RBI in Annual Report for 2010-11

The Reserve Bank of India released its Annual Report for 2010-11 on 25 August 2011. The Report of the Central Board of the Reserve Bank includes (i) the assessment of the macroeconomic performance during 2010-11 and the prospects for 2011-12, and (ii) the working and operations of the Reserve Bank and its financial accounts.

Assessment for 2010-11

As part of the assessment for 2010-11 the RBI pointed out that challenges to the Indian economy emerged as investment activity slowed and fiscal consolidation was led by cyclical and one-off factors, the sustainability of the economy thus became uncertain, more so given the immense inflationary pressure. The report highlighted RBI’s measures adopted when faced with the growing challenges.

•    RBI opted for cumulative monetary tightening by raising operational policy rates by 475 bps since mid-March 2010. The policy was tightened aggressively as high inflation was believed to have brought down growth by itself. The threshold inflation was estimated in 4-6 per cent range for India. The inflation objective of monetary policy was kept lower than the threshold keeping in view the welfare costs for the poor and the open nature of the economy. Reserve Bank’s medium-term inflation objective was therefore fixed at 3 per cent. The central bank emphasised on containing perceptions of inflation in the range of 4.0-4.5 per cent
•    In the report the RBI pointed out that Fiscal deficit ratios in 2010-11 turned out to be better than envisaged in the Union budget. However the qualitative assessment of fiscal correction during 2010-11, was likely to raise concern. Capital outlay-GDP ratio fell. The RBI felt that since improved fiscal position had a large temporary component a more enduring fiscal consolidation strategy is needed.
•    The report pointed out that the improvement in the current account gap came about by cyclical upswing in global trade and turnaround in invisibles. The cyclical upswing as well as the turnaround resulted from pick-up in exports from November 2010 aided by diversification of trade in composition and direction. Trade policy in particular supported exports through schemes such as DEPB.
•    In India, it was observed, post-Lehman crisis, regulators took several measures for risk mitigation. However, the RBI cautioned that areas of concern still remained.
•    A series of stress tests conducted by the Reserve Bank revealed that banks remained resilient. RBI warned nevertheless that risks of asset quality deterioration in infrastructure sector needed to be averted by quickly resolving the pricing and input supply issues.
The gross non-performing assets (NPA) ratio of scheduled commercial banks was noted to have increased marginally to 2.52 per cent by end-June 2011. The CRAR at 13.86 per cent at end-June 2011 was thus well above the minimum requirement.