Monetary and Financial Sector Developments: The Cart and the Horse (2024-25) | Indian Economy for UPSC CSE PDF Download

 Page 1


02
CHAPTER
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


02
CHAPTER
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


02
CHAPTER
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 
Monetary and Financial Sector Developments
37
time liabilities (NDTL) from 4.5 per cent. The decision is expected to infuse around 
?1.16 lakh crore liquidity in the banking system.
1
  
2.5 Examining the trend in various measures of money supply in the economy, viz., 
different aggregates that reflect varying degrees of liquidity, it is seen that the monetary 
base, viz. the most liquid form of money, M0, recorded a year-on-year (YoY) growth of 
3.6 per cent as of 3 January 2025, compared to 6.3 per cent a year ago. The growth in 
M3, excluding the impact of the merger of a non-bank with a bank (with effect from 1 
July 2023), was 9.3 per cent (YoY) as of 27 December 2024, compared to 11 per cent a 
year ago. Component-wise
2
, aggregate deposits were the most significant component 
and contributed most to the expansion of M3. Amongst sources
3
, bank credit to the 
commercial sector was a major contributor to the increase in M3. As of 27 December 
2024, MM
4
, i.e., the ratio of M3 to M0, stood at 5.7 against 5.5 a year ago. Adjusted for 
reverse repo amounts, analytically akin to banks’ deposits with the central bank, the 
adjusted MM was lower at 5.6 as of 27 December 2024. 
Chart II.1: Higher Money Multiplier as of December 2024, 
indicating higher liquidity in the market
 
4.3
4.6
4.9
5.2
5.5
5.8
22-04-22
22-05-22
22-06-22
22-07-22
22-08-22
22-09-22
22-10-22
22-11-22
22-12-22
22-01-23
22-02-23
22-03-23
22-04-23
22-05-23
22-06-23
22-07-23
22-08-23
22-09-23
22-10-23
22-11-23
22-12-23
22-01-24
22-02-24
22-03-24
22-04-24
22-05-24
22-06-24
22-07-24
22-08-24
22-09-24
22-10-24
22-11-24
22-12-24
Ratio
MM MM adjusted for Reverse Repo
Source: Money Stock: Components and Sources, Publications, Weekly Statistical Supplement, RBI Reserve 
Money: Components and Sources, Publications, Weekly Statistical Supplement, RBI
1 RBI press release dated 6 December 2024, ‘Maintenance of Cash Reserve Ratio (CRR), https://tinyurl.com/
pxkhxndd.
2  Components of Broad Money=Currency with the Public + Aggregate Deposits (Demand Deposits with Banks + 
Time Deposits with banks + ‘Other’ deposits with Reserve Bank).
3  Sources of Broad Money=Net Bank Credit to Government + Bank Credit to Commercial Sector + Net Foreign 
Exchange Assets of Banking Sector + Government's Currency Liabilities to the Public- Banking Sector's Net Non-
Monetary Liabilities).
4  The money multiplier measures the maximum amount of money that a banking system generates with each unit 
of central bank money.
Page 4


02
CHAPTER
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 
Monetary and Financial Sector Developments
37
time liabilities (NDTL) from 4.5 per cent. The decision is expected to infuse around 
?1.16 lakh crore liquidity in the banking system.
1
  
2.5 Examining the trend in various measures of money supply in the economy, viz., 
different aggregates that reflect varying degrees of liquidity, it is seen that the monetary 
base, viz. the most liquid form of money, M0, recorded a year-on-year (YoY) growth of 
3.6 per cent as of 3 January 2025, compared to 6.3 per cent a year ago. The growth in 
M3, excluding the impact of the merger of a non-bank with a bank (with effect from 1 
July 2023), was 9.3 per cent (YoY) as of 27 December 2024, compared to 11 per cent a 
year ago. Component-wise
2
, aggregate deposits were the most significant component 
and contributed most to the expansion of M3. Amongst sources
3
, bank credit to the 
commercial sector was a major contributor to the increase in M3. As of 27 December 
2024, MM
4
, i.e., the ratio of M3 to M0, stood at 5.7 against 5.5 a year ago. Adjusted for 
reverse repo amounts, analytically akin to banks’ deposits with the central bank, the 
adjusted MM was lower at 5.6 as of 27 December 2024. 
Chart II.1: Higher Money Multiplier as of December 2024, 
indicating higher liquidity in the market
 
4.3
4.6
4.9
5.2
5.5
5.8
22-04-22
22-05-22
22-06-22
22-07-22
22-08-22
22-09-22
22-10-22
22-11-22
22-12-22
22-01-23
22-02-23
22-03-23
22-04-23
22-05-23
22-06-23
22-07-23
22-08-23
22-09-23
22-10-23
22-11-23
22-12-23
22-01-24
22-02-24
22-03-24
22-04-24
22-05-24
22-06-24
22-07-24
22-08-24
22-09-24
22-10-24
22-11-24
22-12-24
Ratio
MM MM adjusted for Reverse Repo
Source: Money Stock: Components and Sources, Publications, Weekly Statistical Supplement, RBI Reserve 
Money: Components and Sources, Publications, Weekly Statistical Supplement, RBI
1 RBI press release dated 6 December 2024, ‘Maintenance of Cash Reserve Ratio (CRR), https://tinyurl.com/
pxkhxndd.
2  Components of Broad Money=Currency with the Public + Aggregate Deposits (Demand Deposits with Banks + 
Time Deposits with banks + ‘Other’ deposits with Reserve Bank).
3  Sources of Broad Money=Net Bank Credit to Government + Bank Credit to Commercial Sector + Net Foreign 
Exchange Assets of Banking Sector + Government's Currency Liabilities to the Public- Banking Sector's Net Non-
Monetary Liabilities).
4  The money multiplier measures the maximum amount of money that a banking system generates with each unit 
of central bank money.
Economic Survey 2024-25
38
2.6 A country’s MM is influenced by two main factors: - the amount of cash individuals 
(and businesses) hold and the reserves that banks maintain. When individuals keep 
more cash, the banking system cannot create money, resulting in a lower multiplier. In 
this case, cash in hand acts as a leakage from the banking system. Similarly, the reserves 
that banks hold with the central bank also count as a leakage, further decreasing the 
MM. In India’s case, banks hold a portion of their deposits as reserves with the RBI, 
known as CRR. 
2.7 A higher MM indicates that the banking system is generating a greater money 
supply from the money provided by the central bank. In India, recent efforts to promote 
financial inclusion have encouraged people to hold less cash in hand relative to their 
deposits, which partly explains the increase in the MM. Chart II.2 shows that MM has 
been on an upward trend over the years. It declined during the COVID-19 pandemic 
as increased economic uncertainty caused individuals to increase their cash holdings, 
resulting in a fall. However, after FY22, it has resumed its upward trajectory, reflecting 
enhanced liquidity generation in the economy. 
Chart II.2: Increase in Money Multiplier over the years
 
4.0
4.5
5.0
5.5
6.0
6.5
7.0
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
Money Multiplier
Source: Database on Indian Economy, RBI
FINANCIAL INTERMEDIATION 
2.8 Financial intermediaries are critical in implementing and transmitting monetary 
policy actions. Policy rates set by the MPC are transmitted to the real economy through 
financial intermediaries adjusting their lending and deposit rates. Similarly, the CRR 
and SLR requirements influence the lending capacity of the financial intermediaries. All 
these policy rates/ratios, in effect, have a bearing on the economic growth, price levels 
and financial stability of the economy.  The performance of financial intermediaries, 
such as banks, capital markets, insurance, pension sector, etc., is discussed in this 
chapter section. 
Page 5


02
CHAPTER
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 
Monetary and Financial Sector Developments
37
time liabilities (NDTL) from 4.5 per cent. The decision is expected to infuse around 
?1.16 lakh crore liquidity in the banking system.
1
  
2.5 Examining the trend in various measures of money supply in the economy, viz., 
different aggregates that reflect varying degrees of liquidity, it is seen that the monetary 
base, viz. the most liquid form of money, M0, recorded a year-on-year (YoY) growth of 
3.6 per cent as of 3 January 2025, compared to 6.3 per cent a year ago. The growth in 
M3, excluding the impact of the merger of a non-bank with a bank (with effect from 1 
July 2023), was 9.3 per cent (YoY) as of 27 December 2024, compared to 11 per cent a 
year ago. Component-wise
2
, aggregate deposits were the most significant component 
and contributed most to the expansion of M3. Amongst sources
3
, bank credit to the 
commercial sector was a major contributor to the increase in M3. As of 27 December 
2024, MM
4
, i.e., the ratio of M3 to M0, stood at 5.7 against 5.5 a year ago. Adjusted for 
reverse repo amounts, analytically akin to banks’ deposits with the central bank, the 
adjusted MM was lower at 5.6 as of 27 December 2024. 
Chart II.1: Higher Money Multiplier as of December 2024, 
indicating higher liquidity in the market
 
4.3
4.6
4.9
5.2
5.5
5.8
22-04-22
22-05-22
22-06-22
22-07-22
22-08-22
22-09-22
22-10-22
22-11-22
22-12-22
22-01-23
22-02-23
22-03-23
22-04-23
22-05-23
22-06-23
22-07-23
22-08-23
22-09-23
22-10-23
22-11-23
22-12-23
22-01-24
22-02-24
22-03-24
22-04-24
22-05-24
22-06-24
22-07-24
22-08-24
22-09-24
22-10-24
22-11-24
22-12-24
Ratio
MM MM adjusted for Reverse Repo
Source: Money Stock: Components and Sources, Publications, Weekly Statistical Supplement, RBI Reserve 
Money: Components and Sources, Publications, Weekly Statistical Supplement, RBI
1 RBI press release dated 6 December 2024, ‘Maintenance of Cash Reserve Ratio (CRR), https://tinyurl.com/
pxkhxndd.
2  Components of Broad Money=Currency with the Public + Aggregate Deposits (Demand Deposits with Banks + 
Time Deposits with banks + ‘Other’ deposits with Reserve Bank).
3  Sources of Broad Money=Net Bank Credit to Government + Bank Credit to Commercial Sector + Net Foreign 
Exchange Assets of Banking Sector + Government's Currency Liabilities to the Public- Banking Sector's Net Non-
Monetary Liabilities).
4  The money multiplier measures the maximum amount of money that a banking system generates with each unit 
of central bank money.
Economic Survey 2024-25
38
2.6 A country’s MM is influenced by two main factors: - the amount of cash individuals 
(and businesses) hold and the reserves that banks maintain. When individuals keep 
more cash, the banking system cannot create money, resulting in a lower multiplier. In 
this case, cash in hand acts as a leakage from the banking system. Similarly, the reserves 
that banks hold with the central bank also count as a leakage, further decreasing the 
MM. In India’s case, banks hold a portion of their deposits as reserves with the RBI, 
known as CRR. 
2.7 A higher MM indicates that the banking system is generating a greater money 
supply from the money provided by the central bank. In India, recent efforts to promote 
financial inclusion have encouraged people to hold less cash in hand relative to their 
deposits, which partly explains the increase in the MM. Chart II.2 shows that MM has 
been on an upward trend over the years. It declined during the COVID-19 pandemic 
as increased economic uncertainty caused individuals to increase their cash holdings, 
resulting in a fall. However, after FY22, it has resumed its upward trajectory, reflecting 
enhanced liquidity generation in the economy. 
Chart II.2: Increase in Money Multiplier over the years
 
4.0
4.5
5.0
5.5
6.0
6.5
7.0
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
Money Multiplier
Source: Database on Indian Economy, RBI
FINANCIAL INTERMEDIATION 
2.8 Financial intermediaries are critical in implementing and transmitting monetary 
policy actions. Policy rates set by the MPC are transmitted to the real economy through 
financial intermediaries adjusting their lending and deposit rates. Similarly, the CRR 
and SLR requirements influence the lending capacity of the financial intermediaries. All 
these policy rates/ratios, in effect, have a bearing on the economic growth, price levels 
and financial stability of the economy.  The performance of financial intermediaries, 
such as banks, capital markets, insurance, pension sector, etc., is discussed in this 
chapter section. 
Monetary and Financial Sector Developments
39
Performance of the banking sector and credit availability
Improvement in asset quality of banks
2.9 The GNPA ratio of SCBs has declined consistently from its peak in FY18 to a 12-
year low of 2.6 per cent at the end of September 2024. Lower slippages and a reduction 
in outstanding GNPAs through recoveries, upgradations, and write-offs have led to 
this decrease. Lower GNPAs and higher provisions accumulated in recent years also 
contributed to a decline in net NPAs at around 0.6 per cent at the end of September 
2024. Improvements in asset quality parameters were observed across all major bank 
groups. 
Chart II.3a: Decline in GNPAs of SCBs Chart II.3b: CRAR well above 
the required norms
 
4.3
7.5
9.3
11. 2
9.1
8. 2
7.3
5. 8
3. 9
2. 8
2. 6
0
2
4
6
8
10
12
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Mar-22
Mar-23
Mar-24
Sep-24
GNPAs as % of gross advances
 
12.9
13.3
13.7
13.9
14.3
14.8
16.3
16.8
17.2
16.8
16.7
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Mar-22
Mar-23
Mar-24
Sep-24
Capital-to-risk (weighted) assets 
ratio (per cent) 
Source: RBI Financial Stability report, various issues
2.10  The restructured standard advances (RSA) ratio, which is the share of RSA in 
total gross loans and advances, for SCBs declined from 1.8 per cent at the end of March 
2022 to 0.7 per cent at the end of September 2024. All major bank groups reported a 
decrease in this ratio. The CRAR of SCBs has increased in the post-asset quality review 
period, which was conducted from August to November 2015. For FY24, around 93 per 
cent of the increase in the capital funds was contributed by the rise in Tier-I capital of 
banks, indicative of the robustness of capital buffers. At the end of September 2024, 
the CRAR of SCBs stood at 16.7 per cent, and all banks met the Common Equity Tier-1 
(CET-1) requirement of 8 per cent.
2.11  The profitability of SCBs improved during H1 of FY25, with profit after tax (PAT) 
surging by 22.2 per cent (YoY). The cost of funds rose in sync with the tightening 
monetary policy cycle. During Q2 of FY25, the cost of funds increased marginally for 
SCBs. As the transmission was faster for lending rates relative to deposit rates and the 
overall yield on assets remained broadly stable during the last year, the net interest