Another year nears its end, and for the Indian financial sector, 2024 was a year of steady interest rates and heightened regulatory activity. While high inflation kept the central bank cautious on rate cuts, the Reserve Bank of India (RBI) remained active on the regulatory front, addressing rule violations and keeping a close watch on various entities. Now, as we look towards 2025, the signals suggest a shift in the financial landscape, with expectations of lower interest rates and a proactive approach to ethical technology adoption.

Lower Rates on Horizon

The dominant expectation for 2025 is a move towards lower interest rates. After a year of holding steady, the Monetary Policy Committee (MPC) is anticipated to shift its stance, possibly starting as early as February. This shift is expected as concerns over economic slowdown intensify, potentially outweighing inflation worries. Banks, which have so far maintained lending rates, are likely to respond to cues from the RBI and adjust their rates accordingly. For borrowers, this will bring relief in the form of cheaper loans. However, depositors may find less appealing returns as deposit rates also adjust downwards. Banks might also observe a continued moderation in deposit growth as customers seek higher returns in alternative assets.

AI Ethics Framework

In a significant move reflecting the growing influence of technology, the RBI has constituted a committee to develop a framework for ethical artificial intelligence (AI) in the financial sector. This committee will focus on creating a responsible and ethical enablement of AI (FREE-AI) framework. With experts from IITs, industry, and government, the committee’s mandate is comprehensive. It will assess the current state of AI adoption, identify potential risks, and recommend mitigation strategies and governance frameworks. This initiative signals the RBI’s commitment to not just embracing technological advancements but also ensuring they are deployed responsibly and ethically across banks, NBFCs, fintech firms, and payment system operators. The focus on ethical AI is crucial as the financial sector increasingly integrates AI for various functions, from customer service to risk assessment, ensuring fairness, transparency and accountability.

Navigating a Tech-Led Future

The RBI’s dual approach – anticipating lower interest rates while proactively regulating AI ethics – highlights a central bank preparing the financial sector for a complex future. The anticipated lower interest rate regime aims to spur economic growth, while the focus on ethical AI seeks to build a robust and trustworthy financial system in the age of rapid technological change. The year 2025 will likely see the financial sector grapple with these shifts. Banks will need to balance margin pressures in a lower rate environment with the need to support credit growth. Simultaneously, the entire sector will need to prepare for and adapt to the upcoming ethical AI framework. This is a delicate balancing act for the RBI and the financial institutions it regulates. Will these measures be sufficient to ensure a stable, growing, and ethically sound financial sector? The effectiveness of these initiatives will unfold in the coming year, shaping the contours of India’s financial landscape.

What can we expect in the near term? The RBI is clearly setting the stage for a more tech-integrated and ethically conscious financial sector. However, the real test lies in the implementation and the industry’s adaptation to these evolving norms. Watch for the MPC’s rate decisions early in 2025 and the progress of the FREE-AI committee’s recommendations for a clearer picture.