RBI Annual Report – Looking back and looking ahead

31 May 2023 , 09:31 AM

As we are aware, the RBI in its meeting of the central board in May had declared a surplus transfer (dividend) to the central government to the tune of Rs87,465 crore. However, the RBI report is a lot more than that. One of the most interesting aspects of the RBI annual report is the central bank’s assessment of the fiscal year gone by (FY22-23) and the prospects for the fiscal year ahead (FY23-24). Let us look at what the RBI annual report says.

Key takeaways from the assessment of FY22-23

Here is what the RBI annual report 2022-23 has to say about the assessment of the fiscal year gone by.

• At a global level, the period from 2022 to 2023 marked the recovery from the pandemic lows, driven by a surfeit of liquidity. However, relentless liquidity had also resulted in high levels of inflation forcing the central banks across the world to tighten since the start of 2022. This resulted in global growth falling sharply from 6.1% in 2021 to 3.4% in 2022. This had its side effects too. The surge in borrowing costs and stress on corporates led to severe portfolio outflows and India was no exception, looking at FPI outflows.

   

• For FY22-23, the big global story was the spike in inflation. For instance, between 2021 and 2022, the global median inflation had surged by 400 bps from 4.7% to 8.7%. Combined with weak demand and supply chain constraints, global trade growth slackened from 10.4% in 2021 to just 5.1% in 2022. Effectively, high inflation and a hawkish central bank policy globally led to fears of recession. This induced lower consumption of imported goods. India also experienced slowdown in goods exports.

   

• While India also witnessed a slowdown in growth in 2022-23 compared to the previous year, the fall was much less for India as it continued to remain the fastest growing large economy in the world. Expected GDP growth of 7% in FY23 is still a very good number. This has been largely helped by robust growth in agriculture at over 3.3%. One striking feature of the last few years has been Rabi making up for the weak performance of Kharif and that was evident in 2022 also. On the industrial growth front, there was traction in construction, capital goods and infrastructure, but recovery in consumption was too lopsided. Services sector recovered in the second half.

   

• However, even India was not spared the blushes of high inflation. The inflation was largely driven by supply shocks caused in the aftermath of the pandemic when supply failed to keep pace with growth in demand. Inflation in India had touched a high of 7.8% in 2022, but has tapered sharply since. However, tight money policies by the RBI ensured that the overall spike in CPI inflation in FY23 was just 120 bps over FY22 at 6.7%. The real challenge for the economy is the core inflation, which remains sticky. RBI not only attacked inflation with higher rates, but also with deft liquidity management.

   

• Gross Fiscal deficit (GFD), which had fallen to 6.75% in FY22, fell further to 6.45% in FY23. This was despite targeted fiscal measures to shield consumers from the impact of the Ukraine war and the lag effects of the pandemic. What is more interesting is that this lower fiscal deficit was achieved by cutting down on revenue spending, without compromising on capital outlays. Prudence has been evident in the states also with state fiscal deficit contained at under 3.4% of GSDP.

   

• There were 2 sub-texts on the export front. Firstly, merchandise exports in FY23 at $451 billion was 67% higher yoy. However, services exports in FY23 were up 28% over FY22. The services exports were driven by IT, BPM, ERD and GCC. Portfolio flows were dodgy with lower FDI flows and negative FPI flows in FY23. The current account deficit at 2.7% in the first 9 months of FY23 was sharply higher than 1.1% in FY22. However, it was not as bad as the 3.5% bombshell that was suggested at the end of Q2FY23. 

   

• The big story of FY23 was Indian banking. Both public sector banks and private banks saw a sharp expansion in their net interest income (NII) and expansion of net interest margins (NIMs). This was driven by a sharp spike in loan yields, but cost of deposits not keeping pace. In addition, banks sharp reduction in provisions, spike in the provision coverage ratio and gross NPAs and net NPAs falling sharply. Even the top line was supported by a sharp growth in advances, although the deposit growth did not keep pace. Indian banks also witnessed a sharp spike in ROA and ROE during FY23.

Of course, digital payments grew at a frenetic pace at the cost of cash; so much so that the withdrawal of the Rs2,000 note almost became a non-event. But let us turn to the future.

How the RBI sees prospects for FY24

If FY23 was a year of economic flux, some of the challenges are likely to continue into FY24 also. Here is what the RBI sees as prospects for the financial year 2023-24.

• Let us begin with the RBI outlook for the global economy. Global GDP growth in 2023 is likely to further slow to 2.8% from 3.4% in 2022. This is likely to be followed by growth plateauing at 3% for a couple of years. On the positive side, the year 2023 will also see global inflation falling to 4.7% on an average from 7.3% in 2022 for advanced economies and from 9.8% to 8.6% for emerging economies. The fall will be more aggressive for the developed economies of the US and Western Europe.

   

• The tepid global outlook is likely to rub off on domestic economic activity, to the extent of merchandise exports, service exports and tech spending. However, India has a lot of domestic positives like a vast domestic market, rising income levels, higher propensity to consume and a pre-reform approach to growth, output, and infrastructure. In addition, sharp fall in commodity prices has nipped one of the biggest causes of imported inflation in India. The RBI has specifically stated that the 250 bps rate hike till February 2023 should steer disinflation going ahead. That logically implies that the RBI may not be looking at further rate hikes in FY24, unless absolutely warranted.

   

• The big growth story for India Inc is likely to be predicated in FY24 on 3 factors. These are realignment of global supply chains, transition to green energy and technological advancement. On supply chains, the China Plus One policy adopted by global companies is a big boost for India. Already, Apple and Samsung have set the tone and others like Tesla are likely to follow the trail from China to India. Green energy is where billions of dollars are being sunk by the biggest industrial groups into green hydrogen, green ammonia, lithium cells etc. Also, focus on new age technologies like AI, ML, cloud etc are being supported by massive investments in skilling and in data centres.

   

• On the agricultural front, IMD expects normal monsoons in 2023 at 96% of LPA. Food grain production target for 2023 has been set at 332 million tonnes, which is just about 40 bps above last year levels. RBI also sees the virtuous outcomes this year of high capex by the government. In Union Budget 2023-24, the government has increased its capex target by 37.4% yoy. That is likely to have a huge positive spill-over effect. The year will also see widening of the PLI scheme as well as implementation of the National Logistics Policy to reduce logistics costs.

   

• The big story of FY24 will continue to be the services sector, where IT, BPM and GCC are likely to drive bulk of the service export growth. As a result, the current account deficit for FY24 will be a lot more palatable. With higher services exports, lower commodity zones and a focus on free trade agreements (FTAs), the current account deficit is expected to fall from 2.7% of GDP in 2022 to 1.7% of GDP in 2023.

   

• One big question is whether the banking sector crisis embodied by the likes of Signature Bank, Silicon Valley Bank and Credit Suisse would touch upon Indian banks also? One conclusion that emerges is that the contagion effect would be very limited since the problems with these banks were localized. Also, the RBI plans to tighten compliance with measures like expect loss based provisioning, which would further reduce stress on capital. 

To sum up the RBI outlook, it expects that much of the shocks experienced in 2022-23 should wane or vanish in 2023-24. The environment should be more conductive to economies and business. The Indian economy in general and Indian companies in particular may find themselves in a sweet spot. That is the good news.