Chapter 3: Monetary Management & Financial Intermediation

5.25%

Repo Rate (Dec 2025)

3.0%

CRR (After 100 bps cut)

2.2%

GNPA Ratio (Sep 2025, multi-decadal low)

17.2%

CRAR of SCBs (Sep 2025)

21.6 cr

Demat Accounts Total

₹80L cr

Mutual Fund AUM (23% GDP)

🏦

1. Monetary Developments & RBI Policy Actions (FY26)

Key Theme In FY26 (April–December 2025), RBI undertook aggressive easing: 100 bps repo cut, 100 bps CRR cut, and large OMO purchases — all while shifting MPC stance from accommodative → neutral (June 2025).

Repo Rate Cuts (MPC)

Cumulative Cut -100 basis points in April–December 2025
Repo rate: 6.25% → 5.25%

MPC stance: Accommodative → Neutral (June 2025)
WALR on fresh rupee loans: -64 bps (8.71%, Nov 2025)
WALR on outstanding loans: -56 bps (9.21%, Nov 2025) — lowest since Sep 2022

CRR Reduction

CRR Cut -100 bps to 3.0% of NDTL
Staggered: September–November 2025
Released: ~₹2.5 lakh crore liquidity

M0 growth (CRR-adjusted): 9.4% vs 6.2% a year ago
Currency in circulation: +10.2% (Dec 2025)
Broad money M3 growth: 12.1%
Money multiplier: 6.21 (up from 5.70 a year ago)

Liquidity Management

OMO Purchases ₹2.39L cr (9 OMOs, Apr–May 2025)
+ ₹1L cr in December + USD 5 bn swap

System liquidity (net LAF): avg ₹1.89L cr surplus in FY26 vs ₹1,605 cr in FY25
MSF borrowings fell: ₹6,902 cr → ₹2,244 cr
SDF deployment rose: ₹0.94L cr → ₹1.74L cr
Weighted avg call rate: ~8 bps below repo rate

🏛️

2. Banking Sector Performance

Asset Quality (SCBs)

Indicator	FY18	Sep 2025
GNPA Ratio	11.2%	2.2% (multi-decadal low)
Net NPA Ratio	~6%	0.5% (record low)
CRAR	~13%	17.2%
Slippage Ratio	7.1%	1.3%
Recovery Rate (NPAs)	13.2%	26.2%
PAT growth (FY25)	—	+16.9% YoY

Sectoral GNPA (Sep 2025) Industry: 1.9% | Services: 1.8% | Personal loans: 1.1% | Agriculture: 6.0% (relatively high — 36.3% of total GNPA)

Credit Growth

Bank Credit (YoY, Dec 2025) 14.5% vs 11.2% in Dec 2024 — highest YoY growth of FY26

MSME credit: +21.8% YoY (Nov 2025); Micro & Small: +24.6%
Personal loans: +12.8% — driven by gold loans: +125.3%
Agriculture: +8.7% | Services: +11.7% | Large Industry: +4.6%

Flow of Resources to Commercial Sector FY20: ₹13.6L cr → FY25: ₹35.1L cr (CAGR 20.9%)
FY26 Apr–Dec: ₹30.8L cr — +44.7% YoY

Note: Large corporations shifting to market-based funding → reduced bank credit demand from large firms. MSMEs remain bank-dependent.

PSB Credit Assessment Model (CAM) for MSMEs Launched 2025 — uses digital footprints (KYC, GST, bank statements via AA, ITR) for automated loan appraisal. Integrates CGTMSE. Result: ₹3.2L cr MSME loan applications sanctioned (Apr–Nov 2025).

🌾

3. Regional Rural Banks (RRBs) – Consolidation & Performance

Consolidation (One-State-One-RRB) RRBs reduced: 196 → 28 (as of 1 May 2025) — in 4 phases
Common logo adopted for all 28 RRBs

Core Banking Solutions integrated across amalgamated RRBs
Priority sector lending: consistently exceeded 75% target

Financial Performance

Indicator	FY24	FY25
Net Profit	₹7.6K cr (record)	₹6.8K cr (2nd highest)
GNPA Ratio	6.1%	5.4% (13-year low)
CRAR	~13%	14.4% (all-time high)
Credit-Deposit Ratio	71.4%	73.8% (35-year high)

⚖️

4. RBI's Regulatory Reforms & FREE-AI Framework

Key Regulatory Actions

Framework for Formulation of Regulations (7 May 2025) — Standardised, consultative, impact-driven; review every 5–7 years via Regulatory Review Cell (operational 1 Oct 2025)

Master Directions Consolidation — 9,000+ circulars → 238 Master Directions; 9,446 circulars repealed (3,809 in Master Circulars; 5,673 obsolete)

Advisory Group on Regulation — External experts for continuous stakeholder engagement

FREE-AI Framework (RBI)

Stands for: Fostering Responsible and Ethical Enterprise in AI Only 21% of banks/FIs implementing AI — adoption concentrated in large banks

Seven Sutras (Core Principles):

① Trust

② People First

③ Innovation over Restraint

④ Fairness & Equity

⑤ Accountability

⑥ Understandable by Design

⑦ Safety, Resilience & Sustainability

6 Strategic Pillars: (Innovation Enablement: Infrastructure, Policy, Capacity) + (Risk Mitigation: Governance, Protection, Assurance)

🤝

5. Microfinance & Financial Inclusion

MFI Sector Profile

Key Facts (as of Mar 2025) Active borrowers: 627 lakh (FY14: 330 lakh)
Gross Loan Portfolio: ₹2,38,198 cr (7x in a decade)
Branches: 37,380 (FY14: 11,687)

Market Share by Loan Outstanding:

NBFC-MFIs: 39% | Banks: 32% | SFBs: 16% | NBFCs: 12%
Eastern + Southern regions: 62% of portfolio
95% women borrowers, 80% rural clientele

FY25 Stress & RBI Response Sector stressed — loan outstanding -14% YoY due to over-lending post-pandemic. RBI reduced qualifying asset threshold: 75% → 60% for NBFC-MFIs (Jun 2025)

Financial Inclusion Schemes

Scheme	Achievement
PMJDY	55.02 cr accounts (36.63 cr rural/semi-urban)
PMMY	₹36.18L cr across 55.45 cr accounts; 10 cr first-time borrowers; NPA: 3.31%
PM SVANidhi	51.5% in 1st cycle; 32.3% in 2nd; income +20% (2023→2025); digital payments 45%→83%
Stand-Up India	Loans ₹10L–₹1 cr for SC/ST/women

PMMY Tiers (Upgraded) Shishu (up to ₹50K) → Kishore (₹50K–₹5L) → Tarun (₹5L–₹10L) → Tarun Plus (₹10L–₹20L) — added Oct 2024 for repeat borrowers

FI-Index (Mar 2025) 67.0 (up from 64.2 in Mar 2024) — captures 97 indicators across Access (35%), Usage (45%), Quality (20%)

⚖️

6. Insolvency & Bankruptcy Code (IBC) – Performance & Gaps

IBC Achievements

S&P Global Ratings Upgrade (3 Dec 2025) India's insolvency regime: Group C → Group B

Recovery rate: 15–20% (pre-IBC) → ~30%
Resolution timeline: 6–8 years → ~2 years
Creditors realised: ₹3.99L cr from 1,300 resolution cases
94% of fair value recovered; 170% of liquidation value
Resolution-to-liquidation ratio: 20% (FY18) → 91% (FY25)
Overdue corporate loans: 18% (2018) → 9% (2024)

CIRP Status & Gaps

Case Outcomes (as of Sep 2025) Total closed: 57% going-concern rescue | 43% liquidation
(1,300 via resolution plans + 1,342 appeal/settlement + 1,223 withdrawn under S.12A)

Key Challenges:

CIRP mandated limit: 330 days; actual: 713 days avg (853 days for FY25 cases) — 150%+ deviation
NCLT pendency: 30,600 cases; clearance time ~10 years at current rates
Only 30 NCLT benches; of 4,527 registered RPs, only 2,198 (49%) active
PPIRP (Pre-Pack): only 14 admissions in 4 years
IBC Amendment Bill 2025: procedural reforms + cross-border insolvency framework

📈

7. Capital Markets – IPOs, Equity, Corporate Bonds

Equity Markets (FY26: Apr–Dec 2025)

Index Performance Nifty 50: +11.1% | Sensex: +10.1%
India's IPO volumes: World's highest! +20% over FY25

Total primary market resource mobilisation: ₹10.7L cr
Main board IPOs: 69 → 94; amount: ₹1,46,534 cr → ₹1,60,273 cr
OFS component: 58% of total IPO proceeds
SME listings: 190 → 217; amount ₹7,453 cr → ₹9,635 cr
Demat accounts added: 235 lakh in FY26; total: 21.6 crore
Unique investors crossed 12 crore (Sep 2025); ~25% women

Securities Markets Code 2025 (Introduced Dec 2025) Consolidates SCRA 1956 + SEBI Act 1992 + Depositories Act 1996
3 clusters: Service Delivery | Regulatory Governance | MII Statutory Footing
SEBI board: 9 → 15 members (min 5 full-time); interim orders capped at 180 days

Corporate Bond Market

Size & Growth Outstanding: ₹17.5T (FY15) → ₹53.6T (FY25) at ~12% CAGR
FY25: Highest-ever fresh issuances: ₹9.9T
As % of GDP: 15–16% (vs South Korea 79%, Malaysia 54%, China 38%)

Structural Weaknesses:

85–90% issuances: AAA/AA-rated only (US: <5% AAA)
99% via private placements; secondary market turnover: 0.3x (Indonesia: 1.17x)
Only 400–500 ISINs traded daily out of ~30,000 ISINs
Regulatory overlaps: SEBI + RBI + MCA

Target: ₹100–120 trillion by 2030 Reforms: tri-party repos, credit default swaps, ESG debt securities framework, InvITs

Household Savings Shift

Equity/MF share in household savings: 2% (FY12) → 15.2% (FY25)
Deposits share: 58% (FY12) → 35% (FY25)
SIP inflows: <₹4,000 cr/month (FY17) → ₹28,000 cr/month (FY26)
DII share (18.3%) surpassed FII share (16.7%) for 1st time (Q4 FY25)

🌐

8. Foreign Portfolio Investment & GIFT City

FPI Trends (FY26)

FPI Position FPIs net sellers in equity (₹16.5K cr outflows, till Jan 13, 2026)
Reasons: INR depreciation, elevated US yields, global risk-off, India equity underperformance

FPI AUC: ₹81.4L cr (Dec 2025) — +10.4% over Mar 2025
FPI ownership in NSE equities: 16.9% (Q2 FY26) — 13-year low
India–US 10Y bond spread: 165 bps (May) → 250 bps (Dec 2025)

DII Counterbalancing: DII equity holdings (18.7%) now exceed FII (16.7%) — all-time high for DIIs

GIFT City IFSC Progress

GFCI Rank: 43/120 (up 9 places); Fintech: up 10 places
Entities registered: 1,034+ (as of Nov 2025)

Operation	Achievement
Banking	38 IBUs; USD 100B+ assets; USD 142.98B transactions
Capital Markets	Monthly turnover USD 88B+; derivatives USD 1,351B; ESG listings USD 15B+
Aircraft Leasing	33 lessors; 303 aviation assets
Fund Management	194 FMEs; USD 26.30B commitments; 52 insurance entities
Bullion (IIBX)	185 jewellers; 151T gold vault; 930T silver vault

Key 2025 Milestones June: Sri Lanka's DFCC Bank — first foreign listing on GIFT IFSC exchange
Oct: Foreign Currency Settlement System (FCSS) launched

👴

9. Pensions Sector

NPS & APY Performance

NPS (Dec 2025) Subscribers: 211.7 lakh (CAGR 9.5% over FY15–FY25)
AUM: ₹16.1 lakh crore (CAGR 37.3% over FY15–FY25)

APY (since 2016) Subscriber CAGR: 43.7% | AUM CAGR: 64.5%

New Pension Schemes

UPS (Unified Pension Scheme) — Notified 24 Jan 2025; for Central Govt employees; blends guaranteed minimum pension + investment growth
NPS Vatsalya — For minors; culture of savings from early age
NPS e-Shramik — Launched 29 Oct 2025; for platform/gig workers; integrates them into NPS
FPO/MSME Partnership — PFRDA partnering with Farmer Producer Organisations + MSMEs for agriculture/SHG coverage under NPS/APY

Coverage Gap India pension assets: ~17% of GDP vs OECD average: 80%+
Mercer CFA Global Pension Index: India ranked low on adequacy and maturity

🛡️

10. Insurance Sector & Sabka Bima Act

Sector Snapshot

AUM & Premiums (FY25) AUM: ₹74.4 lakh crore
Total premium: ₹11.9L cr (up from ₹8.3L cr in FY21)
Life: 91% of AUM; 75% of premiums
Health insurance overtook motor as largest non-life line (41% of GWP)

Distributors: 48 lakh (FY21) → 83 lakh (FY25)
Insurer offices: 22,076 (Mar 2025)
Insurance density: USD 97/FY25
Penetration DECLINED: 3.7% — high-cost, low-penetration paradox
GST exemption: Life + individual health insurance — from Sep 2025

Social Security Schemes PMSBY: 56.15 cr enrolled | PMJJBY: 26.32 cr enrolled

Sabka Bima Sabki Raksha Act, 2025

Notified: 21 December 2025 Amends Insurance Act 1938 + LIC Act 1956 + IRDAI Act 1999

FDI limit: 74% → 100%
One-time registration of insurance intermediaries
Share transfer IRDAI approval threshold: 1% → 5%
Foreign reinsurer Net Owned Funds: ₹5,000 cr → ₹1,000 cr
Policyholders' Education & Protection Fund created
IRDAI power of disgorgement (clawback of wrongful gains)
Maximum penalty: ₹1 cr → ₹10 cr
Alignment with Digital Personal Data Protection Act 2023

Vision: Insurance for All by 2047 Need: penetration to grow faster than nominal GDP to close protection gap

📚 Key Concepts Explained — Chapter 3

Repo Rate vs CRR

Repo Rate: Rate at which RBI lends to banks (short-term). Cut by 100 bps → 5.25% in FY26. CRR: % of NDTL banks must park with RBI (no interest). Cut by 100 bps → 3% → releases ₹2.5L cr into system.

M0, M3, Money Multiplier

M0 (Reserve Money): Currency in circulation + banker deposits with RBI. M3 (Broad Money): M0 + bank deposits. Money Multiplier: M3/M0 = 6.21 in Dec 2025 (↑ from 5.70) — higher means better financial intermediation.

OMO (Open Market Operations)

RBI buying/selling govt securities to manage liquidity. OMO Purchases = RBI buys from banks → injects rupees = expansionary. FY26: ₹3.39L cr in OMO purchases + USD 5B buy-sell swap.

LAF, SDF, MSF

LAF (Liquidity Adjustment Facility): Mechanism for RBI to inject/absorb liquidity. SDF: Banks park excess funds with RBI at SDF rate (floor). MSF: Emergency borrowing from RBI at MSF rate (ceiling). The three form the policy corridor.

GNPA, NNPA, CRAR

GNPA: Gross Non-Performing Assets — loans in default as % of total loans. NNPA: Net NPA = after provisions. CRAR: Capital-to-Risk-weighted Assets Ratio — measures bank's capital adequacy (minimum 9% mandated; banks at 17.2%).

IBC — CIRP vs PPIRP

CIRP: Corporate Insolvency Resolution Process — creditor-driven, 330-day limit (actual: 713 days avg). PPIRP: Pre-Packaged Insolvency — debtor-initiated, faster, designed for MSMEs — but only 14 cases in 4 years due to low awareness.

FREE-AI (RBI Framework)

RBI's principle-based AI governance framework with 7 Sutras: Trust, People First, Innovation, Fairness, Accountability, Understandability, Safety. 6 pillars: Infrastructure, Policy, Capacity Building, Governance, Protection, Assurance.

Securities Markets Code 2025

Consolidated legislation replacing SCRA 1956 + SEBI Act 1992 + Depositories Act 1996. Introduces: SEBI board expansion (9→15), interim order cap (180 days max), mandatory public consultation for regulations, MII statutory recognition. Introduced Dec 2025.

DII vs FII

DIIs (Domestic Institutional Investors): MFs, insurance cos, pension funds, banks. FIIs: Foreign Portfolio Investors. Historic shift: DII equity holdings (18.3%) surpassed FIIs (16.7%) in Q4 FY25 — first time ever. DIIs now counterbalance FII volatility.

GIFT City (IFSC)

India's first International Financial Services Centre at Gandhinagar. IFSCA (est. Apr 2020) is unified regulator. Competes with Singapore/Cayman Islands. GFCI rank: 43/120. Key: FCSS launched Oct 2025 — real-time foreign currency settlement without overseas correspondent banks.

Account Aggregator Framework

DPI pillar enabling lenders to access verified financial data (bank statements, GST, ITR) with user consent. Enables credit to first-time borrowers. UPI generates transaction histories for credit scoring. Together, AA + UPI = credit for the uncreditworthy.

Cost of Capital & CAB Link

Economic Survey analysis: 1% improvement in Current Account Balance → 2.8 bps reduction in interest rates (vs financial deepening: only 1.1 bps). Implication: India's cost of capital will durably fall only through productivity gains + export competitiveness, not just financial reforms.

🎯 UPSC Prelims Practice MCQs — Chapter 3

Q1. As of December 2025, what is the repo rate set by RBI's Monetary Policy Committee?

A) 6.25%

B) 5.25%

C) 5.50%

D) 6.00%

✅ Correct: B) 5.25% — The MPC cumulatively reduced repo rate by 100 bps during Apr–Dec 2025. MPC stance changed from accommodative to neutral in June 2025.

Q2. Which of the following statements about the GNPA ratio of Scheduled Commercial Banks is correct for September 2025?

A) 5.1% — a 5-year low

B) 3.2% — a 10-year low

C) 2.2% — a multi-decadal low

D) 1.5% — an all-time low

✅ Correct: C) The GNPA ratio reached a multi-decadal low of 2.2% and NNPA reached a record low of 0.5% in September 2025. CRAR stood at 17.2%.

Q3. How many RRBs are operational as of 1 May 2025 after the consolidation process?

A) 43

B) 28

C) 56

D) 12

✅ Correct: B) 28 — RRBs were reduced from 196 to 28 through 4 phases of consolidation on the principle of One-State-One-RRB. A common logo was adopted for all 28.

Q4. The RBI's FREE-AI framework is built around seven guiding principles called 'Seven Sutras'. Which of the following is NOT one of them?

A) People First

B) Accountability

C) Maximise Profitability

D) Understandable by Design

✅ Correct: C) The Seven Sutras are: Trust, People First, Innovation over restraint, Fairness & equity, Accountability, Understandable by design, Safety-resilience-sustainability. Profitability is NOT one of them.

Q5. Consider the following about the Securities Markets Code 2025: 1) It replaces SCRA 1956, SEBI Act 1992, and Depositories Act 1996. 2) It caps SEBI interim orders at 180 days (max 2 years). 3) SEBI board expands from 9 to 15 members. Which are correct?

A) 1 and 2 only

B) 2 and 3 only

C) 1 and 3 only

D) All three (1, 2, and 3)

✅ Correct: D) All three statements are correct. The SMC was introduced in Lok Sabha on 18 December 2025, and has been referred to a Standing Committee.

Q6. Under the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act 2025, the FDI limit for Indian insurance companies was raised to:

A) 74%

B) 51%

C) 100%

D) 49%

✅ Correct: C) 100% — The Act raised FDI limit from 74% to 100%. Also, penalty cap raised from ₹1 cr to ₹10 cr, and foreign reinsurer NOF reduced from ₹5,000 cr to ₹1,000 cr. Notified: 21 Dec 2025.

Q7. Which of the following correctly describes S&P Global Ratings' assessment of India's insolvency regime as of December 2025?

A) Upgraded from Group D to Group C

B) Upgraded from Group C to Group B

C) Upgraded from Group B to Group A

D) Downgraded from Group B to Group C

✅ Correct: B) S&P upgraded India from Group C to Group B (3 December 2025). Groups are: A (most efficient), B (moderately effective), C (least effective). Recovery rate improved: 15–20% → ~30%.

Q8. The GIFT City IFSC ranked ____ out of 120 financial centres in the Global Financial Centres Index (GFCI) as of 2025:

A) 34

B) 52

C) 43

D) 28

✅ Correct: C) GIFT City moved up 9 places to rank 43 out of 120 financial centres in the GFCI. In fintech ranking, it improved by 10 places. Established under IFSCA Act 2019.

Q9. Regarding PM Mudra Yojana (PMMY), consider these statements: 1) Total disbursement: ₹36.18L cr. 2) Tarun Plus (₹10L–₹20L) was introduced in October 2024. 3) Women accessed 69% of all microloans. Which are correct?

A) 1 and 2 only

B) 2 and 3 only

C) 1 and 3 only

D) All three

✅ Correct: D) All correct. PMMY: ₹36.18L cr across 55.45 cr accounts; Tarun Plus added Oct 2024 for repeat borrowers; women: 69% of loans = ₹13.8L cr across 34.8 cr accounts. NPA: 3.31%.

Q10. According to Economic Survey 2025-26's analysis, which factor is approximately TWICE as effective as financial deepening in reducing India's cost of capital in the long run?

A) Reducing government debt

B) Improving the Current Account Balance

C) Expanding GDP growth rate

D) Deepening private credit to GDP

✅ Correct: B) A 1% improvement in CAB reduces interest rates by 2.8 bps vs 1.1 bps for financial deepening — nearly twice as effective. Implication: productivity, manufacturing competitiveness, and export growth are the durable route to lower capital costs.

Topper IAS · Economic Survey 2025-26 · Chapter 3: Monetary Management & Financial Intermediation

Source: Ministry of Finance, GoI · Prepared for UPSC Prelims 2026