MONETARY AND FINANCIAL SECTOR DEVELOPMENTS: THE CART AND THE HORSE
Chapter 2 of the Economic Survey 2024-25 highlights key monetary and financial sector developments in India. The chapter underscores the role of monetary policy and financial institutions in maintaining macroeconomic stability and supporting growth. It also explores sectoral performance, innovations, and regulatory measures to strengthen financial markets. Despite global uncertainties, India’s financial system has shown resilience through sound fiscal and monetary policies.
The survey focuses on crucial aspects such as liquidity management, financial inclusion, the role of development institutions, capital market performance, technological integration, and insolvency reforms.
Data at a Glance
Category | Data | Comments |
Monetary Policy Objectives | Repo rate maintained at 6.5% | Shifted to a neutral stance from tightening policies. |
Cash Reserve Ratio (CRR) | Reduced to 4% | Released ₹1.16 lakh crore into the banking system. |
Monetary Base (M0) | Grew by 3.6% | Reflects stable monetary expansion. |
Broad Money (M3) | Increased by 9.3% | Driven by deposits and improved credit access. |
Money Multiplier (MM) | Rose to 5.7 | Indicates better monetary transmission and financial inclusion. |
Gross Non-Performing Assets (GNPAs) | Declined to 2.6% | Lowest level in over a decade for SCBs. |
Capital-to-Risk Weighted Asset Ratio | Increased to 16.7% | Stronger capital buffers across banks. |
Return on Assets (RoA) | Improved | Reflects increased profitability in banking operations. |
Credit Growth | Moderated to 7.7% | Influenced by elevated lending rates and cautious borrowing. |
Agricultural Credit | Grew by 5.1% | Supported by favourable monsoons and rural schemes. |
MSME Credit | Increased by 13% | Boosted by government schemes and loan guarantees. |
NaBFID Loans | ₹1.3 lakh crore sanctioned | Focused on infrastructure financing. |
DEMAT accounts | 33% YoY increase to 18.5 crore | 11.5 crore unique investors by December 2024 |
Insurance Sector Premiums | Significant growth | Driven by government schemes and increased awareness. |
National Pension System (NPS) | Expanded participation | Supported by regulatory measures for long-term stability. |
IPO Mobilization | ₹1.53 lakh crore raised | Reflects strong corporate growth and investor confidence. |
Corporate Bond Issuance | ₹7.3 lakh crore | Market depth still below global benchmarks. |
Monetary Developments
1. Monetary Policy Objectives
- The primary goal of monetary policy is to achieve price stability while fostering economic growth. Policy measures aim to ensure a balance between growth, inflation control, and liquidity.
- The Monetary Policy Committee (MPC) maintained the repo rate at 6.5% in FY25, signifying a shift to a neutral stance from earlier tightening policies.
- A key step involved reducing the Cash Reserve Ratio (CRR) to 4%, releasing ₹1.16 lakh crore into the banking system to ease liquidity constraints.
2. Money Supply and Liquidity Trends
- The monetary base (M0) grew by 3.6% as of January 2025, reflecting stable expansion compared to previous periods.
- Broad money (M3) rose by 9.3%, driven by increased deposits and improved access to credit from commercial banks.
- The money multiplier (MM) increased to 5.7, underscoring better monetary transmission and greater financial participation, facilitated by ongoing financial inclusion initiatives.
3. Inflation Management and Monetary Instruments
- Inflation rates moderated due to a combination of policy instruments, including open market operations (OMO), adjustments in CRR, and the Statutory Liquidity Ratio (SLR).
- Improved supply chains and policy-driven liquidity enhancements helped stabilize price levels despite global inflationary pressures.
Financial Sector Performance
1. Banking Sector Developments
- Scheduled Commercial Banks (SCBs) experienced significant improvements in asset quality, with gross non-performing assets (GNPAs) declining to 2.6% in September 2024, the lowest in over a decade.
- The Capital-to-Risk Weighted Asset Ratio (CRAR) increased to 16.7%, reflecting stronger capital positions across banks.
- Profitability metrics such as Return on Assets (RoA) and Return on Equity (RoE) rose, although minor declines in net interest margins were noted due to increased competition and tightening credit spreads.
2. Credit Availability and Lending Trends
- Deposit growth stood at 1%, while overall credit growth moderated to 7.7%, influenced by elevated lending rates and cautious borrowing behaviour.
- Agricultural credit grew by 1%, supported by favourable monsoons and enhanced rural financing schemes.
- Credit to micro, small, and medium enterprises (MSMEs) increased by 13%, driven by targeted government schemes and loan guarantee programs.
- Commencement of a new credit up-cycle: India is now in a period of credit growth after a phase of slow or stagnant lending. Such a phase typically follows improvements in banking health, such as lower non-performing assets (NPAs), stronger capital buffers, and favourable monetary conditions. In India’s case, this trend includes:
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- Declining GNPAs (to 2.6%), indicating better asset quality.
- Improved profitability and capital strength among banks.
- Increased demand for loans in key sectors like infrastructure and MSMEs, supported by policy reforms.
- Regulatory and monetary policy easing (e.g., reduction in CRR), enabling banks to lend more effectively.
- In India lending by the bank is lower in comparison to the Private lending. This means that Indians are forced to take money from informal sector at high rates. The cross-country comparison of bank credit to the private non-financial sector (as a percentage of GDP) highlights how much bank lending supports private economic activity in different economies.
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- India: Credit to the private non-financial sector is approximately 57% of GDP, indicating moderate reliance on bank financing.
- Developed Economies: Countries like the United States and United Kingdom typically have higher bank credit levels exceeding 100% of GDP, supported by advanced financial markets.
- Emerging Economies: Countries such as China have much higher ratios (around 160%), driven by significant bank-financed investments in infrastructure and industry.
- Policy Implications: India’s moderate ratio signals potential for expanding private sector credit, emphasizing the importance of financial sector reforms to boost lending capacity.
This means India needs development financial institutions (DFIs) to fulfil its needs of infrastructure financing.
3. Role of Development Financial Institutions (DFIs)
- NaBFID (National Bank for Financing Infrastructure and Development) sanctioned ₹1.3 lakh crore for infrastructure projects, underscoring the importance of DFIs in long-term capital formation.
- Government efforts to recapitalize Regional Rural Banks (RRBs) have boosted their credit-deposit ratios, expanding rural access to finance.
4. Technological Integration and Artificial Intelligence (AI)
- Banks increasingly adopt AI-driven tools to enhance customer service, fraud prevention, and risk assessment. These technologies improve operational efficiency but pose regulatory challenges around transparency and data protection.
- AI adoption has also led to the automation of routine processes, reducing costs for financial institutions.
5. Insurance and Pension Sector Developments
- The insurance sector witnessed substantial growth in premium collections, fueled by increased awareness and government schemes such as PM Jeevan Jyoti Bima Yojana.
- The National Pension System (NPS) and Atal Pension Yojana (APY) saw expanded participation, with regulatory measures enhancing long-term financial stability.
- Insurance penetration and pension coverage remain areas of focus, with reforms aimed at boosting participation and capital adequacy.
6. Capital Market Trends and Developments
The Indian stock market achieved record highs in 2024, with strong investor interest in equity and debt markets. India’s Market cap to GDP is at a all time high. Several countries. The ratio stands around 100% in 2024, reflecting strong equity market performance and corporate growth. This has risen from around 80% in 2020 during the pandemic.
- Developed Markets:
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- United States: 150-200%, driven by deep capital markets and tech-driven valuations.
- United Kingdom: Approximately 120%, benefiting from diversified industries and financial markets.
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- Emerging Markets:
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- China: 80-90%, affected by regulatory tightening and lower market participation.
- Brazil: Around 50%, reflecting smaller market capitalization relative to GDP.
Country | Dec-19 | Dec-20 | Dec-21 | Dec-22 | Dec-23 | Dec-24* |
India | 77 | 95 | 113 | 105 | 124 | 136 |
China | 60 | 79 | 80 | 65 | 61 | 65 |
Brazil | 65 | 68 | 50 | 42 | 44 | 37 |
Japan | 121 | 129 | 136 | 126 | 147 | 157 |
South Korea | 89 | 122 | 127 | 96 | 114 | 90 |
United Kingdom | 106 | 92 | 108 | 91 | 71 | 84 |
United States | 158 | 195 | 206 | 157 | 179 | 213 |
- IPO mobilization increased by 1%, raising ₹1.53 lakh crore between April and December 2024, reflecting robust corporate growth and investor confidence.
- Corporate bond issuance grew to ₹7.3 lakh crore, though market depth remains below global benchmarks.
- Despite volatility triggered by geopolitical tensions, the secondary market maintained positive momentum, reflecting improved investor sentiment and institutional participation.
7. Risks to the Indian Stock Market in 2025
- Risks include potential global economic slowdowns, interest rate hikes by major central banks, and geopolitical factors affecting capital flows.
- Regulatory measures to curb speculative trading and enhance market transparency have been introduced to mitigate risks.
- The number of DEMAT accounts rose by 33% YoY to 5 crore by December 2024, with 11.5 crore unique investors. Investor turnover in the equity cash segment reached 35.6%. Mutual fund participation also grew to 5.6 crore investors, driving a self-reinforcing cycle of higher market returns and increased participation.
8. Efficacy of Insolvency Law
- The Insolvency and Bankruptcy Code (IBC) has expedited the resolution of distressed assets but faces challenges due to delays in case proceedings at National Company Law Tribunals (NCLTs).
- Strengthening tribunal infrastructure and enhancing resolution timelines are key priorities for improving insolvency outcomes.
9. Financial Sector Regulators
- The Financial Stability and Development Council (FSDC) oversees systemic risk management, with a focus on consumer credit expansion and regulatory alignment.
- Coordinated efforts by regulators aim to maintain stability in the face of technological disruptions and rising financial interlinkages.
- The Financial Development Index (FDI) measures the efficiency, depth, and access of a country’s financial system, including institutions and markets. India has made notable progress, driven by financial inclusion initiatives and market reforms. India ranks 52nd globally on the FDI scale, reflecting moderate progress in financial infrastructure compared to advanced economies. This is due to:
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- Financial inclusion, driven by PM Jan Dhan Yojana.
- Robust growth in capital markets and mutual fund
Challenges:
- Low credit penetration in rural areas.
- Underdeveloped corporate bond market compared to global peers.
Policy Focus: Regulatory reforms aim to improve access to credit, deepen financial markets, and enhance investor protection.
Challenges and Future Outlook
1. Emerging Risks
- The rise in consumer debt, along with the proliferation of non-bank financing, could pose medium-term risks to financial stability.
- Market volatility driven by external shocks, inflationary pressures, and credit risks in the MSME sector remains a concern.
2. Strengthening Reforms and Positive Outlook
- Continued improvements in asset quality, financial inclusion, and access to credit provide a stable foundation for future growth.
- Policy reforms aimed at enhancing the efficiency of financial institutions and markets will be crucial for sustaining investor confidence.
Conclusion
India’s financial and monetary sectors have shown resilience and adaptability, backed by sound regulatory frameworks and policy measures. Improvements in banking, insurance, pensions, and capital markets highlight the effectiveness of recent reforms.
Going forward, the emphasis will remain on balancing economic growth with financial stability. Key priorities include strengthening insolvency resolution mechanisms, promoting innovation, expanding financial inclusion, and mitigating emerging risks through robust regulation.