RBI annual report: focus on medium-term challenges. Most of the risks associated with macroeconomic fundamentals are either balanced or subsiding. The annual report focused on medium-term challenges that need to be tackled to ensure macroeconomic stability. The report highlighted some measures that can help curb high food prices, along with outlining the issues on (1) revenue-led fiscal adjustment, (2) strengthening infrastructure by improving contractual arrangements for the private sector, (3) removing obstacles and improving access to finance and (4) managing the NPA cycle to ensure a sound banking system. Read Full Report
RBI’s balance sheet expansion driven by growth in foreign currency assets
RBI’s balance sheet increased by ~10% in the year ending June 30, 2014. This was mainly due to expansion in the foreign currency assets, which increased by ~15% (in rupee terms). The balance sheet of the issue department (in charge of notes in circulation) increased ~12% while the balance sheet of the banking department increased ~7.5%. Exhibits 1-5 detail RBI’s balance sheet along with explanation on some of the components.
Record transfer to government due to zero transfer to contingency reserves
RBI’s total gross income fell 13.1% to Rs646.2 bn in 2013-14 (see Exhibit 6). Earnings from foreign sources decreased due to lower interest rates in the global market. Earnings from domestic sources decreased due to higher depreciation (as yields were higher in 2013-14 compared to last year) even as profit on sale of securities was higher (see Exhibit 7). With expenditure falling 4.9%, RBI generated surplus of Rs526.8 bn with zero transfer to both contingency reserve (CR) and asset development reserve (ADR). The Technical Committee II (chaired by YH Malegam) recommended that since balances in CR and ADR are in excess of the required buffers, no further transfer was needed. Hence, the entire surplus of Rs526.8 bn was transferred to the central government, the largest-ever surplus transfer by RBI.
A few measures to reduce food inflation through supply-side management
RBI highlighted a few measures that could help reduce high food prices:
} Agriculture price policy. Given that long-term elasticity of market prices to MSP is close to unity, the model of fixing MSP (which is based on cost-plus approach) should be relooked at.
Equating wage growth to productivity growth. Wage cost increase has been a major factor behind higher agriculture production costs. Wage increases in excess of productivity growth lead to a wage-price