Days before Governor Raghuram Rajan's three-year term comes to an end, the Reserve Bank on Monday released its annual report, with a foreword written by the much admired former International Monetary Fund chief economist. RBI's annual report provides details on the central bank's thinking across a slew of topics. This will be the last annual report published under Dr Rajan, who will be replaced by Deputy Governor Urjit Patel next month.
Here are 10 things to know about RBI's latest annual report:
1) RBI's focus remains on bringing down inflation, while managing cash conditions and cleaning up the banking sector of soured assets would be its other priorities. "The short-term macroeconomic priorities of the Reserve Bank continue to be to focus on bringing down inflation towards the government-set target of 4 per cent," Dr Rajan said.
2) He warned that "room to cut policy rates can emerge only if inflation is projected to fall further," after consumer prices rose 6.07 per cent in July, although the report noted the fall in prices outside of food and fuel were "a heartening development."
3) The economy is showing signs of picking up, but it is still below the levels that the country is capable of, Dr Rajan noted. "The key weakness is in investment, with private corporate investment subdued because of low capacity utilisation, and public investment slow in rolling out in some sectors," he said.
4) Dr Rajan once again asked commercial banks to pass on lower interest rates to their customers. The willingness of commercial banks to cut lending rates was muted, since the level of corporate investment had reduced the volume and scope of new profitable loans for banks, he said.
5) Dr Rajan called for ushering new owners or managers for companies whose loans accounts have gone sticky. According to him, where it is necessary, new management teams have to be brought in, sometimes as owners, and where not possible, as managers. "Of course, if the existing promoter is capable and reliable, they should be retained," he said.
6) Dr Rajan warned banks against "unrealistic application" of stressed asset resolution schemes to postpone recognition of non-performing assets (NPAs).
7) Dr Rajan said that an area of short-term focus with macroeconomic relevance is stressed asset resolution. The Asset Quality Review initiated in early 2015-16 has improved recognition of NPAs and provisioning in banks enormously. Some banks have taken significant steps in recognising incipient stress early, he added.
8) One of the critical components of the medium-term strategy in the financial sector will be to strengthen the public sector banks in all aspects, including governance, cost structure, and balance sheets, Dr Rajan said.
9) RBI projected the overall gross value added (GVA) growth at 7.6 per cent in 2016-17, up from 7.2 per cent last year. GVA is the measure of goods and services produced in an economy minus the intermediate consumption. The services sector is likely to do well on Seventh Pay Commission wage hikes.
10) Dr Rajan said that financial institutions need to strengthen grievance redressal mechanism in the rural areas as well as to the weaker sections of the society.