RBI Annual Report 2021-22: Key Insights

On 27 May, RBI said in its report that the Indian economy is likely to bounce back despite global risks. 

Below are key highlights from the RBI annual reports:

Assessment and Prospects

• The escalation of geopolitical tensions into war from late February 2022 has delivered a brutal blow to the world economy.
• Emerging market and developing economies (EMDEs) are bearing the brunt of global spillovers, despite being bystanders.
• The immediate impact of geopolitical aftershocks is on inflation, with close to three-fourths of the consumer price index at risk.
• High-frequency indicators already point to some loss of momentum in the recovery that has been gaining traction from the second quarter of 2021-22. 
• Steadfast policy support put a floor underneath aggregate demand and economic activity. As per RBI, the experience of 2021-22 has yielded valuable lessons that will illuminate the path of the Indian economy in the year ahead.

Looking Ahead to 2022-23

• The geopolitical conflict in Europe which started in February 2022 has imparted a strong shock that threatens to overwhelm the global economy and its constituents.
• Surging food and fuel prices, in particular, and shortages of essential items are impacting the disadvantaged adversely.
• These forces are superimposed upon tightening financial conditions as countries across the world adopt more hawkish monetary policy stances in response to elevated and diffused inflationary pressures. 
• The near-term outlook is fluid, rapidly evolving, and extremely uncertain. It will likely have a bearing on longer-term prospects, including by exacerbating the scars of the pandemic, deglobalization, financial fragmentation, and setting back the initiatives towards climate change.
• The global recovery is expected to suffer a significant loss of momentum in 2022. Risks are large and to the downside - war escalation, shortages, a resurgence of the pandemic, slowdown in China, and climate stress overshooting the Paris agreement goals.

Response to evolving challenges at a global level

The following policy priorities at the global level will condition the way forward:

• Calibrate monetary policy to fight inflation while safeguarding economic recovery.
• Prioritize fiscal support to the most vulnerable within the consolidation envelope.
• Tighten macroprudential policy in step with monetary policy.
• Focus on health and structural reforms (via digitalization, reskilling workers, reconfiguring supply chains, climate resilience, debt resolution, and trade cooperation).
• Prevent economic fragmentation and support the poorest countries through coordinated actions of the international institutions. These priorities call for country-specific as well as multilateral actions.

Economic Review

Global Economy - Over the first half of 2021, an uneven and divergent recovery had lifted the global economy out of the deep contraction imposed by the pandemic in the preceding year. According to the International Monetary Fund (IMF) in its World Economic Outlook of April 2022, world GDP expanded by 6.1% in 2021 as against a contraction of 3.1% in the previous year.

Indian Economy - In 2021-22, India renewed its tryst with the recovery that had commenced in the second half of 2020-21 with the abatement of the first wave. Supported by continuing fiscal measures and congenial financial conditions engendered by monetary, regulatory, and liquidity initiatives undertaken by the Reserve Bank, including some unconventional ones, the real GDP bounced back in Q2:2021-22 and grew at 1.3% over Q2:2019-20. The recovery was further entrenched in Q3:2021-22 with GDP exceeding the corresponding pre-pandemic quarter by 6.2%.

Other Key Highlights

• The Indian economy is relatively better placed to strengthen the recovery that is underway and improve macroeconomic prospects going forward.
• The central bank is also factoring in the emerging risks in the FinTech segment. The involvement of BigTechs in the BFSI segment also brings along systemic risks.
• Cost-push pressures from high industrial raw material prices, transportation costs, and global logistics and supply chain bottlenecks continue to impinge on core inflation.