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What we gathered from the RBI Annual Report FY22

Restrictions placed for Omnicorn variant caused sharp damage to economic recovery in second half

May 30, 2022 9:59 IST | India Infoline News Service
The latest RBI Annual Report for the fiscal year ended March 2022 (RBI shifted out of July-June from FY21) comes at a time of great flux. Perhaps, the urge to recover from the lows of COVID-19 impelled global economies to go overboard on monetary and fiscal support. The result was runaway inflation, which is now above the median 4% for over 35 months and above the upper tolerance limit of 6% for six out of last twelve months.

In the US, consumer inflation is at a 42 year high of 8.3% forcing prolonged spells of hawkishness by the Federal Reserve. That cannot come at the cost of GDP growth. It is amidst this state of flux that the RBI presented its annual report for FY22. Here are some major takeaways from the FY22 annual report of the RBI.

What we read about FY22 in the RBI Annual Report

Here is what the RBI annual report laid out about FY22 ended March 2022.
  1. The momentum of the first half of 2021 could not be maintained in the second half due to the emergence of the Omicron virus. This led to fresh round of restrictions and shutdowns leading to a sharp impact on output in the second half.
  2. The slowdown in the Indian economy resulted in equity markets peaking in October 2021. Since then, equity markets have corrected 15%. The damage to start-up digital stocks was much steeper. However, the fall is benign compared to the 30% fall in the NASDAQ and 20% in the S&P 500.
  3. During FY22, manufacturing showed an uptick despite supply chain bottlenecks and weak discretionary consumption.  Manufacturing growth was finally above pre-COVID levels. However, contact intensive services like hotels, trade and transport were tepid.
  4. The big story of FY22 was persistent inflation. Food inflation was caused by supply shocks while fuel inflation was largely imported inflation. However, government has tried to mitigate this impact with a slew of supply side measures.
  5. In the second half of FY22, RBI refrained from providing additional liquidity. It used VRRRs aggressively to rebalance liquidity, absorbing 70% of the overhang. CRR restoration also helped absorb liquidity in FY22.
  6. The central fiscal deficit fell by 250 basis points in FY22 to 6.7%, compared to 9.2% in FY21. This was on the back of graded withdrawal of COVID fiscal stimulus. Robust direct and indirect tax collections also helped.
  7. One of the big drivers of Indian GDP growth in FY22 was international trade. For FY22, the total merchandise exports touched $422 billion while total imports crossed the $1 trillion landmark for the first time. Export mix improved significantly.
  8. During FY22, banks were cushioned by adequate liquidity support by RBI. Bank recapitalization helped bolster risk-taking capacity. GNPAs moderated to 6-year lows while credit is just picking up. However, NBFC asset quality deteriorated.
  9. On the microfinance space, RBI enhanced regulations for customer protection and harmonizing regulations. While the Financial Inclusion (FI) index became a benchmark for MFIs, Digital Payments Index (DPI) represented cash-less financial system.
  10. Regulation has to be followed up with complaint redressal to be effective. RBI launched Integrated Ombudsman Scheme in 2021 for rapid redressal of complaints. DICGC Act was also amended to make deposit insurance payments within 90 days.
In a nutshell, not only did the RBI help smoothen the response mechanism to global crisis in FY22, but also tweaked regulations for greater effectiveness.

How the RBI Annual Report visualizes FY23?

If FY22 was interesting, the RBI Annual Report has rightly pointed out that FY23 could be challenging. To begin with, the impact of the conflict in Ukraine on oil prices and the Indian economy could persist through FY23. Even the IMF has pointed out that the recovery in developed markets would be surer than emerging markets.

RBI pointed out that global growth could be hit by 4 factors viz. US Fed hawkishness, battle lines in Europe, China slowdown and inflation caused by shortages. IMF has downsized GDP growth for developed economies for calendar 2022 from 5.2% to 3.6% and for emerging markets from 6.8% to 3.8%.

According to RBI, the biggest challenge to the world order would be the regulatory conflict for central banks. They need to sharpen countervailing monetary policy to contain inflation. However, this comes at a risk of impeding GDP growth. RBI has also highlighted the risk of Stagflation (weak GDP growth with high inflation) for global economies.

However, RBI is confident of India weathering this macro crisis in FY23. GDP estimates were lowered by 60 bps to 7.2% while inflation projections were raised by 120 bps to 5.7%. Both could get worse before it gets better. However, record agricultural output at 328 million tonnes in FY23 could solve a lot of problems. Despite rising input costs, capacity utilization levels are on the rise India. Meanwhile, the government and RBI are already fighting inflation with a combination of monetary and fiscal measures.

What to read from the RBI data charts?

The table compares key FY22 macro data with FY21 and FY20. Here FY20 is critical as it shows the pre-COVID period. In addition, these numbers are also compared with the 5 year period prior to the global financial crisis (GFC) i.e. FY2004 to FY2008. This is juxtaposed with data for 5 years post the GFC viz. FY2010 to FY2014.
Macro FY22 FY21 FY20 FY04-FY08 FY10-FY14
GDP growth 8.9% -6.6% 3.7% 7.9% 6.7%
Foodgrain (MT) 314.5 308.7 297.5 213.6 248.8
Food Stocks (MT) 74.0 78.0 74.0 18.6 50.1
IIP Growth 11.3% -8.4% -0.3% 9.3% 3.5%
Core Sector 10.4% -6.4% 0.4% 5.9% 5.8%
WPI Inflation 13.0% 1.3% 1.7% 5.5% 7.1%
Central Fiscal Deficit 6.7% 9.2% 4.7% 3.7% 5.4%
Export Growth 51.8% -7.5% -5.0% 25.3% 12.2%
USD – INR 75.8 73.5 75.4 43.1 51.1

Data Source: RBI Annual Report

Let us look at some of the positives emerging from the data. Over the last 20 years what really improved is the food grain production and food stocks. That gives more leverage to manage food supply chains better. Merchandise export growth has been the other big positive with the trade in goods and services now accounting for 45% of GDP.

GDP, IIP and core sector growth are looking attractive in FY22, but that is more due to a negative base. FY23 will give a clearer picture. But the data point that best captures the macro challenge of today is WPI inflation which is way above the 20-year average. Addressing supply chain issues will define India in FY23.

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