RBI annual report: Economic recovery is underway despite headwinds

RBI Annual Report: The Reserve Bank of India will follow a nuanced approach in the wake of inflation risks emanating from high commodity prices while ensuring adequate liquidity in the banking system to support the need of the productive sectors of the economy, the central bank’s annual report for 2021-22, which was released on Friday, said.

“…the year gone by brought many challenges, but a recovery is underway in spite of headwinds. The future path of growth will be conditioned by addressing supply-side bottlenecks, calibrating monetary policy to bring inflation within the target while supporting growth and targeted fiscal policy support to aggregate demand, especially by boosting capital spending,” the report said.

The report highlighted that the immediate impact of geopolitical aftershocks is on inflation, with close to three-fourths of the consumer price index at risk.

“The elevation in international prices of crude, metals, and fertilisers has translated into a terms of trade shock that has widened trade and current account deficits,” it said.

Following the worsening of the geopolitical situation after Russian invasion of Ukraine, the central bank decided to change its focus to control inflation. Over the last two years, since the onset of the Covid-19 pandemic, RBI’s main objective was to support growth. Earlier this month, the six-member monetary policy committee of the central bank increased the repo rate – for the first time in 4 years – by 40 bps to 4.4%.

“Overall, headline inflation averaged 5.5 per cent in 2021-22 as against 6.2 per cent a year ago. Headline inflation breached the upper tolerance band in Q4:2021-22 and rendered the conduct of monetary policy challenging,” RBI said in the annual report.

During the year, an amount of Rs 2.2 trillion was withdrawn from the system through restoration of cash reserve ratio (CRR) to pre-pandemic levels, repayment of targeted long term repo operations (TLTRO) and open market operations (OMO) sales, it said.

“The Reserve Bank will continue to follow a nuanced and nimble footed approach to liquidity management while maintaining adequate liquidity in the system to meet the credit needs of the productive sectors of the economy,” the report said.

The report observed that early indicators point to revival of economic activity across other sectors that need to be assiduously nurtured to boost consumer and business confidence and private investment.

“Capacity utilisation in several industries is moving closer to normal levels, although rising input costs and persisting supply bottlenecks, for instance in semiconductors for the automobile sector, may impede or delay a fuller recovery,” it said.

Commenting on the banking sector, the report observed that the sector was cushioned against the disruptions caused by the pandemic by adequate liquidity support and various regulatory dispensations provided by the Reserve Bank.

Banks bolstered their capital to augment risk absorbing capacity, aided by recapitalisation by the government in the case of public sector banks (PSBs) along with capital raising from the market and retention of profits by both PSBs and private sector banks.

“The gross non-performing assets (GNPA) ratio of all scheduled commercial banks (SCBs) moderated to its lowest level in six years, aided by due efforts towards recoveries and technical write-offs. Bank credit growth has begun to pick up to track nominal GDP growth and banks are regaining bottom lines,” it said.