India's Journey from Crisis to Confidence

Speech by Shri Shaktikanta Das, Governor,
Reserve Bank of India

Delivered at an event organised by the Confederation of
Indian Industry (Cll), Davos, Switzerland, January 17, 2024

It gives me great pleasure to be here at Davos for the annual
meeting of the World Economic Forum. While the winter outside is
cold, the warmth of coming together of eminent leaders and experts
from diverse fields more than compensates for it. These meetings
assume greater relevance when fundamental changes are taking
place in a global scale that would potentially shape our common
destiny. I thank the Confederation of Indian Industries (Cll) for giving

me this opportunity to speak at this event.

2. Recent information on the global macroeconomic front has
been somewhat reassuring with inflation gradually descending closer
to the target, even as growth has held up better than expected. The
odds of a soft landing have increased and this has enthused the
financial markets. Financial conditions have eased, and markets
have scaled new highs, raising concerns that they might be running
ahead of themselves. At this critical juncture, certain hard facts have
to be kept in mind, namely, global growth is slowing down;
geopolitical situation continues to be fragile with new flash points and

fear of supply chain disruptions; geo-economic fragmentation

remains unabated undermining global trade; and the daunting

climate related challenges are holding their ground.

3. Given this global setting, I propose to speak on the broad theme
of India's journey from crisis to confidence. I shall first dwell upon our
recent experience in maintaining macroeconomic and _ financial
stability, which are the prime responsibilities of a central bank. I shall
then talk about the emerging fintech space and payments ecosystem
that have become the hallmark of India's success in financial
innovation and inclusion. Finally, I propose to end with some

concluding remarks.

Macroeconomic Stability

4. Amidst an uncertain and challenging global macroeconomic
environment, the Indian economy presents a picture of confidence,
positivity and optimism. Recent growth outturns have surprised most
forecasts on the upside. After clocking real gross domestic product
(GDP) growth of 7.2 per cent in 2022-23, real GDP is expected to
grow by 7.3 per cent during 2023-24 according to the latest release
by the National Statistical Office (NSO). With strong domestic
demand conditions, India remains the fastest growing major
economy and is now the fifth largest economy in the world. In fact, in
purchasing power parity (PPP) terms, India is already the third
largest economy. The International Monetary Fund (IMF) has
projected that India's contribution to world growth will rise from the

current 16 per cent to 18 per cent by 2028. Strong domestic demand

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remains the main driver of growth, although there has been a
significant increase in Indian economy's global integration through
trade and financial channels. Higher reliance on domestic demand

cushioned India from multiple external headwinds.

5. We have emerged from the recent spate of shocks with
stronger fundamentals - inflation is easing; bank and corporate
balance sheets are stronger than before; fiscal consolidation is on
course and its quality has improved; and the external balances are
eminently manageable with strong forex reserves. The decisive and
timely monetary policy actions of the Reserve Bank of India through
appropriate policy rate and liquidity measures helped India's quick
and sustained recovery. Added to this, the structural reforms
undertaken by the government over the last few years in the field of
taxation, banking, ease of doing business, manufacturing, inflation
management, digitalisation coupled with a clear focus on physical
and digital infrastructure have boosted the medium and long-term
growth potential of the economy. These reforms are continuously
helping the Indian businesses to improve productivity and adopt
technology driven changes across the spectrum. The manufacturing
sector! is undergoing a marked shift with support from the production
linked incentives (PLIs) scheme. Services sector, which contributes
the largest share to total value addition in the economy, is fast

adopting new technologies to improve delivery, reach, and

' Based on first advance estimates (FAE) for 2023-24 released by NSO, manufacturing sector
has a share of 17.7 per cent in GDP, while services sector has a share of 63.3 per cent in
GDP.

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competitiveness. The external demand for India's services is surging
and diversifying rapidly from information technology related services
to other professional services like business development, research
and development, professional management, accountancy and legal

services on the back of rising competitiveness.

6. Headline inflation has substantially eased from its highly
elevated level of the summer of 2022. This disinflation is underpinned
by steady moderation in CPI core (excluding food and fuel group)
inflation. There is easing of price momentum across core goods and
services. This would show that our monetary policy action of
increasing the repo rate by 250 basis points between May 2022 and
February 2023, together with rebalancing of liquidity, is working.
Even as the cost-push pressures induced by high commodity prices
and supply-side shocks have eased, adverse transitory food price
shocks with their increasing incidence and intensity, are imparting
considerable volatility to headline inflation. Pro-active supply side
interventions by the government have played a significant role to
mitigate the impact of food price shocks. Going forward, the inflation
outlook would be considerably influenced by food prices, which
remain uncertain. Recurring food price shocks could lead to
de-anchoring of inflation expectations and generalisation of price
pressures. Monetary policy, amidst these uncertainties, needs to be
alert and remain actively disinflationary to steer inflation towards the
target rate of 4 per cent on a durable basis. Needless to add that a

stable inflation will provide the bedrock to India's growth ambitions.

7. Turning to the outlook on inflation and growth for the next
financial year (2024-25), our research teams are in the process of
making a comprehensive assessment for our forthcoming February
2024 monetary policy. At this stage, our expectation is that the CPI
inflation will average around 4.5 per cent in FY 2024-25. As regards
growth, my sense is that the GDP growth in India will touch 7 per cent
in FY 2024-25. I am saying this on the basis of strong momentum of
economic activity seen in India. Consequently, growth would be 7 per

cent and above for four consecutive years starting from FY 2021-22.

Financial Stability

8. Let me now turn to financial stability. A stable and efficient
financial system is pivotal in safeguarding monetary stability; meeting
the financing needs of the economy; protecting depositors and
investors interests; and achieving sustainable economic growth. The
banking sector is now characterised by robust earnings, strong
buffers, renewed focus on governance and strengthening of balance
sheets. This has been possible due to the efforts of the banks under
the overarching, prudent and proactive financial sector policies
adopted by the Reserve Bank of India. Overall, the Indian banking
sector has seen a remarkable turnaround in the recent period. The
Reserve Bank's focus is not just on mere compliance with the

regulatory parameters but on genuine strengthening of the internal

defences of the banking system which has stood us in good stead as

can be seen from the latest performance indicators."

9. The non-banking financial companies (NBFC) sector is also
reflecting sound performance parameters.? Improved balance sheets
of financial institutions are providing good support to durable and
broad-based credit growth. Moreover, macro stress tests undertaken
to assess the resilience of banks under adverse stress scenarios
show that their capital ratios will remain sufficiently above the
regulatory minimum.* Rapid growth in retail loans, especially
unsecured credit, and growing interconnectedness between banks
and NBFCs, however, necessitated the Reserve Bank to take pre-
emptive policy actions to prevent potential build-up of risks and
safeguard financial stability.°

2 The capital to risk weighted assets ratio (CRAR) of the banking system at 16.8 per cent
remains sufficiently above the regulatory minimum, while profitability has grown to
multidecadal highs. The return on assets and return on equity of the banking system are at
1.3 per cent and 13.7 per cent, respectively. Asset quality has further improved with gross
non-performing assets (GNPA) ratio and net non-performing assets (NNPA) ratio falling to
multiyear lows of 3.3 per cent and 0.8 per cent, respectively.

3 The CRAR of NBFCs at 27.6 per cent in September 2023 remains well above the regulatory
minimum of 15 per cent; the GNPA ratio has declined from a high of 7.2 per cent in December
2021 to 4.3 per cent in September 2023; and NIM and RoA stood at 5.1 per cent and 2.8 per
cent, respectively, in September 2023.

4 For instance, if a 250 basis points (the cumulative rate hike between May 2022-February
2023) parallel upward shift in the yield curve is applied, the mark-to-market impact on the held
to maturity (HTM) portfolio of banks would reduce the system level capital to risk weighted
assets ratio (CRAR) from 16.6 per cent to 13.1 per cent in September 2023. A similar shock
on the trading portfolio would reduce the CRAR to 15.6 per cent. Under both instances,
however, the CRAR will remain above the regulatory minimum.

5 Considering the persistent credit growth in certain segments of retail credit, pre-emptive
measures were announced on November 16, 2023 to sober down undue exuberance which
was Clearly visible. Risk weights on certain segments of consumer credit were enhanced by
25 percentage points. The issue of interconnectedness through bank lending to NBFCs has
also been addressed through higher risk weights.

10. The recent developments in the banking system of some
advanced countries drive home the importance of ensuring prudent
asset liability management; robust risk management; sustainable
growth in liabilities and assets; undertaking periodic stress tests; and
building up capital buffers for any unanticipated future stress.° The
Reserve Bank has applied a judicious mix of micro and
macroprudential measures to strengthen financial stability and

support growth in the real economy.'

11. The Reserve Bank has overhauled the regulatory architecture
of Banks, NBFCs, Urban Cooperative Banks and other segments of
the financial ecosystem. Steps have also been taken for mitigating
cyber security risks and enhancing operational resilience of the
regulated entities Our approach has been to ensure that innovation
is assimilated in the financial system in a non-disruptive manner

while simultaneously ensuring appropriate customer protection.

12. In parallel, we have made a paradigm shift in the Reserve

Bank's supervision of the financial sector. The thrust has shifted

§ In India, risk management measures are in place which allow banks to provide for interest
rate risk with the upturn of the interest rate cycle. Sufficient levels of investment fluctuation
reserves (IFR) - where banks transfer net profit on sale of investment until it reaches at least
2 per cent of the held-for-trading (HFT) and available for sale (AFS) portfolios - create
necessary buffers for banks. Moreover, all commercial banks in India, irrespective of size, are
subject to liquidity coverage ratio (LCR) guidelines which have stringent requirements for
unsecured wholesale funding. The valuation guidelines on available for sale (AFS) category
of investment are stringent and follow a conservative approach.

7 We have issued guidelines for large exposure framework, scale-based regulation for non-
banking finance companies, and digital lending norms for supervised entities. We also make
use of the other conventional measures such as sectoral risk weights, provisioning norms,
loan to value ratio, among others, as macroprudential tools flexibly to address the occasional
risks that are observed.

towards early identification and remediation of risk factors by
identifying root causes of vulnerabilities and triggering timely
intervention before such factors culminate into distress. The systems
have been recalibrated to be more proactive and forward-looking and

to smell a distress early.

13. Akey component of financial stability is to have a currency that
is stable and appreciates or depreciates in an orderly manner.
Various stakeholders in the economy including businesses, investors
and, above all, the people stand to benefit from a stable currency.
Excessive volatility has to be checked through market intervention by
the central bank, more so in an emerging market economy (EME).
The Indian rupee is a freely floating currency and its exchange rate
is market determined. Its relative stability in the recent period is an
outcome of the strength of the Indian economy, its macroeconomic
fundamentals and improvements in India's external position,
particularly the significant moderation in the current account deficit
(CAD) and revival of capital flows on the back of comfortable foreign
exchange reserves. Labelling the Indian rupee in any other manner
by cherry-picking time periods for analysis is not appropriate and

grossly inconsistent with reality.

14. During the recent period of heightened uncertainty, the
emerging market economies (EMEs) were at the receiving end of
excess volatility in US dollar and bond yields. In view of the systemic
importance of the US economy in the global financial system,

spillovers from these fluctuations are not unexpected, especially in

the context of shifting expectations about the monetary policy
trajectory in the US and its own fundamentals. In such a situation,
the EMEs, which have their own domestic dynamics and challenges,
cannot afford to be held hostage by international financial cycles.
EMEs have to act to safeguard their own interest. We agree that
there should be flexibility in exchange rates, but it should not be a
destabilising influence on the domestic economy of EMEs.
Accordingly, multilateral institutions would do well to take a more

nuanced and balanced view of the policy perspectives of the EMEs.

15. Overall, domestic macroeconomic and systemic risks in India
have declined and the improving balance sheets of financial
institutions, together with prudent policies of the regulators, have

strengthened the resilience of the financial system.

Fintech and Payments Ecosystem

16. There are several aspects of the Indian economy which are
reflecting a lot of promise. I have chosen one area which merits
greater attention, namely, the FinTech and the Payments

Ecosystem.

17. The FinTech ecosystem in India has tremendously improved
the delivery of financial services by making them faster, cheaper,
efficient and more accessible. India is currently the world's third
largest FinTech ecosystem in terms of the number of FinTech entities

operating in India. The adoption rate of FinTech in India is 87 per

cent, which is well above the global average of 67 per cent. India's
FinTech market is projected to reach USD 150 billion by 2025, a
significant leap from USD 50 billion in 2021.8 The JAM trinity - a
combination of bank accounts (Jan Dhan); Aadhaar (India's biometric
identity system that provides a single and portable proof of identity);
and Mobile phone numbers - has revolutionised India's FinTech
ecosystem in terms of financial inclusion, digitisation of financial
services, and overall service delivery.

18. The indigenously developed Unified Payments Interface (UPI)
has been the game changer. Its success story has, in fact, become
an international model. The interoperability of UPI across banks has
created a unified payment ecosystem. Its user-friendly interface and
QR code-based payments have made it very popular. It has
facilitated digital payments for small businesses and street vendors,
leading to greater financial inclusion. The success is visible with more
than 12 billion transactions carried out through UPI in December
2023. Various recent enhancements to UPI like 'Conversational
Payments' backed by an artificial intelligence powered system; offline
transactions; and linkage of credit lines to UPI would further enhance
its versatility. At the same time 'UPI One World' provides foreign
nationals visiting India to transact payments through the UPI. The
linkage between India's UPI and Singapore's PayNow bears
testimony to the resilience of UPI as a potential global fast payment
system. The journey continues as we have signed up MoUs with a

few other countries to tap the benefits offered by UPI.

8 https://www.investindia.gov.in/sector/bfsi-FinTech-financial-services

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19. With 24x7 operationalisation of retail as well as large value
payment system operated by the Reserve Bank, India is part of a
club of select countries providing such round the clock facilities with
real time gross settlement (RTGS). With such availability, more than
485 million digital payments happen every day. This phenomenal
growth of digital payments is reflected in the Reserve Bank's
composite Digital Payment Index which has increased almost four-

fold in the last 5 years.°

20. The Reserve Bank has taken several other initiatives to
promote innovation. In 2019, the innovative Regulatory Sandbox
framework was introduced. It allows live testing of financial products
or services within a controlled environment. One of its notable
successes is UPI123Pay, which enables offline UPI payments. The
Regulatory Sandbox framework has been made interoperable in
2023 across multiple regulators. The annual Global hackathon,
HaRBlInger, organised by the Reserve Bank and the Innovation Hub
set up by the Reserve Bank further amplify our collaborative efforts

with the private sector in the pursuit of innovation.

21. Asastep towards greater digitalisation, the pilot for our Central
Bank Digital Currency (CBDC), e-Rupee, was launched in both
wholesale and retail segments in November-December, 2022. Since
then, 4 million customers have been onboarded. The CBDC will

enhance digital transactions, especially in areas with limited internet

° The RBI's composite Digital Payment Index has increased to 395.6 in March 2023 up from
100 as of March 2018.

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connectivity. We expect our CBDC (e-Rupee) to become a global

trendsetter and facilitate seamless cross-border payments.

22. Our approach to FinTech ecosystem is customer-centric, with
focus on ensuring effective oversight, ethical conduct, risk
management, and encouraging self-regulation by the FinTechs

themselves by establishing a Self-Regulatory Organisation (SRO).

Conclusion

23. The global economy is confronted with multiple challenges.
There is a dire need for collective and coordinated action by all
stakeholders and global agencies. I am sure the discussions in
Davos will energise the spirit of cooperation and guide us to a better

future.

24. As far as the Indian economy is concerned, it is now poised for
a long haul of higher growth. There are challenges, but they have to
be dealt with effectively. With a confluence of factors in its favour, the
confidence on India's prospects is at an all-time high. We have to
make this happen in reality. All stakeholders need to be

unambiguously focused and take measures to support this journey.

Thank you. Namaskar

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