The Reserve Bank of India-led (RBI) Monetary Policy Committee (MPC) announced its decision today on December 6, 2024, wherein the policy repo rate was maintained at 6.50% and the stance was kept “neutral”. In addition to this, the MPC also announced some developmental and regulatory policy measures pertaining to liquidity and financial markets, regulation, communication, financial inclusion, payment systems and fintech.
Liquidity and financial markets
The first measure by the Reserve Bank of India (RBI) will reduce banks' cash reserve ratio (CRR) by 50 basis points (0.50%), implemented in two 25 basis point (0.25%) steps on December 14 and December 28, 2024. This adjustment will return the CRR to 4% of net demand and time liabilities (NDTL), effectively reversing the policy tightening measures implemented since April 2022. The reduction is expected to inject approximately ₹1.16 lakh crore of liquidity into the banking system.
Through the second measure, the central bank has increased interest rate ceilings on Foreign Currency Non-Resident Bank (FCNR(B)) deposits to attract more capital inflows. Effective December 6, 2024, banks can now offer higher rates on foreign currency deposits, with a ceiling of overnight Alternative Reference Rate plus 400 basis points (4%) for deposits between one and three years, and a ceiling of overnight ARR plus 500 basis points (5%) for deposits between three and five years. This rate enhancement will be available until March 31, 2025, aimed at boosting foreign currency deposit mobilization and providing more attractive investment options for non-resident investors.
The third measure pertains to the Clearing Corporation of India Limited’s (CCIL) plans to expand its FX-Retail platform by integrating with Bharat Connect to improve foreign exchange accessibility for individuals and small businesses. Initially launching a pilot program for US Dollar purchases against the Rupee, the platform will allow users to register and transact through bank mobile apps and other payment system providers. This integration aims to enhance transparency and fairness in foreign exchange pricing, offering an additional channel for transactions while maintaining the existing direct access option. The initiative represents a significant step in making currency exchange more convenient and accessible for retail users and small enterprises.
The fourth measure talks about introducing the Secured Overnight Rupee Rate (SORR), a new financial benchmark based on secured money markets. This development follows recommendations from the Committee on the MIBOR Benchmark, chaired by Ramanathan Subramanian, which reviewed existing Rupee interest rate benchmarks. The proposed SORR will be developed using basket repo and Tri-Party Repo (TREP) data, aiming to improve the credibility of interest rate benchmarks. Financial Benchmarks India Limited (FBIL) has been tasked with implementing this new benchmark, reflecting the evolving dynamics of the financial market. Other recommendations from the committee are currently under review, signaling a comprehensive approach to enhancing India's financial benchmark infrastructure.
Regulations
The central bank is launching 'Connect 2 Regulate', an innovative initiative designed to enhance regulatory development through stakeholder engagement. As part of its ongoing RBI@90 commemorative events, the program will create a dedicated website section where stakeholders can contribute ideas, case studies, and concept notes on regulatory topics. This approach reflects the RBI's commitment to a consultative and transparent regulatory process, inviting input from various participants to shape future financial regulations. The initiative aims to foster more collaborative and responsive regulatory frameworks by directly incorporating insights from industry experts, financial professionals, and other interested parties.
Communication
The Reserve Bank of India is expanding its communication strategy by introducing a podcast platform to enhance public outreach and information dissemination. Building on its existing efforts to improve transparency and engage with a broader audience through various communication channels, the RBI aims to leverage podcasts as a modern, accessible medium. This initiative will provide an additional avenue for explaining monetary policies, financial insights, and important economic decisions to the general public in an easily consumable format.
Financial inclusion
The Reserve Bank of India is increasing the collateral-free agriculture loan limit from ₹1.6 lakh to ₹2 lakh, reflecting the impact of inflation and rising agricultural input costs. This enhancement aims to expand financial support for small and marginal farmers, facilitating greater access to formal credit systems. The decision builds on previous limit increases, with the original threshold of ₹1 lakh set in 2010 and subsequently raised to ₹1.6 lakh in 2019, demonstrating the RBI's ongoing commitment to supporting agricultural communities.
Payment systems
The Reserve Bank of India plans to expand the Unified Payments Interface (UPI) by allowing Small Finance Banks (SFBs) to offer pre-sanctioned credit lines through the platform. Building on the September 2023 initiative that initially permitted scheduled commercial banks to link credit lines to UPI, this extension aims to enhance financial inclusion. The move leverages SFBs' high-tech, low-cost model to provide low-ticket, short-term credit to 'new-to-credit' customers, potentially broadening access to financial services for underserved populations. Detailed guidelines for implementation will be issued soon.
Fintech
The first measure for fintech is regarding the Reserve Bank of India establishing a Committee on the Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the financial sector. Recognizing the transformative potential of AI and machine learning technologies, the initiative aims to address both the significant benefits and emerging risks associated with technological adoption. The committee will comprise experts from various disciplines and will develop a comprehensive, adaptable framework to mitigate challenges such as algorithmic bias, decision explainability, and data privacy. This proactive approach seeks to harness AI's potential while ensuring responsible and ethical implementation in financial services.
As the final measure, the Reserve Bank of India (RBI), in collaboration with banks and other stakeholders, is actively working to combat digital fraud in the financial sector. Key measures include enhanced cybersecurity, fraud prevention protocols, and improved transaction monitoring systems. Among the common methods used by fraudsters is the exploitation of mule accounts to transfer illicit funds.
To address this, the RBI has launched a hackathon themed "Zero Financial Frauds," focusing on innovative solutions for detecting and preventing mule accounts. A significant initiative under this program is MuleHunter.AI, an AI/ML-powered model piloted by the Reserve Bank Innovation Hub (RBIH). This tool efficiently identifies mule bank accounts and has shown promising results during trials with two major public sector banks.
The RBI encourages further collaboration between banks and RBIH to refine MuleHunter.AI and strengthen the fight against financial frauds involving mule accounts.
Conclusion
These developmental and regulatory policy measures by the MPC pertaining to liquidity and financial markets, regulation, communication, financial inclusion, payment systems and fintech aim to improve the functioning and management of the Indian economy.
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