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Business News/ Opinion / Views/  The RBI annual report: Let’s judge it by its cover
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The RBI annual report: Let’s judge it by its cover

The rupee is being weakened by inflation. RBI’s report would have served better had it offered some clarity on how it views its mandate and the effect of over-loose money on price stability

Photo: RBIPremium
Photo: RBI

Friday saw the Reserve Bank of India (RBI) release its first annual report after it adopted an April-to-March cycle—for fiscal 2021-22. Its cover design, with a rupee symbol that looks suitably covid stressed (if not stricken), seemed to capture RBI’s current challenge. Ensuring that our currency retains its retail power to buy goods and services is a key part of the central bank’s job, and its recent loss of inflation control has it staring at failure if price escalation is not reined back under 6% by next quarter. As its latest report shows, it gradually began to sponge up excess liquidity in the second half of 2021-22, but with inflation at an average of 5.5% during the year, its policy emphasis was still on extra-loose money to ease pandemic seizures. Credit offtake and economic activity staged a partial recovery after the Delta wave’s blow, thankfully, though its fragility was evident in diverse metrics. Growth was uneven, the velocity of money saw only a slight uptick, and the country’s ‘credit gap’, which traces the slack in loan demand against its long-term trend, was still too weak to emerge from a slump that had haunted our economy since 2013-14. As covid was a crisis within a long slowdown, with its supply jitters amid excess capacity taken as transient, prices evidently did not alarm RBI sufficiently to shift focus. The oil shock of Russia’s Ukraine invasion on 24 February should have made price stability RBI’s top priority right away, but we had to wait till 4 May for a response that went beyond small soak-ups of cash.

Globally, a price surge that caught Western central banks off-guard had preceded the war in Europe, pushing up bond yields and implying mark-to-market losses for RBI’s own expanded portfolio. As seen in its accounts for 2021-22, an asset revaluation drop of 94,250 crore left it with a gaping hole in its contingency fund. To cover losses that may actually need to be booked, the RBI norm is not to let this fund dip below 5.5% of total assets. So RBI refilled it with more than 1.1 trillion, taking its level to just above 3.1 trillion (still a bit short). Logged as an expense, this refill left a surplus of only 30,308 crore for transfer to the government, a slide from almost 1 trillion the year before, in spite of a 20% jump in RBI’s income to over 1.6 trillion (earned mostly as interest). The Centre, however, has no reason to complain. While it has received bulkier transfers in the past—it got six times that sum in 2018-19—RBI needs a cushion in the face of bond yields likely to harden further as money tightens in the US, whose Federal Reserve may finally start reducing its bloated asset holdings on 1 June. For all its pandemic-relief lending, RBI’s balance sheet was enlarged far less. Yet, at 62 trillion at the end of 2021-22, it was up 51% from end-June 2019 and 8.5% over the past fiscal year. Some 72% of its assets were held as foreign holdings plus gold (up by 65 tonnes to 760 tonnes). Backed by this asset expansion, “Notes issued" went up by about 10 trillion in 11 quarters and 10% over the past four—to 31 trillion. That’s a lot more money.

While RBI’s report has done well in calling for a “graded approach" to a digital rupee and flagging risks arising from fintech and shadow banks, it was also a missed opportunity. We await a clear exposition of the central bank’s views on inflation set off by monetary excess. It would be a pity if a truly bold reform of the Narendra Modi administration—an inflation target—gets let down by ambivalence.

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Published: 29 May 2022, 10:17 PM IST
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