Structural reforms essential for sustained, balanced, inclusive growth: RBI

Reserve Bank of India (RBI) on Friday pitched for structural reforms for sustained economic growth amid rising inflationary pressure and asked banks to remain watchful of possible slippages in restructured loans.

In its annual report, RBI also said the number of Rs 2,000 denomination notes fell to 1.6 per cent of the total currencies in circulation as of March 2022 from 2 per cent in the year-ago period.

The central bank stressed that the future path of growth would be conditioned by addressing supply-side bottlenecks, calibrating monetary policy to bring down inflation and boosting capital spending.

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"Undertaking structural reforms to improve India's medium-term growth potential holds the key to secure sustained, balanced and inclusive growth, especially by helping workers adapt to the after-effects of the pandemic by reskilling and enabling them to adopt new technologies for raising productivity," it said in the chapter on 'Assessment and Prospects'.

The escalation of geopolitical tensions into war from late February 2022 has delivered a brutal blow to the world economy, battered as it has been through 2021 by multiple waves of the pandemic, supply chain and logistics disruptions, elevated inflation and bouts of financial market turbulence, triggered by diverging paths of monetary policy normalisation, it added.

"... the immediate impact of geopolitical aftershocks is on inflation, with close to three-fourths of the consumer price index at risk. The elevation in international prices of crude, metals and fertilisers has translated into a term of trade shock that has widened trade and current account deficits," the report said.

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Due to the ongoing Russia-Ukraine war, global commodity prices have moved northwards as supply lines have been severely impacted leading to a rise in worldwide inflation.

On the price situation, the report said there is a risk of high Wholesale Price Inflation (WPI) putting pressure on the retail inflation, albeit with a lag.

RBI said the cost-push pressures from high industrial raw material prices, transportation costs and global logistics, and supply chain bottlenecks continue to impinge on core inflation.

"The substantial wedge between wholesale and retail price inflation amidst a sharp rise in manufactured products' inflation poses the risk of a possible pass through of input cost pressures to retail inflation with a lag, although slack in the economy is muting the pass-through," the central bank noted.

To control spiralling prices, the government recently cut excise duty on petrol and diesel and also waived import duty on some raw materials used in the steel and plastic industry. Besides, export duty was hiked on iron ore and iron pellets.

A rise in price across all items from fuel to vegetables and cooking oil pushed WPI to a record high of 15.08 per cent in April and retail inflation to a nearly eight-year high of 7.79 per cent.

High inflation prompted RBI to hold an unscheduled meeting to raise the benchmark interest rate by 40 basis points to 4.40 per cent earlier this month.

On bank credit, the report said the advances to commercial sector improved, aggregate deposits moderated with the ebbing of precautionary savings. The bank credit growth picked up, especially since August 2021, and it was broad-based.

The banks, RBI said, would need to support growth while being watchful of the credit behaviour of entities whose loans were restructured during the pandemic period to arrest slippages.

Banks had extended moratorium on repayment of loans and restructured advances to businesses to help them combat the impact of the COVID pandemic and subsequent lockdowns to check the spread of the virus.

"There is, however, a need to be watchful of the credit behaviour of the restructured advances and possibility of increased slippages arising from sectors that were relatively more exposed to the pandemic," it said.

With the unwinding of support measures, some of the restructured accounts might face solvency concerns, and the impact on banks' balance sheets would become clear in the upcoming quarters, the report noted.

"Going forward, as the economy recovers and credit demand rises, banks will need to focus on supporting credit growth while being vigilant of the evolving risks.

"Care needs to be taken to ensure that fresh slippages are arrested, and banks' balance sheets are strengthened to avoid future build-up of stress," it said.

As regards the Rs 2,000 currency notes, the report said, the number of bank notes has steadily declined over the years to touch 214 crore or 1.6 per cent of the total currency notes in circulation at the end of March this year.

The total number of currency notes of all denominations in circulation stood at 13,053 crore as of March this year, up from 12,437 crore from the year-ago period.

According to the report, the number of Rs 500 denomination notes in circulation rose to 4,554.68 crore at the end of March this year as against 3,867.90 crore in the year-ago period.