farm input costs decelerated with an increase in prices of furnace oil, naphtha, and paper and pulp products in the industrial sector and higher fodder and machinery costs in the agricultural sector. Minerals inflation, on the other hand, remained positive in H2:2045-25, primarily led by iron ore due to an increase in global iron ore prices on the back of higher Chinese demand and lower supply. Nominal rural wage growth averaged 6.3 per cent during October 2024-February 2025. While agricultural sector wages saw a sequential pick-up during this deflation since September 2024, primarily on account period, non-agricultural sector wage growth showed of electricity, fodder, aviation turbine fuel (ATF), high- a deceleration (Chart II.28). Agricultural wage growth speed diesel (HSD), and pesticides driven by easing was mainly driven by horticulture workers, inland international commodity prices (Chart II.27). The fishermen, picking workers, and ploughing and tilling Chart II.28: Wage Growth (y-o-y) and Inflation in Rural Areas (y-o-y) *: Comprise ploughing, sowing, harvesting, picking, horticulture workers, fishermen, loggers and wood cutters, animal husbandry, packaging, general agriculture labourers, plant protection workers. **: Comprise carpenter, blacksmith, mason, weavers, beedi makers, bamboo-cane basket weavers, handicraft workers, plumbers, electrician, construction workers, LMV & tractor drivers, sweeping/cleaning workers, and other non-agricultural labourers. Sources: NSO; Labour Bureau; and RBI staff estimates. 3333 tnec reP 9 8 7.3 7 6 5.5 5 4 3 2 1 0 tnec reP 32-beF 32-raM 32-rpA 32-yaM 32-nuJ 32-luJ 32-guA 32-peS 32-tcO 32-voN 32-ceD 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF Chart II.27: Farm and Non-farm Input Cost Inflation (y-o-y) 25 20 15 10 5 2.4 1.4 0 -0.8 -5 -10 -15 Overall WPI Farm Inputs$ Industrial raw materials* *: Comprise primary non-food articles, minerals, coal, aviation turbine fuel, high speed diesel, naphtha, bitumen, furnace oil, lube oil, petroleum coke, electricity, cotton yarn and paper and pulp from WPI. $: Comprise high speed diesel, fodder, electricity, fertilisers, pesticides, and agricultural and forestry machinery from WPI. Sources: Office of Economic Adviser; and RBI staff estimates. 32-beF 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beFMonetary Policy Report April 2025 Chart II.29: Staff Cost in Manufacturing and Services Note: The staff cost growth (y-o-y) is based on common set of companies. Sources: Capitaline database; and RBI staff estimates. workers; while that of non-agricultural wages was further along with higher growth in selling prices in on account of plumbers, electricians, and LMV and Q1:2025-26 (Chart II.30). tractor drivers in the rural sector. One year ahead business inflation expectations17, In the organised sector, staff cost growth (y-o-y) after firming up to 4.79 per cent in December 2024 decelerated for manufacturing and services sectors from 4.18 per cent in November, corrected sharply to in Q3:2024-25 as compared to the previous quarter, 4.24 per cent in January 2025 and softened further to driven by a decline in momentum of staff costs in 4.06 per cent in February 2025. The businesses polled both sectors assisted by favourable base effects in the survey perceived marginal softening in cost (Chart II.29). pressures. However, subdued sales figures resulted in muted expectations for profit margins compared On the assessment and outlook of cost conditions, to the previous round. manufacturing firms polled in the Reserve Bank’s enterprise surveys16 indicate that input cost pressures Manufacturing firms polled for the purchasing may soften in Q1:2025-26 but pressures from salary managers’ index (PMI) reported an uptick in input outgo are expected to accelerate. Manufacturing firms prices in Mar-25 after three months of consecutive also anticipate growth of selling prices to decelerate deceleration. Manufacturing sector saw a slowdown in in Q1 in tandem with lower input costs whereas for the rate of increase in output prices, during December services firms, the input and wage cost pressures 2024 to March 2025, though it continued to grow as well as selling prices are likely to pick up during at a faster pace as compared to input costs. On the Q1:2025-26. Infrastructure firms, on the other hand, other hand, PMI services sector continued to report expect input cost and wage cost pressures to rise relatively sticky input prices in March 2025. 16 Industrial Outlook Survey; and Services and Infrastructure Outlook Survey. 17 Based on the monthly Business Inflation Expectations Survey (BIES) of the Indian Institute of Management, Ahmedabad. The survey polls a panel of business leaders primarily from the manufacturing sector about their inflation expectations in the short and medium term. 34 tnec reP tnec reP a: Manufacturing Sector b: Services Sector 14 5.7 6 12 10 7.7 5 8 6 4 4 2 3 0 -2 -4 2 -6 -8 1 Quarterly Momemtum Base Effect Staff cost growth (y-o-y) Staff cost/value of production (right scale) 22-12-4Q 32-22-1Q 32-22-2Q 32-22-3Q 32-22-4Q 42-32-1Q 42-32-2Q 42-32-3Q 42-32-4Q 52-42-1Q 52-42-2Q 52-42-3Q tnec reP tnec reP 30 40 25 35 20 26.2 30 15 25 9.3 10 20 5 15 0 10 -5 -10 5 -15 0 22-12-4Q 32-22-1Q 32-22-2Q 32-22-3Q 32-22-4Q 42-32-1Q 42-32-2Q 42-32-3Q 42-32-4Q 52-42-1Q 52-42-2Q 52-42-3QChapter II Prices and Costs The input-output price gap for the manufacturing while the increase in prices charged by the services sector indicates no pent-up pass-through with output sector remained softer vis-à-vis that of input prices price increase remaining sticky since October 2024, from September 2024 (Chart II.31). Chart II.31: PMI Input-Output Price Gap Sources: S&P Global; and RBI staff estimates. 3355 paG xednI a: Manufacturing Sector )egnahc oN=05 ,detsujda yllanosaes( xednI paG xednI b: Services Sector )egnahc oN=05 ,detsujda yllanosaes( xednI 75 5 70 4 65 3 60 2 55 1 50 0 45 -1 40 -2 35 -3 Input prices Output prices Input prices Prices charged Input-output price gap (right scale) Input-output price gap (right scale) 32 naJ 32 raM 32 yaM 32 luJ 32 peS 32 voN 42 naJ 42 raM 42 yaM 42 luJ 42 peS 42 voN 52 naJ 52 raM 75 5 70 4 65 3 60 2 55 1 50 0 45 -1 40 -2 35 -3 32 naJ 32 raM 32 yaM 32 luJ 32 peS 32 voN 42 naJ 42 raM 42 yaM 42 luJ 42 peS 42 voN 52 naJ 52 raM Chart II.30: Expectations of Cost and Price Conditions a: Salary Outgo b: Cost of Inputs c: Selling Prices Manufacturing firms Services firms Infrastructure firms )tnec rep ni( esnopser teN 90 80 70 66.0 60 61.5 50 40 36.8 30 20 10 0 -10 -20 Note: ‘Net response’ is the difference between the percentage of respondents reporting an increase in prices and those reporting decrease. Sources: Reserve Bank’s Industrial Outlook Survey; Services & Infrastructure Outlook survey; and RBI staff estimates. noisnapxE noitcartnoC 22-1202:4Q 32-2202:1Q 32-2202:2Q 32-2202:3Q 32-2202:4Q 42-3202:1Q 42-3202:2Q 42-3202:3Q 42-3202:4Q 52-4202:1Q 52-4202:2Q 52-4202:3Q 52-4202:4Q 62-5202:1Q 90 80 71.1 70 69.2 60 50 40 40.1 30 20 10 0 -10 -20 22-1202:4Q 32-2202:1Q 32-2202:2Q 32-2202:3Q 32-2202:4Q 42-3202:1Q 42-3202:2Q 42-3202:3Q 42-3202:4Q 52-4202:1Q 52-4202:2Q 52-4202:3Q 52-4202:4Q 62-5202:1Q 90 80 70 60 62.1 55.8 50 40 30 20 10 12.5 0 -10 -20 22-1202:4Q 32-2202:1Q 32-2202:2Q 32-2202:3Q 32-2202:4Q 42-3202:1Q 42-3202:2Q 42-3202:3Q 42-3202:4Q 52-4202:1Q 52-4202:2Q 52-4202:3Q 52-4202:4Q 62-5202:1QMonetary Policy Report April 2025 II.4 Conclusion this could facilitate a durable alignment of headline inflation with the 4 per cent target and anchor CPI headline inflation exhibited significant volatility inflation expectations effectively, thereby enhancing in H2:2024-25 due to food price shocks. Despite the credibility of monetary policy. The impact of the repetitive supply side shocks, pre-emptive monetary hike in trade tariffs by the US on domestic inflation policy actions have helped to limit their second-round outlook is uncertain at the moment. Following effects on underlying inflation trends and sustain the tariff announcements, commodity prices, the disinflation process. In this context, supply side measures have also played a role in mitigating the however, have seen sharp swings – while energy impact of sectoral price shocks on general inflation and metal prices plunged, gold prices experienced trends. The significant softening in CPI headline considerable volatility. Amidst large uncertainties inflation in Q4:2024-25 so far, driven by the sharp surrounding the global economic outlook, the correction in food inflation, is likely to sustain on considerable progress achieved on the disinflation robust agricultural production. In the absence of front has provided greater leeway to monetary further adverse weather events and negative spillovers policy in effectively managing the growth-inflation from geopolitical and external sector uncertainties, balance. 36Chapter III Demand and Output III. Demand and Output Domestic economic activity recovered in H2:2024-25 from Q2:2024-25, with consumption demand acting as the main driver. Improved prospects for agriculture and rural economy, sustained buoyancy in services, government’s efforts to spur demand, and healthy balance sheets of banks and corporates brighten the outlook. The recent tariff announcements by the US, on the other hand, is likely to adversely impact India's net external demand. Heightened trade policy uncertainties, geoeconomic fragmentations, geopolitical tensions, volatility in global financial markets and weather disturbances pose downside risks to the domestic growth outlook. Domestic economic activity picked up in H2:2024-25 the previous quarter (Table III.1 and Chart III.1a). after slackening in Q2. Private consumption remained The momentum of GDP – quarter-on-quarter (q-o-q) robust, driven by strong rural demand and improving seasonally adjusted annualised rate (SAAR) – also urban demand, and government final consumption recorded improvement as compared to the previous expenditure picked up in H2. Investment activity quarter (Chart III.1b). moderated vis-a-vis the highs of the previous years. GDP Projections versus Actual Outcomes Net external demand remained bouyant supported The Monetary Policy Report (MPR) of October 2024 by resilient services exports. On the supply side, had projected real GDP growth at 7.0 per cent for Q2, while agriculture posted a strong growth and services and 7.4 per cent for both Q3 and Q4 of 2024-25. Actual remained resilient, industrial growth was muted, on growth in Q2 and Q3 turned out to be much lower the back of deceleration in manufacturing activity. (Chart III.2), mainly on account of moderation in III.1 Aggregate Demand investment on the back of lower government capital Aggregate demand conditions recovered as real gross expenditure. Data for Q4 are scheduled to be released domestic product (GDP) growth improved to 6.2 by the National Statistical Office (NSO) on May 30, per cent (y-o-y)1 in Q3:2024-25 from 5.6 per cent in 2025. Table III.1: Real GDP Growth (Y-o-y, per cent) Item 2023-24 2024-25 Weighted 2023-24 2024-25 Contribution* (FRE) (SAE) 2023-24 2024-25 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4# Private Final Consumption 5.6 7.6 3.2 4.3 7.4 3.0 5.7 6.2 7.7 5.9 6.9 9.9 Expenditure Government Final 8.1 3.8 0.8 0.4 5.3 20.1 2.3 6.6 -0.5 3.8 8.3 4.2 Consumption Expenditure Gross Fixed Capital Formation 8.8 6.1 3.0 2.1 8.4 11.7 9.3 6.0 6.7 5.8 5.7 6.4 Exports 2.2 7.1 0.5 1.5 -7.0 4.6 3.0 7.7 8.1 2.5 10.4 7.6 Imports 13.8 -1.1 3.3 -0.3 18.0 14.3 11.3 11.4 -0.7 -2.5 -1.1 -0.1 GDP at market prices 9.2 6.5 9.2 6.5 9.7 9.3 9.5 8.4 6.5 5.6 6.2 7.6 Notes: *: Component-wise contributions to growth do not add up to GDP growth because changes in stocks, valuables and discrepancies are not included. FRE: First revised estimates; SAE: Second advance estimates. #: Implicit Sources: National Statistical Office (NSO); and RBI staff estimates. 1 Unless specified otherwise, all discussions on growth in this chapter are on a year-on-year (y-o-y) basis. 3377Monetary Policy Report April 2025 Chart III.1: GDP Growth and its Constituents a: Weighted Contribution of the Components b: GDP Growth and Momentum to GDP Growth 16 18 12 12 e points 6 ent 8 entag Per c 4 erc 0 P 0 -6 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4# 2022-23 2023-24 2024-25 -4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4# PFCE GFCE 2022-23 2023-24 2024-25 GFCF Net exports GDP (y-o-y, per cent) y-o-y growth q-o-q SAAR Notes: # Implicit; SAAR – Seasonally adjusted annualised rate. Sources: NSO; and RBI staff estimates. III.1.1 Private Final Consumption Expenditure vehicle sales posted positive growth in H2 so far Private final consumption expenditure (PFCE) – (October-February) after contracting in Q2. Consumer the mainstay of aggregate demand – revived and durables production expanded at a robust pace of 9.1 recorded a growth of 6.9 per cent in Q3:2024-25, per cent in Q3 and 7.2 per cent in January, indicating contributing 4.1 percentage points to overall GDP steady expansion in discretionary spending. Bank growth. Amongst the high frequency indicators (HFIs) credit to households grew in double digits, despite of urban consumption, domestic air passenger traffic the slowdown in unsecured personal loans and credit rose by a strong 11.4 per cent in Q3 and sustained cards outstanding. Fast Moving Consumer Goods its momentum in January-February 2025. Passenger (FMCG) sales volume growth showed improvement in Q3 and Jan-Feb 2025 for urban areas, despite lagging Chart III.2: GDP Growth - Projection versus Actual their rural counterpart (Table III.2). 8 7.4 Rural demand, supported by healthy crops production 7.0 7 and improved reservoir levels, gained strength. 6.2 Growth in FMCG sales volume in the rural areas, 6 5.6 nt which has been healthy in Q3 and Jan-Feb 2025, e per c 5 continued to outpace that of urban areas. Tractor n wth i 4 sales recorded upbeat growth in H2:2024-25 so far o gr (October-February) after remaining muted in H1. o-y 3 Y- Fertiliser sales growth turned positive in Q3 and 2 January 2025 after contracting in Q2. Motorcycle sales, however, inched down during H2:2024-25 so 1 far (Table III.2). 0 Q2:2024-25 Q3:2024-25 Private consumption in India shows a strong co- October 2024 MPR Projection Actual movement with GDP and adjusts fast for any Sources: NSO; and RBI staff estimates. divergence from shocks. The pace of convergence, 38Chapter III Demand and Output Table III.2: Indicators of Consumption (Y-o-y, per cent) Indicators 2023-24 2024-25 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Jan Feb Urban Demand Domestic Air Passenger Traffic 19.1 23.0 9.1 5.2 5.6 7.2 11.4 14.1 12.1 Passenger Vehicle Sales# 9.6 5.8 8.7 10.8 3.4 -1.3 5.0 3.5 3.3 IIP Consumer Durables -2.7 1.1 5.3 11.2 10.7 6.6 9.1 7.2 Personal Loans 21.3 18.2 17.6 17.6 16.6 16.4 14.9 14.2 14.0 Vehicle Loans 23.0 21.2 19.7 17.6 14.9 13.3 8.8 9.7 9.6 Credit Card Outstanding 37.6 31.4 32.6 25.6 23.3 18.0 15.6 13.0 11.2 Rural Demand Tractor Sales -1.9 -5.8 -4.9 -22.9 0.5 0.7 13.5 11.4 35.9 Motorcycle Sales 13.8 -2.9 22.1 27.0 16.8 10.2 -1.9 -3.1 -12.9 IIP Consumer Non-durables 6.8 7.0 2.5 0.7 -0.2 -2.2 -1.8 -0.2 Fertiliser Sales -2.8 4.2 0.2 -7.4 5.5 -6.1 2.8 8.2 FMCG Sales Volume Rural 3.1 5.4 4.9 7.2 4.9 5.8 9.2 10.5 10.5* Urban 9.6 10.2 6.9 5.3 1.3 1.9 4.2 4.8 3.5* All-India 6.7 8.2 6.0 6.1 2.8 3.6 6.3 7.2 6.4* Note: *: Adjusted for leap year effect in February. #: Doesn't include Tata Motors data. Sources: Directorate General of Civil Aviation (DGCA), Society of Indian Automobile Manufacturers (SIAM); NSO; RBI; Tractor and Mechanization Association (TMA); and Ministry of Chemicals and Fertilisers (MoC&F); NielsenIQ’s Retail Audit Service; and RBI staff estimates. however, moderated during post-COVID as compared Employment conditions remained healthy in Q3:2024- with the pre-COVID period (Box III.1). 25, as reflected by the labour force participation Box III.1: Unravelling the Consumption Puzzle: Long-run Relationship and Post-shock Convergence with GDP The importance of private final consumption are corrected primarily through adjustments in expenditure (PFCE) in driving GDP growth is well- private consumption. This implies that following established as being the primary driver of aggregate an economic shock, PFCE responds more quickly to demand, directly influencing output (Keynes, 1936). In restore equilibrium. Moreover, comparing the results of pre-COVID period and full sample period (including India also, PFCE has remained the largest contributor COVID and post-COVID), it is found that the speed of to aggregate demand over the years. To investigate adjustments in private consumption was lower for the the relationship between PFCE and GDP in the Indian full sample period compared to the pre-COVID period, context, a co-integration technique is employed using possibly due to slowing response during the post- quarterly data spanning Q1:1996-97 to Q3:2024-25. COVID period in the face of heightened uncertainty. The results confirm a strong long-run relationship Nonetheless, these findings reinforce the critical role between PFCE and GDP. The short-term results of PFCE in shaping India’s economic trajectory and its indicate that deviations from the long-run equilibrium resilience in the face of external shocks. (Contd.) 3399Monetary Policy Report April 2025 Chart III.1.1: GDP and PFCE Growth (y-o-y) 30 8 6 20 4 10 2 0 0 -2 -10 -4 -20 -6 -30 -8 Table III.1.1: GDP and PFCE: Co-integration and Error Correction Estimates Pre-COVID (1998Q1 – 2019Q4) Long-Run Equation LN(GDP) 0.96*** (-53.53) Short-Run Equation D(LNPFCE) D(LNGDP) Error Correction Term -0.28*** -0.13 (-2.92) (-1.9) Adjusted R-squared 0.45 0.07 Full Sample (1998Q1 – 2024Q3) Long-Run Equation Ln(GDP) 0.98*** (-48.77) Short-Run Equation D(LNPFCE) D(LNGDP) Error Correction Term -0.19*** -0.06 (-3.06) (-1.37) Adjusted R-squared 0.77 0.83 Notes: (1) GDP and PFCE series are seasonally adjusted; (2) COVID-19 dummies are used to capture the substantial short-term disruptions caused by the pandemic, with negative effects observed during the initial quarters of 2020, followed by partial recovery in subsequent periods; (3) Trace test and max-eigenvalue test indicates cointegrating relationship at 5 per cent level of significance; (4) Figures in parentheses are t-statistics; (5) *** denotes significance at 1 per cent level. Sources: NSO; and RBI staff estimates. References: 1. Engle, R. F., & Granger, C. W. J. (1987). Co-integration and Error Correction: Representation, Estimation, and Testing, Econometrica. 55(2), 251-276. 2. Johansen, S. (1988). Statistical Analysis of Cointegration Vectors, Journal of Economic Dynamics and Control. 12(2- 3), 231-254. 3. Keynes, J. M. (1937). The General Theory of Employment, The Quarterly Journal of Economics. 51(2), 209-223. 40 tnec reP 1Q:31-2102 3Q:31-2102 1Q:41-3102 3Q:41-3102 1Q:51-4102 3Q:51-4102 1Q:61-5102 3Q:61-5102 1Q:71-6102 3Q:71-6102 1Q:81-7102 3Q:81-7102 1Q:91-8102 3Q:91-8102 1Q:02-9102 3Q:02-9102 1Q:12-0202 3Q:12-0202 1Q:22-1202 3Q:22-1202 1Q:32-2202 3Q:32-2202 1Q:42-3202 3Q:42-3202 1Q:52-4202 3Q:52-4202 stniop egatnecreP GDP less PFCE (RHS) GDP PFCE Sources: NSO; and RBI Staff Estimates.Chapter III Demand and Output Table III.3: Employment Situation in India (Per cent) Indicators 2023-24 2024-25 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Labour Force Participation Rate 48.8 49.3 49.9 50.2 50.1 50.4 50.4 Worker Population Ratio 45.5 46 46.6 46.9 46.8 47.2 47.2 Unemployment Rate 6.6 6.6 6.5 6.7 6.6 6.4 6.4 Net Payroll Additions in EPFO Records (y-o-y) -9.2 -0.6 12.5 22.7 7.8 -3.4 4.2 Sources: NSO; and Employees’ Provident Fund Organisation (EPFO). rate (LFPR) and the employment rate (ER) under recorded improvement in January 2025. Among the urban Periodic Labour Force Survey (PLFS). the coincident indicators of construction activity, The unemployment rate in urban areas remained both steel consumption and cement production at 6.4 per cent in Q3, the lowest in the PLFS series. reverted to double-digit growth in Jan-Feb 2025. Steel consumption, however, contracted marginally Strengthening of formal employment was evident in in March 2025 (Table III.4). the Employees’ Provident Fund Organisation (EPFO) payrolls data – net payroll additions rose by 4.2 per Capacity utilisation (CU) in the manufacturing sector2 cent in Q3 as compared with a contraction in the increased to 75.4 per cent in Q3:2024-25 from 74.7 previous quarter (Table III.3). per cent in the same quarter of the previous year. Seasonally adjusted capacity utilisation at 75.3 per III.1.2 Gross Fixed Capital Formation cent was well above the long-term average of 73.8 per Gross fixed capital formation (GFCF) expansion at cent3 (Chart III.3). Robust capacity utilisation act as an 5.7 per cent in Q3:2024-25 was lower as compared important driver in boosting private investment (Box to 9.3 per cent in the same period last year. In Q4, III.2). Since the level of CU has been above the long amongst the key underlying indicators, import of period trend over the last few quarters, heightened policy uncertainty may be acting as a dampening force capital goods expanded by 7.5 per cent in Jan-Feb for revival in private capex. 2025, led by electronic goods, electrical and non- electrical machinery, iron and steel, and machine The interest coverage ratio (ICR)4 of listed tools. Domestic production of capital goods private manufacturing companies remained Table III.4: Indicators of Investment Demand (Y-o-y, per cent) Indicators 2023-24 2024-25 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Jan Feb Mar Import of Capital Goods 9.2 9.6 5.6 8.9 10.0 11.7 6.0 15.5 -0.5 IIP: Capital Goods 5.1 8.8 7.5 4.1 3.0 4.9 7.3 7.8 Finished Steel Consumption 12.1 17.7 14.7 10.4 15.0 12.0 7.8 10.9 10.9 -0.5 Cement Production 12.7 10.3 5.1 7.6 0.4 3.2 6.7 14.5 10.5 Sources: Directorate General of Commercial Intelligence and Statistics (DGCI&S); NSO; Joint Plant Committee; and Office of Economic Adviser. 2 Based on RBI’s survey of order books, inventories and capacity utilisation (OBICUS). 3 Long term average is for the period Q1:2008-09 to Q3:2024-25 excluding Q1:2020-21. 4 Interest coverage ratio is the ratio of earnings before interest and taxes (EBIT) to interest expenses and measures a company’s capacity to make interest payments on its debt. The minimum value for a viable ICR is 1. 4411Monetary Policy Report April 2025 comfortable in Q3:2024-25, indicating improved debt servicing capacity which, in conjunction with easing financial conditions, augers well for expansion in capacity. Within the services sector, ICR of non-IT companies improved during Q3 while ICR of IT companies remained at elevated levels despite moderation (Table III.5). The investment rate5 at 31.4 per cent in 2023-24 moderated from the previous year level (32.6 per cent). On the other hand, domestic savings rate remained steady at 30.7 per cent of GDP in 2023-24, indicating lower reliance on external funding (Chart III.4). Net household financial savings improved marginally CU CU (Seasonally adjusted) to 5.2 per cent of GDP from 5.0 per cent last year, Long-term average mainly due to uptick in financial assets of households (Table III.6). Box III.2: Investment Dynamics through the Lens of Capacity Utilisation The public sector played a major role in the post- cycle with healthy balance sheets and easing of financial pandemic revival of gross fixed investments while the conditions. The dynamic relationship between capacity private corporate sector has been lagging, which is pivotal utilisation and private investments is empirically in expanding the productive capacity of the economy explored to find out the threshold level of capacity (IMF, 2025). The capacity utilisation (CU) level is a vital utilisation that triggers investment. indicator to understand whether fresh investments by A structural vector auto-regression (SVAR) model is the private corporate sector will get triggered to meet estimated using five variables6 viz., business expectation, the improving domestic demand conditions. Capacity CU, gross fixed investments, inflation (GFCF deflator) utilisation in the manufacturing sector in the recent and repo rate for the period Q2:2008-09 to Q3:2024- period has been higher than its long-term average. It 25. Since uncertainty is believed to dampen current is generally understood that a high level of capacity and future investments, it is included as an exogenous utilisation coupled with a positive economic outlook variable7. Empirical findings suggest that around 50.0 incentivises fresh capacity additions. An improvement per cent of the variation in private investment growth is in productivity, however, may lead to a lower level of explained by CU, suggesting its dominant role as a driver capacity utilisation. Thus, examining the threshold level of private investments (Chart III.2.1). Economic policy of capacity utilisation assumes importance; particularly, uncertainty is found to have a dampening effect on fresh at the current juncture when the environment seems investments. The threshold level of CU, which might to be conducive for a turnaround in the private capex trigger private corporate investment going forward, (Contd.) 5 Ratio of Gross Capital Formation to GDP at current prices. 6 Business expectation index is as per the quarterly Industrial Outlook Survey (IOS) conducted by the Reserve Bank of India; CU is as per the quarterly Order Book, Inventory and Capacity Utilisation Survey (OBICUS) conducted by the Reserve Bank; quarterly gross fixed capital formation by the private corporate sector derived from the annual estimates using econometric method. 7 Uncertainty is measured by the economic policy uncertainty index for India published by Baker, Bloom and Davis. 42 tnec reP Chart III.3: Capacity Utilisation in Manufacturing 80 75.4 75 73.8 75.3 70 65 60 55 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2021-22 2022-23 2023-24 2024-25 Source: RBI staff estimates.Chapter III Demand and Output is estimated with the same set of variables but using (Balke, 2000). The findings suggest a band of 72.4 to 74.4 an alternative specification of Threshold VAR models per cent as a threshold level for CU. References: 1. IMF (2025). India 2024 Article IV Consultation, International Monetary Fund Country Report No. 25/54. 2. N. Balke (2000). Credit and Economic Activity: Credit Regimes and Nonlinear Propagation of Shocks, The Review of Economics and Statistics. 82(2), 344-349. III.1.3 Government Consumption in Q3:2024-25 (Chart III.5). GFCE growth for 2024-25, however, fell to 3.8 per cent as compared to 8.1 per Government final consumption expenditure (GFCE) cent in the previous year. posted a sharp recovery in Q3:2024-25, rising by 8.3 per cent, following a subdued growth of just 1.6 per cent in H1, mainly due to the model code of conduct during the general elections. Notably, union government’s revenue expenditure, excluding interest payments and major subsidies, grew by 11.2 per cent, and capital outlay surged by 20.5 per cent Table III.5: Interest Coverage Ratio (Ratio) Sector 2023-24 2024-25 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Manufacturing 6.8 7.5 7.4 7.5 7.9 7.9 7.6 Services (non-IT) 1.6 1.4 1.8 1.7 1.8 1.7 2.1 IT 44.5 43.2 41.2 44.1 42.9 45.6 40.9 Note: Data for Q3:2024-25 are based on results of 2,924 listed non- government non-financial companies. Source: RBI staff estimates. 4433 PDG fo tnec reP Chart III.4: Saving-Investment Gap 40 38 36 34 32 31.4 30.7 30 28 26 24 Savings rate Investment rate Sources: NSO; and RBI staff estimates. 21-1102 31-2102 41-3102 51-4102 61-5102 71-6102 81-7102 91-8102 02-9102 12-0202 22-1202 32-2202 42-3202 Chart III.2.1: Variance Decomposition of GFCF Growth tnec reP 100 80 60 40 20 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Quarters Inflation Policy rate Business Expectation Capacity Utilisation GFCF growth Sources: NSO; and RBI Staff Estimates.Monetary Policy Report April 2025 Table III.6: Domestic Savings (Per cent of GDP) Sector 2011-12 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 to 2015-16 Households Physical (1) 13.3 10.7 11.6 12.4 11.4 11.0 12.8 13.7 13.0 Savings Gross Financial Assets (2) 10.6 10.5 12.0 12.0 11.6 15.4 11.1 10.9 11.4 Gross Financial Liabilities (3) 3.1 3.0 4.4 4.1 3.9 3.7 3.8 5.9 6.2 Net Financial Savings (4=2-3) 7.5 7.4 7.6 7.9 7.7 11.7 7.3 5.0 5.2 Total Household Savings (5=1+4) 20.8 18.1 19.3 20.3 19.1 22.7 20.1 18.6 18.1 Private Corporate Savings (6) 10.8 10.8 11.5 11.2 10.5 10.2 10.5 11.2 11.0 Public Savings (7) 1.2 1.2 1.7 1.6 0.9 0.2 -4.1 -0.1 1.1 Gross Domestic Savings (5+6+7) 32.8 32.8 31.3 32.1 31.7 29.6 29.1 31.2 30.7 Note: Physical saving comprises saving in physical assets and saving in the form of gold and silver ornaments. Source: NSO. The central government’s revenue expenditure government’s fiscal consolidation in 2025-26 (BE) has (excluding interest payments and major subsidies) been planned largely by rationalisation in revenue grew by 7.9 per cent, while capital expenditure expenditure, while maintaining a thrust on capital expanded by 7.3 per cent during 2024-25 (RE). Pursuing expenditure which has been budgeted at 3.1 per cent fiscal consolidation, the central government’s gross of GDP. Gross tax revenues are projected to rise to 12.0 fiscal deficit (GFD) at 4.7 per cent of GDP in 2024- per cent of GDP in 2025-26 (BE) from 11.6 per cent 25 (RE) was 20 basis points lower than its budget in 2024-25 (RE) (Table III.7). The revenue expenditure estimate, and 75 basis points lower compared to the Table III.7: Central Government Finances previous year. The centre’s GFD for 2025-26 has been (Per cent of GDP) budgeted at 4.4 per cent of GDP, which is consistent Indicator 2022-23 2023-24 2024-25 2025-26 (RE) (BE) with the medium-term goal of reducing the GFD-GDP 1. Gross tax revenue 11.4 11.5 11.6 12.0 ratio to below 4.5 per cent by 2025-26. The central 2. Revenue receipts 8.9 9.1 9.3 9.6 a. Tax revenue (Net) 7.8 7.7 7.7 7.9 b. Non-tax revenue 1.1 1.3 1.6 1.6 3. Non-debt capital receipts 0.3 0.2 0.2 0.2 4. Revenue expenditure 12.8 11.6 11.2 11.0 a. Interest payments 3.5 3.5 3.4 3.6 b. Major subsidies 2.0 1.4 1.2 1.1 5. Revenue expenditure excluding interest 7.4 6.7 6.6 6.4 payments and major subsidies 6. Capital expenditure 2.8 3.2 3.1 3.1 7. Capital outlay 2.3 2.6 2.6 2.5 8. Effective capital 3.9 4.2 4.0 4.3 expenditure 9. Total expenditure 15.6 14.8 14.2 14.2 10. Gross fiscal deficit 6.5 5.5 4.7 4.4 11. Revenue deficit 4.0 2.5 1.8 1.5 12. Primary deficit 3.0 2.0 1.3 0.8 Notes: RE: Revised Estimates; BE: Budget Estimates. Effective capital expenditure includes grants in aid for creation of capital assets. Figures may vary from those published in the Union Budget due to revision in GDP. Sources: Union Budget 2025-26; and RBI staff estimates. 44 tnec rep ni htworg y-o-Y Chart III.5: Central Government's Revenue Expenditure and Capital Outlay during 2024-25 50 40.0 40 30 20.5 20 14.6 11.2 12.5 7.2 10 0 -1.5 -10 -20 -30 -40 -35.4 Q1 Q2 Q3 Q4# Revenue expenditure excluding interest payments and major subsidies Capital outlay Note: #: Implicit Sources: Controller General of Accounts (CGA); and Union Budget 2025-26.Chapter III Demand and Output Chart III.6: Central Government’s Tax Collections: April-February a: Direct Taxes b: Indirect Taxes c: GST Collections (Centre plus States) Sources: CGA; Ministry of Finance (MoF); and GST Portal. to capital outlay ratio (RECO), a key indicator of the fuelled by both tax and non-tax components. Notably, quality of expenditure, stood at 4.4 in 2025-26 (BE), the states have continued their thrust on augmenting same as in the last two years and the lowest in over capital expenditure, with a budgeted increase of 22.4 three decades. per cent in 2024-25. During April-February 2024-25, the central State’s GFD reached 61.3 per cent of their BE during government's revenue expenditure excluding interest April-January 2024-25, lower than the level recorded and major subsidy payments increased by 3.9 per in the previous year (Chart III.7a). Total revenue cent, whereas capital expenditure witnessed muted receipts for the states remained buoyant during April- growth of 0.8 per cent. The central government’s January 2024-25, driven primarily by a strong rise gross tax revenue recorded a growth of 10.9 per cent, in tax revenue, although growth in non-tax revenue supported by buoyant direct tax collections. Direct moderated. On the expenditure side, capital spending taxes increased by 13.3 per cent with income tax contracted marginally by 0.6 per cent during April- January 2024-25, while growth in revenue expenditure expanding by 22.0 per cent. Indirect tax collections accelerated during this period (Chart III.7b). rose by 7.9 per cent, with goods and services tax (GST) and custom duties registering a growth of 11.6 Table III.8: State Government Finances - Key Fiscal and 4.2 per cent, respectively. Monthly average GST Indicators collections (centre plus states) was ₹1.84 lakh crore (per cent of GDP) during 2024-25, registering a growth of 9.4 per cent Items 2022-23 (A) 2023-24 (PA) 2024-25 (BE) over the previous year (Chart III.6). Revenue deficit 0.2 0.2 0.2 Gross fiscal deficit 2.7 2.9 3.2 The aggregate gross fiscal deficit (GFD) for the states Primary deficit 1.0 1.4 1.5 and union territories has been estimated at 3.2 per Notes: Data pertains to 31 States/UTs A: Actuals; PA: Provisional Accounts; BE: Budget Estimates cent of GDP for 2024-25 (BE) (Table III.8). The states Sources: Budget Documents of States/UTs; and Comptroller and Auditor have projected a rise in revenue receipts 2024-25 (BE), General (CAG) of India. 4455 erorc dnasuoht ₹ erorc dnasuoht ₹ erorc dnasuoht ₹ 1,400 225 1,200 200 1,000 935 175 773 837 800 150 600 125 400 100 269 254 250 75 200 189 196 205 50 0 2022-23 2023-24 2024-25 25 0 rpA yaM nuJ luJ guA peS tcO voN ceD naJ beF raM 2,000 1,800 1,600 1,400 991 1,200 812 1,000 646 800 600 400 753 767 642 200 0 GST (including compensation cess) 2022-23 2023-24 2024-25 Union excise duties Corporation tax Income tax Customs duties Other taxes Other taxes 2022-23 2023-24 2024-25Monetary Policy Report April 2025 Chart III.7: Key Fiscal Indicators of the States: April-January a: Fiscal Indicators b: Growth in Receipts and Expenditure 120 35 32.1 100 97.5 30 Per cent) 80 92.6 n per cent 22 05 19.7 Share in BE ( 46 00 35.6 49.763.161.3 53.9 48.9 Y-o-y growth i 11 05 5 7.111.5 12.3 8.812.2 8.9 20 15.8 0 -0.6 -5 0 Revenue Revenue Capital Revenue deficit Gross fiscal Primary deficit receipts expenditure expenditure deficit 2022-23 2023-24 2024-25 2022-23 2023-24 2024-25 Note: Data pertains to 21 States Sources: Budget Documents of State Governments; and CAG. The rise in revenue expenditure along with the totalling ₹1,22,180 crore as of January 31, 2025, of contraction in capital outlay has diluted the quality which, about ₹1,10,792 crore has been disbursed.8 of state spending (Chart III.8). The states’ capital The scheme has been extended to 2025-26 in the expenditure has been supported by the Scheme for Union budget, recognising its critical role in fostering Special Assistance to States for Capital Investment. investment and growth. Under this initiative, the centre has approved loans Chart III.8: Revenue and Expenditure of States: April-January a: Components of States' Own Tax Revenue b: Capital Expenditure of States 30 3.5 10.0 25.5 nt 25 3.0 2.8 8.0 e per c 20 17.4 2.5 7.1 y growth in 11 05 14.3 13.2 14.6 11.3 8.0 Per cent 12 .. 50 46 .. 00 Ratio o- Y- 4.8 1.0 5 2.0 0.5 0 -1.3 0.0 0.0 -5 2021-22 2022-23 2023-24 2024-25 SGST Sales tax/VAT State excise Capital outlay as per cent of GDP (Full year) 2022-23 2023-24 2024-25 Revenue expenditure to capital outlay (RHS) Note: Data for revenue expenditure to capital outlay (RECO) ratio pertain to 21 States. Data for capital outlay as per cent of GDP pertains to all States/UTs and data for 2024-25 is a Budget Estimate. Sources: CAG; and RBI. 8 Lok Sabha Unstarred Question No. 1080, available at https://sansad.in/getFile/loksabhaquestions/annex/184/AU1080_mHyVcX.pdf?source=pqals 46Chapter III Demand and Output Table III.9: Government Market Borrowings (₹ crore) 2022-23 2023-24 2024-25 Centre States Total Centre States Total Centre States Total Net borrowings 11,08,261 5,18,830 16,27,091 11,80,456 7,17,140 18,97,596 10,39,275 7,53,345 17,92,620 Gross borrowings 14,21,000 7,58,392 21,79,392 15,43,000 10,07,058 25,50,058 14,00,697 10,73,310 24,74,007 Sources: Government of India (GoI); and RBI staff estimates. In 2024-25, the centre’s gross market borrowings by 2.4 per cent. As a result, the merchandise trade amounted to ₹14.01 lakh crore, marginally lower deficit widened to US$115.8 billion during H2:2024- than the budgeted estimates. In pursuit of active debt 25 (October-February) from US$ 106.6 billion in the consolidation, the Reserve Bank of India conducted corresponding period of the previous year (Chart III.9). eight switch auctions on behalf of the central The contraction in merchandise exports during H2 government, totalling ₹1.47 lakh crore. These auctions was primarily driven by petroleum, oil and lubricants involved substituting shorter-maturity securities with (POL), gems and jewellery, iron ore, organic and those of longer maturities. The weighted average yield inorganic chemicals, and oil meals, while electronic on issuances during 2024-25 declined to 7.0 per cent goods, engineering goods, rice, readymade garments from 7.2 per cent in 2023-24. On the other hand, the (RMG) of all textiles, and drugs and pharmaceuticals weighted average maturity of borrowings increased to contributed positively (Chart III.10). 20.7 years from 18.1 years in the previous year. States The growth in merchandise imports during H2:2024-25 raised market borrowing of ₹10.73 lakh crore in 2024- (October-February) was primarily driven by imports of 25, lower than the total sanctioned amount of ₹11.72 electronic goods, gold, machinery (both electrical and lakh crore for the fiscal year (Table III.9). The Ways non-electrical), vegetable oil, and chemical materials and Means Advances (WMA) limits of the central government, to meet temporary mismatches between Chart III.9: Merchandise Trade receipts and payments, remained unchanged from the previous year at ₹1.5 lakh crore for H1 and ₹50,000 crore for H2 in 2024-25. The WMA limits for states and union territories were increased to ₹60,118 crore from the earlier ₹47,010 crore, effective on July 1, 2024.9 The centre's gross market borrowings and net borrowings for 2025-26 (BE) are placed at ₹14.82 lakh crore and ₹11.54 lakh crore, respectively. III.1.4 External Demand During April-February 2024-25, merchandise exports saw a modest growth of 0.1 per cent, while merchandise imports recorded a rise of 5.7 per cent. During H2:2024-25 (October-February), India’s merchandise exports contracted by 1.2 per cent, while imports rose Source: DGCI&S. 9 Based on the recommendations, by the group constituted by the RBI and consisting of select State Finance Secretaries. 4477 tnec rep ni htworg y-o-Y noillib $SU 30 30 20 20 10 10 0 0 -10 -10 -20 -20 -30 -30 -40 -40 Exports Imports Non-POL exports Non-POL non-gold imports Trade balance (RHS) 32-rpA 32-yaM 32-nuJ 32-luJ 32-guA 32-peS 32-tcO 32-voN 32-ceD 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beFMonetary Policy Report April 2025 and products (Chart III.11). On the other hand, imports Services exports grew by 13.1 per cent during 2024-25 of coal, coke, and briquettes, petroleum, crude and (April-February), a notable increase from 5.5 per cent products, pearls, precious and semi-precious stones, recorded in the same period of last year, reflecting silver, and iron and steel contributed negatively to robust global demand for Indian services. In H2:2024- the overall import growth. Non-oil exports posted a 25 (October-February), services exports surged by 15.4 robust y-o-y increase of 8.7 per cent during H2, while per cent, compared to a modest 6.0 per cent growth non-oil non-gold imports rose by 4.7 per cent to reach in the previous year (Chart III.12). The growth in US$ 199.7 billion during this period. H2 was primarily driven by strong performances Chart III.11: Merchandise Imports a: Imports Growth - Relative Contribution b: Major Drivers of Imports in H2:2024-25 (October-February) - Relative Contribution POL imports Gold imports Non-POL non-gold imports Merchandise imports (per cent) Note: Figures in parentheses in chart b are y-o-y per cent change in imports of the commodity during the period. Sources: DGCI&S; and RBI staff estimates. 48 stniop egatnecreP 50 40 30 20 10 0 -10 -20 Percentage points 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q beF-naJ Electronic goods (11.9) Gold (12.6) Machinery, electrical and non- electrical (12.6) Vegetable oil (38.1) Chemical material and products (37.1) Iron and steel (-13.3) Silver (-36.1) Pearls, precious and semi-precious stones (-32.3) Petroleum, crude and products (-6.0) 2022-23 2023-24 2024-25 Coal, coke and briquettes, etc. (-30.6) -2 0 24 5 poT 5 mottoB Chart III.10: Merchandise Exports Notes: Figures in parentheses in chart b are y-o-y per cent change in exports of the commodity during the period. *: World trade data is available up to January 2025. Sources: DGCI&S; CPB Netherlands; and RBI staff estimates. stniop egatnecreP tnec reP a: Exports Growth - Relative Contribution b: Major Drivers of Exports in H2:2024-25 (October-February) - Relative Contribution 30 6 25 5 20 4 15 3 10 2 5 1 0 0 -5 -10 -1 -15 -2 -20 -3 Percentage points 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q beF-naJ Electronic goods (46.5) Engineering goods (10.9) Rice (53.4) RMG of all Textiles (13.2) Drugs and pharmaceuticals (5.6) Oil meals (-32.4) Organic and inorganic chemicals (-3.1) Iron ore (-64.7) Gems and jewellery (-10.3) 2022-23 2023-24 2024-25 Petroleum products (-40.6) Non-POL exports POL exports -10 -8 -6 -4 -2 0 2 4 Merchandise exports (per cent) World trade* (RHS) 5 poT 5 mottoBChapter III Demand and Output Chart III.12: Services Trade Table III.10: Net Foreign Direct and Portfolio Investment (US$ billion) 2023-24 2024-25 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Net FDI 4.7 -0.8 4.0 2.3 6.6 -2.3 -2.8 0.9# Net FPI* 16.1 5.3 11.7 11.6 0.9 19.8 -11.4 -6.8 Notes: #: Net FDI for Q4:2024-25 is up to January 2025; *: Net FPI data up to Q3:2024-25 are based on balance of payments (BoP) statistics of RBI, while data for Q4:2024-25 is sourced from daily data, published by NSDL. Sources: National Securities Depository Limited (NSDL); and RBI. by 15.3 per cent over last year, a notable rebound compared to a 2.6 per cent contraction during the corresponding period of last year. Major sources of FDI Exports Imports inflows included Singapore, Mauritius, the USA, UAE, Source: RBI. Netherlands and Japan, which together accounted for 80.0 per cent of total FDI. The majority of FDI equity in software, business, and transportation services. inflows were into manufacturing, financial services, Among the world’s leading service-exporting nations, electricity generation, distribution & transmission, India maintained its position within the top five communication services, retail & wholesale trade, and countries in 2024-25 (up to December 2024). Services imports rebounded from contraction and recorded a computer services, which together received 77.0 per 12.1 per cent growth during 2024-25 (April-February), cent of FDI equity inflows. with a significant increase of 14.6 per cent during H2 Foreign portfolio investment (FPI) to India recorded (October-February) on the back of buoyant domestic a net outflow of US$ 18.3 billion in H2:2024-25, as demand. portfolio investors turned net sellers in equities mainly On a balance of payments (BoP) basis, India’s current due to hightened global uncertainties. Although FPI account deficit (CAD) widened marginally to US$ 11.5 flows in the debt segment moderated in H2:2024-25, billion (1.1 per cent of GDP) in Q3:2024-25 from US$ they remained positive for the full year, reflecting the 10.4 billion (1.1 per cent of GDP) in Q3:2023-24, but inclusion of Indian government bonds in J.P. Morgan’s moderated from US$ 16.7 billion (1.8 per cent of GDP) benchmark emerging market index and other indices. in Q2:2024-25. Overall, FPI recorded a net inflow of US$ 2.4 billion in 2024-25, a sharp decline from the net inflow of In the financial accounts, net foreign direct investment (FDI) flows to India declined to US$ 2.5 billion during US$ 44.6 billion in the same period of the previous April-January 2024-25 from US$ 11.5 billion in the year. The uncertain global economic outlook, rising same period of last year, mainly due to a surge in US bond yields, and moderation in corporate earnings repatriations and increased outward FDI (Table III.10). seem to have dampened FPI sentiment. The FPI flows Gross FDI flows, however, remained strong at US$ have revived in March 2025 and recorded net inflow 69.4 billion in 2024-25 (up to January), growing of US$ 3.8 billion. 4499 tnec rep ni htworg y-o-Y 50 40 30 20 11.8 10 3.8 0 -10 -20 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q beF-naJ :4Q 2021-22 2022-23 2023-24 2024-25Monetary Policy Report April 2025 External commercial borrowing (ECB) flows saw Chart III.13: GVA Growth and Momentum significant increase, reaching US$ 15.2 billion during 25 April-February 2024-25, as against US$ 2.8 billion 20 a year ago. Net accretions to non-resident deposits 15 surged to US$ 14.3 billion during April-January 10 7.4 2024-25 from US$ 10.2 billion in the previous year, 5 6.8 on the back of strong deposit growth in all three 0 accounts i.e., FCNR(B), NRE and NRO. As of March -5 28, 2025, India’s foreign exchange reserves stood -10 at US$ 665.4 billion, equivalent to 11.0 months of -15 annualized merchandise imports on a BoP basis and Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4# 92.7 per cent of the outstanding external debt as of 2022-23 2023-24 2024-25 December 2024. y-o-y q-o-q SAAR III.2 Aggregate Supply Notes: #: Implicit; and SAAR - Seasonally adjusted annualised rate. Sources: NSO; and RBI staff estimates. Aggregate supply – measured by real gross value III.2.1 Agriculture added (GVA) at basic prices – expanded by 6.2 per cent Real GVA in agriculture and allied activities recorded a in Q3:2024-25 (8.0 per cent in Q3:2023-24), showing six-quarter high growth of 5.6 per cent in Q3:2024-25 improved momentum over the previous quarter (5.8 (1.5 per cent a year ago) on the back of healthy kharif per cent growth in Q2:2024-25). This improvement in production. Q3 was supported by robust growth in agriculture and As on March 27, 2025, the water storage levels in major allied sector activity and resilience in services activity reservoirs across India stood at 42 per cent of full (Table III.11 and Chart III.13). Table III.11: Real GVA Growth (Y-o-y, per cent) Sector 2023-24 2024-25 Weighted 2023-24 2024-25 Contribution (FRE) (SAE) 2023-24 2024-25 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4# Agriculture, forestry and fishing 2.7 4.6 0.4 0.7 5.7 3.7 1.5 0.9 1.7 4.1 5.6 6.2 Industry 11.0 4.3 2.4 0.9 6.6 15.3 12.6 9.9 7.7 2.0 3.5 4.3 Mining and quarrying 3.2 2.8 0.1 0.1 4.1 4.1 4.7 0.8 6.8 -0.3 1.4 2.4 Manufacturing 12.3 4.3 2.1 0.8 7.3 17.0 14.0 11.3 7.5 2.1 3.5 4.3 Electricity, gas, water supply and other utilities 8.6 6.0 0.2 0.1 4.1 11.7 10.1 8.8 10.2 3.0 5.1 6.0 Services 9.2 7.5 5.8 4.7 12.1 8.3 8.5 8.0 7.2 7.4 7.3 8.0 Construction 10.4 8.6 0.9 0.8 9.2 14.6 10.0 8.7 10.1 8.7 7.0 8.9 Trade, hotels, transport, communication 7.5 6.4 1.4 1.2 11.0 5.4 8.0 6.2 5.4 6.1 6.7 7.0 Financial, real estate and professional services 10.3 7.2 2.4 1.7 15.0 8.3 8.4 9.0 6.6 7.2 7.2 8.0 Public administration, defence and other services 8.8 8.8 1.1 1.1 9.3 8.9 8.4 8.7 9.0 8.8 8.8 8.7 GVA at basic prices 8.6 6.4 8.6 6.4 9.9 9.2 8.0 7.3 6.5 5.8 6.2 6.8 Notes: FRE: First revised estimates; SAE: Second advance estimates; #: Implicit. Sources: NSO; and RBI staff estimates. 50 tnec rePChapter III Demand and Output Table III.12: Agricultural Production in 2024-25 (Lakh tonnes) Crop 2023-24 2024-25 Variation in 2024-25 Final (Per cent) Estimates Target SAE Over 2023-24 1. Foodgrains 3157.7 3259.2 3309.2 4.8 Kharif 1557.7 1613.7 1663.9 6.8 Rabi 1600.1 1645.5 1645.3 2.8 a. Rice 1278.6 1260.5 1364.4 6.7 b. Wheat 1132.9 1150.0 1154.3 1.9 c. Pulses 221.7 276.5 230.2 3.8 2. Oilseeds 384.4 434.0 416.7 8.4 3. Sugarcane 4531.6 4700.0 4350.8 -4.0 4. Cotton # 325.2 350.0 294.3 -9.5 5. Jute & Mesta ## 96.9 105.0 86.2 -11.0 Notes: Table covers data only for Kharif and Rabi seasons. #: Lakh bales of 170 kgs each; ##: Lakh bales of 180 kgs each. SAE: Second Advance Estimates. Source: Ministry of Agriculture and Farmers’ Welfare (MoA&FW), GoI. capacity, marking an increase of 16.5 per cent compared Allied activities like livestock, forestry and fishing to the previous year and 14.6 per cent above the contributed almost 82.0 per cent of agricultural GVA decadal average. Notably, storage levels exceeded the growth in 2023-24 (Chart III.14). Real GVA of agriculture decadal average in all regions, except the Northern and and allied activities expanded by 2.7 per cent in 2023- Eastern regions. 24 (FRE), primarily driven by 5.4 per cent growth in The second advance estimate (SAE) for 2024-25 placed livestock and 5.9 per cent growth in fisheries and foodgrains production at 3309.2 lakh tonnes, marking an increase of 4.8 per cent over the previous year Chart III.14: Contribution of Crops (Table III.12). Among major crops, rice production and Allied Activities increased by 6.7 per cent with a significant increase in both kharif and rabi output, while wheat production rose by 1.9 per cent. Pulses production is estimated to record a growth of 3.8 per cent. Among commercial crops, oilseeds production increased by 8.4 per cent, while the output of cotton and sugarcane registered a decline vis-à-vis last year. The production of horticultural crops in 2024-25 reached 3620.9 lakh tonnes as per the first advance estimates (FAE), 2.1 per cent higher than the final estimates for 2023-24. The growth in production was Crops Allied activities primarily attributed to a higher output of onions and Source: NSO; and RBI staff estimates. potatoes. 5511 stniop egatnecreP 8 6 4 2 0 -2 -4 GVA agriculture and allied (y-o-y, per cent) 31-2102 41-3102 51-4102 61-5102 71-6102 81-7102 91-8102 02-9102 12-0202 22-1202 32-2202 42-3202Monetary Policy Report April 2025 Chart III.15: Stock and Procurement – Rice and Wheat aquaculture sector. In 2023-24, total meat production High-frequency indicators such as tractor and fertiliser grew by 4.9 per cent, while milk production grew by sales, and agriculture exports suggested buoyancy 3.8 per cent. in the rural economy during H2:2024-25, whereas demand for employment under Mahatma Gandhi As on March 31, 2025, rice procurement for the National Rural Employment Guarantee Act (MNREGA) 2024-25 kharif marketing season reached 511.5 lakh and agricultural credit growth reflected moderation tonnes, an increase of 6.9 per cent over the previous (Table III.13). Higher kharif and rabi production year. Rice stocks at 659.3 lakh tonnes as of March 16, coupled with improved reservoir levels are supportive 2025, 8.7 times the buffer requirement, while wheat of rural economic activity. FAE for horticultural stocks at 121.7 lakh tonnes were marginally lower production also indicate a positive trend as compared than the buffer norms (Chart III.15). to the previous year. Table III.13: Rural Economy - High Frequency Indicators Item Unit H1 (Apr-Sep) H2 (Oct-Mar) 2022-23 2023-24 2024-25 2022-23 2023-24 2024-25 Tractor sales* Number (in lakh) 4.9 4.7 4.7 3.8 3.3 3.9 Two-wheeler sales* Number (in lakh) 84.0 87.4 101.6 61.7 77.5 77.9 Fertiliser sales# Lakh tonnes 335.4 338.5 335.5 248.8 243.8 253.6 Demand for employment (MGNREGA) Crore households 13.9 15.1 12.6 12.0 11.5 12.0 Agriculture and allied sector exports# USD billion 26.4 23.3 23.4 16.4 15.4 18.2 Agriculture credit growth* y-o-y 13.4 16.7 16.4 14.9 20.0 11.4 Rice stock to buffer norm** Ratio 2.8 3.1 3.8 5.8 7.6 8.7 Wheat stock to buffer norm** Ratio 1.1 1.2 1.2 0.7 0.6 0.9 Notes: *: up to February; #: up to January; **: as on March 16, 2025. Sources: TMA; SIAM; MoC&F; Ministry of Rural Development (MoRD); CMIE; RBI; and Food Corporation of India (FCI). 52 sennot hkaL a: Rice sennot hkaL b: Wheat 700 600 500 400 300 200 100 0 Stock Procurement Buffer norm Stock Procurement Buffer norm Note: Stock data pertains to March 16, 2025. Sources: Food Corporation of India (FCI); and Central Food Grains Procurement Portal (CFPP). 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 350 300 250 200 150 100 50 0 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raMChapter III Demand and Output III.2.2 Industry an expansion of 4.4 per cent in Q3 (5.4 per cent during the previous year) and 5.5 per cent in January. While As per the SAE, industrial sector growth moderated the production of basic metals, electrical equipment, to 4.3 per cent in 2024-25, from 11.0 per cent in the coke and refined petroleum products, fabricated metal previous year, mainly owing to the sharp deceleration products, and machinery and equipment posted an in manufacturing along with a slowdown in mining upsurge in Q3, manufacturing of food products, activity. The industrial sector, however, picked up pharmaceuticals, printing, and leather products modestly and expanded by 3.5 per cent in Q3:2024- acted as a drag on growth. In terms of the use- 25 as against 2.0 per cent in Q2, supported by a based classification, primary, capital, intermediate, recovery in manufacturing activity. Manufacturing infrastructure and consumer durables rose during Q3 sector witnessed a gradual recovery in sales growth and January. Consumer non-durable goods, however, and operating profit. Mining and quarrying activity contracted during this period. witnessed a slowdown in coal production and a Electricity, gas, water supply and other utility contraction in crude oil and natural gas production services registered 5.5 per cent growth in H2. in Q3. GVA of electricity, gas, water supply, and other Electricity generation rose modestly by 4.0 per cent utility services grew modestly by 5.1 per cent during in Q3:2024-25 (9.2 per cent a year ago) with thermal Q3 in the face of a relatively warmer winter along power generation remaining muted amidst subdued with a slowdown in industrial activity (Chart III.16). demand due to less harsh winter. Renewable energy, The index of industrial production (IIP) grew by 4.1 which has a share of 12.7 per cent in total generation, per cent during Q3:2024-25 and 5.0 per cent in January increased sharply by 17.2 per cent in Q3. In Q4 (up to (Chart III.17 and Table III.14). Mining and quarrying February), electricity generation grew by 3.0 per cent. registered a moderate growth of 1.8 per cent in Q3 Region-wise, electricity demand exhibited divergence and 4.4 per cent in January. Manufacturing recorded –– while the northern region maintained robust Chart III.16 Industrial GVA Growth Note: Data for Q3:2024-25 are based on results of 1,675 listed private Note: #:Implicit. manufacturing companies. Sources: NSO: and RBI staff estimates. Source: RBI staff estimates based on data published by listed companies. 5533 stniop egatnecreP a: Weighted Contribution to Industrial GVA Growth tnec rep ni htworg y-o-Y b: Manufacturing Sector's Profitability 60 15 45 10 30 5 15 0 0 -5 -15 -10 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4# Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2022-23 2023-24 2024-25 2022-23 2023-24 2024-25 Cost of raw materials Staff cost Mining and quarrying Interest expenses Depreciation Manufacturing Profit before tax Electricity, gas, water supply and other utility services Industry (y-o-y)Monetary Policy Report April 2025 Chart III.17: Index of Industrial Production (IIP) demand, other regions recorded subdued demand per cent, with the western region leading the growth, with the southern region witnessing a contraction in followed by the eastern, southern and northern Q3. In Q4, electricity demand growth increased to 3.5 regions (Table III.15). Table III.14: Industrial Sector y-o-y growth (Per cent) Indicators 2024-25 Q1 Q2 Q3 Jan Feb Mar 1 PMI: Manufacturing (>50 indicates growth over 58.2 57.4 56.8 57.7 56.3 58.1 previous month) 2 Index of Industrial Production (IIP) 5.5 2.7 4.1 5.0 3 IIP: Manufacturing 4.3 3.3 4.4 5.5 4 IIP: Primary goods 1.1 1.6 3.0 5.5 5 IIP: Capital goods 3.0 4.9 7.3 7.8 6 IIP: Infrastructure and construction goods 8.1 3.9 6.7 7.0 7 IIP: Consumer durables 10.7 6.6 9.1 7.2 8 IIP: Consumer non-durables -0.2 -2.2 -1.8 -0.2 9 Eight Core Industries (ECI) 6.3 2.4 4.8 5.1 2.9 10 ECI: Steel 8.4 4.3 7.8 4.7 5.6 11 ECI: Cement 0.4 3.2 6.6 14.6 10.5 12 Electricity demand 10.2 -0.7 2.6 1.3 2.4 6.6 Production of Automobiles 13 Passenger vehicles 5.8 -0.7 -8.9 3.7 4.5 14 Two-wheelers 19.6 12.5 8.0 10.3 1.6 15 Three wheelers 9.4 6.3 -2.1 16.2 6.5 16 Tractors 1.0 3.2 12.1 23.7 -7.8 Sources: CMIE; CEIC; NSO; SIAM and RBI staff estimates. 54 stniop egatnecreP a: Sectoral Contribution to IIP Growth (y-o-y) stniop egatnecreP b: Use-based Contribution to IIP Growth (y-o-y) 12 10 8 6 4 2 0 -2 Primary goods Capital goods Intermediate goods Infrastructure/construction goods Mining Manufacturing Consumer durables Consumer non-durables Electricity General (per cent, y-o-y) General (per cent, y-o-y) Sources: NSO; and RBI staff estimates. 32-rpA 32-yaM 32-nuJ 32-luJ 32-guA 32-peS 32-tcO 32-voN 32-ceD 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 12 10 8 6 4 2 0 -2 32-rpA 32-yaM 32-nuJ 32-luJ 32-guA 32-peS 32-tcO 32-voN 32-ceD 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJChapter III Demand and Output Table III.15: Electricity Generation and Consumption (Y-o-y, per cent) Indicators 2023-24 2024-25 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Jan Feb Mar Electricity generation Thermal 2.1 14.7 14.3 10.1 12.1 -1.3 0.0 -2.9 1.0 3.1 Nuclear -6.4 16.7 10.0 -2.2 28.3 18.4 11.4 15.1 18.6 16.8 Hydro -10.0 -13.4 -30.7 -20.2 1.0 6.2 28.3 16.3 17.6 24.2 Renewables 8.1 21.9 7.0 5.6 7.0 7.3 17.2 31.9 12.2 Electricity consumption Northern region -8.9 8.4 6.0 8.3 22.0 3.1 9.5 -2.9 2.4 6.0 Western region 3.5 20.8 7.7 7.1 5.5 -6.7 0.4 3.3 3.0 9.5 Southern region 10.7 16.3 18.2 9.3 3.3 0.8 -2.3 3.1 2.1 3.9 Eastern region 4.9 6.6 9.2 7.9 9.8 0.6 3.9 2.7 1.7 6.6 All-India 1.5 13.4 9.9 8.1 10.2 -0.7 2.6 1.3 2.4 6.6 Sources: Central Electricity Authority (CEA); and Power System Operation Corporation Limited (POSOCO). The manufacturing purchasing managers’ index (PMI) to GVA growth in 2024-25. A notable transformation stayed in expansion zone and stood at 56.8 in Q3, within India’s services sector has been observed with improving further to 57.4 in Q4 with an uptick in new the growing share of high-skill and high-value services. export orders and employment. Business expectations The services sector maintained its momentum in for manufacturing remained optimistic, as indicated Q3:2024-25, with an impetus from trade, hotels, by future output assessment (Chart III.18a). transport, communication and broadcasting; III.2.3 Services financial, real estate and professional services; and Services sector remains the mainstay of the Indian public administration, defence and other services economy, with contribution of around 75 per cent (Chart III.19a). As per the SAE, the services sector grew Chart III.18: PMI Manufacturing and Services a: PMI Manufacturing b: PMI Services 70 60 50 40 30 20 10 0 PMI manufacturing New orders New export orders No change Future output Note: PMI>50: Expansion, PMI< 50: Contraction. Source: HSBC, S&P Global. 5555 xednI 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM Business activity New business New export business No change Business expectations xednI 70 60 50 40 30 20 10 0 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raMMonetary Policy Report April 2025 robustly at 7.5 per cent in 2024-25, on top of 9.2 per per cent and 10.5 per cent, respectively, in March cent growth a year ago. Finished steel consumption 2025. Insurance premia in non-life segments grew and cement production – proximate indicators of at a healthy rate in H2 (October-February), while construction activity – improved from Q3 and recorded life insurance premia witnessed a contraction double-digit growth during Jan-Feb 2025. Steel (Table III.16). consumption, however, contracted marginally in March Nominal sales of non-IT services remained buoyant (Chart III.19b). and registered double-digit growth in Q3. The Trade, hotels, transport, and communication recorded performance of IT sector also inched up further in Q3, a growth of 6.7 per cent in Q3:2024-25 (6.1 per cent despite global headwinds (Chart III.20). in Q2). GST collections improved in Q4, indicating Chart III.20: Nominal Sales Growth healthy domestic trading activity. Domestic air 70 passenger traffic sustained strong growth in January- 60 February 2025, reflecting steady growth in tourism and 50 business-related travels. Indicators of transportation 40 services exhibited a mixed picture – toll collections remained strong in Q4 and port cargo rebounded 30 strongly in Q4 after a weak performance in Q3, while 20 passenger vehicle sales recorded muted growth during 10 this period. 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Financial, real estate and professional services 2022-23 2023-24 2024-25 rose by 7.2 per cent in Q3:2024-25 and was a major contributor to services sector GVA growth (33.1 per Note: Results are based on 2,924 listed non-government non-financial companies cent) as well as to aggregate GVA growth (23.9 per for Q3:2024-25. Source: RBI staff estimates. cent). Bank credit and deposits expanded by 12.1 56 tnec rep ni htworg y-o-Y Chart III.19: Services Sector a: Service Sector Components b: Construction Indicators 30 25 20 15 10 5 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4# 2022-23 2023-24 2024-25 Construction Trade, hotels, transport, communication and services related to broadcasting Financial, real estate & professional services Public administration, defence and other services Note: #: Implicit. Sources: NSO; Office of Economic Adviser; and Joint Plant Committee. Manufacturing Services (non-IT) Services (IT) sennot noilliM xednI Finished steel consumption Cement production (RHS) tnec rep ni htworg y-o-Y 14 220 13 200 12 11 180 10 160 9 8 140 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raMChapter III Demand and Output Table III.16: Services Sector y-o-y growth (Per cent) Indicators 2024-25 Q1 Q2 Q3 Jan Feb Mar 1 PMI: Services (>50 indicates growth over previous month) 60.5 59.6 58.7 56.5 59.0 58.5 Construction 2 Steel consumption 15.0 12.0 7.8 10.9 10.9 -0.5 3 Cement production 0.4 3.2 6.6 14.6 10.5 Trade, Hotels, Transport, Communication and Services related to Broadcasting 4 Commercial vehicle sales 3.5 -11.0 1.2 5 Domestic air passenger traffic 5.6 7.2 11.4 14.1 12.1 6 Domestic air cargo 7.1 7.6 4.6 6.9 -2.5 7 International air cargo 18.4 21.9 15.0 7.1 -6.3 8 Port cargo 3.9 6.2 -1.7 6.2 7.4 13.3 9 Toll collection: volume 5.6 7.6 9.9 14.8 18.7 11.9 10 Petroleum consumption 3.9 1.0 5.4 3.0 -5.2 -3.1 11 GST E-way bill 16.0 16.8 16.9 23.1 14.7 20.2 12 GST revenue 10.2 8.9 8.3 12.3 9.1 9.9 Financial, Real Estate and Professional Services 13 Credit outstanding 13.9 14.4 12.4 12.5 12.0 12.1 14 Bank deposits 10.6 12.0 10.2 10.6 10.6 10.5 15 Life insurance premium 22.9 16.5 -6.6 -8.1 -11.6 16 Non-life insurance premium 13.3 1.9 10.8 6.6 -2.8 Sources: CEIC; HSBC; IRDAI; MoSPI; NSO; S&P Global; SIAM; and RBI Staff Estimates. Real estate activity in Q3:2024-25 presented surpassed launches, unsold inventory registered a mixed signals with lesser new launches, reflecting marginal decline (Chart III.21a). The growth in all- uncertainty about future demand, even as sales India housing prices moderated in Q3, with its pace recorded some uptick in momentum. As sales decelerating across all major cities (Chart III.21b). Chart III.21: Housing Sector – Launches, Sales and Prices a: Housing Activity b: Housing Price Index 160 1,000 140 800 120 100 600 80 60 400 40 200 20 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2021-22 2022-23 2023-24 2024-25 Sources: PropTiger and RBI. 5577 )sdnasuoht ni( sinu fo rebmuN 20 15 10 5 0 -5 -10 -15 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2021-22 2022-23 2023-24 2024-25 Units launched Units sold Unsold inventory (RHS) tnec rep ni htworg y-o-Y Mumbai Delhi Bengaluru Chennai All India )sdnasuoht ni( stinu fo rebmuNMonetary Policy Report April 2025 Public administration, defence, and other services III.3 Conclusion (PADO) grew at 8.8 per cent in Q3, primarily driven by After witnessing a transient slowdown in Q2:2024- other services, like, health, education and recreation. 25, economic activity recovered in Q3 on the back The centre’s revenue expenditure, excluding interest of healthy private consumption and improved payments and subsidies, increased by 11.2 per cent government’s capital expenditure. Further, buoyancy during Q3 before contracting by 3.0 per cent in Jan- in the rural economy, resilient services sector, Feb 2025. governments’ efforts to spur household demand Services PMI remained in expansionary zone at 58.7 through tax incentives and healthy balance sheets in Q3 and 58.0 in Q4, although it moderated from 60.1 of financial entities and corporates along with in H1:2024-25, supported by employment and new the easing of financing conditions are expected to business activity from abroad (Chart III.18b and Table give an impetus to growth. Continued geopolitical III.16). The composite PMI index moderated from the uncertainties, global trade disruptions, weather- high of 60.4 in H1:2024-25 to 58.9 in Q3, and further related disturbances amidst high volatility in the to 58.6 in Q4, but remained comfortably above the 50- global financial markets, on the other hand, pose mark signalling sustained growth. PMI manufacturing downside risks to the outlook. While reciprocal tariff and PMI services readings for India have remained by the US will adversely impact India’s net external the highest globally since July 2022 and April 2023, demand, India’s relative tariff advantage over its peer respectively. economies may contain the impact. 58Chapter IV Liquidity Conditions and Financial Markets IV. Liquidity Conditions and Financial Markets Domestic financial markets remained relatively stable and resilient in contrast to volatile global markets during H2:2024-25. Money market rates evolved in sync with the policy stance and shifts in liquidity conditions while bond yields eased in response to domestic developments and global cues. Transmission to lending and deposit rates remained robust. Bank credit growth moderated in H2:2024-25. The Reserve Bank took a slew of liquidity augmenting measures to ensure orderly market conditions. Introduction was reduced by 50 basis points to 4.0 per cent of net demand and time liabilities (NDTL) in December 2024, During H2:2024-25, global financial markets remained restoring the CRR to its pre-pandemic level while volatile amidst elevated trade and policy uncertainties releasing primary liquidity to the tune of ₹1.16 lakh and continuing geopolitical tensions. Advanced crore to the banking system. To assure markets and economy central banks have been charting out a instil confidence about the availability of adequate carefully calibrated course for monetary policy in the liquidity to meet the productive requirements of wake of a spurt in volatility and foggy macroeconomic the economy, the Reserve Bank undertook a slew outlook. Global bond yields, especially at the longer of liquidity augmenting measures in Q4:2024-25. It end, gyrated in line with the shifting economic introduced daily variable rate repo (VRR) auctions on outlook and expectations about increasingly divergent all working days with reversal taking place on the next monetary policy trajectories across jurisdictions. working day effective January 16, 2025. In addition, Amidst heightened volatility and regional variations, the Reserve Bank injected durable liquidity through global equity markets fell sharply in Q4:2024-25. term repo auctions, open market purchase operations Volatile capital flows and exchange rates and their and USD/INR Buy/Sell swaps. The Reserve Bank attendant impact on domestic financial conditions increased the aggregate limit available to Standalone posed complex policy challenges in emerging market Primary Dealers (SPDs) under the Standing Liquidity economies (EMEs) (see Chapter V for details). Facility (SLF) from ₹10,000 crore to ₹15,000 crore, IV.1 Liquidity Conditions and the Operating starting from April 2, 2025, and announced a monthly Procedure of Monetary Policy calendar of open market purchase operations for April 2025. Furthermore, the MPC reduced the policy repo The Reserve Bank of India (RBI) Act, 1934 requires rate by 25 basis points to 6.25 per cent in February the RBI to place the operating procedure related to 2025. the implementation of monetary policy and changes Drivers and Management of Liquidity thereto from time to time, if any, in the public domain.1 System liquidity, as measured by net balances under the liquidity adjustment facility (LAF), transited During H2:2024-25, the monetary policy committee from surplus in H1:2024-25 to deficit in H2:2024-25 (MPC) changed the stance from withdrawal of (Chart IV.1). accommodation to neutral in October 2024 to ensure that inflation progressively aligns to the 4 per cent On a net basis, average daily injection under the target, while supporting growth. To ease liquidity LAF amounted to ₹0.36 lakh crore in H2 as against conditions, the cash reserve ratio (CRR) of banks average daily net absorption of ₹0.39 lakh crore in 1 The revised liquidity management framework was announced on February 6, 2020 in the Statement on Developmental and Regulatory Policies and operationalised on February 14, 2020. The salient features of the framework are given in the Monetary Policy Report of April 2024. 5599Monetary Policy Report April 2025 Chart IV.1: Liquidity Conditions Source: Reserve Bank of India (RBI). H1. Changes in the Government of India (GoI) cash reduction in CRR and the Reserve Bank’s liquidity balances, expansion in currency in circulation (CiC) augmenting measures during H2 (Table IV.1). and volatile capital flows emerged as the major drivers Within H2, system liquidity was in surplus during of liquidity during H2. The leakage of banking system October-November (except for a brief period at liquidity due to the increase in currency demand end November) on account of higher government and the Reserve Bank’s forex market operations was spending, notwithstanding an increase in CiC due partly offset by the drawdown of GoI cash balances, to festival related demand in October and significant Table IV.1: Liquidity – Key Drivers and Management (₹crore) 2023-24 2024-25 H1 H2 H1 Q3 Q4* H2* Drivers (i) CiC [withdrawal (-) /return (+)] 89,356 -2,26,366 33,556 -78,963 -1,59,204 -2,38,167 (ii) Net Forex Purchases (+)/ Sales (-) 1,44,667 1,94,861 70,402 -3,27,601 -2,52,034^ -5,79,635^ (iii) GoI Cash Balances [build-up (-) / drawdown (+)] -4,17,850 1,42,694 -1,50,494 1,06,873 78,358 1,85,231 (iv) Excess Reserves [build-up (-) / drawdown (+)] 34,925 -46,886 36,768 41,534 -39,962 1,572 Management (i) Net OMO Purchases (+)/ Sales (-) -8,480 -10,025 -24,040 0 2,83,386 2,83,386 (ii) Required Reserves [including both change in NDTL and CRR] -1,35,220 7,503 -55,613 39,349 37,101 76,450 (iii) Long term Forex Swaps Buy/Sell (+)/Sell/Buy (-) - - - - 2,18,000^ 2,18,000^ (iv) Term Repo Auctions - - - - 1,82,964 1,82,964 Memo Item Net Absorption (+)/ Injection (-) as at end-period -97,015 -52,918 84,651 -1,82,788 -172 -172 Notes: 1. (+) / (-) sign suggests accretion/depletion in banking system liquidity. 2. Data pertain to the last Friday of the respective period. 3. Net forex purchases or sales do not include the first leg of long-term forex swaps announced by the Reserve Bank. *: Data for Q4 and H2:2024-25 are up to March 28, 2025. ^: approximate values. Source: RBI. 60 erorc hkal ₹ 4.5 3.5 2.5 1.5 0.5 -0.5 -1.5 -2.5 -3.5 -4.5 Daily SDF Variable rate reverse repo Total absorption MSF Variable rate repo Net LAF [Surplus (+) / Deficit (-)] 42-rpA-10 42-rpA-51 42-rpA-92 42-yaM-31 42-yaM-72 42-nuJ-01 42-nuJ-42 42-luJ-80 42-luJ-22 42-guA-50 42-guA-91 42-peS-20 42-peS-61 42-peS-03 42-tcO-41 42-tcO-82 42-voN-11 42-voN-52 42-ceD-90 42-ceD-32 52-naJ-60 52-naJ-02 52-beF-30 52-beF-71 52-raM-30 52-raM-71 52-raM-13Chapter IV Liquidity Conditions and Financial Markets capital outflows in November. System liquidity turned Chart IV.2: Banks' Liquidity Demand and SDF Holding into deficit during the second half of December due to the combined impact of advance tax payments, capital outflows and currency leakage. The liquidity infusing impact of CRR reduction, drawdown of GoI cash balances and excess reserves was overwhelmed by the withdrawal of banking system liquidity due to increase in CiC and the Reserve Bank’s forex market operations. As a result, average daily net absorption under the LAF (including MSF) declined to ₹0.8 lakh crore in Q3:2024-25 compared to ₹1.3 lakh crore in the preceding quarter. In contrast, liquidity conditions remained in deficit for a major part of Q4 due to continued capital outflows and seasonal increase in CiC. Reflecting liquidity tightness, the average net injection under the LAF stood at ₹1.6 lakh crore in Source: RBI. Q4. To manage liquidity conditions, the Reserve Bank introduced daily VRR auctions on all working The Reserve Bank remained nimble and flexible in days beginning January 16, 2025, with the notified its liquidity management and conducted two-way amount being in sync with the evolving liquidity operations under the LAF in view of the changing conditions. Furthermore, the Reserve Bank took a liquidity dynamics. With system liquidity remaining slew of measures – Open Market Operations (OMOs) in surplus during Q3, five main and 23 fine tuning purchases, USD/INR Buy/Sell swaps and long term VRRR auctions (1-4 days maturity) were conducted, VRRs – to inject durable liquidity into the system. cumulatively mopping up about ₹11.7 lakh crore Consequently, system liquidity turned into surplus at from the banking system in October-November 2024.2 end-March, after a gap of more than 3 months. Banks showed reluctance in parking liquidity with Banks’ recourse to the marginal standing facility the Reserve Bank, as reflected in the lower bid-offer (MSF) at a daily average of ₹0.06 lakh crore in H2 was ratio for main as well as fine-tuning VRRR operations lower than ₹0.08 lakh crore in H1. Of the average total (Chart IV.3.a). The demand for liquidity remained absorption under the LAF at ₹1.26 lakh crore during elevated during mid-December to February, as reflected H2, average placement under the standing deposit in the higher bid-cover ratio for the repo auctions. As facility (SDF) constituted about 82.6 per cent (₹1.04 liquidity turned into deficit since the latter half of lakh crore), while the remaining amount was absorbed December, two main and 12 fine-tuning VRR auctions through variable rate reverse repo (VRRR) auctions. were conducted, cumulatively injecting ₹9.4 lakh crore The simultaneous occurrence of liquidity deficit into the system. The demand for liquidity, as reflected conditions alongside substantial fund placements in the bid-cover ratios of daily VRRs, moderated in under the SDF suggests asymmetric distribution March as liquidity conditions eased in the wake of of liquidity within the banking system as well as several liquidity augmenting measures (Chart IV.3.b). increased liquidity preference on the part of banks Overall, the Reserve Bank conducted four main and (Chart IV.2). 62 fine-tuning VRR auctions to alleviate the liquidity 2 Four fine-tuning VRR auctions were conducted during November 22-28 to alleviate liquidity tightness due to GST related payments. 6611 erorc hkal ₹ 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 42-rpA-1 42-rpA-92 42-yaM-72 42-nuJ-42 42-luJ-22 42-guA-91 42-peS-61 42-tcO-41 42-voN-11 42-ceD-9 52-naJ-6 52-beF-3 52-raM-3 52-raM-13 Total Injection through Repos and MSF SDF holdingMonetary Policy Report April 2025 Chart IV.3: Bid-Offer/Cover Ratio and Banks’ Preference for Liquidity a: Bid-Offer/Cover Ratio of Variable Rate b: Liquidity Defi cit and Bid-cover Ratio Operations of Daily VRRs Note: Figures in parentheses indicate number of operations. Source: RBI. tightness during Q4:2024-25, cumulatively injecting through a combination of CRR cut, open market ₹48.7 lakh crore into the banking system. purchases, term VRR auctions and USD/INR Buy/Sell To meet durable liquidity requirements, the Reserve swaps during H2:2024-25 (Table IV.2). The high bid- Bank injected around ₹8.0 lakh crore of liquidity cover ratios for the OMOs and forex swaps suggested Table IV.2: Durable Liquidity Measures during H2:2024-25 (Amount in ₹ crore) Measures Auction Date Description Bid Cover Ratio Liquidity injected CRR Cut Announced on CRR cut by 50 bps in two equal tranches of 25 1,16,000* December 6, 2024 bps each with effect from the fortnight beginning December 14 and December 28 OMO Purchase Q4:2024-25 Through NDS-OM 38,825 OMO Purchase January 30, 2025 Notified Amount: 20,000 6.03 20,020 auctions February 13, 2025 Notified Amount: 40,000 4.53 40,000 February 20, 2025 Notified Amount: 40,000 4.69 40,000 March 12, 2025 Notified Amount: 50,000 2.51 50,000 March 18, 2025 Notified Amount: 50,000 2.02 50,000 March 25, 2025 Notified Amount: 50,000 1.35 44,541 Term Repo Auctions February 07, 2025 56-day VRR auction 2.17 50,010 Notified Amount: 50,000 February 14, 2025 49-day VRR auction 1.33 75,003 Notified Amount: 75,000 February 21, 2025 45-day VRR auction 0.77 57,951 Notified Amount: 75,000 USD/INR Buy/Sell January 31, 2025 Tenor: 6 months 5.12 44,000* swap auctions (Settlement on Feb 4, 2025) Notified Amount: USD 5 billion (USD 5.10 Billion) February 28, 2025 Tenor: 3 years 1.62 88,000* (Settlement on Mar 4, 2025) Notified Amount: USD 10 billion (USD 10.06 Billion) March 24, 2025 Tenor: 3 years 2.23 86,000* (Settlement on Mar 26, 2025) Notified Amount: USD 10 billion (USD 10.04 Billion) Total 8,00,350* Note: * indicates approximate value. Source: RBI. 62 oitaR oitaR )LTDN fo tnec rep sa( noitcejni teN 2.5 2.0 1.6 1.95 1.89 1.4 2.0 (1) (4) 1.5 1.2 1 1.5 1.10 1.08 1.03 1.0 0.8 0.96(12) (2) (18) 0.90 1.0 (2) (20) 0.6 0 (1.4 17 ) 0 (1.5 29 ) 0 (. 15 )5 0 (2.5 48 ) 0.5 0.4 0.5 0.20 0.17 0.2 (3) 0.07 (1) (2) 0.0 0 0.0 Oct-24 Nov-24 Dec-24 Jan-25 Feb-25 Mar-25 Main Repo Main Reverse Repo Fine-tuning Repo Fine-tuning Reverse Repo 52-naJ-61 52-naJ-02 52-naJ-22 52-naJ-32 52-naJ-72 52-naJ-92 52-naJ-13 52-beF-4 52-beF-6 52-beF-01 52-beF-21 52-beF-41 52-beF-81 52-beF-02 52-beF-42 52-beF-72 52-raM-30 52-raM-50 52-raM-70 52-raM-11 52-raM-31 52-raM-81 52-raM-91 52-raM-12 52-raM-52 52-raM-72 Bid-Cover ratio Liquidity Deficit (RHS)Chapter IV Liquidity Conditions and Financial Markets high demand for durable liquidity. Considering a year ago. The money multiplier increased to 5.7 as this and the expected financial year-end liquidity on March 21, 2025, from 5.4 a year ago, reflecting the tightness, the Reserve Bank provided further durable dual impact of both the CRR cut and a lower currency- liquidity support through additional OMO purchase deposit ratio. auctions of ₹1,50,000 crore and a USD/INR Buy/Sell IV.2 Domestic Financial Markets swap auction of USD 10 billion for a tenor of thirty-six In contrast to global developments, domestic financial months during March. markets remained relatively stable and resilient. As on March 28, 2025, reserve money (RM) expanded Money market rates evolved in sync with the policy by 3.3 per cent (y-o-y) as against 6.7 per cent a year stance and shifts in liquidity conditions. Long- ago. The lower growth in RM reflected the decline term government bond yields eased in response to in bankers’ deposits with the RBI on account of the domestic developments and global cues. Corporate reduction in cash reserve ratio (CRR) in December bond yields generally softened while spreads 2024. Adjusted for the CRR change, growth in RM widened during H2:2024-25 reflecting higher softening stood at 5.8 per cent (6.7 per cent a year ago). As of G-sec yields. The simultaneous occurrence of rising on March 21, 2025, growth (y-o-y) in money supply uncertainties and liquidity constraints drove spreads (M3) decelerated to 9.6 per cent from 11.2 per cent across market segments (Box IV.1). Equity markets Box IV.1: What Drives Yields and Spreads – Liquidity or Uncertainty? In the recent period, global financial markets have and Yinjie, 2019). Accordingly, the impact of liquidity remained volatile amidst trade and policy uncertainties, conditions and uncertainty on spreads is examined based lingering geopolitical tensions and shifting expectations on monthly data of money and bond markets for the about the monetary policy trajectories of advanced period January 2012 to January 2025, using the following economy central banks. These global spillovers have a regression specification: disconcerting impact on domestic financial conditions in S β β β β Emerging Market and Developing Economies (EMDEs), t t t t β ρ S necessitating policy interventions. In the backdrop of = 0 + 1 t* Liq_Cond + 2 * Liq_tUncertt + 3t * Liq_Cond * elevated uncertainties, the attendant impact of such ,Lwiqh_eUrnec Ser dte +n o4t e* sE scpor_ePaodl_sU innc tehret +m o n* ey-1 a +n εd bond market t interventions on domestic liquidity conditions has a segments3; is liquidity conditions as proxied t bearing on yields and spreads across market segments, by Net LAF as a proportion of NDTL in which lower which merit closer scrutiny from a policy perspective. values indicL aiq te_ C ro en lad tively tighter liquidity conditions; is an indicator variable for months of high Related literature suggests that spreads in the money t and bond markets are driven by uncertainty, apart from liquidity uncertainty4; and Eco_Pol_Uncert captures Liq_Uncert prevailing liquidity conditions. Uncertainty could emanate global economic policy uncertainty5. In addition, an from volatility in liquidity conditions, which can have its interaction term of liquidity conditions and liquidity own independent impact on spreads by increasing the uncertainty is included in the specification to capture the demand for precautionary savings (Amisano and Tristani, heterogeneous impact of liquidity conditions on spreads 2019). Additionally, economic and policy uncertainty during periods of high uncertainty (Chart IV.1.1). Lagged may also cause spreads to increase by tightening credit dependent variable is included to capture the persistence supply and increasing borrowers’ default premia (Ashraf in spreads. (Cont.) 3 Weighted average call rate (WACR) and weighted average money market rate (WAMMR) spreads are computed over the policy repo rate, while CP and bond market spreads are computed over the risk-free rates of corresponding maturities. 4 Liquidity uncertainty is proxied by conditional volatility, which is estimated using a GARCH (1,1) model fitted on the daily data of liquidity conditions. Months having higher uncertainty (in the top decile of conditional volatility) are assigned a value of 1, and the rest are assigned 0. 5 The logarithmic form of the Purchasing Power Parity (PPP)-adjusted Global Economic Policy Uncertainty Index (Baker et al., 2016) is used in the regression. 6633Monetary Policy Report April 2025 3 2.5 2 1.5 1 0.5 0 -3 -2 -1 0 1 2 3 4 5 6 -0.5 -1 -1.5 Source: RBI staff estimates. The estimates suggest that an easing of liquidity conditions money market spreads, implying the intensified impact lowers spreads across all segments in a statistically of liquidity conditions during periods of high uncertainty. significant manner, albeit more in the money than in bond From a policy perspective, the result suggests that markets (Table IV.1.1). Increase in liquidity uncertainty is providing sufficient liquidity has a more pronounced associated with higher spreads in the overnight money impact on spreads, especially during uncertain times. market but its effect on spreads in Commercial Paper (CP) Moreover, global economic policy uncertainty is found to and bond markets is found to be insignificant. This may be have a significant impact on spreads in CP and corporate attributed to the spreads in CP and bond market reflecting bond markets. Overall, the findings suggest that while pure credit risk premium, while the liquidity uncertainty liquidity and uncertainty drive spreads in financial premium gets captured in the risk-free rates. Notably, markets with their simultaneous occurrence having a the interaction term of liquidity condition and liquidity magnified impact, their relative importance varies across uncertainty turns out to be statistically significant for market segments and financial cycles. Table IV.1.1: Drivers of Spread in Money and Bond Market Dependent Variable Regressors WAMMR AA AAA AA AAA WACR spread CP spread spread 3-year spread 3-year spread 5-year spread 5-year spread Liquidity Condition -0.033*** -0.031** -0.046*** -0.024*** -0.026*** -0.021*** -0.020*** Liquidity Uncertainty 0.192*** 0.194*** 0.039 0.054 0.022 -0.006 -0.026 Liquidity Condition*Liquidity -0.056** -0.089*** 0.043 0.013 0.021 0.009 0.012 Uncertainty Global EPU 0.154** 0.103** 0.040 0.096*** 0.050** Constant -0.014 -0.029 -0.554 -0.230 -0.057 -0.289** -0.176 Lagged Dependent Variable 0.749*** 0.751*** 0.707*** 0.774*** 0.815*** 0.840*** 0.890*** Number of Observations 156 156 156 156 156 156 156 Adjusted R-squared 0.782 0.768 0.615 0.712 0.785 0.800 0.882 Note: ‘***’,‘**’ and ‘*’ represent statistical significance at 1 per cent, 5 per cent and 10 per cent level, respectively. References: Amisano, G., and Tristani, O. (2019). Uncertainty Shocks, Monetary Policy and Long-Term Interest Rates. ECB Working Paper No. 2279. Ashraf, B.N., and Yinjie, S. (2019). Economic policy uncertainty and banks’ loan pricing. Journal of Financial Stability, Volume 44. Baker, S.R., Bloom, N., Davis, S.J. (2016). Measuring economic policy uncertainty. Quarterly Journal of Economics, 131, 1593-1636. 64 daerps RCAW Chart IV.1.1: WACR Spread and Liquidity Conditions Liquidity Uncertainty Bottom 75% Top 25% Liquidity ConditionChapter IV Liquidity Conditions and Financial Markets experienced a persistent decline in H2:2024-25 they preferred parking funds under the SDF. In early amidst geopolitical, trade and policy uncertainties January, the WACR reverted closer to the policy repo and foreign portfolio investment (FPI) outflows. rate as liquidity conditions eased before tightening The INR traded with a depreciating bias against the again in the second week. The WACR moderated since US dollar until February, but recovered some of the mid-January with the introduction of daily VRR, the loses in March and remained among the least volatile policy repo rate cut in February and the RBI’s liquidity major EME currencies. In the credit market, despite augmenting measures. some moderation, growth in bank credit continued to Generally, movements in WACR mainly reflected outpace deposit expansion in H2:2024-25. transient liquidity conditions, softening during IV.2.1 Money Market the beginning of the month on higher government spending and hardening during the third week due to The weighted average call rate (WACR) – the operating target of monetary policy – moved in tandem with the tax outflows (Chart IV.4.a). Reflecting the alleviation policy repo rate and the evolving liquidity conditions. of liquidity tightness at the short-end, the average During H2:2024-25, the WACR, which remained spread of WACR over the policy repo rate declined within the policy corridor and hovered close to the to 7 basis points (bps) in March 2025 from a high of policy repo rate during October-November, hardened, 15 bps in December 2024 (Chart IV.4.b). Volatility of moving close to and occasionally breaching the ceiling the WACR, as measured by the exponential weighted of the LAF corridor (MSF rate) during the second moving average (EWMA)6, however, continued to half of December and early January. This was partly remain elevated till March 2025. The overnight attributed to the lower lending volumes in the call rates in the collateralised segment, i.e., triparty repo money market as banks were unwilling to on-lend in (TREPS) and market repo broadly remained aligned the uncollateralised market at the quarter-end; instead, with the WACR. Chart IV.4: Policy Corridor and WACR a: Liquidity, Policy Corridor and WACR b: Average Spread of WACR over Repo Rate and Volatility Sources: RBI; and RBI staff calculations. 6 EWMA is an improvement over simple variance as it assigns greater weight to the more recent observations. EWMA expresses volatility as a weighted average of past volatility with higher weights assigned to the more recent observations. 6655 tnec reP erorc hkal ₹ stniop sisaB )AMWE( ytilitaloV 7.50 3.5 3.0 7.25 2.5 7.00 2.0 1.5 6.75 1.0 0.5 6.50 0.0 6.25 -0.5 -1.0 6.00 -1.5 5.75 -2.0 -2.5 5.50 -3.0 42-rpA-10 42-rpA-02 42-yaM-90 42-yaM-82 42-nuJ-61 42-luJ-50 42-luJ-42 42-guA-21 42-guA-13 42-peS-91 42-tcO-80 42-tcO-72 42-voN-51 42-ceD-40 42-ceD-32 52-naJ-11 52-naJ-03 52-beF-81 52-raM-90 52-raM-82 20 0.24 15 0.16 10 0.08 5 0 0.00 Net liquidity surplus (+)/deficit (-) (RHS) WACR Repo rate SDF rate MSF rate 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM Spread EWMA (RHS)Monetary Policy Report April 2025 Table IV.3: Average Volume and Share in Overnight Chart IV.5: Money Market Rates and Money Market Policy Corridor (₹ lakh crore) 2023-24 2024-25 H1 H2 H1 Q3 Q4 H2 Call/Notice 0.10(2) 0.10(2) 0.10(2) 0.10(2) 0.13(2) 0.11(2) Triparty Repo 2.87(64) 3.14(68) 3.30(68) 3.74(72) 3.51(69) 3.62(70) Market Repo 1.51(34) 1.37(30) 1.48(30) 1.37(26) 1.48(29) 1.42(28) Total 4.47(100) 4.62(100) 4.88(100) 5.20(100) 5.11(100) 5.16(100) Note: Figures in parentheses denote share of each segment in overnight money market. Figures may not add up to total due to rounding off. Sources: Clearing Corporation of India Ltd. (CCIL); and RBI. Money market activity continued to be dominated by the collateralised (tri-party and market repo) segments, with their share in overnight money market volume mostly remaining unchanged at 98 per cent. Sources: Financial Benchmarks India Pvt Ltd. (FBIL); and RBI. (Table IV.3). Mutual funds (MFs) remained the major lenders in Fresh issuances of CDs increased to ₹6.6 lakh crore in the TREPS market, with their share increasing to 67 H2 from ₹5.4 lakh crore in H1:2024-25. Consequently, per cent in H2 from 65 per cent in H1:2024-25. In the total outstanding amount of CD issuances reached market repo segment, the lending share of mutual an all-time high of ₹5.3 lakh crore for the fortnight funds (MFs) increased to 46 per cent in H2 from 41 ending March 21, 2025, as banks continued to rely on per cent in H1:2024-25, alongside a decline in the raising funds through CDs amidst subdued deposit share of foreign banks to 31 per cent from 34 per cent. growth. Within H2, CD issuances in the shorter tenor On the borrowing side, public sector banks (PSBs) (up to 91-days) declined, with their share in total remained the dominant players in TREPS, although issuances reducing to 58 per cent in March 2025 from their share reduced to 40 per cent in H2 from 47 per 68 per cent in October 2024. Concomitantly, the share cent in H1:2024-25. In market repo, however, their of longer tenor CDs (181-365 days) increased to 40 per share increased to 6 per cent from 4 per cent over the same period. cent in March 2025 from 30 per cent in October 2024 (Table IV.4). In the longer-term segments of the money market, rates on commercial paper (CPs) and certificates of Table IV.4: Tenor wise Break up for CD Issuances deposit (CDs) increased during H2 relative to H1:2024- (₹ lakh crore) 25 due to the liquidity tightness in the banking system 2023-24 2024-25 (Chart IV.5). On the contrary, T-bill rates softened H1 H2 H1 Q3 Q4 H2 during the same period. The average spread of CDs Up to 91 Days 2.37(76) 3.76(68) 3.93(73) 1.75(61) 1.99(54) 3.74(57) and CPs over the policy repo rate increased to 91 bps 92-180 Days 0.18(6) 0.18(3) 0.20(4) 0.09(3) 0.08(2) 0.17(3) and 105 bps, respectively, in H2 from 74 bps and 92 181-365 Days 0.58(19) 1.59(29) 1.22(23) 1.02(36) 1.63(44) 2.64(40) bps, respectively, in H1:2024-25. On the other hand, Total 3.13(100) 5.52(100) 5.35(100) 2.86(100) 3.70(100) 6.56(100) the average spread of T-Bills over the policy repo rate Note: Figures in parentheses denote the share of each segment in the moderated to 4 bps from 25 bps during the same overnight money market. Figures may not add up to total due to rounding off. period. Sources: CCIL; and RBI staff estimates. 66 tnec reP 9.0 8.5 8.0 7.5 7.0 6.5 6.0 42-rpA-1 42-rpA-02 42-yaM-9 42-yaM-82 42-nuJ-61 42-luJ-5 42-luJ-42 42-guA-21 42-guA-13 42-peS-91 42-tcO-8 42-tcO-72 42-voN-51 42-ceD-4 42-ceD-32 52-naJ-11 52-naJ-03 52-beF-81 52-raM-9 52-raM-82 Triparty repo rate WACR 3-month CD rate 3-month CP rate Market repo rate SDF rate 91-day T-bill rate Repo rate MSF rateChapter IV Liquidity Conditions and Financial Markets Chart IV.6: Primary Issuances of Commercial Paper a: Systemic Liquidity, Issuances and WADR b: CP Spread and Policy Uncertainty Sources: RBI; CCIL F-TRAC; www.policyuncertainty.com; and RBI staff estimates. Resource mobilisation through fresh issuances of Among fresh issuances, the average share of non- CPs increased to ₹8.2 lakh crore during H2 from ₹7.6 banking financial companies (NBFCs) increased to 33 lakh crore in H1:2024-25 (Chart IV.6.a). The weighted per cent in H2:2024-25 from 32 per cent in H1:2024-25. average discount rate (WADR) of CPs increased during In the CP market, corporates were the major players Q4:2024-25 mainly due to liquidity deficit. The spread with an average share of 38 per cent in total issuances of CP rate over T-bills increased before the February during H2:2024-25 (Chart IV.7). 2025 policy rate reduction, mainly attributed to Maturity bucket wise, the 91-180 days segment had policy uncertainty amidst tight liquidity conditions the largest share of fresh CP issuances (Table IV.5). (Chart IV.6.b). Higher issuances of longer tenor CPs during H2 compared to H1 could be attributed to higher investor demand in view of the commencement of an interest rate easing cycle. 6677 erorc hkal ₹ tnec reP stniop egatnecreP xednI 4 8.0 7.8 3 7.6 2 7.4 7.2 1 7.0 0 6.8 -1 6.6 6.4 -2 6.2 -3 6.0 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 1.4 200 180 1.2 160 1.0 140 0.8 120 100 0.6 80 0.4 60 40 0.2 20 0.0 0 Average daily liquidity surplus (+)/deficit(-) Issuance WADR (RHS) 32-rpA 32-yaM 32-nuJ 32-luJ 32-guA 32-peS 32-tcO 32-voN 32-ceD 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM Spread of 3 Month CP over 91-Day T-bill India Policy Uncertainty (RHS) Chart IV.7: Issuer Profile of Commercial Paper 2.0 1.5 1.0 0.5 0 Sources: RBI; CCIL F-TRAC; and RBI staff estimates. 32-rpA 32-yaM 32-nuJ 32-luJ 32-guA 32-peS 32-tcO 32-voN 32-ceD 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM Financial institutions Corporates Housing finance companies NBFCs Limited liability partnership erorc hkal ₹ Table IV.5: Maturity Profile of CP Issuances (₹ lakh crore) Tenor H1: 2023-24 H2: 2023-24 H1: 2024-25 H2: 2024-25 7- 30 days 0.45(6) 0.48(7) 0.63(8) 0.51(6) 31-90 days 3.18(45) 2.32(35) 2.35(31) 2.33(28) 91-180 days 2.75(39) 3.11(47) 3.94(52) 4.24(52) 181-365 days 0.70(10) 0.77(12) 0.64(8) 1.11(14) Total 7.09(100) 6.67(100) 7.55(100) 8.19(100) Outstanding 4.12 3.89 3.98 4.43 (as at end-period) Note: Figures in parentheses denote the share of each maturity profile. Figures may not add up to total due to rounding off. Sources: CCIL; F-TRAC; and RBI.Monetary Policy Report April 2025 IV.2.2 Government Securities (G-sec) Market Government Bonds in the Emerging Market Local Currency Index (EMLCI). Yields traded in a narrow The 10-year G-sec yield moved in the range of 6.62 range during February and remained steady during to 6.86 per cent during H2:2024-25. At the beginning end-February on account of release of Q3 GDP data. of H2, yields hardened, tracking movements in US During March, the yields softened on account of yields and the rise in crude oil prices. Yields, however, lower-than-expected CPI print, liquidity measures softened amidst positive sentiments on the inclusion by RBI, lower than expected April-September central of Indian Government Bonds in the Emerging Market government borrowing calendar, and expectations of Government Bond Index (EMGBI). During November, another rate cut (Chart IV.8). yields softened primarily due to sharp fall of gross domestic product (GDP) growth estimates of Q2 The yields on T-bills hardened during October amidst and anticipation of an early easing of monetary increasing volatility in the global financial markets. policy cycle. During November, they softened at the short end The decline in yields continued in December, but it but hardened at the longer end. The hardening was tempered by the unchanged repo rate and the bias continued in December due to tight liquidity continuation of neutral stance in the December policy. conditions and reduced expectations of rate cuts. Yields rose thereafter, following the Federal Open During January, T-bill rates softened across tenors, Markets Committee’s (FOMC) indication of a slower tracking the decline in domestic yields, and buoyed pace of rate cuts, and thereafter remained steady. by the expectations of policy easing. The softening Beginning January, yields exhibited some moderation, bias continued for a short period in February tracking US yields and buyback announcements by with yields hardening amidst the cancellation of GoI. Yields came down in the latter half of January treasury bill auctions. During March, T-bill rates due to lower-than-expected US CPI inflation print, softened tracking global and domestic developments fall in crude oil prices and the inclusion of Indian (Chart IV.9). Chart IV.8: 10-year Par Yield, Repo Rate and Liquidity Conditions Sources: RBI; and FBIL. 68 tnec reP erorc hkal ₹ 8.00 3.5 7.75 FOMC, decision on 3.0 Neutral Stance rate cuts 2.5 7.50 Fall in US treasury / Lower US CPI print / fall in Release of GDP data 2.0 7.25 Crude Oil crude oil prices 1.5 1.0 7.00 0.5 6.75 0.0 -0.5 6.50 -1.0 6.25 Rise in US treasury Fall in US treasury Yields -1.5 6.00 -2.0 Lower than expected Q2 -2.5 5.75 GDP data -3.0 5.50 -3.5 Net LAF surplus(+)/deficit(-) (RHS) 10-year Par yield Repo rate 42-tcO-1 42-tcO-8 42-tcO-51 42-tcO-22 42-tcO-92 42-voN-5 42-voN-21 42-voN-91 42-voN-62 42-ceD-3 42-ceD-01 42-ceD-71 42-ceD-42 42-ceD-13 52-naJ-7 52-naJ-41 52-naJ-12 52-naJ-82 52-beF-4 52-beF-11 52-beF-81 52-beF-52 52-raM-4 52-raM-11 52-raM-81 52-raM-52 Lower CPI Print Borrowing CalendarChapter IV Liquidity Conditions and Financial Markets bps and 26 bps, respectively, in H2 from that in Chart IV.9: FBIL -T-Bill Benchmark H1:2024-25. (Yield to Maturity) The overall dynamics of the yield curve are captured by its latent factors viz., level, slope and curvature7. Yields have softened across the longer end of the term structure as reflected in the downward shift of the yield curve during H2:2024-25 (Chart IV.11.a), with its average level reducing by 8 bps while the slope of the yield curve steepened by 10 bps (Chart IV.11.b). The curvature, on the other hand, declined by 20 bps, reflecting the softening bias in the mid-segment vis-à-vis the short and long term. In the Indian context, the level and curvature of the yield curve are found to have more information content on future macroeconomic outcomes than the slope owing to market segmentation, unlike in The average trading volume in G-secs and T-bills AEs (Patra et al, 2022)8. moderated in H2:2024-25 relative to H1 (Chart To facilitate debt consolidation, the Reserve Bank IV.10). The weighted average yield (WAY) on traded conducted two switch auctions on behalf of GoI maturities for G-secs and T-bills declined by 21 amounting to ₹31,424 crore during H2:2024-25. The 7 The level is the average of par yields of all tenors up to 30-years published by FBIL and the slope (term spread) is the difference in par yields of 3-months and 30-year maturities. The curvature is calculated as twice the 15-year yield minus the sum of 30-year and 3-month yields. 8 Patra, M.D., Joice, J., Kushwaha, K.M., and I. Bhattacharyya (2022), “What is the Yield Curve telling us about the Economy?”, Reserve Bank of India Bulletin, June. 6699 tnec reP 6.70 6.55 6.40 6.25 6.10 Tenor Source: FBIL. syaD 7 syaD 41 htnoM 1 shtnoM 2 shtnoM 3 shtnoM 4 shtnoM 5 shtnoM 6 shtnoM 7 shtnoM 8 shtnoM 9 shtnoM 01 shtnoM 11 shtnoM 21 Sep 30, 2024 Oct 09, 2024 Dec 06, 2024 Feb 07, 2025 March 28, 2025 Chart IV.10: Trading Volumes and Yield a: G-sec b: T-bills Sources: CCIL; and RBI staff estimates. erorc ₹ tnec reP erorc ₹ tnec reP 70,000 7.5 9,000 7.5 60,000 7.0 8,000 7.0 7,000 6.5 6.5 50,000 6,000 6.0 6.0 40,000 5,000 5.5 5.5 30,000 4,000 5.0 5.0 3,000 20,000 4.5 2,000 4.5 10,000 4.0 1,000 4.0 0 3.5 0 3.5 H1:2023-24 H2:2023-24 H1:2024-25 H2:2024-25 H1:2023-24 H2:2023-24 H1:2024-25 H2:2024-25 Average daily volume Average daily volume Weighted average yield of traded maturities (RHS) Weighted average yield of traded maturities (RHS)Monetary Policy Report April 2025 weighted average maturity (WAM) of the outstanding inter-state spread on securities of 10-year tenor stock of G-secs increased to 13.24 years as at end- (fresh issuances) was 4 bps in H2 as against 2 bps March, 2025 from 12.96 years at end-September in H1. 2024, while the weighted average coupon (WAC) was lower over the same period (7.25 per cent as against Chart IV.12: SGS - Amount Raised and Spread 7.28 per cent). During H2:2024-25, five buyback auctions were announced for an aggregate amount of ₹1.25 lakh crore with a view to retiring some of the GoI’s debt, particularly in the backdrop of its improved cash position9. The market response to the auctions, however, was modest with the Reserve Bank accepting offers aggregating only ₹0.88 lakh crore against the notified amount of ₹1.25 lakh crore. The weighted average spread of cut-off yields on state government securities (SGS) over G-sec yields of comparable maturities was 30 bps in H2:2024-25 (Chart IV.12) as against 31 bps in H1. The average 9 Although buybacks have a liquidity impact, they should not be construed as liquidity management operations; instead, they are part of an active debt consolidation strategy. 70 erorc ₹ stniop sisaB 1,00,000 40 90,000 80,000 35 70,000 60,000 30 50,000 40,000 25 30,000 20,000 20 10,000 0 15 Total accepted amount Cumulative weighted average spread (RHS) Source: RBI. tcO-10 tcO-80 tcO-51 tcO-22 tcO-92 voN-50 voN-21 voN-91 voN-62 ceD-30 ceD-01 ceD-71 ceD-42 ceD-13 naJ-70 naJ-41 naJ-12 naJ-82 beF-40 beF-11 beF-81 beF-52 raM-40 raM-11 raM-81 raM-52 Chart IV.11: G-sec Yield Curve a: Shifts b: Changes in Lev el, Slope and Curvature Sources: FBIL; and RBI staff estimates. )tnec reP( dleiY stnioP sisaB 7.30 7.20 7.10 7.00 6.90 6.80 6.70 6.60 6.50 6.40 6.30 Maturity in years 52.0 57.1 52.3 57.4 52.6 57.7 52.9 57.01 52.21 57.31 52.51 57.61 52.81 57.91 52.12 57.22 52.42 57.52 52.72 57.82 52.03 57.13 52.33 57.43 52.63 57.73 52.93 57.04 52.24 57.34 52.54 57.64 52.84 57.94 20 15 10 10 7 5 5 4 1 1 1 0 -5 -1 -2 -3 -10 -8 -8 -11 -15 -12 -20 -20 -25 Sep 30 Oct 08 Dec 05 Feb 06 Cumulative - Oct 08 - Dec 05 - Feb 06 - Mar 28 (Sep 30 - Mar 28) Sep 30, 2024 Oct 09, 2024 Dec 06, 2024 Feb 07, 2025 Mar 28, 2025 Level Slope CurvatureChapter IV Liquidity Conditions and Financial Markets Chart IV.13: AAA-rated 3-Year Corporate Bond Yield and Spreads a: Yield b: S pread* Note: * indicates monthly average spreads over G-secs. Source: Fixed Income Money Market and Derivatives Association of India (FIMMDA). IV.2.3 Corporate Bond Market banks; from 102 bps to 106 bps for NBFCs; and from 97 bps to 98 bps for corporates in H2:2024-25 (Chart Corporate bond yields generally softened while IV.13.b). spreads widened during H2:2024-25. Issuer-wise, the average yield on AAA-rated 3-year bonds of public The increase in risk premia was evident across tenors sector undertakings (PSUs), financial institutions (FIs) and rating spectrum amidst moderate corporate and banks softened by 5 bps to 7.48 per cent, while performance in Q3:2024-25 and softer economic those by NBFCs and corporates declined by 14 bps to growth outlook for FY:2024-25 (Table IV.6). In tandem, 7.70 per cent and 18 bps to 7.62 per cent, respectively, the average 3-year credit default swap (CDS) spreads in March 2025 over September 2024 (Chart IV.13.a). that are trading overseas for the State Bank of India and Nevertheless, the risk premium (the spread of 3-year ICICI Bank increased by 2 bps and 4 bps, respectively, AAA corporate bond yields over 3-year G-sec yields) in H2:2024-25 over H1. increased from 71 bps to 83 bps for PSUs, FIs and Table IV.6: Financial Markets - Rates and Spread Interest Rates Spread (bps) (per cent) (over corresponding risk-free rate) Instruments March 2024 September 2024 March 2025 March 2024 September 2024 March 2025 1 2 3 4 5 6 7 Corporate Bonds (i) AAA (1-yr) 7.97 7.92 7.76 77 117 115 (ii) AAA (3-yr) 7.95 7.80 7.62 77 97 98 (iii) AAA (5-yr) 7.74 7.70 7.60 54 86 89 (iv) AA (3-yr) 8.55 8.55 8.43 137 172 178 (v) BBB-minus (3-yr) 12.19 12.14 12.09 500 531 544 Note: Yields and spreads are computed as monthly averages. Source: FIMMDA. 7711 tnec reP stniop sisaB 8.5 8.0 7.5 7.0 6.5 6.0 NBFCs Corporates PSUs, FIs & Banks 3-Yr G-sec NBFCs Corporates PSUs, FIs & Banks 32-tcO-50 32-voN-10 32-voN-82 32-ceD-52 42-naJ-12 42-beF-71 42-raM-51 42-rpA-11 42-yaM-80 42-nuJ-40 42-luJ-10 42-luJ-82 42-guA-42 42-peS-02 42-tcO-71 42-voN-31 42-ceD-01 52-naJ-60 52-beF-20 52-raM-10 52-raM-82 110 100 90 80 70 60 50 40 30 20 10 0 32-tcO 32-voN 32-ceD 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raMMonetary Policy Report April 2025 Primary issuances of listed corporate bonds in 2024, with the utilisation of the approved limits domestic markets stood at ₹4.2 lakh crore during H2 declining to 15.8 per cent from 16.4 per cent (Chart (up to February 2025) as against ₹4.6 lakh crore during IV.14.b). Secondary market activity, however, picked H1:2024-2510 (Chart IV.14.a). Overseas issuances at up, with daily average trading volume at ₹7,715 crore ₹26,494 crore during H2 were lower than ₹33,952 during H2 (up to February 2025) from ₹6,533 crore crore during H1:2024-25 amidst heightened global during H1:2024-25 (Chart IV.14.c). uncertainty and decline in domestic yields. Almost To address the issue of illiquidity in the secondary the entire resource mobilisation in the corporate market for corporate bonds, the Securities and bond market (99.3 per cent) was through the private Exchange Board of India (SEBI) issued guidelines to placement route (up to February 2025). Outstanding investments by foreign portfolio investors (FPIs) in introduce a liquidity window facility allowing bond corporate bonds stood at ₹1.21 lakh crore at end-March issuers to give investors voluntary put options, which 2025, as against ₹1.18 lakh crore at end-September is the right to sell the bond back to the issuer at specific Chart IV.14: Corporate Bond Market Activity a: Domestic and Overseas Issuances b: FPI Investments in Corporate Bonds Note: Data for domestic issuances is up to February 2025 while data for overseas issuances is up to March 2025; Daily averages are calculated as monthly turnover divided by number of trading days. Sources: SEBI; NSDL; and Prime Database. 10 Issuances in the first half of the financial year are usually lower than in the second half as the borrowing plans of corporates are chalked out gradually. Moreover, central government borrowing is usually frontloaded, which provides greater space to corporates for resource mobilisation in the second half. 72 erorc hkal ₹ erorc hkal ₹ tnec reP 5.0 4.9 4.6 4.6 3.9 4.2 4.0 3.0 2.8 2.0 1.0 0.0 0.2 0.1 0.3 0.3 0.3 0.0 Domestic Overseas Total investment % of limit utilised (RHS) c: Secondary Market Turnover - Daily Average 32-2202 :1H 32-2202 :2H 42-3202:1H 42-3202 :2H 52-4202 :1H 52-4202:2H 1.4 18.0 1.18 1.21 1.2 1.04 1.03 1.08 17.5 1.0 17.0 0.8 16.5 0.6 16.0 0.4 0.2 15.5 0.0 15.0 32-raM-13 32-peS-92 42-raM-82 42-peS-03 52-raM-82 12,500 11,500 10,500 9,500 8,500 7,500 6,500 5,500 4,500 3,500 erorc ₹ 32-tcO 32-voN 32-ceD 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beFChapter IV Liquidity Conditions and Financial Markets intervals before maturity. Furthermore, the regulator dampened investor sentiments. However, markets also announced the establishment of a centralised recovered in the second half of March amid favourable database for corporate bonds with an objective to global cues and a rebound in FPI inflows. Overall, the create a single authentic source of information on BSE Sensex declined by 8.2 per cent during H2:2024- corporate bonds issued in India. 25 to close at 77,415 at end-March 2025. The broader market indices underperformed the benchmark with IV.2.4 Equity Market the BSE MidCap and BSE SmallCap index shedding The Indian equity market experienced a persistent 15.8 per cent and 18.4 per cent, respectively (Chart decline in H2:2024-25 amidst uncertainty over global IV.15.a). The India Volatility Index (VIX), a measure tariff wars and geopolitical tensions that triggered of short-term expected volatility of Nifty 50, averaged risk-off sentiment and FPI outflows. The benchmark around 14.5 during H2:2024-25, compared to 14.9 in Bombay Stock Exchange (BSE) Sensex declined in H1:2024-25. All the BSE sectoral indices registered October in the wake of FPI selling amidst geopolitical losses during the second half (Chart IV.15.b). strains and weaker-than-expected corporate earnings The average daily notional equity derivatives volume in Q2:2024-25. Markets pared some of the losses in exhibited a declining trend in H2 over H1, pursuant late November and early December on favourable to SEBI’s implementation of specific measures to global cues. Subsequently, markets faced headwinds strengthen equity derivatives framework with effect amidst a global sell-off triggered by changes in the US from November 20, 2024 (Chart IV.16). Fed’s monetary policy outlook for 2025. Net FPI flows in the domestic equity markets turned The markets began 2025 on a negative note on risk- negative in H2:2024-25. In contrast, flows from off sentiment. Moreover, uncertainties regarding domestic institutional investors (DIIs) continued to US policy changes, persistent FPI selling and mixed remain robust. Overall, FPIs were net sellers to the domestic corporate earnings for Q3:2024-25 also tune of ₹2.2 lakh crore while DIIs were net buyers to Chart IV.15: Stock Market Performance a: Benchmark and Broad Indices Performance b. Performance o f BSE Sectoral indices Source: Bloomberg. 7733 )001 = 4202 rebmetpeS-dnE( xednI tnec reP BSE Sensex BSE MidCap BSE SmallCap 8.0- 8.2- 4.6- 2.01- 9.01- 7.31- 2.41- 7.41- 2.51- 0.61- 5.71- 3.81- 6.91- 8.91- 1.12- 6.12- 9.12- 3.22- 2.32- 9.32- 0.0 -5.0 -10.0 -15.0 -20.0 -25.0 -30.0 xeknaB secivreS laicnaniF erachtlaeH noitacinummoC lateM secivreS sdooG latipaC TI USP moceleT slairtsudnI GCMF elbaruD remusnoC ygrenE saG & liO yranoitercsiD remusnoC otuA seitilitU ytlaeR rewoP 105 100 95 90 85 80 75 70 42-peS-92 42-tcO-9 42-tcO-91 42-tcO-92 42-voN-8 42-voN-81 42-voN-82 42-ceD-8 42-ceD-81 42-ceD-82 52-naJ-7 52-naJ-71 52-naJ-72 52-beF-6 52-beF-61 52-beF-62 52-raM-8 52-raM-81 52-raM-82Monetary Policy Report April 2025 December, issuances declined significantly in January and February 2025 amidst muted risk sentiment. Out of the total primary market mobilisation during H2 (up to February 2025), amount raised by small and medium enterprises (SME) companies through public issues aggregated ₹4,178 crores as against ₹5,253 crore in H1:2024-25. IV.2.5 Foreign Exchange Market Global foreign exchange market experienced increased volatility during the latter part of 2024-25, primarily due to rising geopolitical tensions and uncertainties regarding trade policies. The US dollar experienced sharp fluctuations, reaching a two-year high in mid-January 2025 due to expectations of robust US economic growth. It, however, subsequently declined, the tune of ₹3.6 lakh crore in H2 (Chart IV.17.a). On reflecting growing concerns over the sustainability of a relative basis, i.e., when FPI outflows are measured US economic expansion amidst fears of an impending with respect to total market capitalisation, outflows trade war. Emerging market (EM) currencies initially remained modest so far at 0.5 per cent of the market faced depreciating pressures due to the strengthening capitalisation in comparison to the sell-off of 1 per of the US dollar but recovered as the dollar weakened. cent witnessed during October 2021 to July 2022. During this period, the Indian rupee (INR) faced Primary market resource mobilisation in equity downside pressure primarily because of US dollar markets remained at ₹2.07 lakh crore during H2:2024- appreciation. Moreover, persistent FPI outflows, 25 (up to February 2025) against ₹2.09 lakh crore in increasing global economic uncertainty, and widening H1:2024-25 (Chart IV.17.b). After remaining robust till trade deficit added to the downward pressure on the Chart IV.17: Institutional Investments and Resource Mobilisation a: Net Investment in Indian Equities by b: Resource Mobilis ation in Equity Markets Institutional Investors Note: DII – Domestic Institutional Investors, FPI – Foreign Portfolio Investment, IPO – Initial Public Offer, QIP – Qualified Institutional Placement, FPO – Follow On Public Offer. *: up to February 2025. Sources: Capitaline; NSDL; and SEBI. 74 erorc hkal ₹ erorc hkal ₹ erorc ₹ 1.0 0.8 0.6 0.4 0.2 0 -0.2 -0.4 QIPs & Preferential allotment IPOs, FPOs & Rights DII FPI SME IPOs/ FPOs (RHS) 32-peS 32-tcO 32-voN 32-ceD 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 2.2 6,000 2.0 1.8 5,000 1.6 1.4 4,000 1.2 3,000 1.0 0.8 2,000 0.6 0.4 1,000 0.2 0.0 0 22-1202:2H 32-2202:1H 32-2202:2H 42-3202:1H 42-3202:2H 52-4202:1H *52-4202:2H Chart IV.16: Average Daily Turnover in Equity Derivative Segment BSE NSE Sources: BSE; and National Stock Exchange (NSE). erorc hkal ₹ 600 500 400 300 200 100 0 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 394 389 381 377 399 361 332 335 224 209 192 184 85 100 109 116 124 144 120 107 86 106 103 129Chapter IV Liquidity Conditions and Financial Markets Chart IV.18: Exchange Rate and Volatility a: Movements of Indian Rupee, US Dollar b: Volality o f INR, US Dollar and EM currency Index and EM Currency Index INR. However, the INR staged a recovery in March Forward premia also exhibited significant fluctuations 2025, supported by FPI inflows and improved risk and remained elevated across all maturities during sentiments (Chart IV.18.a). The INR also experienced H2:2024-25, reflecting tighter liquidity conditions heightened volatility, particularly in Q4:2024-25, and heightened global uncertainties (Chart IV.19.a). It mirroring the fluctuations in the global foreign surged notably from November 2024 onwards, with the exchange market (Chart IV.18.b). The 1-month at-the- 1-month forward premia surging above longer-term money (ATM) option-implied volatility for the INR premia, thus resulting in an inversion in the forward rose to 3.0 per cent in H2:2024-25 from 2.2 per cent premia curve which signalled increased near-term in H1:2024-25. uncertainty and volatility on the back of rising global Several global events contributed to foreign exchange risk-off sentiment. While forward premia remained market volatility during H2:2024-25, including the US elevated, it began to decline since early 2025 due to elections, tariff announcements and signals from US the RBI’s USD/INR Buy/Sell swap operations to inject Fed meetings (Table IV.7). durable liquidity into the system before rising during Table IV.7: Episodes of Significance in Global and Domestic Exchange Rate Market During H2:2024-25 Appreciation(+) / Depreciation(-) (%) Volatility Measures (%) ₹/US$ US DXY EMCI Index INR 1 ATM 3 Month Forward Volatility Premium Nov 6, 2024 (US Election Results) -0.1 1.6 -0.5 2.1 1.7 Nov 25, 2024 (US Tariff Announcement on Mexico, 0.3 -0.7 0.4 2.2 1.8 Canada and China) Dec 2, 2024 (US Tariff Announcement on BRICS) -0.2 0.7 -0.5 2.8 1.9 Dec 18, 2024 (US FOMC Meeting) -0.01 1.0 -1.0 2.3 2.4 Feb 3, 2025 (Executive Orders on Tariffs) -0.5 0.6 -0.03 3.9 2.9 Feb 4, 2025 (Tariffs Paused for a Month) -0.01 -0.9 0.3 3.7 2.7 Mar 3, 2025 (Paused Tariffs Imposed) 0.1 -0.8 0.2 3.8 2.5 Mar 19, 2025 (US FOMC Meeting) 0.2 0.2 -0.5 3.5 2.6 Sources: FBIL; Refinitiv Eikon; Bloomberg; and RBI staff estimates. 7755 )001 = 4202 ,13 hcraM( xednI )001 = 4202 ,13 hcraM( xednI )001 = 4202 ,03 peS( xednI 450 400 350 300 250 200 150 100 50 0 USD/INR 1ATM Implied Volatility ₹/US$ US DXY (RHS) US DXY (30-day moving CoV) Emerging market currency index (RHS) EMCI Index (30-day moving CoV) Note: CoV refers to coefficient of variation. Sources: FBIL; Refinitiv Eikon; and Bloomberg. 42-tcO-30 42-tcO-91 42-voN-40 42-voN-02 42-ceD-60 42-ceD-22 52-naJ-70 52-naJ-32 52-beF-80 52-beF-42 52-raM-21 52-raM-82 106 106 104 104 102 102 100 100 98 98 96 96 94 94 92 92 42-rpA-1 42-rpA-02 42-yaM-9 42-yaM-82 42-nuJ-61 42-luJ-5 42-luJ-42 42-guA-21 42-guA-13 42-peS-91 42-tcO-8 42-tcO-72 42-voN-51 42-ceD-4 42-ceD-32 52-naJ-11 52-naJ-03 52-beF-81 52-raM-9 52-raM-82Monetary Policy Report April 2025 Chart IV.19: Indian Rupee Volatility Measures a: Movements in INR-USD Forward Premia b: USD-INR Ons hore-Offshore Spread late March. The onshore-offshore spread for the INR occurring in H2:2024-25. Despite this, the INR’s followed a similar pattern, rising during Q3:2024-25 depreciation during 2024-25 was relatively modest in the wake of increased global risk aversion before compared to some peer EMEs. moderating in Q4 (Chart IV.19.b). Volatility also rose across most EM currencies in Most major EM currencies depreciated during H2:2024-25 (Table IV.8). Despite the heightened global H2:2024-25 due to a stronger US dollar and heightened uncertainty, however, the INR remained one of the global uncertainty (Chart IV.20). Between end-March least volatile EM currencies, exhibiting resilience 2024 and end-March 2025, the INR depreciated by 2.6 during turbulent times. per cent against the US dollar, with major depreciation 76 tnec reP DSU / RNI RNI 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Source: Bloomberg. 42-rpA-2 42-yaM-2 42-nuJ-1 42-luJ-1 42-luJ-13 42-guA-03 42-peS-92 42-tcO-92 42-voN-82 42-ceD-82 52-naJ-72 52-beF-62 52-raM-82 89 1.2 88 1.0 87 86 0.8 85 84 0.6 83 0.4 82 81 0.2 80 79 0.0 1 month 3 months 6 months 12 months 42-rpA-20 42-yaM-20 42-nuJ-10 42-luJ-10 42-luJ-13 42-guA-03 42-peS-92 42-tcO-92 42-voN-82 42-ceD-82 52-naJ-72 52-beF-62 52-raM-82 Onshore-Offshore Spread (RHS) USD INR Spot Rate USD INR NDF 3 M Rate Chart IV.20: Movements in Major EM Currencies tnec reP 15 10 5 0 -5 -10 -15 -20 -25 H1:2024-25 H2:2024-25 2024-25 Note: The movements represent point to point changes over the preceding period. Sources: FBIL; and Refinitiv Eikon. YXD SU osep enitnegrA osep nacixeM aril hsikruT laer nailizarB haipur naisenodnI gnod esemanteiV eepur naidnI osep enippilihP nauy esenihC osep naelihC dnar nacirfA htuoS tiggnir naisyalaM thab dnaliahT elbur naissuR Table IV.8: Month-Wise Volatility of Major EM Currencies* H1: H2: Oct- Nov- Dec- Jan- Feb- Mar- 2024- 2024- 24 24 24 25 25 25 25 25 US DXY 0.9 1.1 0.8 0.7 0.7 0.8 1.7 2.0 Indian rupee 0.1 0.1 0.3 0.4 0.3 0.7 0.3 1.4 Argentine peso 0.6 0.5 0.6 0.7 0.3 0.3 3.5 3.1 Brazilian real 1.9 1.4 1.4 1.8 0.9 1.2 3.8 3.2 Chinese yuan 0.6 0.5 0.2 0.5 0.3 0.2 1.0 1.1 Chilean peso 1.6 1.6 0.9 1.1 1.3 1.1 2.2 2.8 Indonesian rupiah 0.9 0.9 0.9 0.5 0.5 0.6 2.3 2.0 Malaysian ringgit 1.4 2.0 0.6 1.1 0.4 0.3 4.2 1.6 Mexican peso 1.5 1.4 0.9 0.8 0.5 1.1 6.1 1.7 Philippine peso 1.2 0.5 0.7 0.4 0.3 0.3 1.8 1.1 Russian ruble 0.7 1.9 3.3 4.4 5.0 3.0 2.8 7.4 South African 0.6 1.6 2.1 1.0 0.6 0.7 2.5 2.4 rand Thailand baht 0.9 1.7 0.6 1.1 0.6 0.4 3.8 1.3 Turkish lira 0.2 0.3 0.6 0.5 0.6 1.8 2.1 2.9 Vietnamese dong 1.1 0.4 0.1 0.6 0.5 0.2 1.2 0.8 Note: *: Measured by coefficient of variation (CoV). Sources: FBIL; Refinitiv Eikon; and RBI staff estimates.Chapter IV Liquidity Conditions and Financial Markets In terms of the 40-currency real effective exchange modest relative to REER of some major economies rate (REER), the INR also experienced stress during (Chart IV.21.b). H2:2024-25, depreciating by 1.9 per cent between The financial conditions index (FCI) constructed September 2024 (average) and March 28, 2025. The based on twenty Indian financial market indicators11 depreciation of 40-currency REER in recent months at daily frequency for the period April 1, 2016 to also reflected the narrowing of India’s inflation March 28, 2025 and using the dynamic factor model differential relative to its major trading partners (DFM) approach suggests broad-based tightening (Chart IV.21.a). From a cross-country perspective, the across market segments since early November 2024 depreciation of INR’s 40-currency REER remained (Chart IV.22). Financial conditions eased during March Chart IV.22: Financial Conditions Index G-sec Corporate Bond Forex Equity Money FCI (Standardised) Source: RBI staff estimates. 11 The chosen indicators represent five market segments, namely (i) the money market; (ii) the G-sec market; (iii) the corporate bond market; (iv) the forex market; and (v) the equity market. For details, refer Box IV.2 of the Monetary Policy Report (October 2024). 7777 gninethgiT gnisaE 32-01-10 32-01-71 32-11-20 32-11-81 32-21-40 32-21-02 42-10-50 42-10-12 42-20-60 42-20-22 42-30-90 42-30-52 42-40-01 42-40-62 42-50-21 42-50-82 42-60-31 42-60-92 42-70-51 42-70-13 42-80-61 42-90-10 42-90-71 42-01-30 42-01-91 42-11-40 42-11-02 42-21-60 42-21-22 52-10-70 52-10-32 52-20-80 52-20-42 52-30-21 52-30-82 Chart IV.21: Trend in Real Effective Exchange Rate (REER) a: India's 40-Currency REER b: Cross Country Movement in REER (February 2025 over September 2024) Sources: RBI; and BIS. 1.0 0.5 0.0 -0.5 -1.0 tnec reP )001 = 61-5102( xednI Relative Price Effect Nominal Exchange Rate Effect 40-REER (RHS) Change in REER (m-o-m) tnec reP 6 4 2 0 -2 -4 -6 aisenodnI aerA oruE aidnI dnalreztiwS ocixeM napaJ eropagniS acirfA htuoS aisyalaM KU anihC lizarB senippilihP dnaliahT SU anitnegrA aissuR yekruT 3 110 2 106 1 102 0 98 -1 94 -2 -3 90 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beFMonetary Policy Report April 2025 in the wake of relatively easier conditions in the Chart IV.24: Non-food Credit Growth of SCBs money, equity and forex markets. IV.2.6 Credit Market Bank Credit12 Bank credit growth (y-o-y) moderated during 2024-25. The moderation was seen across bank groups except for public sector banks (PSBs) (Chart IV.23.a). PSBs continued to be the major driver of incremental credit extended by all scheduled commercial banks (SCBs) in 2024-25, while the share for private sector banks (PVBs) declined (Chart IV.23.b). Non-food bank credit of scheduled commercial banks (SCBs) increased at a decelerated pace of 12.0 per cent (y-o-y) as on March 21, 2025, compared to 16.3 per cent a year ago (Chart IV.24). February 2024. Despite some deceleration in growth of Sector-wise13, bank credit growth to industry remained credit to services sector and personal loans segments healthy at 7.3 per cent (y-o-y). While agricultural credit at 13.0 per cent and 14.0 per cent, respectively, in growth remained in double-digit at 11.4 per cent in February 2025, they remained the prime drivers of non- February 2025, it moderated from 20.0 per cent in food credit growth during H2:2024-2514 (Chart IV.25). 12 Data pertain to the last reporting Friday of the month. Data exclude the impact of merger of a non-bank with a bank. 13 Based on data on sectoral deployment of bank credit collected from select scheduled commercial banks, accounting for about 95 per cent of the total non-food credit deployed by all scheduled commercial banks. 14 H2: 2024-25 data up to February 2025. 78 tnec reP tnec reP 20.0 5.5 17.5 4.0 15.0 2.5 12.5 1.0 10.0 -0.5 7.5 -2.0 5.0 2.5 -3.5 0.0 -5.0 Base effect (RHS) y-o-y growth rate Momentum (RHS) Source: RBI. 22-raM 22-nuJ 22-peS 22-ceD 32-raM 32-nuJ 32-peS 32-ceD 42-raM 42-nuJ 42-peS 42-ceD 52-raM Chart IV.23: Credit Flow across Bank Groups a: Growth b: Share in In cremental Credit Source: RBI. tnec reP 100 1.8 3.6 90 80 46.6 39.1 70 60 50 40 30 57.3 51.7 20 10 0 22-Mar-24 21-Mar-25 Public sector banks Private banks Foreign banks )y-o-y( tnec reP 25 20 15 12.3 10 11.7 5 0 -5 -10 Public sector banks (including regional rural banks) Private banks (including small finance banks) Foreign banks All SCBs 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raM 13.0 12.1Chapter IV Liquidity Conditions and Financial Markets Chart IV.25: Sectoral Deployment of Bank Credit a: Non-food Credit Growth: Sector-wise b: Contribution to Non-food Credit Growth 25 20 15 10 5 0 Source: RBI. Credit to MSMEs15 segment remained robust, witnessed a robust growth, while credit to registering a growth of 12.3 per cent in February infrastructure sector slowed notably in H2:2024-25 2025, however, credit to large industry segment (Chart IV.26). recorded a modest growth in H2. Within industry, Credit growth to services sector moderated in H2, credit to basic metals and all engineering mainly attributed to decelerated credit growth to 15 Refer to credit to micro, small and medium segments within industry. The Union Budget 2025-26 proposed to revise the definition of micro, small and medium enterprises (MSMEs). The investment limit has been raised by 2.5 times for MSMEs classification, while the turnover threshold doubled. The credit guarantee cover for micro and small enterprises has been increased from ₹5 crore to ₹10 crore. Going forward, MSMEs sector is expected to receive boost in credit due to change in classification and priority sector lending treatment. 7799 y-o-y ,tnec reP 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF Non-food credit Agriculture Industry Services Personal loans stniop egatnecreP 20 15 10 5 0 Agriculture Industry Services Personal loans 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 14.0 13.0 12.0 11.4 7.3 Chart IV.26: Credit to Industry Sector a: Credit Growth in Industrial Sector b: Credit Growth in Major Sub-sectors of Industry 20 18 16 14 12 10 8 6 4 2 0 Source: RBI. y-o-y ,tnec reP 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF Food processing Textiles Chemicals Basic metal All engineering Infrastructure 2.1 4.1 20 4.0 16 12.3 3.0 12 2.0 8 5.4 1.0 4 0 0 y-o-y ,tnec reP 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF erorc hkal ₹ ni )y-o-y( tiderc latnemercnI 19.0 13.3 9.3 7.1 6.8 1.1 Large industry - Credit growth MSMEs - Credit growth Large industry - Incremental credit (RHS) MSMEs - Incremental credit (RHS)Monetary Policy Report April 2025 NBFCs16. However, credit growth was broadly stable in other major sub-sectors, such as trade, commercial real estate and professional services. Incremental credit (y-o-y) to services sector excluding NBFCs, remained nearly steady in H2 (Chart IV.27). Incremental credit in personal loans segments with unchanged risk weights improved progressively, whereas it moderated for the loan categories with increased risk weights. Housing loans – the largest segment of personal loans – grew at a robust pace despite some moderation, while vehicle loans growth slowed down (Chart IV.28). Irrespective of the moderation, non-food bank credit continued to grow at a healthy pace above the 10- year average y-o-y growth rate (10.5 per cent). Sector- wise, while credit to industry continued to grow for segments with unchanged risk weight, the growth above its long-term average, personal loans recorded rate of targeted sectors, i.e., ‘unsecured personal loans’ moderation. Credit growth in services and agriculture and ‘bank’s credit to NBFCs’ moderated gradually in sectors hovered around their respective long-term response to the regulatory measures undertaken in averages. While credit growth remains broadly intact November 2023 (Chart IV.29 and Table IV.9). 16 The risk weights on the exposures of SCBs to NBFCs’ has been restored to their pre-November 2023 level w.e.f. from April 01, 2025 and the same shall be as per the external rating. Also, microfinance loans in the nature of consumer credit shall be excluded from the applicability of higher risk weights and be subject to a risk weight of 100 per cent. It is expected that credit growth in ‘banks’ credit to NBFCs’ as well as services sector may improve going forward. 80 )tnec rep ,y-o-y( htworG erorc hkal ₹ ni )y-o-y( tiderc latnemercnI Chart IV.27: Credit to Services Sector 30 8.0 25 6.0 20 15 4.0 10 2.0 5 0 0 Services excluding NBFCs (RHS) NBFCs (RHS) Commercial real estate Trade Services excluding NBFCs NBFCs Professional services Source: RBI. 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF Chart IV.28: Credit to Personal Loans Segment 35 10.0 30 8.0 25 6.0 20 15 4.0 10 2.0 5 0 0 Source: RBI. )tnec rep ,y-o-y( htworG 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF erorc hkal ₹ ni )y-o-y( tiderc latnemercnI Housing Education Vehicle loans Credit card outstanding Segment with increased risk weight (RHS) Segment with unchanged risk weight (RHS) Chart IV.29: Impact of Rise in Risk Weights on Credit Growth Source: RBI. y-o-y ,tnec reP )tnec rep( erahS Targeted sectors Other sectors Non-food credit Other sectors (RHS) Targeted sectors (RHS) 3.12 7.87 35 100 30 80 25 60 20 40 15 12.8 10 12.0 20 7.9 5 0 22-rpA 22-nuJ 22-guA 22-tcO 22-ceD 32-beF 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beFChapter IV Liquidity Conditions and Financial Markets Table IV.9: Prudential Measures and Sectoral Credit Growth (y-o-y, per cent) Sectors/Sub-Sectors# Long-Term* Post-COVID** Nov-23 Mar-24 Jun-24 Sep-24 Dec-24 Feb-25 Bank Credit without Merger$ 10.5 14.7 16.3 16.3 13.9 14.4 12.4 12.1^ Bank Credit with Merger$ 10.8 15.9 20.7 20.2 17.4 13.0 11.2 11.0^ Agriculture (13.6) 11.8 15.9 18.1 20.0 17.4 16.4 12.5 11.4 Industry (23.2) 4.1 8.0 5.5 8.0 7.7 9.1 7.4 7.3 Services (30.0) 13.4 18.7 22.2 20.8 15.1 15.2 13.0 13.0 Services excluding NBFCs (20.3) 11.8 18.4 24.3 24.0 18.9 18.1 16.4 16.4 NBFCs (9.7) 19.0 19.6 18.5 15.0 8.2 9.7 6.9 6.6 Personal Loans (33.2) 17.2 18.0 18.7 17.6 16.6 16.4 14.9 14.0 Personal loans segment with unchanged risk weight (21.6) 16.2 16.3 16.2 17.4 18.2 18.5 17.0 16.9 Personal loans segment with increased risk weight (11.6) 19.5 21.5 23.3 18.1 13.7 12.6 11.1 9.0 #: Provisional data, bank credit data is based on Section-42 return. *: 10-year average of y-o-y growth. **: Average of y-o-y growth since April 2022. $: In July 2023, a non-bank was merged with a bank. ^: Pertain to data for the fortnight ended March 21, 2025. Note: Figures in parentheses against each sector denote share in total non-food credit as per the data of the fortnight ended February 21, 2025. Source: RBI. The asset quality of SCBs improved during 2024-25 Non-SLR17 investments of banks (comprising (up to December 2024), with the overall gross non- investments in CPs, bonds, debentures, and shares performing assets (NPA) ratio declining to 2.5 per of public and private corporates) increased by 1.2 cent in December 2024 from 3.0 per cent a year ago per cent in H2:2024-25, lower than the expansion of (Chart IV.30.a). Asset quality improved across all the 4.8 per cent witnessed in H1:2024-25 (Chart IV.31.a). major sectors (Chart IV.30.b). Growth in adjusted non-food credit (i.e., non-food Chart IV.30: Stressed Assets and Non-Performing Assets of SCBs a: Overall Loan Portfolio of SCBs b: Sectoral Non-Performing Assets 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.1 3.0 2.5 2.0 Source: RBI. 17 Statutory Liquidity Ratio. 8811 tnec reP 91-raM 91-nuJ 91-peS 91-ceD 02-raM 02-nuJ 02-peS 02-ceD 12-raM 12-nuJ 12-peS 12-ceD 22-raM 22-nuJ 22-peS 22-ceD 32-raM 32-nuJ 32-peS 32-ceD 42-raM 42-nuJ 42-peS 42-ceD 18.0 16.0 14.0 12.0 10.0 8.0 6.2 6.0 4.0 2.7 2.0 2.3 1.2 0.0 Stressed assets ratio Non-performing assets ratio tnec reP 91-raM 91-nuJ 91-peS 91-ceD 02-raM 02-nuJ 02-peS 02-ceD 12-raM 12-nuJ 12-peS 12-ceD 22-raM 22-nuJ 22-peS 22-ceD 32-raM 32-nuJ 32-peS 32-ceD 42-raM 42-nuJ 42-peS 42-ceD Agriculture Industry Services Retail loansMonetary Policy Report April 2025 Chart IV.31: Non-SLR Investment and Adjusted Non-Food Credit a: Changes in Non-SLR Investment b: Adjusted Non-Food Credit Adjusted non-food credit (quarterly variation) Commercial paper Bonds / Shares / Debentures Y-o-y adjusted non-food credit growth (RHS) Source: RBI. bank credit plus non-SLR investments by banks) moderated to 7.3 per cent of their net demand decelerated to 11.8 per cent in Q4:2024-25 from 15.5 and time liabilities (NDTL) from 8.5 per cent at per cent in Q4:2023-24 (Chart IV.31.b). end-March 2024 (Chart IV.32). Excess SLR holdings are a component of the liquidity coverage ratio As on February 21, 2025, excess holdings of (LCR). They also provide collateral buffers to statutory liquidity ratio (SLR) securities by SCBs banks for availing funds under the LAF as well as wholesale funding in the TREPS and market repo segments. NBFCs Credit18 Growth (y-o-y) of credit extended by NBFCs decelerated to 13.3 per cent in February 2025 from 18.6 per cent in February 2024 reflecting the impact of increase in risk weights which has now been reversed effective April 01, 2025. NBFCs' credit to industry, the largest segment in terms of outstanding credit, registered a stable growth in H2:2024-25 (up to February 2025). Retail loans accounted for the largest share of incremental credit, followed by industry, services and agriculture (Chart IV.33). 82 tnec reP 40.0 30,0 20.0 10.0 0 -10.0 -20.0 H1: 2023-24 H2: 2023-24 H1: 2024-25 H2: 2024-25 erorc dnasuoht ₹ 9.0 16.5 15.0 7.5 13.5 12.0 6.0 10.5 9.0 4.5 7.5 3.0 6.0 4.5 1.5 3.0 1.5 0 0.0 erorc hkal ₹ 42-3202:1Q 42-3202:2Q 42-3202:3Q 42-3202:4Q 52-4202:1Q 52-4202:2Q 52-4202:3Q 52-4202:4Q Chart IV.32: Excess SLR of Banks 13 60 50 11 40 9 30 7 20 5 10 3 0 *: Data up to February 21, 2025. Source: RBI. LTDN fo tnec reP 22-1202 :1Q 22-1202 :2Q 22-1202 :3Q 22-1202 :4Q 32-2202 :1Q 32-2202 :2Q 32-2202:3Q 32-2202:4Q 42-3202 :1Q 42-3202 :2Q 42-3202:3Q 42-3202:4Q 52-4202:1Q 52-4202:2Q 52-4202:3Q *52-4202:4Q LTDN fo tnec reP Public sector banks Private banks All SCBs Foreign banks (RHS) 18 Data on sectoral deployment of outstanding credit from select NBFCs pertain to last day of every month. As a pilot work, the collection of monthly sectoral credit information from select NBFCs has been initiated. These NBFCs represent around 88 per cent of total credit extended by all NBFCs in upper and middle layers.Chapter IV Liquidity Conditions and Financial Markets In response to the cumulative 250-bps rate hike during the recent tightening cycle, i.e., May 2022 to January 2025, the 1-year median marginal cost of funds- based lending rate (MCLR) of scheduled commercial banks (SCBs) increased by 178 bps. Consequently, the weighted average lending rates (WALRs) on fresh and outstanding rupee loans increased by 181 bps and 115 bps, respectively, during this period. On deposit side, the weighted average domestic term deposit rates (WADTDRs) on fresh and outstanding deposits increased by 253 bps and 199 bps, respectively, during the same period. After reduction in the policy repo rate by 25 bps in February 2025, banks have adjusted their repo-linked lending rates downward by a similar magnitude. In contrast, the MCLR, that has a longer reset period and is linked to the cost IV.3: Monetary Policy Transmission of funds, may undergo adjustments with some lag. Consequently, the WALR on outstanding rupee loans Transmission to lending rates reached its peak in declined by 7 bps. In case of fresh loans, however, it H1:2024-25 before adjusting downwards thereafter on has increased by 8 bps during February 2025 reflecting account of competition among banks to retain market significant proportion of MCLR-linked loans in it share by reducing the spread (Chart IV.34.a). On the (Table IV.10). other hand, deposit rates have been increasing in the wake of tighter liquidity conditions and higher credit The share of the external benchmark-based lending demand (Chart IV.34.b). rate (EBLR)-linked loans in total outstanding floating Chart IV.34: Transmission to Bank’s Lending and Deposit Rates a: Lending Rates b: De posit Rates 8833 stniop sisaB stniop sisaB 300 250 200 150 100 50 0 Repo Rate WALR-Outstanding Loans Repo Rate WADTDR-Outstanding Deposit WALR-Fresh Loans WADTDR-Fresh Deposit Source: RBI. 22-yaM 22-guA 22-voN 32-beF 32-yaM 32-guA 32-voN 42-beF 42-yaM 42-guA 42-voN 52-beF 300 250 200 150 100 50 0 22-yaM 22-guA 22-voN 32-beF 32-yaM 32-guA 32-voN 42-beF 42-yaM 42-guA 42-voN 52-beF Chart IV.33: Sectoral Credit Growth of NBFCs 245 225 225 189 199 108 y-o-y ,tnec reP erorc hkal ₹ ni tiderC )y-o-y( latnemercnI 35 7.0 30 6.0 25 5.0 20 4.0 15 3.0 10 2.0 5 1.0 0 0 Non-food credit Agriculture Industry Services Retail loans Note: Line diagram on LHS and bar diagram on RHS. Source: RBI. 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beFMonetary Policy Report April 2025 Table IV.10: Transmission to Banks’ Deposit and Lending Rates (Basis points) Term Deposit Rates Lending Rates Period Repo Rate WADTDR- WADTDR- EBLR 1-Yr. MCLR WALR - WALR- Fresh Deposits Outstanding (Median) Fresh Rupee Outstanding Deposits Loans Rupee Loans Retail Retail Retail Deposits and Bulk and Bulk Deposits Deposits (1) (2) (3) (4) (5) (6) (7) (8) (9) Easing Phase -250 -209 -259 -188 -250 -155 -232 -150 Feb 2019 to Mar 2022 Tightening Period +250 182 253 199 250 178 181 115 May 2022 to Jan 2025 Easing Phase -25 -3 -8 0 -25 0 8 -7 Feb 2025 - Mar* 2025 Memo: Jan- 2025 0 4 -1 2 0 0 7 -1 Feb- 2025 -25 -3 -8 0 -25 0 8 -7 Note: 1. Data on EBLR pertain to 32 domestic banks. 2. Data on WALR and WADTDR pertain to February 2025. WALR: Weighted Average Lending Rate; WADTDR: Weighted Average Domestic Term Deposit Rate; MCLR: Marginal Cost of Funds-based Lending Rate; EBLR: External Benchmark-based Lending Rate. Sources: MPD 06 return & RBI. rate loans of SCBs increased to 60.6 per cent at end- (Chart IV.35.a). The share of EBLR-linked loans is December 2024 from 56.6 per cent at end-March higher in private banks (PVBs) (Chart IV.35.b). The 2024. Consequently, the share of MCLR-linked persistence of loans linked to MCLR and other legacy loans declined to 35.9 per cent (Table IV.11). With rates – based on internal benchmarks and having faster adjustments in lending rates, the EBLR longer reset period – acts as an impediment to overall system has quickened the pace of monetary policy monetary policy transmission. transmission. Bank group-wise, the transmission to WALRs on fresh There is still a significant proportion of loans linked rupee loans of PSBs was higher than that of PVBs to MCLR in the case of public sector banks (PSBs) (Chart IV.36.a). Moreover, it was lower for outstanding loans, which could be attributed to the significant Table IV.11: Outstanding Floating Rate Rupee proportion of outstanding loans still linked to the Loans of SCBs across Interest Rate Benchmarks internal benchmark-based lending rate. The lending (Per cent) rates of PVBs remained above those of PSBs (Chart Regime March March March December IV.36.b). The maximum pass-through to lending rates 2020 2022 2024 2024 MCLR 78.3 48.7 39.2 35.9 was witnessed in case of foreign banks, reflecting EBLR 9.1 44.0 56.6 60.6 their higher share of low-cost and wholesale deposits Others 12.6 7.3 4.2 3.5 of lower maturity. Moreover, the higher share of EBLR- Notes: 1. ‘Others’ include benchmark prime lending rate, base rate and linked loans in foreign banks has further enhanced other internal benchmarks. 2. Data pertain to 73 scheduled commercial banks. monetary policy transmission19. Source: RBI. 19 The proportion of EBLR-linked loans was the highest for foreign banks ( 92.2 per cent), followed by private banks ( 85.9 per cent) and public-sector banks ( 44.6 per cent) as at end-December 2024. 84Chapter IV Liquidity Conditions and Financial Markets Chart IV.35: Outstanding Floating Rate Rupee Loans of SCBs across Interest Rate Benchmarks a: Public Sector Banks b: Pri vate Banks During February 2025, transmission to WALRs on fresh loans of domestic banks declined in the range of fresh and outstanding loans has been broad-based 8-19 bps in February 2025. During the tightening cycle, across sectors (Chart IV.37.a). The differential pace however, it had increased by 220 bps for education of transmission to different sectors is on account of loans, 203 bps for vehicle loans, 167 bps for MSME loans, and 163 bps for housing loans (Chart IV.37.b). the proportion of credit portfolios linked to fixed and floating interest rates in the sector and the varied Banks have reduced their spreads (difference of WALRs spreads charged by banks. In case of floating rate loans on fresh floating rate rupee loans and their benchmark that are mandatorily linked to EBLR, the WALRs on rate), which moderated the extent of transmission 8855 )tnec reP( erahS )tnec reP( erahS 100 90 80 70 60 50 40 30 20 10 0 Sources: RBI. 91-peS 91-ceD 02-raM 02-nuJ 02-peS 02-ceD 12-raM 12-nuJ 12-peS 12-ceD 22-raM 22-nuJ 22-peS 22-ceD 32-raM 32-nuJ 32-peS 32-ceD 42-raM 42-peS 42-ceD 100 90 80 70 60 50 40 30 20 10 0 Base Rate MCLR EBLR Others Base Rate MCLR EBLR Others 91-peS 91-ceD 02-raM 02-nuJ 02-peS 02-ceD 12-raM 12-nuJ 12-peS 12-ceD 22-raM 22-nuJ 22-peS 22-ceD 32-raM 32-nuJ 32-peS 32-ceD 42-raM 42-peS 42-ceD Chart IV.36: Bank Group wise Transmission to Lending Rates a: Transmission to Weighted Average Lending Rates b: Lending Rate s of Domestic Banks Source: RBI. tnec reP tnec reP 350 11 320 10.24 300 10 250 10.00 9.08 200 182 167 181 175 185 175 178 9 150 138 8.68 130 115 8 100 97 50 7 9 4 8 0 0 0 0 -10 -7 -5 -8 -7 -5 6 -50 PSBsPVBs FBs SCBs PSBs PVBs FBsSCBs PSBsPVBs FBs SCBs Fresh rupee loans Outstanding rupee 1-Year median MCLR loans WALR (Fresh rupee loans)-PSBs 1-Year median MCLR-PSBs Tightening Cycle (May 22- Jan 25) Easing Cycle (Feb-25) WALR (Fresh rupee loans)-PVBs 1-Year median MCLR-PVBs 02-tcO 12-beF 12-nuJ 12-tcO 22-beF 22-nuJ 22-tcO 32-beF 32-nuJ 32-tcO 42-beF 42-nuJ 42-tcO 52-beFMonetary Policy Report April 2025 Chart IV.37: Sector-wise Transmission to WALRs of Domestic Banks a: Transmission to WALR: Sector-wise b: Transmission to W ALR on Fresh Floating Rate (February-2025) Rupee Loans Mandatorily Linked to EBLR Source: RBI. (Table IV.12). For loans that are linked to the policy from real estate and infrastructure to agriculture and repo rate, the spread on fresh rupee loans (WALR over micro loans. NBFCs bring more borrowers to formal the repo rate) was the highest for education loans, financial institutional network, enhancing the reach followed by other personal loans and MSME loans. of the credit channel of monetary transmission. Among domestic bank groups, PSBs charged a lower Monthly data on lending rates of major NBFCs reveal spread than PVBs for housing, vehicles, education, that interest rates charged by NBFCs tend to be higher and other personal loans. In contrast, PSBs charged a as compared to SCBs, inter alia, reflecting their liability higher spread for MSME loans as compared to PVBs. structure and the risk profile of their borrowers. The degree of monetary policy transmission, thus, differs Non-banking financial companies (NBFCs) have been between NBFCs and SCBs (Chart IV.38). playing an increasingly important role in meeting the credit needs of the economy by extending the Systemic liquidity developments and the relatively last mile of credit to hitherto unbanked areas and faster pace of credit growth prompted banks to providing niche financing to various sectors ranging increase their term deposit rates, especially in shorter Table IV.12: Spread of WALR (Fresh Loans) over the Repo Rate for Loans linked to External Benchmark (Percentage points) Sectors Apr-22 Feb-25 Public sector Private sector Domestic Public sector Private sector Domestic banks banks banks banks banks banks MSME Loans 4.27 3.93 4.04 3.38 3.37 3.37 Personal Loans Housing 2.91 3.32 3.21 2.15 2.59 2.43 Vehicle 3.37 4.39 3.55 2.68 4.53 3.24 Education 4.42 5.71 4.71 3.79 5.19 4.55 Other personal loans 3.54 7.35 4.01 3.05 5.73 3.42 Note: Other personal loans include loans other than housing, vehicles, education and credit card loans. Sources: RBI; and RBI staff estimates. 86 stniop sisaB 250 220 203 200 185 163 167 150 100 50 0 -15 -8 -11 -19 -8 -50 Housing Vehicle Education Other MSME loans personal loans Fresh rupee loans Outstanding rupee loans Tightening Cycle (May 22- Jan 25) Easing Cycle (Feb-25) stniop sisaB 30 25 25 21 21 20 16 15 7 8 10 5 0 0 -5 -3 -5 -3 -4 -4 -10 -7 -8 -15 -11 -20 -15 -15 -13 -14 -13 -16 -25 -20 gnisuoH elciheV noitacudE lanosreP rehtO snaoL sEMSM erutlucirgA )egraL( yrtsudnI erutcurtsarfnI edarT lanoisseforP secivreS tropxE eepuR tiderCChapter IV Liquidity Conditions and Financial Markets deposit rates was higher for PSBs than PVBs (Chart Chart IV.38: Monetary Policy Transmission to IV.39.b). The rates on savings bank deposits that Outstanding Lending Rates of NBFCs comprise about 30 per cent of total deposits, however, have remained mostly sticky (Chart IV.39.c). Accordingly, the overall transmission to deposit rates remained low as savings deposit rates remained unresponsive to policy rate changes. In addition, the decline in the share of current account and savings account (CASA) deposits in total deposits, along with the higher transmission to term deposit rates vis-a-vis lending rates have exerted downward pressure on the net interest margins (NIMs) of banks (Chart IV.39.d). The GoI reviewed the interest rates on various small savings instruments, which are linked to secondary market yields on G-secs of comparable maturities tenor deposits (Chart IV.39.a). Across bank groups, the and kept it unchanged for Q1:2025-26. With these pass-through to WADTDRs on fresh and outstanding adjustments, the rates on most of the instruments are 8877 stniop sisaB 280 230 180 130 80 30 -20 Policy Repo Rate SCBs NBFCs Source: RBI. 22-yaM 22-guA 22-voN 32-beF 32-yaM 32-guA 32-voN 42-beF 42-yaM 42-guA 42-voN 52-beF 225 108 41 Chart IV.39: Deposit Rates and Bank’s Profitability a: Transmission to Fresh Deposits - Tenor Wise b: Transmission to Weighted Average Domestic (May 2022 to January 2025) Term Deposit Rates 300 280 283 275 273 250 250 239 243 200 184 172 150 108 118 100 50 0 c: Savings Deposit Rates of Banks d: Net Interest Margin (NIM) and CASA Share of SCBs stniop sisaB syad 41 - 7 syad 03 - 51 syad 54- 13 syad 09 - 64 syad 081- 19 syad 463 - 181 sraey 2 - 1 sraey 3 - 2 sraey 5 - 3 sraey 8 - 5 sraey 01- 8 Tenor stniop sisaB Tightening cycle (May 22- Jan 25) Easing cycle (Feb 25) 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 tnec reP 02-beF 02-nuJ 02-tcO 12-beF 12-nuJ 12-tcO 22-beF 22-nuJ 22-tcO 32-beF 32-nuJ 32-tcO 42-beF 42-nuJ 42-tcO 52-beF 50 3.9 3.8 45 3.7 40 3.6 3.5 35 3.4 30 3.3 3.2 25 3.1 20 3 Median savings rate (card rates) Weighted average savings deposit rate Repo rate tnec reP 22-raM 32-raM 32-nuJ 32-peS 32-ceD 42-raM 42-nuJ 42-peS 42-ceD CASA Share NIM (RHS) tnec reP 325 276 274 282 275 253 225 204 179 199 189 182 210 175 163 125 125 75 25 1 0 0 2 2 -25 -7 -2 -17 -3 -6 -15 -8 PSBsPVBs FBs SCBs PSBs PVBs FBs SCBs PSBs PVBs FBs SCBs Outstanding deposits Fresh retail deposits Fresh deposits 6.25 3.03 2.75 Source: RBI.Monetary Policy Report April 2025 Table IV.13: Interest Rates on Small Savings Instruments – Q1:2025-26 Small Savings Schemes Maturity Spread Average G-sec Formula based Government Difference (years) (%age point) $ Yield (%) of Rate of Interest Announced Rate (percentage Corresponding (%) (applicable of Interest (%) points) Maturity for Q1:2025-26) in Q1:2025-26 (Dec 2024-Feb 2025) (1) (2) (3) (4) (5) = (3) + (4) (6) (7) = (6) - (5) Savings Deposit - 4.00 - Public Provident Fund 15 0.25 6.85 7.10 7.10 0.00 Term Deposits 1 Year 1 0 6.45 6.45 6.90 0.45 2 Year 2 0 6.50 6.50 7.00 0.50 3 Year 3 0 6.54 6.54 7.10 0.56 5 Year 5 0.25 6.62 6.87 7.50 0.63 Recurring Deposit Account 5 0 6.54 6.54 6.70 0.16 Monthly Income Scheme 5 0.25 6.59 6.84 7.40 0.56 Kisan Vikas Patra 115 months 0 6.85 6.85 7.50 0.65 NSC VIII issue 5 0.25 6.79 7.04 7.70 0.66 Senior Citizens Saving Scheme 5 1.00 6.62 7.62 8.20 0.58 Sukanya Samriddhi Account Scheme 21 0.75 6.85 7.60 8.20 0.60 $: Spreads for fixing small saving rates as per GoI Press Release of February 2016. Note: Compounding frequency varies across instruments. Sources: GoI; FBIL and RBI staff estimates. now above the formula-based rates in the range 16-66 amidst improving inflationary outlook and positive bps (Table IV.13). global sentiment on India’s economic prospects. Equity market witnessed sharp correction driven by IV.4 Conclusion foreign portfolio investment outflows. The INR traded Domestic financial markets broadly mirrored volatile with a depreciating bias until February, recouping global financial market conditions in H2:2024-25. some of the losses in March and remaining among the After remaining in surplus in October and November, least volatile EME currencies during H2. Lending rates system liquidity turned into deficit during the second adjusted downwards during H2, while deposit rates half of December on account of several factors, both remained at elevated level. Going forward, the Reserve domestic and global. The Reserve Bank took a slew Bank will remain agile and nimble in conducting of liquidity augmenting measures to ensure orderly market operations to ensure financial stability while market conditions and enhance monetary policy providing adequate liquidity to meet the productive transmission. Domestic long-term bond yields eased requirements of the economy. 88Chapter V External Environment V. External Environment The global economy is growing below its long-term average, with heightened near-term risks emanating from implementation of trade restrictive economic policies and evolving geopolitics. Inflation rules above the target for many economies due to persistence in services sector. Central banks have cautiously eased monetary policy, but actions remain divergent. Financial markets remain volatile, impacted by changing growth-inflation dynamics. Intensification of protectionist tariffs, heightened policy uncertainty, lingering geopolitical risks, and inflation persistence pose downside risks to the global growth outlook. The global economy is growing below its long- indicators for Q1:2025, however, suggest a slowdown term average, with near-term outlook shrouded in global economic growth as the output index with several risks, especially in the wake of recent of global composite purchasing managers’ index reciprocal tariff impositions. Headline inflation (PMI)1 was the weakest since the last quarter of continues to rule above the target for most economies, 2023. The Organizations for Economic Co-operation with persistent services and core (headline excluding and Development (OECD) in its Economic Outlook food and energy) inflation hindering the pace of Interim Report (March 2025) revised the growth disinflation. Many central banks have lowered their forecast downwards by 20 bps and 30 bps to 3.1 per level of monetary policy restraint but divergence cent and 3.0 per cent for 2025 and 2026 respectively, in monetary policy action has increased. Global from its December 2024 projections. financial markets remain volatile exhibiting risk-off Amongst the AEs, the US economy grew by 2.4 per cent sentiment over fluctuating perceptions on the (quarter on quarter, seasonally adjusted annualized monetary policy trajectory and trade related rates (q-o-q, saar)) in Q4:2024 (lower than the Q3 uncertainty. Equity markets, that were buoyed by tax outturn of 3.1 per cent), supported by increases cut expectations and resilient data releases in the US, in consumer and government spending and fall in experienced significant sell-off in March and early imports, partly offset by a decline in investment April amidst growing trade and policy uncertainty (Table V.1). The labour market remained broadly stable weighing on growth outlook. Bond yields softened averaging 4.1 per cent during October 2024 to March and US dollar retreated in Q1:2025 and early April as 2025. The Standard and Poor’s (S&P) US composite tariffs announcement stoked fears of global PMI touched a three-month high of 53.5 in March slowdown. driven by a strong rebound in the services sector, V.1 Global Economic Conditions which surged to 54.4 in March (51.0 in February). In H2:2024, the global economy remained steady In contrast, growth in manufacturing sector slowed amidst accommodative financial conditions and in March, with the PMI easing to 50.2 from 52.7 a rebound in international trade. High frequency in February. 1 The references to PMIs are to S&P Global indices, unless specified otherwise. 8899Monetary Policy Report April 2025 Labour markets, however, remained resilient, with Table V.1: Real GDP Growth (Per cent) a historic low unemployment of 6.1 per cent in Country Q1- Q2- Q3- Q4- 2023 2024 2025 2026 February 2025. In the Eurozone, the composite PMI 2024 2024 2024 2024 (E) (P) (P) in March, rose to 50.9 from 50.2 in February, driven Quarter-on-quarter, seasonally adjusted, annualised rate (q-o-q, saar) by expansion in services activity while manufacturing Canada 1.8 2.8 2.2 2.6 sector remained in contraction zone despite climbing Euro area 1.3 0.7 1.7 0.9 to 26 month-high at 48.6. Japan -2.1 3.2 1.4 2.2 South Korea 5.3 -0.9 0.4 0.3 The UK economy rebounded, to grow by 0.4 per UK 3.7 1.8 0.0 0.4 cent (q-o-q, saar) in Q4:2024 as growth in services US 1.6 3.0 3.1 2.4 and construction sector more than compensated for Year-on-year the contraction in production. The labour market Advanced Economies continued to ease with unemployment rate rising to Canada 0.7 1.2 1.9 2.4 1.5 1.3 2.0 2.0 4.4 per cent in January from 4.1 per cent in August. Euro area 0.5 0.5 1.0 1.2 0.4 0.8 1.0 1.4 The UK composite PMI climbed to a five-month high Japan -0.7 -0.7 0.7 1.1 1.5 -0.2 1.1 0.8 of 51.5 in March driven by strong services PMI that South Korea 3.3 2.3 1.5 1.2 1.4 2.2 2.0 2.1 rose to 52.5 from 51.0 in February, offsetting the UK 0.7 1.1 1.2 1.5 0.4 0.9 1.6 1.5 sharpest drop in manufacturing PMI since November US 2.9 3.0 2.7 2.5 2.9 2.8 2.7 2.1 2023 to 44.9. Japan’s GDP growth accelerated to 2.2 per Emerging Market Economies cent (q-o-q, saar) in Q4:2024 from 1.4 per cent in Q3 Brazil 2.6 3.3 4.1 3.6 3.2 3.7 2.2 2.2 over improved business investment and sharp fall in China 5.3 4.7 4.6 5.4 5.4 4.8 4.6 4.5 imports. However, the composite PMI (au Jibun Bank) India 8.4 6.5 5.6 6.2 9.2 6.5 6.5 6.5 declined to its lowest level since November 2022 to Indonesia 5.1 5.1 5.0 5.0 5.1 5.0 5.1 5.1 48.9 in March from 52.0 in February, as the services Philippines 5.9 6.5 5.2 5.3 5.5 5.8 6.1 6.3 PMI slipped to the neutral mark while manufacturing Russia 5.4 4.1 3.1 4.1 3.8 1.4 1.2 contracted further. South Africa 0.6 0.4 0.4 0.9 0.7 0.8 1.5 1.6 Thailand 1.7 2.3 3.0 3.2 2.0 2.7 2.9 2.6 Amongst EMEs, China’s real GDP growth accelerated Memo: to 5.4 per cent year-on-year (y-o-y) in Q4:2024, World 2023 2024 (E) 2025 (P) 2026 (P) marking the strongest quarterly expansion in 2024, Year-on-year thus meeting the government’s annual growth target Output 3.3 3.2 3.3 3.3 of around 5 per cent for the full year. Growth was Trade volume 0.7 3.4 3.2 3.3 driven by an expansion in the tertiary and secondary E: Estimate P: Projection sectors, supported by a broad range of government Note: India’s data correspond to fiscal year (April-March); e.g., 2024 pertains to April 2024-March 2025. stimulus measures announced since late September, Sources: Official statistical agencies; Bloomberg; IMF WEO Update, including a 25 bps rate cut in the benchmark lending January 2025; and RBI staff estimates. rate. Growth in the second half of 2024 was led by Real GDP growth in the Euro area moderated to 0.9 per booming exports, contributing around 45 per cent to cent (q-o-q, saar) in Q4 following 1.7 per cent growth the GDP growth in both Q3 and Q4. Industrial capacity in Q3 primarily due to decline in inventories, gross utilization also rose by 1.1 percentage points in Q4 as fixed capital formation and government expenditure. compared to Q3. Consumption, however, remains a 90Chapter V External Environment weak spot with its share in GDP falling sharply from pace in 2024, supported by stronger manufacturing 88.3 per cent in Q4:2023 to 29.7 per cent in Q4:2024. exports and public capital spending in larger The composite PMI (Caixin) expanded to 51.8 in economies, with growth expected to remain stable in March 2025 from 51.5 in February, driven by quicker 2025.3 In Q1:2025, growth remained modest driven by growth in output across both the manufacturing and increased output and new orders amidst a continued services sectors. downtrend in inflationary pressures. Among other major EMEs, Brazil’s GDP growth In the BRICS economies, GDP growth for 2025 is moderated to 3.6 per cent (y-o-y) in Q4:2024 vis-à-vis projected to moderate, barring South Africa and India 4.1 per cent in Q3, driven by contraction in agriculture where growth is expected to accelerate and remain sector which was more than offset by expansion in steady, respectively (Table V.2). The inflation outlook the services and industrial sectors. The labour market is also expected to improve for BRICS economies in conditions eased as unemployment increased from 2025, softening for those that had higher inflation 6.2 per cent in Q4:2024 to 6.7 per cent in Q1:2025. but desirably rising for China, already grappling with The composite PMI increased to four-month high of deflationary pressures. 52.6 in March supported by strong growth in sales. Turning to high frequency indicators, the OECD The South African economy grew at a slightly faster composite leading indicators (CLIs) for March 2025 pace of 0.9 per cent in Q4, compared to 0.4 per cent showed that most economies remained above the in Q3, driven by sharp growth in agriculture sector, long-term trend (Chart V.1a). The global composite supported by finance and trade industries. However, PMI also remained above the neutral mark since the composite PMI for South Africa remained in February 2023 (Chart V.1b). It expanded to 52.1 in contraction territory for the fourth consecutive March from 51.5 in February, its highest reading in month at 48.3 in March as persistent demand 2025, driven by solid expansion in services sector. The weakness continued to weigh on output and sales. global manufacturing PMI moderated to 50.3 in March Growth in the Russian economy moderated to 3.1 from 50.6 in February over slowdown in growth of per cent (y-o-y) in Q3:2024 (4.1 per cent in Q2) output and new orders. owing to an increase in supply-side constraints. In Global merchandise trade volume grew for the tenth March 2025, the composite PMI (49.1), slipped below consecutive month in January 2025, rising sharply by the neutral mark after five months of expansion due 5.0 per cent (y-o-y). The momentum accelerated to 1.1 to manufacturing PMI which fell to its lowest level per cent, remaining positive for the fourth straight since April 2022 at 48.2. month, as countries front loaded their imports in The ASEAN2 economies demonstrated resilient anticipation of tariff imposition. EMEs remained the growth in Q4:2024 driven by higher new orders and major driver of growth for the eighth consecutive increased output activity. Overall, southeast asian quarter in Q4:2024 (October-December). In January economies are expected to have grown at a healthy 2025, however, the contribution of AEs in world 2 Association of Southeast Asian Nations (ASEAN) includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. 3 As per Asian Development Bank’s (ADB) Asian Development Outlook December 2024, Southeast Asian economies are projected to grow at a steady pace of 4.7 per cent in 2025 (same as in 2024). 9911Monetary Policy Report April 2025 Table V.2: Select Macroeconomic Indicators for BRICS Real GDP growth rate Country 2023 2024(E) 2025(P) General Government Country 2023 2024(E) 2025(P) (y-o-y, per cent) gross debt Brazil 3.2 3.7 2.2 Brazil 84.7 87.6 92.0 (per cent of GDP)# Russia 4.1 3.8 1.4 Russia 19.5 19.9 20.4 India 9.2 6.5 6.5 India 83.0 83.1 82.6 China 5.4 4.8 4.6 China 84.4 90.1 93.8 South Africa 0.7 0.8 1.5 South Africa 73.4 75.0 77.4 CPI inflation rate Country 2023 2024(E) 2025(P) Current account Country 2023 2024(E) 2025(P) (y-o-y, per cent) balance Brazil 4.6 4.3 3.6 Brazil -1.0 -1.7 -1.8 (per cent of GDP) Russia 5.9 7.9 5.9 Russia 2.5 2.7 2.6 India 5.4 4.4 4.1 India -0.7 -1.1 -1.3 China 0.2 0.4 1.7 China 1.4 1.4 1.6 South Africa 5.9 4.7 4.5 South Africa -1.6 -1.6 -1.9 General Government Country 2023 2024(E) 2025(P) Forex reserves* Country 2023 2024 2025 net lending/borrowing (in US$ billion) Brazil -7.6 -6.9 -7.3 Brazil 355.0 329.7 332.5 (per cent of GDP) Russia -2.3 -1.9 -0.5 Russia 598.6 609.1 632.4 India -8.3 -7.8 -7.6 India 622.5 635.7 665.4 China -6.9 -7.4 -7.6 China 3449.7 3455.6 3498.6 South Africa -5.8 -6.2 -6.3 South Africa 62.5 65.5 66.3 E: Estimate P: Projection *: Forex reserves for 2025 pertain to February 2025 for all countries except for India (March 2025). #: Gross debt refers to the nonfinancial public sector, excluding Eletrobras and Petrobras, and includes sovereign debt held by the central bank. Notes: India’s data correspond to fiscal year (April-March) except data on forex reserves which are as per calendar year. India's inflation data for 2024 is from April 2024 to February 2025. Sources: Official statistical agencies; WEO October 2024 database and January 2024 Update, IMF; International Reserve and Foreign Currency Liquidity (IRFCL), IMF; and RBI. trade growth increased significantly (Chart V.2a). freight container pricing index that measures 40-feet The Freightos Baltic Global Index – the global ocean container prices – contracted sharply by 23.1 per cent Chart V.1: Survey Indicators a: OECD CLI b: Composite PMI 62 58 54 50 46 Note: For PMI indices a reading above 50 indicates an overall increase compared to the previous month, and below 50 an overall decrease. The indices are seasonally adjusted. Sources: OECD; and Bloomberg. 92 xednI xednI 32-naJ 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raM 102 101 100 99 98 97 96 US Euro area UK Japan Brazil Russia India China (Caixin) Global 32-naJ 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raM US UK Germany France Japan Brazil India China South AfricaChapter V External Environment Chart V.2: World Trade Volume a: World Trade Volume: Relative Contribution b: World Trade Volume and Freightos Baltic Global Index Sources: CPB Netherlands; Refinitiv Eikon; and RBI staff estimates. (y-o-y) in March 2025 driven by slowdown in demand volatile with a downward bias, softening by 1.6 per from China and an increase in vessel capacity amidst cent due to moderation in metal prices (Chart V.3a). new alliances in the shipping industry (Chart V.2b). The correction was, however, more than offset in The latest WTO’s Goods Trade Barometer (March Q1:2025, when prices rose sharply by 7.7 per cent as 2025) indicates that global merchandise trade energy and metal prices increased. The trend again volume expanded at a steady pace through Q4:2024 reversed in early April with commodity prices declining and is poised to continue growing in the first few in tandem with increasing global slowdown fears over months of 2025. According to the IMF’s WEO Update dented demand outlook. According to the Food and of January 2025, global trade volume is expected to Agriculture Organization (FAO), global food prices grow by 3.2 per cent and 3.3 per cent in 2025 and edged up by 4.0 per cent (q-o-q) in Q4:2024, driven 2026, respectively. Nevertheless, the recent wave by higher vegetable oil and dairy prices. The prices, of tariffs announced by the US and varied trade however, moderated in Q1:2025 as prices softened by responses of countries will shape the evolving global 0.9 per cent, primarily due to sharp decline in sugar trade dynamics going ahead. The initial estimates prices, despite higher dairy prices (Chart V.3b). of WTO indicate that the global merchandise trade Crude oil prices rose in the first fortnight of October, volume would contract by about one per cent in surpassing $80 per barrel due to heightened tensions 2025.4 in the Middle East and Hurricane Milton in the US. V.2 Commodity Prices and Inflation Prices softened and remained subdued thereafter In Q4:2024, global commodity prices, as measured in Q4:2024, hovering in the range of $74-76 per by the Bloomberg commodity price index, remained barrel, driven by a mix of geopolitical and economic 4 As per the statement of Director-General of the World Trade Organization (WTO) issued on April 03, 2025. 9933 tniop egatnecreP AEs EMEs World trade (per cent, y-o-y) tnec reP )egareva ylhtnoM( xednI 5.0 6.0 5500 4.0 5.0 3.0 4.0 4500 3.0 2.0 3500 2.0 1.0 1.0 2500 0.0 0.0 -1.0 1500 -1.0 -2.0 -2.0 -3.0 500 -3.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Jan 2023 2024 2025 World trade (y-o-y) World trade (m-o-m) Freightos Baltic Global Index (RHS) 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raMMonetary Policy Report April 2025 Chart V.3: Commodity Prices a: Bloomberg Commodity Price Index b: Food Price Indices 115 110 105 100 95 90 Sources: FAO; World Bank; Bloomberg; and PPAC, Ministry of Petroleum & Natural Gas, GoI. factors. While receding tensions, less than expected after imposition of sanctions on Venezuela and Iran China’s stimulus measures and ceasefire discussion but plummeted to a 3-year low amidst bleak growth in the Middle East continued to pull down prices, prospects and surprise OPEC+ announcement anticipation of sanctions and escalating Russia- (Chart V.3c). Ukraine conflict led to occasional price surges. Base metal prices declined in Q4:2024 due to Prices rebounded in January amidst sanctions on strengthening of US dollar and weak demand Russia’s energy sector and increased demand due from China, the world’s largest consumer of base to cold weather. Since mid-January, price treaded metals, as Chinese stimulus measures were well downwards following ceasefire in Gaza, increasing below expectations. Prices of most base metals, fears surrounding tariff imposition and higher oil however, edged up in Q1:2025 over China's stimulus supply. The correction continued till the first week announcement in January but plunged after metals of March when OPEC+ announced to commence its evaded further tariffs levy by the US. Gold prices unwinding process.5 Oil prices started rising again surged in October by 4.9 per cent (m-o-m) driven by 94 xednI 32-naJ-10 32-beF-11 32-raM-42 32-yaM-40 32-nuJ-41 32-luJ-52 32-peS-40 32-tcO-51 32-voN-52 42-naJ-50 42-beF-51 42-raM-72 42-yaM-70 42-nuJ-71 42-luJ-82 42-peS-70 42-tcO-81 42-voN-82 52-naJ-80 52-beF-81 52-raM-13 120 160 110 150 140 100 130 90 120 110 80 100 70 90 60 80 70 50 )001 = 2202 - dne( xednI 32-naJ-10 32-beF-11 32-raM-42 32-yaM-40 32-nuJ-41 32-luJ-52 32-peS-40 32-tcO-51 32-voN-52 42-naJ-50 42-beF-51 42-raM-72 42-yaM-70 42-nuJ-71 42-luJ-82 42-peS-70 42-tcO-81 42-voN-82 52-naJ-80 52-beF-81 52-raM-13 c: Energy and Crude Oil Prices d: Metal Price Indices Gold Copper Aluminium Zinc Iron (RHS) Nickel (RHS) )001=61-4102( xednI )001 = 2202 - dne( xednI 165 155 145 135 125 115 105 32-naJ 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raM Food Dairy Vegetable oil Meat Cereals Sugar 100 150 90 140 80 130 70 120 60 110 50 100 40 30 90 20 80 10 70 0 60 utbmm/$SU ,lbb rep $SU 32-naJ 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raM xednI Brent WTI Crude Oil Indian basket Natural gas, US Natural gas, Europe Liquefied natural gas, Japan Energy price index (RHS) Natural Gas index (RHS) 5 Voluntary cuts, representing 2.2 million barrels per day, introduced in January 2024 and scheduled to end in June were postponed five times due to lower prices. However, the unwinding process finally began in April 2025 and is expected to be gradually phased out by the end of 2026.Chapter V External Environment heightened uncertainty regarding the US elections Table V.3: Consumer Price Inflation and escalating geopolitical tensions. The rally was (Y-o-y, Per cent) more than offset by decline in prices in November and Country Inflation Q1:2024 Q2:2024 Q3:2024 Q4:2024 Q1:2025 Target December as strengthening US dollar and treasury Advanced Economies yields increased the opportunity cost of holding gold, Canada 2.0 ± 1.0 2.9 2.8 2.0 1.9 2.3 causing gold prices to fall by 1.5 per cent (q-o-q) in Euro area 2.0 2.6 2.5 2.2 2.2 2.3 Q4:2024. Thereafter, prices rose sharply in Q1:2025, Japan 2.0 2.6 2.7 2.8 2.9 3.9 gaining 19.5 per cent and surpassing the USD 3,100 South Korea 2.0 3.0 2.7 2.1 1.6 2.1 per ounce mark for the first time, over increased safe UK 2.0 3.5 2.1 2.0 2.5 2.9 haven demand and higher gold purchases by central US 3.3 3.2 2.6 2.7 2.9 (2.0) (2.7) (2.6) (2.3) (2.5) (2.5) banks (Chart V.3d). Emerging Market Economies Consumer Price Inflation Brazil 3.0 ± 1.5 4.3 4.0 4.4 4.8 4.8 Russia 4.0 7.6 8.2 8.9 9.0 10.0 Consumer price inflation remained above the target India 4.0 ± 2.0 5.0 4.9 4.2 5.6 3.9 in many countries as the progress of disinflation lost China 0.0 0.3 0.5 0.2 -0.1 momentum. While core goods inflation has eased, South Africa 3.0-6.0 5.4 5.2 4.3 2.9 3.2 services inflation remains above pre-pandemic Mexico 3.0 ± 1.0 4.6 4.8 5.0 4.5 3.7 levels, especially in advanced economies. The OECD Indonesia 2.5 ± 1.0 2.8 2.8 2.0 1.6 0.6 in its Interim Economic Outlook Report of March Philippines 3.0 ± 1.0 3.3 3.8 3.2 2.6 2.3 2025 revised up its inflation projections by 30 bps Thailand 1.0-3.0 -0.8 0.8 0.6 1.0 1.1 for both 2025 and 2026 to 3.8 per cent and 3.2 per Turkey 5.0 ± 2.0 66.8 72.3 54.4 46.7 39.8 cent, respectively, for G20 economies. Memo: 2023 2024(E) 2025(P) 2026(P) In the US, headline CPI inflation accelerated from World consumer price inflation 6.7 5.7 4.2 3.5 2.4 per cent in September 2024 to 2.8 per cent in E: Estimate P: Projection February 2025, primarily due to rising shelter prices, Notes: (1) Figures in the parentheses for US are year-on-year change in whereas core CPI inflation moderated to 3.1 per cent personal consumption expenditure (PCE) price index. (2) Inflation numbers for Q1:2025 are upto February 2025 except in February after remaining broadly steady at 3.3 per for Euro area, South Korea, Philippines, Thailand, Indonesia cent from September 2024 to January 2025 (Table and Turkey (March 2025). Sources: Central bank websites; IMF; and Bloomberg. V.3). Inflation in terms of the personal consumption expenditure (PCE) price index – the US Federal In the UK, CPI headline inflation surged by 110 bps Reserve’s (Fed) preferred measure of inflation – to 2.8 per cent in February 2025 from 1.7 per cent edged up to 2.5 per cent in February from 2.1 per in September 2024, whereas core inflation rose cent in September (Chart V.4a), while core PCE by 30 bps over the same period to 3.5 per cent. In inched up to 2.8 per cent from 2.7 per cent over the Japan, headline inflation rose sharply by 120 bps to same period (Chart V.4b). 3.7 per cent in February 2025 from 2.5 per cent in September 2024. CPI inflation (all items less fresh In the Euro area, CPI inflation increased from 2.0 per cent in October 2024 to 2.2 per cent in March 2025, food) also increased by 60 bps – from 2.4 per cent while core inflation (inflation excluding energy, in September 2024 to 3.0 per cent in February 2025, food, alcohol, and tobacco) moderated to 2.4 per cent while core inflation (inflation excluding both fresh in March after remaining stable at 2.7 per cent for food and energy), rose to 2.6 per cent from 2.1 per five months from September 2024 to January 2025. cent over the same period. 9955Monetary Policy Report April 2025 15 11 7 3 -1 Amongst major EMEs, CPI inflation increased in Brazil weak domestic demand. Core inflation movement to 5.1 per cent in February 2025 from 4.4 per cent in exhibited divergence for EMEs, moderating for some September 2024 (Chart V.4c). In Russia, it accelerated but accelerating for others (Chart V.4d). from 8.6 per cent to 10.1 per cent over the same period Since the October 2024 MPR, the last mile of due to western sanctions and shortage of labour disinflation is getting prolonged with slowdown driving up wages. In South Africa, however, inflation in disinflation across AEs and most EMEs (Chart receded to 3.2 per cent in February 2025 from 3.8 per V.5a & 5b). cent in September 2024. China experienced positive V.3 Monetary Policy Stance but low level of inflation, hovering in the range of 0.1 per cent to 0.5 per cent during September 2024 Following the synchronous tightening to counter to January 2025, remaining subdued mostly because multi-decadal high inflation in 2022-23, central banks of weak demand and low consumer confidence. In commenced their policy normalisation from 2023 February 2025, however, the CPI declined to (-)0.7 and 2024. The pace of easing, however, turned out to per cent, returning to the deflationary zone and be divergent as central banks responded to their own marking its lowest level in over a year, driven by evolving growth-inflation dynamics. Most central 96 tnec reP 32-naJ 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ Chart V.4: CPI Inflation (y-o-y) – Select Economies a: Advanced Economies - Headline b: Advanced Economies - Core c: Emerging Market Economies - Headline d: Emerging Market Economies - Core Brazil Russia China South Africa India tnec reP 7 5 3 1 US (PCE) UK Euro area Japan Target tnec reP 32-naJ 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raM US (PCE) UK Euro Area Japan 11 7 3 -1 tnec reP 32-naJ 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 11 9 7 5 3 1 Brazil Russia China South Africa India Note: For India, core CPI, i.e., CPI excluding food and fuel is worked out by eliminating the groups 'food and beverages' and 'fuel and light' from the headline CPI. Sources: Official statistical agencies; Bloomberg; and RBI staff estimates. 32-naJ 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raMChapter V External Environment Chart V.5: Last Mile of Disinflation a: Advanced Economies b: Emerging Market Economies Japan 1.7 India -0.4 0.5 1.5 Euro -0.3 0.2 South Africa -1.3 -0.7 UK -0.3 0.8 Russia 4.6 6.1 2.1 US 0.5 Brazil 0.1 1.4 -1 0 1 -2 0 2 4 6 Per cent Per cent February 2025 Inflation Deviation from Target February 2025 Inflation Deviation from Target September 2024 Inflation Deviation from Target September 2024 Inflation Deviation from Target Notes: 1. For Euro Area, inflation print pertains to March 2025. 2. For Brazil, India and South Africa the target is taken as the mid point of their inflation control target range. Sources: Bloomberg; and RBI staff estimates. banks have become less restrictive but continue Federal Open Market Committee (FOMC) expected to remain vigilant and data dependent for future the target range for the federal funds rates to be at decisions. Nonetheless, the extent of divergence 3.75-4.00 per cent by end 2025, indicating a further increased further in the second half of 2024 and 50 bps rate cut in 2025, unchanged from its December early 2025 as some countries continued with their 2024 projection. easing cycle, some remained watchful at relatively The European Central Bank (ECB) continued to ease lower levels of policy rates while a few pre-emptively its policy rate, lowering the deposit facility rate (DFR) started hiking to stem any surge in inflation. by 25 bps each in all its four meetings held during The US Fed initiated easing cycle in September 2024, October 2024 - March 2025, cumulatively reducing the lowering the target range for the federal funds rate benchmark rate by 150 bps since it began its easing by 50 bps to 4.75-5.00 per cent (Chart V.6a). In its cycle in June 2024. The ECB reiterated that it would two subsequent meetings, i.e., in November and follow a data-dependent and meeting-by-meeting December, it reduced the federal funds rate by 25 approach to determine the appropriate monetary bps each lowering it to 4.25-4.50 per cent. In 2025, policy stance. Besides, with the principal payments however, the policy rate was left unchanged in both from maturing securities being no longer reinvested, the January and March meetings. In its March 2025 both Asset Purchase Programme (APP) portfolio and meeting, the Fed noted that uncertainty around the Pandemic Emergency Purchase Programme (PEPP) economic outlook had increased and announced its plan to slow down the pace of quantitative tightening portfolio continue to shrink at a predictable pace. programme.6 As per the Summary of Economic The Bank of England (BoE), however, has been more Projections released in the March meeting, the gradual in its easing cycle, reducing its policy rate in 6 Beginning in April, the FOMC would slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $25 billion per month to $5 billion per month. The Committee would, however, maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion per month. 9977Monetary Policy Report April 2025 Chart V.6: Policy Rate Changes – Select Major Economies a: Advanced Economies b: Emerging Market Economies Source: Bloomberg. every alternate meeting between August 2024-March in its November 2024 meeting, by 25 bps each in its 2025. Based on the evolving view of the medium-term December 2024 and January 2025 meetings and held outlook for inflation, the BoE indicated a gradual it constant in its March meeting. The Swiss National and careful approach to the further withdrawal of Bank also lowered its policy rate by 50 bps in its monetary policy restraint. December meeting and 25 bps in its March meeting. The Czech National Bank reduced its key rate by 25 Amongst other major AEs, the Bank of Canada bps in its November 2024 and February 2025 meetings lowered its policy rate during Q4:2024 and Q1:2025 but held it constant in December 2024 and March by 150 bps, cumulatively. During all the meetings in 2025 meetings. Norges Bank, however, is yet to begin Q4:2024, the Reserve Bank of New Zealand (RBNZ) its policy normalisation process and has maintained a and the Bank of Korea (BoK) reduced their benchmark status quo during its Q4:2024 and Q1:2025 meetings. rates by 50 bps and 25 bps, respectively. In Q1:2025, Bank of Israel also kept its policy rate unchanged however, the BoK pared its policy rate by 25 bps in during these quarters, although it had reduced its February following a pause in January while the RBNZ policy rate once in January 2024. In contrast, the continued to ease its policy rate by 50 bps. The Reserve Bank of Japan (BoJ), after raising its key rate by 15 bps Bank of Australia initiated its policy easing cycle in in July, paused in its subsequent meetings in 2024. In February 2025, reducing its key rate by 25 bps to 4.10 its January 2025 meeting, however, the BoJ resumed per cent, after an extended pause since December policy hiking, raising the policy rate by 25 bps while 2023. The Central Bank of Iceland embarked on policy keeping it steady in March. easing by reducing its key rate by 25 bps in October 2024 and by 50 bps in all its subsequent meetings. In In the BRICS economies, the Banco Central do Brasil, March, however, it tempered its pace to 25 bps. The which had initiated the policy tightening cycle in Sveriges Riksbank lowered the policy rate by 50 bps September 2024, continued to raise its Selic rate by 98 stniop sisaB stniop sisaB 50 0 0 -25 -100 -75 -75 -100 -150 -150 -175 -175 -200 -225 -300 -300 H1:2024 Q3:2024 Q4:2024 Q1:2025 H1:2024 Q3:2024 Q4:2024 Q1:2025 SU KU aera oruE napaJ adanaC nedewS yawroN cilbupeR hcezC ailartsuA dnalaeZ weN dnalecI aeroK htuoS 500 450 300 250 150 0 -25 -35 -75 -75 -25 -150 -200 -225 -300 -325 -350 -450 -425 Brazil Russia India China South Africa Mexico Chile Hungary Philippines Colombia Indonesia PeruChapter V External Environment 50 bps in November 2024 and by 100 bps each in the but maintained status quo in October, December, month of December, January and March. The South February and March. Among European EMEs, African Reserve Bank cut its repo rate by 25 bps each Hungary and Poland kept their policy rates unchanged in its November 2024 and January 2025 meetings, in all meetings held during Q4:2024 and Q1:2025 followed by a pause in the month of March. In (Chart V.6b). continuation of the slew of measures announced V.4 Global Financial Markets in September, the People’s Bank of China lowered Global financial markets remained volatile since the its one-year Loan Prime Rate (LPR) and over-five- final quarter of 2024 gyrating sharply with every year LPR by 25 bps each to 3.1 per cent and 3.6 per incoming information as the outlook was shrouded cent, respectively, in October 2024. Since then, it has in economic, political and trade policy uncertainty. maintained status quo in all subsequent meetings Market sentiment has been largely conditioned by but indicated that the reserve requirement ratio and shifting expectations regarding monetary policy interest rates may be further cut depending on the domestic and external economic conditions. The amidst fast changing growth-inflation outlook. Bank of Russia increased its policy rate by 200 bps Equities broadly shed gains since the last MPR but in October but maintained status quo thereafter, remained volatile throughout, increasing amidst keeping the key rate elevated at 21.00 per cent amidst resilient economic indicators, expectations of tax inflationary pressures. cuts and AI driven rally in China, but retreating due to risk-off sentiment and tariff induced disruptions. Among Asian EME central banks, the Bank of In Q4:2024, bond yields had increased, and the US Thailand lowered its benchmark rate for the first dollar had appreciated in tandem with political time in October 2024 by 25 bps followed by a pause in transition in the US and uncertainty surrounding December but again reduced by 25 bps in its February geopolitical developments. In Q1:2025, however, 2025 meeting. The Bank Indonesia maintained status the adverse implications of such increased quo on its key rate in Q4:2024, followed by a 25 bps economic uncertainty came to the forefront denting cut in January and pause in subsequent meetings. consumer and corporate sentiments and igniting The central bank of Philippines cut its policy rate growth concerns causing bond yields in the US to by 25 bps in every alternate meeting since October decline and US dollar to depreciate. EME financial 2024, cumulatively lowering its key rate by 75 bps markets remain particularly vulnerable to spillovers since the commencement of the rate easing cycle in from such shocks and the associated uncertainty August 2024. In Latin America, the Banco de Mexico that increases the trade-offs and complicates the reduced its benchmark rate by 50 bps in Q4:2024 conduct of monetary policy (Box V.1). Accordingly, and by 100 bps in Q1:2025. The central bank of EME currencies depreciated in the fourth quarter of Colombia gradually moderated its pace of monetary 2024 although recovering partially in the first quarter policy easing by paring its benchmark rate by 50 bps of 2025. in October 2024 and 25 bps in December, followed by a pause in 2025 so far. Chile lowered its policy Equity markets, in terms of the Morgan Stanley rate by 25 bps in each of its meetings in Q4:2024 Capital International (MSCI) world index, remained but paused in Q1:2025. Peru cut its reference rate volatile in the last quarter of 2024 shedding 1.2 by 25 bps each in November and January meetings per cent in Q4:2024 with EME equity markets 9999Monetary Policy Report April 2025 underperforming relative to those of AEs (Chart V.7a). administration’s policies would boost growth, In Q1:2025, equity markets extended their sell-off but lower taxes, and reduce regulation. Equity markets, with reversing trends as EMEs outperformed their AE however, witnessed an intermittent correction in counterparts. Among AEs, the US S&P 500 remained mid-November post strong economic data releases buoyant for the most part of October, spurred by the and hawkish Fed commentary causing readjustments unusually aggressive beginning of the rate-cutting in the monetary policy trajectory (Chart V.8a). The cycle by the US Fed, followed by turbulence amidst correction persisted through mid-January 2025, election-related uncertainty. Nonetheless, as the as odds of one or no rate cuts by December 2025 election outcome unveiled, US stock market rallied in increased. Optimism over the US exceptionalism and November driven by expectations that the incoming strong corporate earnings fuelled an equity market Box V.1: Geopolitical Spillover Shocks on Financial Markets of EMEs Geopolitical tensions and heightened uncertainties owing stock market meltdown, exchange rate depreciation, and to conflicts, wars including trade wars and related tensions rising risk premia (Caporale and Menla-Ali, 2024), with have been a defining feature of the global landscape over heterogenous effects on advanced and emerging markets the last few years, with its deleterious impact on the (Choi, 2025). global economy drawing increasing attention of policy To gauge the economic ramifications of geopolitical makers and researchers. Such systemic geopolitical shocks reinforce “flight home effect” (Feng et al., 2023), risks (GPR), the GPR Index (Chart V.1.1), which captures leaving the financial system vulnerable, especially in the episodic fluctuations linked to major geopolitical EMEs. Geopolitical events can escalate risk aversion, events (Caldara and Iacoviello, 2022)7, is used to prompting shifts in investment portfolios, triggering assess the impact on stock markets, credit spreads (Contd.) 7 The Geopolitical Risk Index captures global risks by analysing geopolitical-related content in 10 major global newspapers. The index is calculated using a dictionary-based method by counting the number of articles related to adverse geopolitical events in each newspaper for each month (as a share of the total number of news articles). 100 selcitrA lla fo erahS egatnecreP Chart V.1.1: GPR Index 10 9 8 7 6 5 4 3 2 1 5102 5102 5102 6102 6102 7102 7102 7102 8102 8102 9102 9102 0202 0202 0202 1202 1202 2202 2202 2202 3202 3202 4202 4202 Russian invasion of Ukraine Israel-Hamas war Paris terrorist attack China-India Social unrests in border dispute South America Source: Caldara and Iacoviello, 2022.Chapter V External Environment Chart V.1.2: Impact of GPR shocks a: Stock Market b: Foreign Exchange Market c: Credit Spread 1 2 2 5 1 0 0 0 -2 -5 -1 -4 -1 -2 0 1 2 3 4 5 6 0 1 2 3 4 5 6 0 1 2 3 4 5 6 Orthogonalized IRF Notes: Shaded region of the OIRFs indicate 68 per cent confidence interval using Newey-West standard errors. x-axes represent months and y-axes represent percentage points. Source: RBI Staff estimates. and exchange rates of EMEs using monthly data8 and uncertainty, keeping the risks elevated. The findings spanning 10 years (January 2015 to January 2025). Using are broadly robust to alternate lags and controls. the local projections model (Jordà, 2005), the movement Thus, the geopolitical shocks entail risks to financial in each financial market segment for the subsequent stability in EMEs, underscoring the need for strategic six months is predicted. The orthogonalized impulse policy measures to enhance resilience by building on response functions (OIRFs) evaluate the impact of a one- their fundamentals and mitigating vulnerabilities. unit increase in the GPR Index on EMEs stocks, bonds and currency markets, after employing appropriate controls References: (Chart V.1.2). 1. Caldara, D., & Iacoviello, M. (2022). “Measuring The results indicate that a one percentage point rise in Geopolitical Risk”. American Economic Review, 2022. the GPR Index leads to a significant deterioration in EME 2. Caporale, G.M., & Menla-Ali, F. (2024). “Geopolitical financial conditions, causing stock markets to decline by Risk and Cross-Border Portfolio Flows: Effects and 0.25 percentage points, currencies to depreciate by 0.16 Channels”. CESifo Working Paper No. 11337. percentage points, and credit spreads to widen by around 3. Choi, S., & Havel, J. (2025). “Geopolitical risk and U.S. 1 basis point in the first month, reflecting enhanced risk Foreign Portfolio Investment: A Tale of Advanced and premia during periods of high geopolitical uncertainty Emerging Markets”. Journal of International Money and consequent flight to safety. The effect peaks in the and Finance, 2025. second month in all three market segments, with stock markets shedding gains by 0.64 percentage points, 4. Feng, C., Han, L., Vigne, S., & Xu, Y. (2023). “Geopolitical currencies depreciating by 0.32 percentage points and Risk and the Dynamics of International Capital credit spread worsening by around 1.2 basis points by the Flows”. Journal of International Financial Markets, end of the second month. The effect, thereafter, gradually Institutions & Money, January 2023. peters out. Nevertheless, the repeated occurrence of such 5. Jorda, O. (2005). “Estimation and Inference of Impulse geopolitical shocks that impinges on the economy with Responses by Local Projections”. The American differential impact has lent a persistence to the turmoil Economic Review, March 2005. 8 The MSCI Emerging Markets Index, the MSCI Emerging Markets Currency Index and the J.P. Morgan EMBI Global Spread are used to track equity markets, foreign exchange markets and credit spread in the emerging markets, respectively. 110011Monetary Policy Report April 2025 rally briefly in the later half of January. After turning European stocks underperformed in Q4:2024 as tariff cautious in February, markets corrected sharply in fears induced market correction but have markedly outperformed its peers in Q1:2025 amidst ECB rate March amidst preliminary fears of stagflation and cut expectations, increased odds of a Russia-Ukraine increasing policy uncertainty (Chart V.8b). Overall, peace deal, a stronger economy in France passing the US S&P index rose by 2.1 per cent during Q4:2024 its contentious 2025 budget and Germany’s fiscal but pared gains to the tune of 4.6 per cent during overhaul. The UK’s stock indices broadly tracked the Q1:2025. European markets, though with a smaller magnitude, Chart V.8: Sources of Uncertainty: Monetary and Economic Policy a: Target Rate Probability for Federal b: US Uncertainty Indicators Reserve Meeting on 10 Dec 2025 Sources: Bloomberg; and RBI staff estimates. Notes: 1. In Chart V.8a, red shaded area represents the period with receding multiple rates cut expectations. 2. In chart 8a, baseline re fers to no change in policy rate of the US while the pace of rate cut is assumed to be 25 bps. 102 xednI xednI 100% 80% 60% 40% 20% 0% Baseline 1Cut 2Cuts 42-voN-80 42-voN-51 42-voN-22 42-voN-92 42-ceD-60 42-ceD-31 42-ceD-02 42-ceD-72 52-naJ-30 52-naJ-01 52-naJ-71 52-naJ-42 52-naJ-13 52-beF-70 52-beF-41 52-beF-12 52-beF-82 52-raM-70 52-raM-41 52-raM-12 52-raM-82 550 5,000 450 4,000 350 3,000 250 2,000 150 1,000 0 50 TradePolicyUncertaintyIndex EconomicPolicyUncertainty Index(RHS) )001=3202-dne( xednI 32-naJ 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raM Chart V.7: Equity Markets a: Equity Indices (MSCI) b: Change in Equity Indices 120 115 110 105 100 95 90 World AEs EMEs Sources: Bloomberg; and RBI staf f estimates. 42-naJ-60 42-naJ-13 42-beF-52 42-raM-12 42-rpA-51 42-yaM-01 42-nuJ-40 42-nuJ-92 42-luJ-42 42-guA-81 42-peS-21 42-tcO-70 42-voN-10 42-voN-62 42-ceD-12 52-naJ-51 52-beF-90 52-raM-60 52-raM-13 Euro area (Euro Stoxx 50) -2.1 7.2 Japan (Nikkei) 5.2 -10.7 UK (FTSE) -0.8 5.0 US (S&P 500) -4.6 2.1 Brazil (Ibovespa) -8.7 8.3 India (Sensex) -7.3 -0.9 China (SSE Index) -0.5 0.5 South Africa (JSE Index) -2.8 5.4 -12 -8 -4 0 48 Per cent Q4:2024 Q1:2025 decnavdA tekram gnigremE seimonoce seimonoceChapter V External Environment performing well in Q1:2025, supported by higher broadly hardened between October 2024-March odds of rate cut by the BoE. The Japanese market 2025. The German 10-year yields also firmed up outperformed the US market in Q4:2024 as yen since Q4:2024 and even more so in March after the weakness towards the end of 2024 bolstered the fiscal stimulus announcement. The 10-year Japanese Government bond yield firmed up by 63 bps (as on earnings outlook for large-cap exporters, but retreated March 31, 2025) since October, driven by the BoJ’s in 2025 as policy normalisation by the BoJ led to policy normalization, including its stance on further appreciation of the yen. Barring China, EME equities rate hikes contingent on its economic outlook (Chart corrected in Q4:2024, tracking global cues and trade V.9a). During October 2024-March 2025, bond yields policy uncertainty (Chart V.7b). In 2025 so far, EME in several EMEs exhibited an upward movement, equity markets exhibited mixed trends as they gained driven by domestic fiscal conditions and global ground supported by waning currency depreciation factors (Chart V.9b). In contrast, bond yields in China pressures but declined following global cues amidst eased amidst expectations of further monetary policy increased uncertainty and idiosyncratic factors. easing, while India’s bond yield remained relatively Sovereign bond yields across most major AEs stable during this period with a softening bias. hardened since Q4:2024 in response to expectations In the currency market, the US dollar appreciated by of a firmer future path of interest rates amidst sticky 9.1 per cent between October 2024 and its peak on inflation and rising economic policy uncertainty. In January 13, 2025 – the highest level since November the US, bond yields hardened in Q4:2024 with the 10- 10, 2022 – driven by several factors arising from the year treasury yield rising by 79 bps due to a revision in policies of the new US administration. Investors the dot plot projection to 50 bps rate cut by the end of swiftly adjusted their portfolios in anticipation of the 2025 as against 100 bps earlier. In Q1:2025, however, yields softened, driven by fears of growth slowdown, change in trade and tariff policies, as the inflationary market corrections and shifting perceptions of policy impact of tariffs could prompt the US Fed to adopt rates and fiscal deficit. The UK 10-year bond yields a more cautious stance on rate cuts. At the same 110033 tnec reP Chart V.9: 10-Year Sovereign Bond Yields a: Select AEs b: Select EMEs 5 4 3 2 1 0 US UK Japan Germany Source: Bloomberg. 42-naJ-60 42-naJ-13 42-beF-52 42-raM-12 42-rpA-51 42-yaM-01 42-nuJ-40 42-nuJ-92 42-luJ-42 42-guA-81 42-peS-21 42-tcO-70 42-voN-10 42-voN-62 42-ceD-12 52-naJ-51 52-beF-90 52-raM-60 52-raM-13 Brazil India China South Africa tnec reP 14 12 10 8 6 4 2 0 42-naJ-60 42-naJ-13 42-beF-52 42-raM-12 42-rpA-51 42-yaM-01 42-nuJ-40 42-nuJ-92 42-luJ-42 42-guA-81 42-peS-21 42-tcO-70 42-voN-10 42-voN-62 42-ceD-12 52-naJ-51 52-beF-90 52-raM-60 52-raM-13Monetary Policy Report April 2025 time, heightened trade tensions clouded the global V.5 Conclusion economic growth outlook, and anticipated stricter Global growth faces considerable headwinds due to immigration policies raised inflation concerns, all intensification of protectionist tariffs and heightened leading to portfolio rebalancing in favour of US assets. policy uncertainty. The sweeping tariff announcement Since mid-January, however, the dollar has retreated by the US and ensuing retaliation by other countries from its multi-year high, amidst high frequency risk escalating into a full-blown trade war, potentially indicators signalling a lacklustre growth momentum, disrupting the existing global supply chains. These elevated policy uncertainty and non-realisation supply chain disruptions may further hinder the of other economic policies that had previously stalling disinflation process, thus impeding the process fuelled appreciation pressures (Chart V.10a). These of monetary policy easing. EMEs face considerable movements were mirrored in the EME currencies, downside risks including burgeoning capital outflows, though the upswings were capped due to capital increasing risk premium and deepening external outflows (Chart V.10b). The MSCI Emerging Market vulnerabilities. Besides, the recent financial market Currency Index depreciated sharply in Q4:2024 (3.6 rout could just be a preview, showcasing the cascading per cent) but rose by 1.7 per cent in Q1:2025. effects of changing trade policies. 104 )001=3202-dne( xednI Chart V.10: Currency Movements and Capital Flows b: Portfolio Flows to EMEs Sources: Bloomberg; Institute of I nternational Finance (IIF); and RBI Staff Estimates. noillib $SU a: Currency Indices 108 106 104 102 100 98 42-naJ-60 42-naJ-13 42-beF-52 42-raM-12 42-rpA-51 42-yaM-01 42-nuJ-40 42-nuJ-92 42-luJ-42 42-guA-81 42-peS-21 42-tcO-70 42-voN-10 42-voN-62 42-ceD-12 52-naJ-51 52-beF-90 52-raM-60 52-raM-13 12 6 0 -6 -12 -18 -24 MSCI EME Currency Index US Dollar Index Debt Equity Total 42-naJ-3 42-naJ-82 42-beF-22 42-raM-81 42-rpA-21 42-yaM-7 42-nuJ-1 42-nuJ-62 42-luJ-12 42-guA-51 42-peS-9 42-tcO-4 42-tcO-92 42-voN-32 42-ceD-81 52-naJ-21 52-beF-6 52-raM-3 52-raM-82