Monetary policy will be calibrated to contain inflation: RBI annual report
The Reserve Bank of India (RBI) will follow a nuanced approach following inflation risks from high commodity prices and monetary policy will be calibrated while ensuring adequate liquidity to meet the needs of the productive sectors of the economy , the central bank said. Annual report for 2021-22, released Friday.
The lower surplus transferred to the government at Rs 30,307.45 crore in 2021-22 compared to Rs 99,122 crore in the previous year was due to a large increase in the Provident Fund.
“The lower than expected dividend was due to higher provisioning and interest charges on LAF [liquidity adjustment facility] operations. The higher provisioning was due to the revaluation loss of foreign securities,” IDFC First Bank said in a report.
The central bank made a provision of Rs 1.15 trillion for the provident fund in FY22 from Rs 20,710.12 crore in the previous year.
The fund was held at 5.5% of the balance sheet – the lower end of the 5.5-6.5% range recommended by the Bimal Jalan committee.
“The lower than expected dividend was due to higher provisioning and interest charges on LAF [liquidity adjustment facility] operations. The higher provisioning was due to the revaluation loss of foreign securities,” IDFC First said in a report.
Appearing cautious on inflation, which surged after Russia’s invasion of Ukraine, the central bank said the immediate impact of geopolitical aftershocks is on rising prices, with nearly three-quarters of the index consumer price at risk.
“Higher international prices for crude, metals and fertilizers translated into a terms-of-trade shock that widened trade and current account deficits,” he said.
Following the worsening of the geopolitical situation, the central bank decided to change direction to control inflation. For the past two years, since the onset of the pandemic, the main objective of the RBI has been to support growth. Earlier this month, the central bank’s six-member monetary policy committee raised the repo rate – for the first time in four years – by 40 basis points to 4.4%.
“Overall, headline inflation averaged 5.5% in 2021-22, down from 6.2% a year ago. Headline inflation breached the upper tolerance band in the fourth quarter 2021-22 and made the conduct of monetary policy difficult,” the RBI said in the annual report.
In line with the objective of reducing inflation, the RBI has started withdrawing liquidity from the banking system.
During the year, Rs 2.2 trillion was withdrawn from the system through the restoration of the cash reserve ratio (CRR) to pre-pandemic levels, targeted long-term repurchase transactions and to open market operations, he said.
On the growth front, the central bank hinted that the recovery was underway amid headwinds.
“…the past year has brought many challenges, but a recovery is underway despite the headwinds. The future growth path will be conditioned by addressing supply-side bottlenecks, calibrating monetary policy to bring inflation back within target while supporting growth, and targeted fiscal policy support to aggregate demand, including by stimulating capital spending,” the report said.
The report says early indicators point to a resumption of economic activities in other sectors that need to be encouraged.
The report says that amid these adverse international developments, the Indian economy is relatively well positioned to strengthen the ongoing recovery and improve the macroeconomic outlook.
“Capacity utilization in several industries is approaching normal levels, although rising input costs and persistent supply bottlenecks, such as in semiconductors for the automotive sector, may hamper or delay a fuller recovery,” he said.
However, for the fourth quarter of FY22, the RBI said the third wave of the pandemic, driven by the Omicron variant and more recently the geopolitical conflict, caused a loss of momentum in the recovery and clouded the outlook.
Commenting on the banking sector, the report observed that the sector was shielded from pandemic-related disruptions thanks to adequate liquidity support and regulatory waivers provided by the RBI.
Banks have strengthened their capital to increase their risk absorption capacity, helped by the recapitalization of public sector banks (PSBs) as well as the raising of capital in the market and the retention of profits by PSBs and private banks.
“The Gross Non-Performing Assets (GNPA) ratio of all Regular Commercial Banks (SCBs) moderated to its lowest level in six years, helped by necessary collection and technical write-off efforts. Bank credit growth has started to pick up to keep pace with nominal GDP growth and banks are getting back to bottom line,” he said.