Monetary policy will be calibrated to rein in inflation: RBI annual report

Surplus to government fell due to large transfer to Contingency Fund

The Reserve Bank of India (RBI) will follow a nuanced approach in the wake of inflation risks from high commodity prices and the monetary policy will be calibrated while ensuring adequate liquidity to support the needs of the productive sectors of the economy, said the central bank’s Annual Report for 2021-22, released on Friday.

The lower surplus transferred to the government at Rs 30,307.45 crore in 2021-22 against Rs 99,122 crore in the previous year was due to a sharp increase in the Contingency Fund.

“The lower-than-expected dividend was due to higher provisioning and interest cost on LAF [liquidity adjustment facility] operations. The higher provisioning was on account of revaluation loss on foreign securities,” IDFC First Bank said in a report.

The central bank made a provision of Rs 1.15 trillion for the Contingency Fund in FY22 against Rs 20,710.12 crore in the previous year.

The fund was maintained at 5.5 per cent of the balance sheet -- the lower end of the 5.5-6.5 per cent band as recommended by the Bimal Jalan committee.

“The lower-than-expected dividend was due to higher provisioning and interest cost on LAF [liquidity adjustment facility] operations. The higher provisioning was on account of revaluation loss on foreign securities,” IDFC First said in a report.

Sounding cautious on inflation, which has surged after the Russian invasion of Ukraine, the central bank said the immediate impact of geopolitical aftershocks is on price rise, 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, the central bank decided to change its focus to control inflation. The past two years, since the onset of the pandemic, the 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 four years -- by 40 basis points to 4.4 per cent.

“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,” the RBI said in the Annual Report.

In line with the objective to bring down inflation, the RBI has started withdrawing liquidity from the banking system.

During the year, Rs 2.2 trillion was withdrawn from the system through restoring the cash reserve ratio (CRR) to pre-pandemic levels, targeted long-term repo operations, and open market operations, it said.

On the growth front, the central bank suggested recovery was underway amid headwinds.

“…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 said early indicators pointed to revival in economic activities across other sectors that needed to be nurtured.

The report said amid these adverse international developments, the Indian economy was relatively well-placed to strengthen the recovery underway and improve macroeconomic prospects.

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

Commenting on the banking sector, the report observed the sector was cushioned against pandemic-related disruptions through adequate liquidity support and regulatory dispensations provided by the RBI.

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