Monetary and Financial Sector Developments: The Cart & The Horse | Economic Survey & Government Reports - UPSC PDF Download

 Page 1


35
MONETARY AND FINANCIAL 
SECTOR DEVELOPMENTS: 
THE CART AND THE HORSE
India’s monetary and financial sectors have performed well in the first nine 
months of FY25. Bank credit has grown at a steady rate in the current financial 
year, with credit growth converging towards deposit growth. There has been 
a consistent improvement in the profitability of scheduled commercial banks 
(SCBs) as reflected in a fall in gross non-performing assets (GNPAs) accompanied 
by a rise in the capital-to-risk weighted asset ratio (CRAR). The government 
has also achieved significant progress in financial inclusion, with the Financial 
Inclusion Index of the Reserve Bank of India (RBI) increasing from 53.9 in March 
2021 to 64.2 at the end of March 2024. Rural Financial Institutions (RFIs) have 
been an important player in facilitating India’s financial inclusion journey. 
Development Financial Institutions (DFIs) have contributed significantly to the 
country’s economic progress by financing infrastructure development projects. 
The capital markets have demonstrated strong performance, driving capital 
formation in the real economy, increasing the financialisation of domestic 
savings, and supporting wealth creation. As of December 2024, the Indian 
stock market has recorded new highs, consistently outperforming its emerging 
market peers despite geopolitical uncertainties and election-driven market 
volatility challenges. Meanwhile, the insurance and pension sectors continue to 
perform with the vision of achieving universal coverage and strengthening the 
financial ecosystem further. 
The financial sector is currently undergoing a transformative period marked by 
several emerging trends. Notably, there is an increase in the share of consumer 
credit in overall credit extended by banks and a rise in non-bank financing 
options. Additionally, equity-based financing has gained popularity, with 
the number of initial public offerings (IPOs) increasing sixfold between FY13 
and FY24. While these developments herald a new era for the financial sector, 
they also introduce potential risks from a regulatory standpoint. The rise in 
consumer debt, the expansion of unsecured lending, and the growing number of 
young investors underscore the need for balancing growth and stability. Such 
regulation should encourage financial sector growth while ensuring stability 
and resilience.
Page 2


35
MONETARY AND FINANCIAL 
SECTOR DEVELOPMENTS: 
THE CART AND THE HORSE
India’s monetary and financial sectors have performed well in the first nine 
months of FY25. Bank credit has grown at a steady rate in the current financial 
year, with credit growth converging towards deposit growth. There has been 
a consistent improvement in the profitability of scheduled commercial banks 
(SCBs) as reflected in a fall in gross non-performing assets (GNPAs) accompanied 
by a rise in the capital-to-risk weighted asset ratio (CRAR). The government 
has also achieved significant progress in financial inclusion, with the Financial 
Inclusion Index of the Reserve Bank of India (RBI) increasing from 53.9 in March 
2021 to 64.2 at the end of March 2024. Rural Financial Institutions (RFIs) have 
been an important player in facilitating India’s financial inclusion journey. 
Development Financial Institutions (DFIs) have contributed significantly to the 
country’s economic progress by financing infrastructure development projects. 
The capital markets have demonstrated strong performance, driving capital 
formation in the real economy, increasing the financialisation of domestic 
savings, and supporting wealth creation. As of December 2024, the Indian 
stock market has recorded new highs, consistently outperforming its emerging 
market peers despite geopolitical uncertainties and election-driven market 
volatility challenges. Meanwhile, the insurance and pension sectors continue to 
perform with the vision of achieving universal coverage and strengthening the 
financial ecosystem further. 
The financial sector is currently undergoing a transformative period marked by 
several emerging trends. Notably, there is an increase in the share of consumer 
credit in overall credit extended by banks and a rise in non-bank financing 
options. Additionally, equity-based financing has gained popularity, with 
the number of initial public offerings (IPOs) increasing sixfold between FY13 
and FY24. While these developments herald a new era for the financial sector, 
they also introduce potential risks from a regulatory standpoint. The rise in 
consumer debt, the expansion of unsecured lending, and the growing number of 
young investors underscore the need for balancing growth and stability. Such 
regulation should encourage financial sector growth while ensuring stability 
and resilience.
Economic Survey 2024-25
36
INTRODUCTION
2.1 Financial institutions play a pivotal role in shaping a country's economic growth 
trajectory by facilitating savings, investments, and credit for economic activities. The 
prevailing monetary policies influence the interplay between financial intermediation 
and economic growth. This chapter examines the key trends and policy changes 
in monetary policy and the financial intermediation ecosystem in India. These 
developments are shaped by evolving domestic and global factors, including inflation 
trends, economic activity projections, and interest rate movements in major economies 
like the US, EU, and Japan.  
2.2 The chapter is structured into two parts. The first part of the chapter explores 
the evolving monetary policy and key indicators such as Reserve Money (M0), Broad 
Money (M3) and Money Multiplier (MM), among others. The second part focuses 
on the various developments in the financial sector. It begins with an analysis of the 
banking sector's performance and credit availability, including the contributions of 
RFIs and DFIs to economic growth. The next section under the discussion on ‘financial 
sector developments’ examines capital market trends, particularly the rise in investor 
participation in the equity segment. Subsequent sections cover developments in 
the insurance and pension sectors, followed by an overview of the role of financial 
sector regulators in maintaining financial stability. The chapter also discusses the 
government’s mechanism for addressing cybersecurity in the financial sector and the 
role of the Financial Stability and Development Council (FSDC). It concludes with a 
financial sector outlook, highlighting key challenges for the future.
MONETARY DEVELOPMENTS
2.3 The primary objective of monetary policy is to maintain price stability while also 
considering the goal of economic growth, as stable prices are essential for sustainable 
growth. The RBI employs various policy instruments, such as manoeuvring the interest 
rates, conducting open market operations (OMO), altering the cash reserve ratio (CRR) 
and statutory liquidity ratio (SLR), etc, to achieve this stability.
2.4 During the first nine months of FY25 (April 2024-December 2024), the Monetary 
Policy Committee (MPC) of the RBI, in its various meetings, decided to keep the policy 
repo rate unchanged at 6.5 per cent. Until its August 2024 meeting, the committee 
retained its stance on the ‘withdrawal of accommodation’ to ensure inflation aligns with 
the target while supporting growth. Considering the prevailing and expected inflation-
growth dynamics, the committee, in its October 2024 meeting, decided to change the 
policy stance from the ‘withdrawal of accommodation’ to ‘neutral’. In its December 
2024 meeting, the MPC announced a cut in CRR to 4 per cent of the net demand and 
Page 3


35
MONETARY AND FINANCIAL 
SECTOR DEVELOPMENTS: 
THE CART AND THE HORSE
India’s monetary and financial sectors have performed well in the first nine 
months of FY25. Bank credit has grown at a steady rate in the current financial 
year, with credit growth converging towards deposit growth. There has been 
a consistent improvement in the profitability of scheduled commercial banks 
(SCBs) as reflected in a fall in gross non-performing assets (GNPAs) accompanied 
by a rise in the capital-to-risk weighted asset ratio (CRAR). The government 
has also achieved significant progress in financial inclusion, with the Financial 
Inclusion Index of the Reserve Bank of India (RBI) increasing from 53.9 in March 
2021 to 64.2 at the end of March 2024. Rural Financial Institutions (RFIs) have 
been an important player in facilitating India’s financial inclusion journey. 
Development Financial Institutions (DFIs) have contributed significantly to the 
country’s economic progress by financing infrastructure development projects. 
The capital markets have demonstrated strong performance, driving capital 
formation in the real economy, increasing the financialisation of domestic 
savings, and supporting wealth creation. As of December 2024, the Indian 
stock market has recorded new highs, consistently outperforming its emerging 
market peers despite geopolitical uncertainties and election-driven market 
volatility challenges. Meanwhile, the insurance and pension sectors continue to 
perform with the vision of achieving universal coverage and strengthening the 
financial ecosystem further. 
The financial sector is currently undergoing a transformative period marked by 
several emerging trends. Notably, there is an increase in the share of consumer 
credit in overall credit extended by banks and a rise in non-bank financing 
options. Additionally, equity-based financing has gained popularity, with 
the number of initial public offerings (IPOs) increasing sixfold between FY13 
and FY24. While these developments herald a new era for the financial sector, 
they also introduce potential risks from a regulatory standpoint. The rise in 
consumer debt, the expansion of unsecured lending, and the growing number of 
young investors underscore the need for balancing growth and stability. Such 
regulation should encourage financial sector growth while ensuring stability 
and resilience.
Economic Survey 2024-25
36
INTRODUCTION
2.1 Financial institutions play a pivotal role in shaping a country's economic growth 
trajectory by facilitating savings, investments, and credit for economic activities. The 
prevailing monetary policies influence the interplay between financial intermediation 
and economic growth. This chapter examines the key trends and policy changes 
in monetary policy and the financial intermediation ecosystem in India. These 
developments are shaped by evolving domestic and global factors, including inflation 
trends, economic activity projections, and interest rate movements in major economies 
like the US, EU, and Japan.  
2.2 The chapter is structured into two parts. The first part of the chapter explores 
the evolving monetary policy and key indicators such as Reserve Money (M0), Broad 
Money (M3) and Money Multiplier (MM), among others. The second part focuses 
on the various developments in the financial sector. It begins with an analysis of the 
banking sector's performance and credit availability, including the contributions of 
RFIs and DFIs to economic growth. The next section under the discussion on ‘financial 
sector developments’ examines capital market trends, particularly the rise in investor 
participation in the equity segment. Subsequent sections cover developments in 
the insurance and pension sectors, followed by an overview of the role of financial 
sector regulators in maintaining financial stability. The chapter also discusses the 
government’s mechanism for addressing cybersecurity in the financial sector and the 
role of the Financial Stability and Development Council (FSDC). It concludes with a 
financial sector outlook, highlighting key challenges for the future.
MONETARY DEVELOPMENTS
2.3 The primary objective of monetary policy is to maintain price stability while also 
considering the goal of economic growth, as stable prices are essential for sustainable 
growth. The RBI employs various policy instruments, such as manoeuvring the interest 
rates, conducting open market operations (OMO), altering the cash reserve ratio (CRR) 
and statutory liquidity ratio (SLR), etc, to achieve this stability.
2.4 During the first nine months of FY25 (April 2024-December 2024), the Monetary 
Policy Committee (MPC) of the RBI, in its various meetings, decided to keep the policy 
repo rate unchanged at 6.5 per cent. Until its August 2024 meeting, the committee 
retained its stance on the ‘withdrawal of accommodation’ to ensure inflation aligns with 
the target while supporting growth. Considering the prevailing and expected inflation-
growth dynamics, the committee, in its October 2024 meeting, decided to change the 
policy stance from the ‘withdrawal of accommodation’ to ‘neutral’. In its December 
2024 meeting, the MPC announced a cut in CRR to 4 per cent of the net demand and 
Page 4


35
MONETARY AND FINANCIAL 
SECTOR DEVELOPMENTS: 
THE CART AND THE HORSE
India’s monetary and financial sectors have performed well in the first nine 
months of FY25. Bank credit has grown at a steady rate in the current financial 
year, with credit growth converging towards deposit growth. There has been 
a consistent improvement in the profitability of scheduled commercial banks 
(SCBs) as reflected in a fall in gross non-performing assets (GNPAs) accompanied 
by a rise in the capital-to-risk weighted asset ratio (CRAR). The government 
has also achieved significant progress in financial inclusion, with the Financial 
Inclusion Index of the Reserve Bank of India (RBI) increasing from 53.9 in March 
2021 to 64.2 at the end of March 2024. Rural Financial Institutions (RFIs) have 
been an important player in facilitating India’s financial inclusion journey. 
Development Financial Institutions (DFIs) have contributed significantly to the 
country’s economic progress by financing infrastructure development projects. 
The capital markets have demonstrated strong performance, driving capital 
formation in the real economy, increasing the financialisation of domestic 
savings, and supporting wealth creation. As of December 2024, the Indian 
stock market has recorded new highs, consistently outperforming its emerging 
market peers despite geopolitical uncertainties and election-driven market 
volatility challenges. Meanwhile, the insurance and pension sectors continue to 
perform with the vision of achieving universal coverage and strengthening the 
financial ecosystem further. 
The financial sector is currently undergoing a transformative period marked by 
several emerging trends. Notably, there is an increase in the share of consumer 
credit in overall credit extended by banks and a rise in non-bank financing 
options. Additionally, equity-based financing has gained popularity, with 
the number of initial public offerings (IPOs) increasing sixfold between FY13 
and FY24. While these developments herald a new era for the financial sector, 
they also introduce potential risks from a regulatory standpoint. The rise in 
consumer debt, the expansion of unsecured lending, and the growing number of 
young investors underscore the need for balancing growth and stability. Such 
regulation should encourage financial sector growth while ensuring stability 
and resilience.
Economic Survey 2024-25
36
INTRODUCTION
2.1 Financial institutions play a pivotal role in shaping a country's economic growth 
trajectory by facilitating savings, investments, and credit for economic activities. The 
prevailing monetary policies influence the interplay between financial intermediation 
and economic growth. This chapter examines the key trends and policy changes 
in monetary policy and the financial intermediation ecosystem in India. These 
developments are shaped by evolving domestic and global factors, including inflation 
trends, economic activity projections, and interest rate movements in major economies 
like the US, EU, and Japan.  
2.2 The chapter is structured into two parts. The first part of the chapter explores 
the evolving monetary policy and key indicators such as Reserve Money (M0), Broad 
Money (M3) and Money Multiplier (MM), among others. The second part focuses 
on the various developments in the financial sector. It begins with an analysis of the 
banking sector's performance and credit availability, including the contributions of 
RFIs and DFIs to economic growth. The next section under the discussion on ‘financial 
sector developments’ examines capital market trends, particularly the rise in investor 
participation in the equity segment. Subsequent sections cover developments in 
the insurance and pension sectors, followed by an overview of the role of financial 
sector regulators in maintaining financial stability. The chapter also discusses the 
government’s mechanism for addressing cybersecurity in the financial sector and the 
role of the Financial Stability and Development Council (FSDC). It concludes with a 
financial sector outlook, highlighting key challenges for the future.
MONETARY DEVELOPMENTS
2.3 The primary objective of monetary policy is to maintain price stability while also 
considering the goal of economic growth, as stable prices are essential for sustainable 
growth. The RBI employs various policy instruments, such as manoeuvring the interest 
rates, conducting open market operations (OMO), altering the cash reserve ratio (CRR) 
and statutory liquidity ratio (SLR), etc, to achieve this stability.
2.4 During the first nine months of FY25 (April 2024-December 2024), the Monetary 
Policy Committee (MPC) of the RBI, in its various meetings, decided to keep the policy 
repo rate unchanged at 6.5 per cent. Until its August 2024 meeting, the committee 
retained its stance on the ‘withdrawal of accommodation’ to ensure inflation aligns with 
the target while supporting growth. Considering the prevailing and expected inflation-
growth dynamics, the committee, in its October 2024 meeting, decided to change the 
policy stance from the ‘withdrawal of accommodation’ to ‘neutral’. In its December 
2024 meeting, the MPC announced a cut in CRR to 4 per cent of the net demand and 
Page 5


35
MONETARY AND FINANCIAL 
SECTOR DEVELOPMENTS: 
THE CART AND THE HORSE
India’s monetary and financial sectors have performed well in the first nine 
months of FY25. Bank credit has grown at a steady rate in the current financial 
year, with credit growth converging towards deposit growth. There has been 
a consistent improvement in the profitability of scheduled commercial banks 
(SCBs) as reflected in a fall in gross non-performing assets (GNPAs) accompanied 
by a rise in the capital-to-risk weighted asset ratio (CRAR). The government 
has also achieved significant progress in financial inclusion, with the Financial 
Inclusion Index of the Reserve Bank of India (RBI) increasing from 53.9 in March 
2021 to 64.2 at the end of March 2024. Rural Financial Institutions (RFIs) have 
been an important player in facilitating India’s financial inclusion journey. 
Development Financial Institutions (DFIs) have contributed significantly to the 
country’s economic progress by financing infrastructure development projects. 
The capital markets have demonstrated strong performance, driving capital 
formation in the real economy, increasing the financialisation of domestic 
savings, and supporting wealth creation. As of December 2024, the Indian 
stock market has recorded new highs, consistently outperforming its emerging 
market peers despite geopolitical uncertainties and election-driven market 
volatility challenges. Meanwhile, the insurance and pension sectors continue to 
perform with the vision of achieving universal coverage and strengthening the 
financial ecosystem further. 
The financial sector is currently undergoing a transformative period marked by 
several emerging trends. Notably, there is an increase in the share of consumer 
credit in overall credit extended by banks and a rise in non-bank financing 
options. Additionally, equity-based financing has gained popularity, with 
the number of initial public offerings (IPOs) increasing sixfold between FY13 
and FY24. While these developments herald a new era for the financial sector, 
they also introduce potential risks from a regulatory standpoint. The rise in 
consumer debt, the expansion of unsecured lending, and the growing number of 
young investors underscore the need for balancing growth and stability. Such 
regulation should encourage financial sector growth while ensuring stability 
and resilience.
Economic Survey 2024-25
36
INTRODUCTION
2.1 Financial institutions play a pivotal role in shaping a country's economic growth 
trajectory by facilitating savings, investments, and credit for economic activities. The 
prevailing monetary policies influence the interplay between financial intermediation 
and economic growth. This chapter examines the key trends and policy changes 
in monetary policy and the financial intermediation ecosystem in India. These 
developments are shaped by evolving domestic and global factors, including inflation 
trends, economic activity projections, and interest rate movements in major economies 
like the US, EU, and Japan.  
2.2 The chapter is structured into two parts. The first part of the chapter explores 
the evolving monetary policy and key indicators such as Reserve Money (M0), Broad 
Money (M3) and Money Multiplier (MM), among others. The second part focuses 
on the various developments in the financial sector. It begins with an analysis of the 
banking sector's performance and credit availability, including the contributions of 
RFIs and DFIs to economic growth. The next section under the discussion on ‘financial 
sector developments’ examines capital market trends, particularly the rise in investor 
participation in the equity segment. Subsequent sections cover developments in 
the insurance and pension sectors, followed by an overview of the role of financial 
sector regulators in maintaining financial stability. The chapter also discusses the 
government’s mechanism for addressing cybersecurity in the financial sector and the 
role of the Financial Stability and Development Council (FSDC). It concludes with a 
financial sector outlook, highlighting key challenges for the future.
MONETARY DEVELOPMENTS
2.3 The primary objective of monetary policy is to maintain price stability while also 
considering the goal of economic growth, as stable prices are essential for sustainable 
growth. The RBI employs various policy instruments, such as manoeuvring the interest 
rates, conducting open market operations (OMO), altering the cash reserve ratio (CRR) 
and statutory liquidity ratio (SLR), etc, to achieve this stability.
2.4 During the first nine months of FY25 (April 2024-December 2024), the Monetary 
Policy Committee (MPC) of the RBI, in its various meetings, decided to keep the policy 
repo rate unchanged at 6.5 per cent. Until its August 2024 meeting, the committee 
retained its stance on the ‘withdrawal of accommodation’ to ensure inflation aligns with 
the target while supporting growth. Considering the prevailing and expected inflation-
growth dynamics, the committee, in its October 2024 meeting, decided to change the 
policy stance from the ‘withdrawal of accommodation’ to ‘neutral’. In its December 
2024 meeting, the MPC announced a cut in CRR to 4 per cent of the net demand and