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Page 1 CHAPTER 04 Monetary policy and liquidity operations since the beginning of the COVID-19 pandemic have geared towards mitigating its adverse impact on economy. Accommodative monetary policy along with other regulatory dispensations, asset classification standstill, temporary moratorium and provision of adequate liquidity were put in place in order to provide a safety net to the system. In 2021-22, some of the measures undertaken by RBI like CRR reduction reached pre-set sunset dates, liquidity has been wound down partly but remains in surplus mode and regulatory measures have been realigned. After several rate cuts in 2019-20 and 2020-21, the repo rate was maintained at 4 per cent in 2021-22. The liquidity in the system remained in surplus throughout. RBI undertook various measures, including secondary market G-sec acquisition programme, special Long-Term Repo operations, on tap targeted Long-Term Repo Operations, etc. to provide further liquidity in the system. Thereafter, RBI used Variable Rate Reverse Repo, reverse repo auctions to rebalance liquidity conditions. Reserve money and broad money supply growth in 2021-22 so far was lower than in the previous year. The reserve money growth did not fully translate into commensurate broad money supply growth due to the smaller (adjusted) money multiplier reflecting large deposits by banks with RBI under reverse repo window. Bank credit growth accelerated gradually in 2021-22 up from 5.3 per cent in the beginning of April 2021. The very latest data shows that the bank credit growth stands at 9.2 per cent as on 31 st December 2021. At the sectoral level, credit to agriculture sector continued to register robust growth and showed signs of improvement in the industry sector . Services sector credit growth, however , is yet to recover . Gross Non-Performing advances ratio of Scheduled Commercial Banks (SCBs) continued to decline from 11.2 per cent at end of 2017-18 to 6.9 per cent at end-September 2021. Similarly, Net Non-Performing advances ratio declined from 6 per cent to 2.2 per cent during the same period. Capital to risk-weighted asset ratio of SCBs continued to increase from 13 per cent in 2013-14 to 16.54 per cent at end-September 2021. The Return on Assets and Return on Equity for Public Sector Banks became positive in June 2020 and continued to be positive for the period ending September 2021, after recording negative profitability ratios from March 2016 to March 2020. The economic shock of the pandemic has been weathered well by the commercial banking system so far, even if some lagged impact is still in pipeline. Monetary Management and Financial Intermediation Page 2 CHAPTER 04 Monetary policy and liquidity operations since the beginning of the COVID-19 pandemic have geared towards mitigating its adverse impact on economy. Accommodative monetary policy along with other regulatory dispensations, asset classification standstill, temporary moratorium and provision of adequate liquidity were put in place in order to provide a safety net to the system. In 2021-22, some of the measures undertaken by RBI like CRR reduction reached pre-set sunset dates, liquidity has been wound down partly but remains in surplus mode and regulatory measures have been realigned. After several rate cuts in 2019-20 and 2020-21, the repo rate was maintained at 4 per cent in 2021-22. The liquidity in the system remained in surplus throughout. RBI undertook various measures, including secondary market G-sec acquisition programme, special Long-Term Repo operations, on tap targeted Long-Term Repo Operations, etc. to provide further liquidity in the system. Thereafter, RBI used Variable Rate Reverse Repo, reverse repo auctions to rebalance liquidity conditions. Reserve money and broad money supply growth in 2021-22 so far was lower than in the previous year. The reserve money growth did not fully translate into commensurate broad money supply growth due to the smaller (adjusted) money multiplier reflecting large deposits by banks with RBI under reverse repo window. Bank credit growth accelerated gradually in 2021-22 up from 5.3 per cent in the beginning of April 2021. The very latest data shows that the bank credit growth stands at 9.2 per cent as on 31 st December 2021. At the sectoral level, credit to agriculture sector continued to register robust growth and showed signs of improvement in the industry sector . Services sector credit growth, however , is yet to recover . Gross Non-Performing advances ratio of Scheduled Commercial Banks (SCBs) continued to decline from 11.2 per cent at end of 2017-18 to 6.9 per cent at end-September 2021. Similarly, Net Non-Performing advances ratio declined from 6 per cent to 2.2 per cent during the same period. Capital to risk-weighted asset ratio of SCBs continued to increase from 13 per cent in 2013-14 to 16.54 per cent at end-September 2021. The Return on Assets and Return on Equity for Public Sector Banks became positive in June 2020 and continued to be positive for the period ending September 2021, after recording negative profitability ratios from March 2016 to March 2020. The economic shock of the pandemic has been weathered well by the commercial banking system so far, even if some lagged impact is still in pipeline. Monetary Management and Financial Intermediation 118 Economic Survey 2021-22 MONETARY DEVELOPMENTS 4.1 The Monetary Policy Committee (MPC) maint ained status quo on the policy repo rate during April to December 2021 after a substantial cut of 1 15 basis points (bps) during February- May 2020 and a cumulativ e 250 basis points cut since February 2019 (Figure 1 and T able 1). The repo rate which currently stands at 4 per cent is lowest in the last decade (Figure 1). Since May 2020, the policy rates have been on hold along with an accommodative monetary policy stance with forward guidance that this stance will continue as long as necessary to revive growth on durable basis while ensuring that inflation remains within the tar get (Consumer Price Index inflation of 4 per cent within a band of +/- 2 per cent). Figure 1: Repo and reverse repo rate (per cent) 1 2 3 4 5 6 7 8 9 Apr, 2011 Aug, 2011 Dec, 2011 Apr, 2012 Aug, 2012 Dec, 2012 Apr, 2013 Aug, 2013 Dec, 2013 Apr, 2014 Aug, 2014 Dec, 2014 Apr, 2015 Aug, 2015 Dec, 2015 Apr, 2016 Aug, 2016 Dec, 2016 Apr, 2017 Aug, 2017 Dec, 2017 Apr, 2018 Aug, 2018 Dec, 2018 Apr, 2019 Aug, 2019 Dec, 2019 Apr, 2020 Aug, 2020 Dec, 2020 Apr, 2021 Aug, 2021 Dec, 2021 per cent Policy Repo Rate Reverse Repo Rate Source: RBI The year 2021-22 so far has been an exceptional year for the capital markets. There was a boom in fundraising through IPOs by many new age companies/tech start-ups/unicorns. In April-November 2021, ` 89,066 crore were raised via 75 IPO issues, much higher than in any year in last decade. The Sensex and Nifty scaled up to touch its peak at 61,766 and 18,477 on October 18, 2021. Among major emerging market economies, Indian markets outperformed the peers in April-December 2021. The process of insolvency which was suspended in view of pandemic, started again in end-March 2021. A pre-packaged insolvency resolution process was provided under IBC as an alternative insolvency resolution process for corporate Micro, Small and Medium Enterprises in April 2021. Page 3 CHAPTER 04 Monetary policy and liquidity operations since the beginning of the COVID-19 pandemic have geared towards mitigating its adverse impact on economy. Accommodative monetary policy along with other regulatory dispensations, asset classification standstill, temporary moratorium and provision of adequate liquidity were put in place in order to provide a safety net to the system. In 2021-22, some of the measures undertaken by RBI like CRR reduction reached pre-set sunset dates, liquidity has been wound down partly but remains in surplus mode and regulatory measures have been realigned. After several rate cuts in 2019-20 and 2020-21, the repo rate was maintained at 4 per cent in 2021-22. The liquidity in the system remained in surplus throughout. RBI undertook various measures, including secondary market G-sec acquisition programme, special Long-Term Repo operations, on tap targeted Long-Term Repo Operations, etc. to provide further liquidity in the system. Thereafter, RBI used Variable Rate Reverse Repo, reverse repo auctions to rebalance liquidity conditions. Reserve money and broad money supply growth in 2021-22 so far was lower than in the previous year. The reserve money growth did not fully translate into commensurate broad money supply growth due to the smaller (adjusted) money multiplier reflecting large deposits by banks with RBI under reverse repo window. Bank credit growth accelerated gradually in 2021-22 up from 5.3 per cent in the beginning of April 2021. The very latest data shows that the bank credit growth stands at 9.2 per cent as on 31 st December 2021. At the sectoral level, credit to agriculture sector continued to register robust growth and showed signs of improvement in the industry sector . Services sector credit growth, however , is yet to recover . Gross Non-Performing advances ratio of Scheduled Commercial Banks (SCBs) continued to decline from 11.2 per cent at end of 2017-18 to 6.9 per cent at end-September 2021. Similarly, Net Non-Performing advances ratio declined from 6 per cent to 2.2 per cent during the same period. Capital to risk-weighted asset ratio of SCBs continued to increase from 13 per cent in 2013-14 to 16.54 per cent at end-September 2021. The Return on Assets and Return on Equity for Public Sector Banks became positive in June 2020 and continued to be positive for the period ending September 2021, after recording negative profitability ratios from March 2016 to March 2020. The economic shock of the pandemic has been weathered well by the commercial banking system so far, even if some lagged impact is still in pipeline. Monetary Management and Financial Intermediation 118 Economic Survey 2021-22 MONETARY DEVELOPMENTS 4.1 The Monetary Policy Committee (MPC) maint ained status quo on the policy repo rate during April to December 2021 after a substantial cut of 1 15 basis points (bps) during February- May 2020 and a cumulativ e 250 basis points cut since February 2019 (Figure 1 and T able 1). The repo rate which currently stands at 4 per cent is lowest in the last decade (Figure 1). Since May 2020, the policy rates have been on hold along with an accommodative monetary policy stance with forward guidance that this stance will continue as long as necessary to revive growth on durable basis while ensuring that inflation remains within the tar get (Consumer Price Index inflation of 4 per cent within a band of +/- 2 per cent). Figure 1: Repo and reverse repo rate (per cent) 1 2 3 4 5 6 7 8 9 Apr, 2011 Aug, 2011 Dec, 2011 Apr, 2012 Aug, 2012 Dec, 2012 Apr, 2013 Aug, 2013 Dec, 2013 Apr, 2014 Aug, 2014 Dec, 2014 Apr, 2015 Aug, 2015 Dec, 2015 Apr, 2016 Aug, 2016 Dec, 2016 Apr, 2017 Aug, 2017 Dec, 2017 Apr, 2018 Aug, 2018 Dec, 2018 Apr, 2019 Aug, 2019 Dec, 2019 Apr, 2020 Aug, 2020 Dec, 2020 Apr, 2021 Aug, 2021 Dec, 2021 per cent Policy Repo Rate Reverse Repo Rate Source: RBI The year 2021-22 so far has been an exceptional year for the capital markets. There was a boom in fundraising through IPOs by many new age companies/tech start-ups/unicorns. In April-November 2021, ` 89,066 crore were raised via 75 IPO issues, much higher than in any year in last decade. The Sensex and Nifty scaled up to touch its peak at 61,766 and 18,477 on October 18, 2021. Among major emerging market economies, Indian markets outperformed the peers in April-December 2021. The process of insolvency which was suspended in view of pandemic, started again in end-March 2021. A pre-packaged insolvency resolution process was provided under IBC as an alternative insolvency resolution process for corporate Micro, Small and Medium Enterprises in April 2021. 119 Monetary Management and Financial Intermediation Table 1: Revision in Key Rates set by RBI Effective Date Repo Rate (per cent) Reverse Repo Rate (per cent) Cash Reserve Ratio (per cent of NDTL) Statutory Liquidity Ratio (per cent of NDTL) MSF Rate/ Bank Rate (per cent) 06-02-2020 5.15 4.90 4.0 18.25 5.40 27-03-2020 4.40 4.00 4.0 18.25 4.65 28-03-2020 4.40 4.00 3.0 18.25 4.65 17-04-2020 4.40 3.75 3.0 18.00 4.65 22-05-2020 4.00 3.35 3.0 18.00 4.25 27-03-2021 4.00 3.35 3.5 18.00 4.25 22-05-2021 4.00 3.35 4.0 18.00 4.25 06-08-2021 4.00 3.35 4.0 18.00 4.25 08-10-2021 4.00 3.35 4.0 18.00 4.25 08-12-2021 4.00 3.35 4.0 18.00 4.25 Source: RBI Note: NDTL: Net Demand and T ime Liabilities 4.2 In the initial meeting s of 2021-22, MPC noted that while the inflation has hovered above the upper tole rance band for some months, it was lar gely driven by adverse supply shocks which were expected to be transito ry . The outlook for aggregate demand was progressively improving but capacity utilisation rate s were low . The contact intensive services were lagging behind and the recovery was uneven and required policy support. In the latest MPC meeting in December 2021, the committee pointed out that the outlook was uncertain owing to global spillovers, potential resur gence in COVID-19 infections and diver gences in policy actions and stances across the world with inflationary pressures increasing across economies. Accordingly , the MPC decided to continue monito ring the inflationary pressures, keep the policy repo rate unchanged at 4 per cent and persist with the accommodative stance. 4.3 In 2021-22 so far , the overall monetary and credit conditions remained accommodative. However , the growth rates of monetary aggregates- including Reserve money , Broad money were lower as compared to the last year . Reserve money (M0) recorded a year -on-year (Y oY) growth of 13 per cent as on 7 th January 2022, as compa red to 14.3 per cent a year ago. However , M0 adjusted for the first-round impact of changes in the Cash Reserve Ratio (CRR) recorded a lower growth (Y oY) of 7.7 per cent, as compared with 18.3 per cent a year ago (Figure 2). 4.4 Expansion in M0 during 2021-22 so far was driven by bankers’ deposits with the RBI from the component side, with CRR restoration in phases, effective 27 th March 2021 and 22 nd May 2021. Currency in Circulation (CIC) grew by 7.8 per cent as on 7 th January 2022, lower as compared to the previous year as precautionary demand for cash subsided (T able 2). Page 4 CHAPTER 04 Monetary policy and liquidity operations since the beginning of the COVID-19 pandemic have geared towards mitigating its adverse impact on economy. Accommodative monetary policy along with other regulatory dispensations, asset classification standstill, temporary moratorium and provision of adequate liquidity were put in place in order to provide a safety net to the system. In 2021-22, some of the measures undertaken by RBI like CRR reduction reached pre-set sunset dates, liquidity has been wound down partly but remains in surplus mode and regulatory measures have been realigned. After several rate cuts in 2019-20 and 2020-21, the repo rate was maintained at 4 per cent in 2021-22. The liquidity in the system remained in surplus throughout. RBI undertook various measures, including secondary market G-sec acquisition programme, special Long-Term Repo operations, on tap targeted Long-Term Repo Operations, etc. to provide further liquidity in the system. Thereafter, RBI used Variable Rate Reverse Repo, reverse repo auctions to rebalance liquidity conditions. Reserve money and broad money supply growth in 2021-22 so far was lower than in the previous year. The reserve money growth did not fully translate into commensurate broad money supply growth due to the smaller (adjusted) money multiplier reflecting large deposits by banks with RBI under reverse repo window. Bank credit growth accelerated gradually in 2021-22 up from 5.3 per cent in the beginning of April 2021. The very latest data shows that the bank credit growth stands at 9.2 per cent as on 31 st December 2021. At the sectoral level, credit to agriculture sector continued to register robust growth and showed signs of improvement in the industry sector . Services sector credit growth, however , is yet to recover . Gross Non-Performing advances ratio of Scheduled Commercial Banks (SCBs) continued to decline from 11.2 per cent at end of 2017-18 to 6.9 per cent at end-September 2021. Similarly, Net Non-Performing advances ratio declined from 6 per cent to 2.2 per cent during the same period. Capital to risk-weighted asset ratio of SCBs continued to increase from 13 per cent in 2013-14 to 16.54 per cent at end-September 2021. The Return on Assets and Return on Equity for Public Sector Banks became positive in June 2020 and continued to be positive for the period ending September 2021, after recording negative profitability ratios from March 2016 to March 2020. The economic shock of the pandemic has been weathered well by the commercial banking system so far, even if some lagged impact is still in pipeline. Monetary Management and Financial Intermediation 118 Economic Survey 2021-22 MONETARY DEVELOPMENTS 4.1 The Monetary Policy Committee (MPC) maint ained status quo on the policy repo rate during April to December 2021 after a substantial cut of 1 15 basis points (bps) during February- May 2020 and a cumulativ e 250 basis points cut since February 2019 (Figure 1 and T able 1). The repo rate which currently stands at 4 per cent is lowest in the last decade (Figure 1). Since May 2020, the policy rates have been on hold along with an accommodative monetary policy stance with forward guidance that this stance will continue as long as necessary to revive growth on durable basis while ensuring that inflation remains within the tar get (Consumer Price Index inflation of 4 per cent within a band of +/- 2 per cent). Figure 1: Repo and reverse repo rate (per cent) 1 2 3 4 5 6 7 8 9 Apr, 2011 Aug, 2011 Dec, 2011 Apr, 2012 Aug, 2012 Dec, 2012 Apr, 2013 Aug, 2013 Dec, 2013 Apr, 2014 Aug, 2014 Dec, 2014 Apr, 2015 Aug, 2015 Dec, 2015 Apr, 2016 Aug, 2016 Dec, 2016 Apr, 2017 Aug, 2017 Dec, 2017 Apr, 2018 Aug, 2018 Dec, 2018 Apr, 2019 Aug, 2019 Dec, 2019 Apr, 2020 Aug, 2020 Dec, 2020 Apr, 2021 Aug, 2021 Dec, 2021 per cent Policy Repo Rate Reverse Repo Rate Source: RBI The year 2021-22 so far has been an exceptional year for the capital markets. There was a boom in fundraising through IPOs by many new age companies/tech start-ups/unicorns. In April-November 2021, ` 89,066 crore were raised via 75 IPO issues, much higher than in any year in last decade. The Sensex and Nifty scaled up to touch its peak at 61,766 and 18,477 on October 18, 2021. Among major emerging market economies, Indian markets outperformed the peers in April-December 2021. The process of insolvency which was suspended in view of pandemic, started again in end-March 2021. A pre-packaged insolvency resolution process was provided under IBC as an alternative insolvency resolution process for corporate Micro, Small and Medium Enterprises in April 2021. 119 Monetary Management and Financial Intermediation Table 1: Revision in Key Rates set by RBI Effective Date Repo Rate (per cent) Reverse Repo Rate (per cent) Cash Reserve Ratio (per cent of NDTL) Statutory Liquidity Ratio (per cent of NDTL) MSF Rate/ Bank Rate (per cent) 06-02-2020 5.15 4.90 4.0 18.25 5.40 27-03-2020 4.40 4.00 4.0 18.25 4.65 28-03-2020 4.40 4.00 3.0 18.25 4.65 17-04-2020 4.40 3.75 3.0 18.00 4.65 22-05-2020 4.00 3.35 3.0 18.00 4.25 27-03-2021 4.00 3.35 3.5 18.00 4.25 22-05-2021 4.00 3.35 4.0 18.00 4.25 06-08-2021 4.00 3.35 4.0 18.00 4.25 08-10-2021 4.00 3.35 4.0 18.00 4.25 08-12-2021 4.00 3.35 4.0 18.00 4.25 Source: RBI Note: NDTL: Net Demand and T ime Liabilities 4.2 In the initial meeting s of 2021-22, MPC noted that while the inflation has hovered above the upper tole rance band for some months, it was lar gely driven by adverse supply shocks which were expected to be transito ry . The outlook for aggregate demand was progressively improving but capacity utilisation rate s were low . The contact intensive services were lagging behind and the recovery was uneven and required policy support. In the latest MPC meeting in December 2021, the committee pointed out that the outlook was uncertain owing to global spillovers, potential resur gence in COVID-19 infections and diver gences in policy actions and stances across the world with inflationary pressures increasing across economies. Accordingly , the MPC decided to continue monito ring the inflationary pressures, keep the policy repo rate unchanged at 4 per cent and persist with the accommodative stance. 4.3 In 2021-22 so far , the overall monetary and credit conditions remained accommodative. However , the growth rates of monetary aggregates- including Reserve money , Broad money were lower as compared to the last year . Reserve money (M0) recorded a year -on-year (Y oY) growth of 13 per cent as on 7 th January 2022, as compa red to 14.3 per cent a year ago. However , M0 adjusted for the first-round impact of changes in the Cash Reserve Ratio (CRR) recorded a lower growth (Y oY) of 7.7 per cent, as compared with 18.3 per cent a year ago (Figure 2). 4.4 Expansion in M0 during 2021-22 so far was driven by bankers’ deposits with the RBI from the component side, with CRR restoration in phases, effective 27 th March 2021 and 22 nd May 2021. Currency in Circulation (CIC) grew by 7.8 per cent as on 7 th January 2022, lower as compared to the previous year as precautionary demand for cash subsided (T able 2). 120 Economic Survey 2021-22 Table 2: Growth (YoY) in Monetary Aggregates (end-March) (per cent) Item 2015-16 2016-17 ^ 2017-18 2018-19 2019-20 2020-21 2021-22 * Currency in Circulation (CIC) 14.9 -19.7 37.0 16.8 14.5 16.6 7.8 # Cash with Banks 6.6 4.2 -2.1 21.4 15.4 4.5 10.7 Currency with the Public 15.2 -20.8 39.2 16.6 14.5 17.1 7.7 Bankers’ Deposits with the RBI 7.8 8.4 3.9 6.4 -9.6 28.5 42.0 # Demand Deposits 1 1.0 18.4 6.2 9.6 6.8 14.8 26.2 T ime Deposits 9.2 10.2 5.8 9.6 8.1 10.9 8.2 Reserve Money (M0) 13.1 -12.9 27.3 14.5 9.4 18.8 13.0 # Broad Money (M3) 10.1 6.9 9.2 10.5 8.9 12.2 9.9 Source: RBI Note: ^: March 31, 2017 over April 1, 2016 barring Reserve Money (M0), Currency in Circulation (CIC) and Bankers’ Deposits with the RBI (BD), *: As on December 31, 2021, #: As on January 7, 2022. Figure 2: M0, CRR Adjusted M0 and CiC Growth (YoY) Source: RBI Note: CIC: Currency in Circulation, CRR: Cash Reserve Ratio 4.5 In 2021-22 so far , the Y oY growth of broad money (M3) stood at 9.9 per cent as on 31 st December , as compared to 12.5 per cent a year ago (Figure 3). From the component side, aggregate deposits which is the lar gest component - has contributed most to the expansion of M3 during the year so far (Figure 4). Amongst sources, bank credit to the government was a major contributor to the increase in broad money . Banks’ higher investments in liquid and risk-free assets such as SLR securiti es and G-secs, resulted in higher net bank credit to the government. Bank credit to the commer cial sector also supplemented M3 expansion from the sources side. The Y oY credit growth for Scheduled Commercial Banks was 9.2 per cent as on 31 st December 2021 as compared to 6.6 per cent a year ago, reflecting pick-up in credit. Page 5 CHAPTER 04 Monetary policy and liquidity operations since the beginning of the COVID-19 pandemic have geared towards mitigating its adverse impact on economy. Accommodative monetary policy along with other regulatory dispensations, asset classification standstill, temporary moratorium and provision of adequate liquidity were put in place in order to provide a safety net to the system. In 2021-22, some of the measures undertaken by RBI like CRR reduction reached pre-set sunset dates, liquidity has been wound down partly but remains in surplus mode and regulatory measures have been realigned. After several rate cuts in 2019-20 and 2020-21, the repo rate was maintained at 4 per cent in 2021-22. The liquidity in the system remained in surplus throughout. RBI undertook various measures, including secondary market G-sec acquisition programme, special Long-Term Repo operations, on tap targeted Long-Term Repo Operations, etc. to provide further liquidity in the system. Thereafter, RBI used Variable Rate Reverse Repo, reverse repo auctions to rebalance liquidity conditions. Reserve money and broad money supply growth in 2021-22 so far was lower than in the previous year. The reserve money growth did not fully translate into commensurate broad money supply growth due to the smaller (adjusted) money multiplier reflecting large deposits by banks with RBI under reverse repo window. Bank credit growth accelerated gradually in 2021-22 up from 5.3 per cent in the beginning of April 2021. The very latest data shows that the bank credit growth stands at 9.2 per cent as on 31 st December 2021. At the sectoral level, credit to agriculture sector continued to register robust growth and showed signs of improvement in the industry sector . Services sector credit growth, however , is yet to recover . Gross Non-Performing advances ratio of Scheduled Commercial Banks (SCBs) continued to decline from 11.2 per cent at end of 2017-18 to 6.9 per cent at end-September 2021. Similarly, Net Non-Performing advances ratio declined from 6 per cent to 2.2 per cent during the same period. Capital to risk-weighted asset ratio of SCBs continued to increase from 13 per cent in 2013-14 to 16.54 per cent at end-September 2021. The Return on Assets and Return on Equity for Public Sector Banks became positive in June 2020 and continued to be positive for the period ending September 2021, after recording negative profitability ratios from March 2016 to March 2020. The economic shock of the pandemic has been weathered well by the commercial banking system so far, even if some lagged impact is still in pipeline. Monetary Management and Financial Intermediation 118 Economic Survey 2021-22 MONETARY DEVELOPMENTS 4.1 The Monetary Policy Committee (MPC) maint ained status quo on the policy repo rate during April to December 2021 after a substantial cut of 1 15 basis points (bps) during February- May 2020 and a cumulativ e 250 basis points cut since February 2019 (Figure 1 and T able 1). The repo rate which currently stands at 4 per cent is lowest in the last decade (Figure 1). Since May 2020, the policy rates have been on hold along with an accommodative monetary policy stance with forward guidance that this stance will continue as long as necessary to revive growth on durable basis while ensuring that inflation remains within the tar get (Consumer Price Index inflation of 4 per cent within a band of +/- 2 per cent). Figure 1: Repo and reverse repo rate (per cent) 1 2 3 4 5 6 7 8 9 Apr, 2011 Aug, 2011 Dec, 2011 Apr, 2012 Aug, 2012 Dec, 2012 Apr, 2013 Aug, 2013 Dec, 2013 Apr, 2014 Aug, 2014 Dec, 2014 Apr, 2015 Aug, 2015 Dec, 2015 Apr, 2016 Aug, 2016 Dec, 2016 Apr, 2017 Aug, 2017 Dec, 2017 Apr, 2018 Aug, 2018 Dec, 2018 Apr, 2019 Aug, 2019 Dec, 2019 Apr, 2020 Aug, 2020 Dec, 2020 Apr, 2021 Aug, 2021 Dec, 2021 per cent Policy Repo Rate Reverse Repo Rate Source: RBI The year 2021-22 so far has been an exceptional year for the capital markets. There was a boom in fundraising through IPOs by many new age companies/tech start-ups/unicorns. In April-November 2021, ` 89,066 crore were raised via 75 IPO issues, much higher than in any year in last decade. The Sensex and Nifty scaled up to touch its peak at 61,766 and 18,477 on October 18, 2021. Among major emerging market economies, Indian markets outperformed the peers in April-December 2021. The process of insolvency which was suspended in view of pandemic, started again in end-March 2021. A pre-packaged insolvency resolution process was provided under IBC as an alternative insolvency resolution process for corporate Micro, Small and Medium Enterprises in April 2021. 119 Monetary Management and Financial Intermediation Table 1: Revision in Key Rates set by RBI Effective Date Repo Rate (per cent) Reverse Repo Rate (per cent) Cash Reserve Ratio (per cent of NDTL) Statutory Liquidity Ratio (per cent of NDTL) MSF Rate/ Bank Rate (per cent) 06-02-2020 5.15 4.90 4.0 18.25 5.40 27-03-2020 4.40 4.00 4.0 18.25 4.65 28-03-2020 4.40 4.00 3.0 18.25 4.65 17-04-2020 4.40 3.75 3.0 18.00 4.65 22-05-2020 4.00 3.35 3.0 18.00 4.25 27-03-2021 4.00 3.35 3.5 18.00 4.25 22-05-2021 4.00 3.35 4.0 18.00 4.25 06-08-2021 4.00 3.35 4.0 18.00 4.25 08-10-2021 4.00 3.35 4.0 18.00 4.25 08-12-2021 4.00 3.35 4.0 18.00 4.25 Source: RBI Note: NDTL: Net Demand and T ime Liabilities 4.2 In the initial meeting s of 2021-22, MPC noted that while the inflation has hovered above the upper tole rance band for some months, it was lar gely driven by adverse supply shocks which were expected to be transito ry . The outlook for aggregate demand was progressively improving but capacity utilisation rate s were low . The contact intensive services were lagging behind and the recovery was uneven and required policy support. In the latest MPC meeting in December 2021, the committee pointed out that the outlook was uncertain owing to global spillovers, potential resur gence in COVID-19 infections and diver gences in policy actions and stances across the world with inflationary pressures increasing across economies. Accordingly , the MPC decided to continue monito ring the inflationary pressures, keep the policy repo rate unchanged at 4 per cent and persist with the accommodative stance. 4.3 In 2021-22 so far , the overall monetary and credit conditions remained accommodative. However , the growth rates of monetary aggregates- including Reserve money , Broad money were lower as compared to the last year . Reserve money (M0) recorded a year -on-year (Y oY) growth of 13 per cent as on 7 th January 2022, as compa red to 14.3 per cent a year ago. However , M0 adjusted for the first-round impact of changes in the Cash Reserve Ratio (CRR) recorded a lower growth (Y oY) of 7.7 per cent, as compared with 18.3 per cent a year ago (Figure 2). 4.4 Expansion in M0 during 2021-22 so far was driven by bankers’ deposits with the RBI from the component side, with CRR restoration in phases, effective 27 th March 2021 and 22 nd May 2021. Currency in Circulation (CIC) grew by 7.8 per cent as on 7 th January 2022, lower as compared to the previous year as precautionary demand for cash subsided (T able 2). 120 Economic Survey 2021-22 Table 2: Growth (YoY) in Monetary Aggregates (end-March) (per cent) Item 2015-16 2016-17 ^ 2017-18 2018-19 2019-20 2020-21 2021-22 * Currency in Circulation (CIC) 14.9 -19.7 37.0 16.8 14.5 16.6 7.8 # Cash with Banks 6.6 4.2 -2.1 21.4 15.4 4.5 10.7 Currency with the Public 15.2 -20.8 39.2 16.6 14.5 17.1 7.7 Bankers’ Deposits with the RBI 7.8 8.4 3.9 6.4 -9.6 28.5 42.0 # Demand Deposits 1 1.0 18.4 6.2 9.6 6.8 14.8 26.2 T ime Deposits 9.2 10.2 5.8 9.6 8.1 10.9 8.2 Reserve Money (M0) 13.1 -12.9 27.3 14.5 9.4 18.8 13.0 # Broad Money (M3) 10.1 6.9 9.2 10.5 8.9 12.2 9.9 Source: RBI Note: ^: March 31, 2017 over April 1, 2016 barring Reserve Money (M0), Currency in Circulation (CIC) and Bankers’ Deposits with the RBI (BD), *: As on December 31, 2021, #: As on January 7, 2022. Figure 2: M0, CRR Adjusted M0 and CiC Growth (YoY) Source: RBI Note: CIC: Currency in Circulation, CRR: Cash Reserve Ratio 4.5 In 2021-22 so far , the Y oY growth of broad money (M3) stood at 9.9 per cent as on 31 st December , as compared to 12.5 per cent a year ago (Figure 3). From the component side, aggregate deposits which is the lar gest component - has contributed most to the expansion of M3 during the year so far (Figure 4). Amongst sources, bank credit to the government was a major contributor to the increase in broad money . Banks’ higher investments in liquid and risk-free assets such as SLR securiti es and G-secs, resulted in higher net bank credit to the government. Bank credit to the commer cial sector also supplemented M3 expansion from the sources side. The Y oY credit growth for Scheduled Commercial Banks was 9.2 per cent as on 31 st December 2021 as compared to 6.6 per cent a year ago, reflecting pick-up in credit. 121 Monetary Management and Financial Intermediation 8 9 10 11 12 13 14 Apr 10,20 Jun 10,20 Aug 10,20 Oct 10,20 Dec 10,20 Feb 10,21 Apr 10,21 Jun 10,21 Aug 10,21 Oct 10,21 Dec 10,21 per cent 4 5 6 7 8 9 10 11 12 13 Apr 10,20 Jun 10,20 Aug 10,20 Oct 10,20 Dec 10,20 Feb 10,21 Apr 10,21 Jun 10,21 Aug 10,21 Oct 10,21 Dec 10,21 per cent Figure 3: Broad Money Growth (YoY) Figure 4: Aggregate Deposits Growth (YoY) Source: RBI 4.6 Money multiplier - measured as a ratio of M3 to M0 has been on the decline since 2017-18 (Figure 5(a)). As on 31 st March 2021, money multi plier (MM) stood at 5.2 from 5.6 a year ago. However , money multiplie r adjusted for reverse repo - analytically akin to banks’ deposits with the central bank - turned out to be lower at 4.6 by end-March 2021. The gap between MM and adjusted MM reflects parking of funds by banks under the reverse repo window of the RBI and to some extent a weak credit creation process. Money multiplier , however , improved slightly to 5.3 as on 31 st December 2021, while adjusted MM sta nds at 4.4 (Figure 5 (b)). Figure 5: Money Multiplier - 1 2 3 4 5 6 7 8 1951-52 1956-57 1961-62 1966-67 1971-72 1976-77 1981-82 1986-87 1991-92 1996-97 2001-02 2006-07 2011-12 2016-17 2021-22* ratio (5a) (5b) Source: RBI Note: Money multiplier adjusted for reverse repo is based on reserve money adjusted for commercial banks’ reverse repo deposits with RBI, *Number for 2021-22 is as of 31 st December 2021 in Figure 5(a)Read More
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FAQs on Monetary Management and Financial Intermediation - Economic Survey & Government Reports - UPSC
| 1. What is monetary management and financial intermediation? |  |
Ans. Monetary management refers to the process of controlling and regulating the money supply in an economy, usually by a central bank. It involves various measures such as setting interest rates, implementing monetary policy, and managing foreign exchange reserves. Financial intermediation, on the other hand, refers to the role played by financial institutions in linking borrowers and lenders. These institutions collect funds from savers and provide loans or investments to borrowers, facilitating the flow of funds in the economy.
| 2. What is the role of monetary management in the economy? | |
Ans. Monetary management plays a crucial role in the economy by influencing the overall level of economic activity and controlling inflation. Through measures like setting interest rates and implementing monetary policy, central banks can influence borrowing costs, investment decisions, and consumer spending. By managing the money supply, central banks aim to maintain price stability, promote economic growth, and stabilize financial markets.
| 3. How do financial intermediaries contribute to the economy? | |
Ans. Financial intermediaries, such as banks, credit unions, and insurance companies, play a vital role in the economy. They act as intermediaries between savers who have excess funds and borrowers who need funds for various purposes. These intermediaries collect funds from savers and provide loans or investments to borrowers, thereby channeling funds into productive activities. They also provide various financial services, such as payment systems, risk management, and liquidity support, which promote economic growth and stability.
| 4. What are the main functions of a central bank in monetary management? | |
Ans. The main functions of a central bank in monetary management include:
1. Controlling the money supply: Central banks have the authority to influence the money supply in an economy. They do so through various tools, such as open market operations, reserve requirements, and discount rates.
2. Implementing monetary policy: Central banks formulate and implement monetary policy to achieve specific macroeconomic objectives, such as price stability, economic growth, and employment. They use interest rate adjustments and other policy measures to control borrowing costs and influence economic activity.
3. Managing foreign exchange reserves: Central banks manage the country's foreign exchange reserves to stabilize the exchange rate and ensure smooth international transactions. They intervene in the foreign exchange market to maintain stability and address imbalances.
| 5. How do financial intermediaries manage risks in their operations? | |
Ans. Financial intermediaries manage risks through various risk management techniques and practices. Some common methods include:
1. Diversification: Financial intermediaries diversify their loan and investment portfolios to reduce the impact of potential losses. By spreading their funds across different sectors, industries, and geographical regions, they minimize the risk of a single event negatively affecting their overall portfolio.
2. Credit analysis and assessment: Financial intermediaries conduct thorough credit analysis and assessment of borrowers to evaluate their creditworthiness. This helps them identify potential default risks and make informed lending decisions.
3. Risk transfer through insurance and derivatives: Financial intermediaries often transfer risks through insurance contracts or derivatives. They purchase insurance policies to protect against potential losses and use derivatives, such as futures and options, to hedge against market fluctuations.
4. Capital adequacy requirements: Regulatory authorities impose capital adequacy requirements on financial intermediaries to ensure their financial stability and ability to absorb losses. By maintaining sufficient capital reserves, intermediaries can better manage risks and protect depositors and investors.
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