India is expected to maintain the Reserve Bank of India's current inflation target when the mandate comes up for renewal in March, according to finance ministry officials familiar with the matter. The government views the existing framework as effective in managing price pressures and maintaining economic stability.

Current Inflation Framework Details

The inflation targeting system has been guiding monetary policy decisions since its implementation in 2016. The framework's key parameters are outlined below:

Framework Performance and Effectiveness

The inflation targeting mechanism has demonstrated its resilience across various economic challenges. Finance ministry officials, speaking on condition of anonymity as discussions remain private, highlighted the framework's success in containing price volatility during multiple supply shocks triggered by geopolitical events.

India's inflation rate showed an uptick in November from a record low in the previous month but remained well below the central bank's 4% target. This performance reinforces the government's confidence in the existing system's ability to anchor price expectations effectively.

Stakeholder Consultation Process

The government has actively sought feedback from the Reserve Bank of India regarding the inflation target framework. Following internal deliberations and comprehensive consultations with various stakeholders, the central bank has expressed preference for maintaining the current arrangement.

The target serves as a crucial guide for the central bank's interest-rate decisions, helping maintain price pressures within the designated band while keeping inflation anchored around the mid-point over the medium term. This systematic approach has contributed to greater predictability in monetary policy implementation.

Policy Implications

The decision to retain the 4% inflation target reflects continuity in India's monetary policy approach. The framework has provided a stable foundation for economic planning and has helped establish credible inflation expectations among market participants and the general public.

The Ministry of Finance has not provided immediate comment on the matter, though officials indicate that formal announcements regarding the inflation target renewal are expected closer to the March deadline.

India's banking system continues its strong recovery trajectory with the latest data showing a significant decline in bad loan provisions during the September quarter. The sector's improving fundamentals, combined with better collection efficiency and falling slippages, are positioning banks for enhanced profitability in the December quarter.

Provisions Drop to Seven-Quarter Low

The banking sector's provisioning landscape has shown remarkable improvement in recent quarters:

Sector-Wise Provisioning Performance

The improvement in provisioning has been led primarily by public sector banks, with 10 out of 12 PSU banks reporting year-on-year declines. Notable exceptions include State Bank of India and Indian Overseas Bank, which recorded increases during the quarter.

Private sector banks showed a contrasting trend with a 22.00% jump in NPA provisioning, reflecting varied portfolio performance across different banking segments.

Asset Quality Trends Continue Positive Trajectory

The broader asset quality metrics reinforce the sector's recovery momentum:

December Quarter Outlook and RoA Prospects

Analysts expect the positive provisioning trend to continue supporting bank profitability. JM Financial notes that "asset quality remains broadly stable across banks, with slippages moderating and collection efficiencies improving through the second quarter and into the third quarter." The firm expects overall credit costs to remain around 0.60% in the December quarter.

Motilal Oswal anticipates that while major public and private sector banks will report contained credit costs, mid-sized private banks with higher exposure to unsecured and microfinance portfolios should see improving credit costs as stress abates, supporting better RoA outlook in the second half and beyond.

Risk Management and Portfolio Quality

Despite overall improvements, certain segments continue requiring monitoring:

• Micro-LAP portfolios showing selective stress
• Commercial vehicle financing segments
• Affordable housing loan categories
• Select microfinance institution portfolios

However, prudent lending practices remain evident, with 69.00% of gold loan disbursements directed toward prime-and-above borrowers, and over 70.00% of consumer loans from private banks extended to similar quality borrowers.

Recovery Momentum Strengthens

The combination of falling provisions, improving collection efficiency, and declining slippages indicates that the financial stress from pandemic and interest rate cycles is gradually subsiding. Analysts expect banks to demonstrate improved performance from the December quarter onwards, supported by rising credit growth, easing cost of funds pressure, and continued asset quality improvement.

This sustained recovery trajectory positions the Indian banking sector for enhanced stability and profitability in the coming quarters, with return on assets expected to benefit from the improving operational metrics.