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Highlights of RBI Annual Report 2022-23 – Chapter 1 to 3

Reserve Bank of India (RBI) had released its annual report for the financial year 2022-23. In a series of articles, we will go through the highlights of the report. This is the first article in the series. 

Legal framework for publication of Annual Report by RBI

Report of the Central Board of Directors on the working of Reserve Bank of India (RBI) for the year is submitted to the Central Government in terms of Section 53(2) of Reserve Bank of India Act, 1934 (RBI Act, 1934).

The letter of transmittal is signed by the RBI Governor and addressed to the Finance Secretary, Ministry of Finance, Government of India.

Documents submitted by RBI to the Central Government

In pursuance of Section 53(2) of RBI Act, 1934 following documents have been submitted to the Central Government –

  • A copy of the Annual Accounts for the year ended March 31, 2023 certified by RBI’s Auditors and signed by Chief General Manager-in-charge, Deputy Governors and Governor.
  • 2 copies of the Annual Report of the Central Board on the working of RBI during the year ended March 31, 2023.

Chapter 1 – Assessment and Prospects

  • Indian economy is expected to have recorded a growth of 7.0% in real GDP in 2022-23.
  • Real Gross Domestic Product (GDP) growth for 2023-24 is projected at 6.5%.
  • Monetary Policy Committee (MPC) changed its stance in April 2022 to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
  • India witnessed a transition from net importer to exporter in areas such as mobile phones and toys.
  • Net inflows under foreign direct investment (FDI), albeit strong, were lower during 2022-23 than a year ago. There were net portfolio outflows during the year.
  • India’s current account deficit (CAD) was 2.7% of GDP (during April-December 2022).
  • RBI introduced its Central Bank Digital Currency (CBDC) in phases during the year, with the launch of pilots for Digital Rupee (e₹) in the wholesale and retail segments on November 1, 2022 and December 1, 2022, respectively. The pilots were preceded by issuance of a ‘Concept Note’ on CBDC to create awareness about CBDCs in general and the planned features of e₹ in particular.
  • India outpaced other nations to emerge as the largest player in real-time transactions at the global level, with a 46% share in 2022.
  • As per the IMF’s World Economic Outlook (WEO) released in April 2023, global growth for 2023 at 2.8% is likely to be followed by the medium-term growth plateauing at 3.0%.
  • India assumed the G20 Presidency on December 1, 2022. The theme of India’s G20 Presidency - ‘Vasudhaiva Kutumbakam’ or ‘One Earth · One Family · One Future.
  • With the United Nations General Assembly (UNGA) declaring 2023 as the international year of millets, India can enhance the export potential of millets, as currently only 1% of the total millet production is exported.
  • Foreign Trade Policy (FTP), 2023 announced on March 31, 2023 endeavours to promote an export-friendly environment to nurture comparative advantage; harness the opportunities in bilateral trade agreements to help India participate in global value chains (GVCs) and expand access to markets; and explore more trade in the Indian rupee (INR).

Chapter 2 – Economic Review

  • Industrial output measured by the index of industrial production (IIP) expanded by 5.1% during 2022-23 as compared to 11.4% last year.
  • Manufacturing sector, which accounts for 3/4th of the industrial sector largely shaped the industrial sector recovery.
  • Core inflation generally remained elevated and sticky during the year, reflecting gradual pass-through of input cost pressures to goods inflation and subtle uptick in services inflation.
  • During 2022-23, headline inflation averaged 6.7%.
  • During 2022-23, Consumer Price Index (CPI) headline inflation was primarily driven by food and beverages.
  • Inflation excluding the volatile food and fuel items, i.e., core inflation, picked up to an average of 6.1% in 2022-23.
  • Given the perceived substitutability between currency and digital payment modes for effecting transactions, their parallel growth in a country appears counterintuitive, giving rise to a currency paradox. The persistent affinity for cash has been attributed to factors such as the decline in opportunity costs of holding currency, i.e., interest rates, precautionary holdings amid uncertainty, presence of a large informal economy and direct benefit transfers (DBTs) by the government, promoting both cash and digital modes, as routing of benefits digitally tends to be followed by cash withdrawals. Currency in Circulation (CiC)-GDP ratio would have been 12% in 2020-21 and 11.9% in 2021-22 relative to the actual ratio of 14.4% and 13.4%, respectively, had it not been for the pandemic-induced fall in the base GDP and uncertainty-driven surge in currency levels. The sudden uptick in CiC growth during COVID-19 can be attributed to the precautionary and store-of-value motives even as the transactional use of cash has progressively been substituted by digital modes.
  • The nomenclature of the ‘State Development Loan (SDL)’ has been changed to ‘State Government Security (SGS).
  • Gross fiscal deficit (GFD) of the central government declined from 6.75% of GDP in 2021-22 to 6.45% of GDP in 2022-23 (RE).
  • Reiterating its commitment to reduce GFD below 4.5% of GDP by 2025-26, the government has budgeted GFD at 5.9% of GDP in 2023-24.
  • States and Union Territories (UTs) had budgeted a GFD at 3.4% of GDP for 2022-23. 
  • The Centre has put limit to state’s fiscal deficit at 3.5% of gross state domestic product (GSDP) for 2023-24. As per information available for 26 states / UTs, the gross fiscal deficit for 2023-24 is estimated to be 3.2% of GSDP, well within the Centre’s target
  • Unity Malls would focus on promoting and selling the state’s ‘one district, one product’, geographical indication products and other handicraft products. It will also provide space to promote similar products from other states.
  • Urban Infrastructure Development Fund (UIDF) will be established through priority sector lending shortfall. The fund will be managed by National Housing Bank (NHB) and will be used by public agencies to create urban infrastructure in tier 2 and tier 3 cities.
  • At the end of December 2022, foreign exchange reserves were more than two times that of short-term external debt on residual maturity basis and provided cover of 9.4 months of imports projected for 2022-23.
  • India’s foreign exchange reserves were USD 578.4 billion as at end-March 2023.

Chapter 3 – Monetary Policy Operations

  • The policy repo rate was raised by a cumulative 250 basis points between May 2022 and February 2023 from 4% to 6.50%, with the stance shifting to withdrawal of accommodation. During 2022-23, US Fed hiked rates by 450 bps.
  • Standing Deposit Facility (SDF) was introduced at 40 basis points (bps) above the fixed reverse repo rate (FRRR) and replaced the FRRR as floor of the liquidity adjustment facility (LAF) corridor. The SDF rate was placed 25 basis points (bps) below the repo rate. The width of the corridor was thus restored to its pre-pandemic configuration of 50 bps.
  • CPI headline inflation in India remained above the upper tolerance level of 6% for 10 successive months during January-October 2022. In terms of the accountability norms mandated by Section 45ZN of RBI Act, 1934 and Regulation 7 of RBI MPC and Monetary Policy Process Regulations, 2016, a meeting of the MPC was held on November 3, 2022 and a report was sent to the central government by RBI.
  • An overnight index swap (OIS) is an interest rate derivative contract in which two entities agree to swap / exchange a fixed interest rate payment (the OIS rate) vis-à-vis a floating interest rate payment computed over a notional principal amount during the tenor of the contract. The floating rate is usually the overnight (unsecured) interbank rate and the reference rate for OIS contracts in India is the Mumbai Interbank Offered Rate (MIBOR). 
  • Two black swan events – the pandemic and the war in Ukraine – in succession led to globalisation of inflation in 2022, which accentuated inflation deviations from targets. This necessitated aggressive monetary policy tightening across economies – the third major shock for the global economy since 2020.
  • Currency demand by the public, volatile capital flows and swings in government cash balances were the major drivers of liquidity during 2022-23.
  • The limit under Held to Maturity (HTM) category enhanced from 22% to 23% of NDTL up to March 31, 2024, allowing banks to include eligible SLR securities acquired between September 1, 2020 and March 31, 2024 under this enhanced limit. The HTM limits would be restored from 23.0% to 19.5% in a phased manner by March 31, 2025, starting from the quarter ending June 30, 2024. 


References

Reserve Bank of India. (2023, May 30). 'RBI Annual Report 2022-23'. Retrieved from https://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?year=2023


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