ANNUAL REPORT OF RBI FOR FY14 - IGNORE IT AT YOUR OWN PERIL

By Ruma Dubey

One can ignore the RBI Annual Report for 2013-14, saying that it’s a lot of mumbo-jumbo, too much macro economic data, that too of a year gone by.  But therein lay the ignorance. There are so many cues which one can collate from this Report for the current year. Like reading the Chairman’s Message in every Annual Report of companies, which we read to get an insight into the vision of the company, this RBI Annual Report is like a peek into the mind of the Governor.

The report this time is mixed – in the sense that the first part is about FY14, which is not too positive but the second part, which talks about FY15 looks more optimistic and takes ahead the same mantra of acche din aane wale hain. It is a really long report and would be tedious to go through fully for someone who is not really interested in the woods but just the forest.

So here is a synopsis of the report and this will be good enough to understand what RBI wants to say. But before we begin that the one message which comes across really strong – RBI has no intentions of reducing interest rates any time soon as it continues to keep an eye on the persistent and stubborn high inflation. Unless RBI see’s a clear indication of inflation coming down, the Report conveys, there is no way for interest rates to climb down. Now this is what the markets already knew but might not like hearing it once again. For a quick run through the highlights of the FY14 RBI Annual Report.

• GDP growth is expected to be around 5.5 per cent in 2014-15 from the sub-5 per cent growth in the preceding two years. 
• To secure a sustainable growth of at least 7 per cent over the medium term, microeconomic policies that improve activity levels and productivity will be needed so that they can work in tandem with a supportive macroeconomic regime with a reasonably positive real interest rate, low inflation, moderate CAD and low fiscal deficit.
• The good news - Deficiency in rainfall during the 2014 monsoon season so far poses some downside risks, but overall growth in 2014-15 is likely to be better than previous year with likely revival in industrial and construction activities. The improvement in the monsoon since mid-July will also help contain crop output losses. With greater political stability and a supportive policy framework, investment could turn around. The economy is poised to make a shift to a higher growth trajectory.
• Indian economy could grow in the range of 5 to 6 per cent in 2014-15 with risks broadly in balance around the central estimate of 5.5 per cent. This is broadly in line with the projections made by the Reserve Bank at the start of 2014-15, though risks to the central estimate were more on the downside at that point. However, downside risks could play out if global recovery slows, geopolitical tensions intensify or monsoon weakens again in the rest of the season.
• Area sown under kharif crops (till August 14) was 2.3 per cent lower than the normal and was 8.9 per cent higher than the 2009 drought year. Based on the sowing data, it appears that the drop in output may now be restricted mainly to coarse cereals and pulses. The reservoir water levels provide comfort. As on August 13, the level in the 85 major reservoirs was 14 per cent higher than the average over the last 10 years, though it was 12 per cent lower than last year’s level on the comparable date.
• Adverse impact of deficit monsoon on growth, inflation, fiscal and trade deficits is expected to be small as on the current reckoning, the deficiency in quantitative and qualitative terms is likely to be much less than that in 2009. Moreover any shortfall in kharif could be substantially made good by the rabi crop. On an average basis for the last five years, rabi crop accounted for 50.7 per cent of total foodgrains output.
• The business and investment climate in the economy is improving with the formation of a stable government at the Centre, a comparatively lower inflation and an improvement in global growth. Coincident indicators such as automobile sales, railway freight traffic, cargo handled at ports and foreign tourist arrivals are pointing towards some recovery in the services sector and automobile sales have shown signs of a turnaround.
• Given the tight demand-supply balance, any risk to crude oil supply could have a large impact on prices and as such remains an upside risk going forward.
• Fiscal deficit is likely to reduce further in 2014-15. The budgetary targets are realisable, though concerted efforts will be necessary to achieve these targets. The CAD though is likely to widen from the levels in 2013-14, is expected to remain within the sustainable level. As such, the risks associated with twin deficit risks are expected to stay moderate.

The RBI has also laid out the work for the Govt, stating what it could do to bring down inflation and spur growth. It has listed - Lowering high food inflation through supplyside management, Strengthening the monetary policy framework and transmission, Fiscal adjustment through revenue augmentation and strengthening infrastructure by improving contractual arrangements for private sector.

RBI has also talked about Infrastructure and its impact on the banking sector on account of rising NPAs.  It has stated that while stressed advances of the scheduled commercial banks (SCBs) have declined marginally to 10.0 per cent of the total advances in March 2014 from 10.2 per cent in September 2013, they remain high. Five sub-sectors, viz., infrastructure, iron and steel, textiles, mining (including coal) and aviation services, that account for about 24 per cent of total advances, comprise over half of stressed assets. Of these, asset quality in iron & steel and infrastructure has worsened most sharply.

RBI goes on to state that while share of advances to infrastructure continued growing, albeit slowly (the share of the other four sub-sectors have declined), from 13.5 per cent in March 2011 to 14.4 per cent, in March 2014; infrastructure as a share of stressed assets, has risen sharply, from 8.4 per cent to 29.2 per cent. This implies that the stress rate of infrastructure, which was much less than the average, is now over twice that of the overall portfolio. Over a fifth of all infrastructure advances are stressed and in stress tests of credit risk exposure to sectors, infrastructure impacts banks most severely on account of potential losses on future assumed impairments. To resolve this RBI has recommended a revamp of the contractual relationship between private firms and Govt in infra, while removing obstacles and a more supportive legal infrastructure which can help address issues of asset quality.

This RBI Annual Report of FY14 has tonnes of invaluable information and one should try and at least skim through it once to understand the current economic scenario. RBI has presented the problems but at the same time softened them up, almost like saying there is a solution for everything. You read the report and you come out feeling extremely positive.

But the markets in all likelihood will ignore this report and wait for Yellen’s speech; that is what happens when markets are ruled by FIIs!