Economy gaining speed but at risk from global spillover: RBI

The Reserve Bank of India (RBI), in the April issue of its monthly bulletin, said though the economic activity is returning to speed in several sectors, the gains are at risk of “disruptive spillovers" from geopolitical hostilities. This is increasingly evident in inflation prints, tightening financial conditions and terms of trade shock, accompanied by portfolio outflows, the central bank said.

India is facing these challenges with improving fundamentals and strong buffers, the RBI said, adding that going forward, spurring “private investment” is key to ensure sustainable growth on a durable basis.

The central bank said that recent readings warrant careful monitoring of supply chain pressures. An index of supply chain pressures for India (ISPI), which tracks supply pressures on the economy efficiently, has started moving upward from May 2021, reflecting supply disruptions. These disruptions can be seen in the semiconductor sector, congestions in inbound port traffic movements and delivery delays in the US, the RBI said.

The article, written by 20 RBI employees, also contains the usual disclaimer that the views expressed in it are of the authors and not the central bank.

On monetary policy transmission to deposit and lending rates of banks, the RBI has said that it has improved in the external benchmark linked rates regime, facilitated by an accommodative monetary policy stance, large surplus liquidity conditions and subdued credit offtake.

Banks have extended the benefits to existing borrowers by reducing the weighted average lending rate more than the repo rate cuts during the external benchmark linked rates period. This means the proportion of loans linked to external benchmarks is expected to increase further along with a commensurate fall in the internal benchmark linked loans. "Coupled with shorter reset periods, monetary transmission to banks’ interest rates can, thus, be expected to strengthen further," the central bank said.

On foreign exchange reserves in emerging market economies, the RBI said India’s foreign exchange reserves increased sharply in 2019-20 and 2020-21, led by strong capital inflows vis-à-vis modest external financing requirements and special drawing right allocation by the IMF. "For India, increase in reserve cover of imports is observed to be associated with the lower cost of foreign currency borrowings," it said.

The RBI has also used survey-based data on urban cooperative banks, covering the period from 2016 to 2021, to analyse the overall digital depth in the sector. It also measures progress achieved by them in the adoption of various digital banking channels. The RBI has found that UCBs "demonstrated a consistent increase in digitisation in recent years".

However, even in 2021, the digital index score for these banks, reflecting their digital depth, was estimated to be 41 against a maximum of 100, indicating the distance still to be travelled by them to be at the forefront of digitisation.

At the bi-monthly meeting of the MPC, the Reserve Bank lowered India's GDP forecast to 7.2% for FY 22-23 from 7.8% earlier. It also raised the inflation projection for the current fiscal to 5.7%, up from the earlier estimation of 4.5% in the face of rising commodity and crude oil prices. The RBi unanimously decided to keep the repo rate unchanged at 4%, while also maintaining the status quo on the reverse repo rate and its "accommodative" stance.