ेस काशनीPRESS RELEASE

RBI Bulletin – October 2021

The Reserve Bank of India today released the October 2021issue of its Monthly Bulletin. The Bulletin includes the Governor’s Statement, the Monetary Policy Statement, Monetary Policy Committee (MPC) Resolution 2021-2022 October 6-8, 2021, Monetary Policy Report – October 2021, five speeches, five articles and current statistics.

The five articles are: I. The state of the economy; II Should financial stability be a

Monetary policy objective? Testimony from India; III. Return to Physical Capital: Lessons from Company-Level Data; IV. Renewable Energy – The Silent Revolution; and V. The low-yield environment and the management of foreign exchange reserves.

I. State of the economy

In a context of heightened global risks, the Indian economy is accelerating, even though the recovery is uneven and is dragging itself through sluggish periods. Scaling up vaccination, collapsing new cases / death rates and normalizing mobility have restored confidence. Domestic demand is strengthening as aggregate supply conditions recover, thanks to the strong performance of Kharif agricultural production and the recovery of industry and services. Lower than expected food prices have allowed headline inflation to move closer to target.

II. Should financial stability be a monetary policy objective? Testimony from India

The literature is divided on whether financial stability should be embraced by a central bank targeting inflation as an “explicit” policy objective. This article empirically assesses the issue in the Indian context where financial stability is not an ‘explicit’ objective of monetary policy, but where macroprudential policies and interest rate decisions are coordinated to simultaneously pursue both. Goals. The main highlights of the article are presented below:

Strong points

• In this article, an aggregate macroprudential policy index (MPP) was constructed using risk weights and provisions for standard assets in housing, commercial real estate (CRE), consumer credit and exposure. capital markets; the loan-to-value ratio (LTV) and the cash reserve ratio (CRR).
• Empirical analysis using macroeconomic variables for the period June 1997 to March 2020 suggests that monetary policy exerts an influence on inflation and business cycles, but, at the same time, does not strongly influence financial cycles. Financial cycles are influenced by credit cycles, themselves impacted by macroprudential policies. Juxtapose the MPP

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index with the repo rate shows that macroprudential policies in India have generally evolved in line with monetary policy.

1. • The article concludes that the approach of using monetary and macroprudential policies in a coordinated fashion has served the economy well, even after the adoption of flexible inflation targeting (FIT).
2. Return on physical capital: insights from company-level data

The return on physical capital (RoPC) is an important measure to assess value creation in the manufacturing sector due to the predominant role of physical capital in production. This study explores the variation of the RoPC in the formal manufacturing sector across various firm characteristics such as age, location, size, type of ownership, capital intensity and type of activity to be carried out. Using data from the Annual Survey of Industries (ASI) at the enterprise level for the year 2017-18.

Strong points

• The overall RoPC of India’s formal manufacturing sector estimated at 19.5 percent is comparable to returns seen in other developing countries.
• In the MSME category, the RoPC increases with the size of the companies. For large companies, it has declined due to its strong capital intensity.
• The RoPC of government (public) enterprises is slightly higher than that of Non-governmental (public) enterprises. However, the average performance of non-governmental (private) enterprises is significantly higher than that of public (private) enterprises.
• RoPC holds a reverse U-shaped relationship with the age of firms and the workforce employed, whereas it decreases monotonously with capital intensity.
• At the regional level, the the northeast outperformed the others due to very high returns from the pharmaceutical industry in Sikkim and the oil industry in Assam. These two industries drove the overall ROPC for the entire region.

IV. Renewable energy – The silent revolution

Renewable energies (RE) have played a central role in India’s transition to an electricity surplus country. This article examines the current structure of the electricity market in India and the role of renewables in electricity inflation. Empirical analysis suggests that the sustained decline in the production costs of renewable energy sources is putting downward pressure on electricity prices in all sales markets and in the short term. He argues that realizing the potential of the progress made in RE development of RE’s promises for a greener, lower-cost economy justifies strategic policy changes, focusing on reducing cross-subsidies, faster resolution of the problem. financial stress facing DISCOMs, promoting decentralized generation and distribution and creating an environment conducive to innovation and faster adoption of green technologies.

Strong points

• The share of RE in overall installed capacity has more than tripled, from 11.8% to at the end of March 2015 at 37.9% at the end of August 2021. The Indian government (GoI) has set a target of 175 GW of installed capacity by 2022 for the production of renewable electricity.
• Empirical analysis shows a significant positive relationship between the producer price of electricity (WPI electricity) and auction prices for conventional electricity, RE energy and the spot price of energy exchange. .

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1. • Regarding the electricity CPI, no significant relationship was observed with the same set of regressors. The methodology for calculating retail electricity tariffs, cross-sectoral cross-subsidies and the exclusion of other segments of electricity consumption excluding household consumption in the electricity CPI may affect this result.
   • India’s per capita electricity consumption at 804.5 kwh in 2014 is well below the world average of 3,132.8 kwh. RE by providing cheap electricity can meet the increased demand in the years to come.
   • Deregulation of the tariff structure and success in minimizing transmission and distribution losses and cross-subsidies could promote efficient price discovery and attract greater investment in renewables.
2. The Low Yield environment and the management of Forex reserves

This article highlights the main drivers of the downward trend in nominal returns and the possibility of going beyond traditional methods of managing foreign exchange reserves in order to increase portfolio returns without compromising security objectives and liquidity.

Strong points

• The short term and Long-term interest rates in advanced economies have been on a downward trend since the early 1980s. This ultra-low interest rate environment reflects structural changes in advanced economies and global financial markets, in particular. particularly low inflation / well entrenched expected inflation, and a downward trend in equilibrium real interest rates over the past 3-4 decades.
• This low return environment has made it difficult for asset managers in general and reserve managers in particular to generate reasonable returns. In light of the likely persistence of various structural reasons for low returns, it is imperative that reserve managers move beyond traditional approaches to reserve management to maintain and improve returns.
• Other means of improving the returns on foreign exchange reserves could be increasing the duration of the portfolio, investing in new products / asset classes, actively managing gold and investing in long-term investments. new markets. However, the choice of strategy should be tailored to the risk appetite, investment priorities, skill sets and operational capacities of individual institutions.

Disclaimer

Reserve Bank of India published this content on October 18, 2021 and is solely responsible for the information it contains. Distributed by Public, unedited and unmodified, on October 18, 2021 03:01:04 PM UTC.