Economic Survey 2022-23: Monetary conditions to remain 'tight' globally

The Economic Survey 2022-23, which was tabled in Parliament today, outlines that as global central banks resort to ‘higher-for-longer’ policy rates to contain high inflation, monetary conditions are expected to remain tight worldwide in FY24. In India, however, the RBI’s support to growth will ensure adequate liquidity in financial markets, it says.

"Strong macroeconomic fundamentals will underpin the return of global capital flows to India once the fog of uncertainty lifts. The financial system will play a key role in realising the objectives of Amrit Kaal," says the Economic Survey 2022-23.

It highlights the change in the RBI’s policy stance in FY 2022-23 led to a moderation of surplus liquidity that prevailed during Covid years. "Consequently, domestic financial conditions began to tighten, which was reflected in the lower growth of monetary aggregates."

The Survey says the year 2022 was a "good year" in terms of monetary management and financial intermediation. However, it also marked the return of high inflation, especially in advanced economies, after nearly four decades, it said. "Inflation did not spare emerging economies either. These developments led to an unprecedented, synchronous, and sharp cycle of monetary tightening across countries."

Amid tightening global financial policies, the RBI implemented a policy repo rate hike of 225 bps since April 2022, says the survey. "Consequently, domestic financial conditions began to tighten, which was reflected in the lower growth of monetary aggregates."

The Survey adds the monetary policy transmission is well underway as lending and deposit rates increased following the hike in policy rates. In the government securities (G-sec) market, bond yields were on an upward trajectory until June 2022 on the concerns of high inflation and policy rate hikes. These yields moderated in November and December 2022, aided by lower crude oil prices, a slower pace of rate hikes, and general moderation in global sovereign bond yields.

The Survey says while the global tightening cycle has contributed to a dampened global outlook, the domestic appetite for credit is on an upswing. "Non-food credit offtake by scheduled Commercial Banks (SCBs) has been growing in double digits since April 2022, with the increase being broad-based. Credit disbursed by Non-Banking Financial Companies (NBFCs) has also been on the rise. The balance sheet clean-up exercise has been vital in enhancing the lending ability of financial institutions. The Gross Non-Performing Assets (GNPA) ratio of SCBs has fallen to a seven-year low of 5.0, while the Capital-to-Risk Weighted Assets Ratio (CRAR) remains healthy at 16.0 and well above the regulatory requirement of 11.5. The health of NBFCs has continued to improve as well. The recovery rate for the SCBs through Insolvency and Bankruptcy Code (IBC) was highest in FY22 compared to other channels."

In its outlook, the Survey says the resilience of the domestic financial system is reflected in the healthy balance sheet of banks, stronger capital levels of NBFCs and robust growth in the AuM of domestic mutual funds. Further, the IBC mechanism, it says, continues to support the ‘Ease of Doing Business’ in India by facilitating easy exit with time-bound resolutions for firms.

Stating that India is one of the fastest-growing insurance markets in the world, the Survey forecasts that it'll emerge as one of the top six insurance markets by 2032.