RBI Annual Report 2021

In News

• The RBI in its annual report has highlighted the threats associated with NBFCs in India. 
  • It has also suggested structural reforms to improve the state of macroeconomy.

Major Findings of the Report

• NBFCs: 
  • Concerns: The Report noted that higher risk appetite of NBFCs has contributed over time to their size, complexity, and interconnectedness.
    • But this higher risk appetite poses a potential threat to the country’s financial stability as many of these NBFCs have become systemically significant in the economy’s financial system.
  • Increased industry exposure: Numerous NBFCs have expanded their balance sheets exponentially primarily in the retail segment. 
    • This prompted the RBI to water down the regulatory framework and bring them on par with banks in terms of regulatory oversight.
  • Enhanced oversight: The central bank has been minutely monitoring the top 50 NBFCs after the collapse of IL&FS group, DHFL and Srei Infrastructure Finance in the past few years. 
    • It has made the oversight mechanism, compliances and supervisions more stringent as the fragile NBFCs pose a threat to the banking system. 
    • According to RBI data, the total exposure of banks to NBFCs is to the tune of Rs 10.54 lakh crore.

• Structural reforms: RBI will aid workers to adapt to after-effects of the pandemic by reskilling and enabling them to adopt new technologies for raising productivity.
  • It said that though the economic recovery is progressing despite the headwinds and challenges in the fiscal year 2022, structural reforms to improve medium-term growth potential hold the key to sustained, balanced and inclusive growth.
• Rectifying supply-side bottlenecks: The growth in coming times would be conditioned by addressing supply-side bottlenecks. 
  • The state should play a proactive role by enhancing expenditure when the market sentiments deter investment by India Inc.
• Coordination of monetary and fiscal Policy: 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.
  • Coordination of both fiscal and monetary policy in tandem would lead to better fiscal health in coming times.
• Geopolitical aftershocks: The conflict in Ukraine and the subsequent upward impact on commodity prices has overcast the outlook for inflation in India as in the rest of the world.
  • Recently, the RBI has hiked the Repo rate by 40 basis points to 4.40 percent to arrest the rising inflation. 
  • The sharp increase in international prices of crude, metals and fertilisers has culminated into a trade shock which has led to widening of trade and current account deficits.
  • The global events have led to loss of momentum in the recovery that has been gaining traction since last year with plummeting effects of Covid-19 pandemic.
• Countervailing Monetary Policy: Persisting high inflation is forcing Central Banks to pursue countervailing monetary policy measures when supporting economic recovery should have been the priority.
  • Central Banks across the globe have raised policy interest rates and have rolled back liquidity thus impacting the economic recovery from the pandemic Policy trade-offs have become quite complex.
• Uncertain global outlook: Financial markets are facing considerable uncertainty and tightening of global financial conditions. 
  • Inflation concerns amid the recovery process have increased the risk of global spillovers, stagflation, unemployment.
• Near-term outlook: Report added that the global outlook of the economy is fluid, rapidly evolving and extremely uncertain.
  • The recovery process is expected to suffer a significant loss of momentum in 2022. 

Way Forward

• The current global outlook is going to have bearing on longer-term prospects like complete recovery from the pandemic, on globalisation, financial health of the world and climate change.
• Structural reforms: Indian economy needs structural improvements to improve medium-term growth potential for sustained, balanced and inclusive growth.
• At industry level: The schemes like PLI for both large and medium industries should be expanded to other labour intensive sectors as well so as to thwart the global headwinds.
• Cautious monetary policy: The RBI should tread cautiously from hereon. Come what may, it should not let inflation loom the recovery process. 
  • The repo rate cut in the recent quarter is a welcome step.
• State’s role: With RBI taking care of the monetary side the state should rectify the supply-side bottlenecks to support growth.
  • It should pursue a precise fiscal policy framework to give a boost to aggregate demand through increasing government spending in the economy as private investments are suffering because of the global outlook. 

Source: IE