RBI’S ANNUAL REPORT
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Context
- Reserve Bank of India (RBI) released its first annual report after it adopted an April-to-March cycle—for fiscal 2021-22.
- Annual Report’s cover design, with a rupee symbol that looks suitably Covid stressed (if not stricken), seemed to capture RBI’s current challenge.
Highlights of the Report
- Headline inflation spiked on repetitive supply shocks during the year. But there was reversion to the target as shocks receded.
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Headline inflation Headline inflation is the raw inflation figure reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labor Statistics (BLS). The CPI calculates the cost to purchase a fixed basket of goods to determine how much inflation is occurring in the broad economy. Headline inflation refers to the change in value of all goods in the basket. Core inflation excludes food and fuel items from headline inflation. Since the prices of fuel and food items tend to fluctuate and create ‘noise’ in inflation computation, core inflation is less volatile than headline inflation. Headline inflation is more relevant for developing economies than developed economies. Read: https://www.iasgyan.in/daily-current-affairs/inflation-29 |
- The monetary policy remained accommodative for COVID recovery to take root. Monetary Policy remained vigilant so that inflation remains within the target going forward.
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Accommodative monetary policy Accommodative monetary policy is when central banks expand the money supply to boost the economy. Measures taken are meant to make money less expensive to borrow and encourage more spending. Managing Inflation before focusing on growth in the sequence of priority. |
- Sustained exports and revival in inbound remittances led to the viability of the balance of payments. Net capital flows contributed to the accumulation to foreign exchange reserves.
- World economy faced a brutal blow. Reasons:
- Escalation of geopolitical tensions into war.
- Multiple waves of the pandemic.
- Supply chain and logistics disruptions.
- Elevated inflation and bouts of financial market turbulence due to diverging paths of monetary policy.
- Economic costs of the war and sanctions.
- Growth was uneven. The velocity of money saw only a slight uptick, and the India’s ‘credit gap’, was still too weak to emerge from a slump that had haunted our economy since 2013-14.
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Velocity of Money The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one rupee is spent to buy goods and services per unit of time. Credit gap Credit gap is defined as the difference between the addressable demand of funds in the market and the existing supply of funds in the economy. |
- Indian economy is relatively better placed to strengthen the recovery that is underway and improve macroeconomic prospects going forward.
- RBI is factoring in the emerging risks in the FinTech segment. The involvement of BigTechs in the Banking, financial services and insurance(BFSI) segment also brings along the systemic risks.
- RBI’s Balance Sheet:
- At Rs 62 trillion at the end of 2021-22, it was up 51% from end-June 2019 and5% over the past fiscal year. Some 72% of RBI’s 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 Rs 10 trillion in 11 quarters and 10% over the past four—to Rs 31 t
Final Thought
- To handle various issues, the Reserve Bank’s approach will have to balance innovation with regulation, without compromising on any of the principles of risk management.
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