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and Macroeconomic Monetary Developments Third Quarter Review 2007-08 Issued with the Third Quarter Review of the Annual Statement on Monetary Policy for 2007-08 January 29, 2008 Reserve Bank of India Mumbai Macroeconomic and Monetary Developments Third Quarter Review 2007-08 Reserve Bank of India Mumbai Contents I. The Real Economy Agricultural Situation Industrial Performance Services Sector Fiscal Situation Combined Government Finances Centre's Fiscal Situation State Finances Monetary and Liquidity Conditions Monetary Survey Reserve Money Survey Liquidity Management Price Situation Global Inflation Global Commodity Prices Inflation Conditions in India Financial Markets International Financial Markets Domestic Financial Markets Money Market Foreign Exchange Market Credit Market Government Securities Market Equity Market The External Economy International Developments Merchandise Trade Current Account Capital Flows Foreign Exchange Reserves External Debt International Investment Position 1 2 5 9 15 15 16 20 23 23 30 32 37 37 45 49 59 59 66 67 70 73 76 76 82 82 85 88 90 92 93 94 II. III. IV. V. VI. I. THE REAL ECONOMY The Indian economy continued to exhibit robust growth during the second quarter (July-September) of 2007-08, albeit with some moderation. According to the Central Statistical Organisation (CSO), real GDP growth moderated to 8.9 per cent during the second quarter of 2007-08 from 10.2 per cent in the corresponding period of 2006-07. Real GDP growth during the first half of 200708 was estimated at 9.1 per cent as compared with 9.9 per cent in the corresponding period of 2006-07 (Table 1 and Chart 1). While agriculture and allied activities recorded higher growth during the first half of 2007-08 over the corresponding period of the previous year, the growth in industrial and services sectors was somewhat lower than in the previous year. Table 1: Growth Rates of Real GDP (At 1999-2000 prices) (Per cent) Sector 2000-01 2005-06* 2006-07# to 2006-07 (Average) 2 2.5 (21.4) 7.0 (19.6) 4.6 7.7 4.8 8.6 (59.0) 3 6.0 (19.7) 8.0 (19.4) 3.6 9.1 5.3 10.3 (60.9) 4 2.7 (18.5) 11.0 (19.6) 5.1 12.3 7.4 11.0 (61.8) 2006-07 2007-08 2006-07 2007-08 Q1 5 2.8 10.6 3.7 12.3 5.8 11.6 Q2 6 2.9 11.3 3.9 12.7 8.1 11.7 Q3 7 1.6 Q4 8 3.8 Q1 9 3.8 10.6 3.2 11.9 8.3 10.6 Q2 April-September 10 3.6 8.3 7.7 8.6 7.3 10.3 11 2.8 11.0 3.8 12.5 6.9 11.6 12 3.7 9.5 5.4 10.2 7.8 10.5 1 1. Agriculture and Allied Activities 2. Industry 2.1 Mining and Quarrying 2.2 Manufacturing 2.3 Electricity, Gas and Water Supply 10.8 11.2 5.5 7.1 11.8 12.4 9.1 6.9 3. Services 3.1 Trade, Hotels, Restaurants, Transport, Storage and Communication 3.2 Financing, Insurance, Real Estate and Business Services 3.3 Community, Social and Personal Services 3.4 Construction 10.9 10.0 10.3 10.4 13.0 12.4 14.2 13.1 12.4 12.0 11.4 13.3 11.7 7.9 6.0 9.9 6.9 (100.0) 10.9 7.7 14.2 9.0 (100.0) 10.6 7.8 10.7 9.4 (100.0) 10.8 11.3 10.5 9.6 11.1 8.3 11.1 10.2 11.2 6.7 9.3 5.7 11.0 7.6 10.7 9.3 10.6 7.8 11.1 8.9 10.9 9.7 10.8 9.9 10.8 7.7 10.9 9.1 1 0 11.2 8.7 9.1 4. Real GDP at Factor Cost Memo: (Amount in Rupees crore) 26,04,532 28,48,157 35,67,177 41,25,725 a) Real GDP at factor cost b )GDP at current market prices *: Quick Estimates. #: Revised Estimates Note : Figures in parentheses denote shares in real GDP. Source : Central Statistical Organisation (CSO). 1 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 12.0 10.0 8.0 Chart 1: Real GDP - Growth Rate Per cent 6.0 4.0 2.0 0.0 1997-98Q1 1998-99Q1 1999-00Q1 2000-01Q1 2001-02Q1 2002-03Q1 2003-04Q1 2004-05Q1 2005-06Q1 2006-07Q1 Agricultural Situation Cumulative rainfall during the 2007 South-West monsoon season (June 1 to September 30) turned out to be 5 per cent above normal. The seasonal rainfall was well-distributed over time, barring the short spells of rainfall deficiency during the first week of June, third and fourth weeks of July and third week of August. At the end of the season (as on September 27, 2007), water stock in 81 major reservoirs was 79 per cent of the full reservoir level (FRL), lower than 87 per cent during the corresponding period of the previous year, but higher than the average of 67 per cent over the last 10 years. Cumulative rainfall during the North-East monsoon (October 1, 2007 to December 31, 2007) was, however, 32 per cent below normal as compared with 21 per cent below normal during the corresponding period of the previous year. Of the 36 meteorological sub-divisions, cumulative rainfall was deficient/scanty/no rain in 27 sub-divisions (same as last year) (Table 2). As on January 17, 2008, the total live water storage was 55 per cent of the FRL (59 per cent last year). The sowing of kharif crops improved during 2007-08 on account of satisfactory rainfall during the South-West monsoon and remunerative market prices. The reported sown area as on October 26, 2007 was about 2.7 per cent higher than the previous year (Table 3). In contrast, area sown under rabi crops so far (up to January 18, 2008) has been about 3.7 per cent lower than a year ago. Rabi sowing was lower in case of rice, wheat, pulses and oilseeds, but higher in case of coarse cereals than in the previous year. 2 2007-08Q1 Q2 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 The Real Economy Table 2: Rainfall during South-West and North-East Monsoon Year Cumulative Rainfall: Above(+)/ Below (-) Normal (per cent) 1 2 South-West Monsoon Excess Rainfall Normal Rainfall Deficient Rainfall Scanty/ Cumulative No Rain Rainfall: Above(+)/ Below (-) Normal (per cent) 6 7 (Number of Meteorological Divisions) North-East Monsoon Excess Rainfall Normal Deficient Rainfall Rainfall Scanty/ No Rain 3 4 5 8 9 10 11 1998 6 12 21 3 0 1999 -4 3 26 7 0 2000 -8 5 23 8 0 2001 -8 1 30 5 0 2002 -19 1 14 19 2 -33 2003 2 7 26 3 0 9 2004 -13 0 23 13 0 -11 2005 -1 9 23 4 0 10 2006 -1 6 20 10 0 -21 2007 5 13 17 6 0 -32 Excess:+20 per cent or more. Normal : +19 per cent to - 19 per cent. Scanty : - 60 per cent to -99 per cent. No Rain: -100 per cent. Source : India Meteorological Department. 28 6 1 1 20 7 6 3 0 4 13 19 14 10 9 3 3 7 12 14 9 9 6 12 8 10 17 1 11 6 5 14 3 6 14 13 2 7 9 18 Deficient :- 20 per cent to -59 per cent. The First Advance Estimates for 2007-08 have placed the total kharif foodgrains production at 112.2 million tonnes, which though lower than the target, was about 1.6 per cent higher than that of the previous year (110.5 million Table 3: Progress of Area under Crops - 2007-08 Crop Normal Area Area Coverage 2006 1 2 3 2007 Variation 4 5 1 Crop (Million hectares) Normal Area Area Coverage (As reported on January 18, 2008) 2006 2007 Variation 2 3 4 5 Rabi Crops 37.3 22.0 8.7 3.6 7.5 12.6 17.7 5.4 8.8 5.1 9.3 104.9 0.2 -0.1 -0.6 -0.2 0.6 1.2 0.9 0.6 0.6 0.3 0.4 2.7 Rice Wheat Coarse Cereals 9.4 4.4 6.2 10.9 9.3 3.8 6.8 11.4 16.8 4.8 8.1 4.8 9.0 102.1 of which: Jowar Maize Total Pulses Total Rabi Oilseeds of which: Groundnut Sunflower All Crops 0.8 1.2 56.5 0.7 6.6 1.1 58.5 0.6 5.9 0.9 56.3 -0.1 -0.7 -0.2 -2.2 Rapeseed/Mustard 5.9 5.0 0.7 11.4 8.8 4.7 0.8 13.7 9.5 4.6 0.9 12.9 8.5 -0.1 0.1 -0.8 -1.0 3.7 26.2 6.4 0.9 28.0 6.4 0.8 27.4 6.5 -0.1 -0.6 0.1 Kharif Crops Rice Coarse Cereals of which: Bajra Jowar Maize Total Pulses of which: Groundnut Soyabean Sugarcane Cotton All Crops 5.5 6.6 4.2 8.3 100.8 38.2 22.9 37.1 22.1 Total Kharif Oilseeds15.4 Source : Ministry of Agriculture, Government of India. 3 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 tonnes) (Table 4). The enhanced kharif foodgrains production is expected to be largely on account of the recovery in the production of pulses and maize. Amongst the non-foodgrains, while the production of sugarcane, jute and mesta, and cotton are expected to witness modest growth over the previous year, that of oilseeds is likely to show a significant increase. Food Management Total procurement of rice and wheat during 2007-08 (up to January 9, 2008) aggregated 30.1 million tonnes, which was higher by 1.5 per cent than that procured during the corresponding period of the previous year mainly on account of a 20.6 per cent increase in wheat procurement at 11.1 million tonnes. Total offtake of rice and wheat during 2007-08 (up to October 31, 2007) at 21.4 million tonnes was marginally lower, by 0.5 per cent, than the 21.5 million tonnes offtake during the corresponding period of the previous year. As on November 1, 2007, total stocks of foodgrains with the Food Corporation of India (FCI) and other Government agencies were at around Table 4: Agricultural Production (Million tonnes) Crop 2003-04 2004-05 2005-06 2006-07* 2007-08 T 1 2 3 4 5 6 A@ 7 Rice Kharif Rabi Wheat Coarse Cereals Kharif Rabi Pulses Kharif Rabi Total Foodgrains Kharif Rabi Total Oilseeds Kharif Rabi Sugarcane Cotton # Jute and Mesta ## 88.5 78.6 9.9 72.2 37.6 32.2 5.4 14.9 6.2 8.7 213.2 117.0 96.2 25.2 16.7 8.5 233.9 13.7 11.2 83.1 72.2 10.9 68.6 33.5 26.4 7.1 13.1 4.7 8.4 198.4 103.3 95.1 24.4 14.1 10.2 237.1 16.4 10.3 91.8 78.3 13.5 69.4 34.1 26.7 7.3 13.4 4.9 8.5 208.6 109.9 98.7 28.0 16.8 11.2 281.2 18.5 10.8 92.8 80.1 12.7 74.9 34.3 25.7 8.6 14.2 4.7 9.5 216.1 110.5 105.6 23.9 13.9 9.9 345.3 22.7 11.3 93.0 80.0 13.0 75.5 37.5 28.7 8.8 15.5 5.5 10.0 221.5 114.2 107.3 30.0 18.5 11.5 310.0 22.0 11.0 80.2 26.6 5.5 112.2 16.1 345.6 22.9 11.3 T : Target. @ : First Advance Estimate for Kharif Production (September 19, 2007). # : Million bales of 170 kgs each. Source : Ministry of Agriculture, Government of India. A : Achievement. * : Fourth Advance Estimates. ## : Million bales of 180 kgs each. 4 The Real Economy 19.7 million tonnes, which were higher by 5.7 per cent than a year ago (18.7 million tonnes). Commodity-wise, the stock of rice (10.7 million tonnes) was lower by 14.9 per cent than that of the previous year (12.5 million tonnes), while the stock of wheat (9.0 million tonnes) was 50.6 per cent higher than that of the previous year (6.0 million tonnes) (Table 5). Industrial Performance Growth in the index of industrial production (IIP) moderated to 9.2 per cent during April-November 2007 from 10.9 per cent during April-November 2006 (Chart 2). Table 5: Management of Food Stocks (Million tonnes) Opening Stock of Foodgrains Month 1 2004-05 2005-06 2006-07 2006-07# 2007-08# 2006 April May June July August September October November December 2007 January February March April May June July August September October November December January * Rice Wheat 2 13.1 13.3 13.7 13.7 13.2 13.7 12.8 12.0 11.1 9.5 7.8 6.0 12.5 12.1 12.0 12.6 14.0 13.2 13.5 12.6 11.0 9.2 6.9 5.5 10.7 _ _ 3 6.9 4.1 2.0 2.0 4.6 2.0 9.0 9.3 8.2 7.3 6.7 6.4 6.0 5.6 5.4 5.4 5.1 4.6 11.6 13.3 12.9 12.0 11.0 10.1 9.0 _ _ Total 4 20.7 18.0 16.6 16.6 17.8 16.6 22.8 22.3 20.5 17.1 15.5 12.6 18.7 17.8 17.5 18.1 19.1 17.8 25.1 25.9 23.9 21.2 18.0 15.6 19.7 _ _ Procurement of Foodgrains Rice Wheat 5 24.0 26.9 26.7 20.4 18.9 1.7 1.6 1.5 0.8 0.5 0.2 8.0 2.0 2.6 4.3 2.4 1.2 0.9 1.5 1.3 0.8 0.1 0.0 7.4 1.8 3.5 1.6 6 16.8 14.8 9.2 9.2 11.1 8.7 0.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 7.9 2.6 0.7 0.0 0.0 0.1 0.0 0.0 0.0 0.0 Total 7 40.8 41.7 35.9 29.6 30.1 10.3 2.2 1.5 0.8 0.5 0.2 8.0 2.0 2.6 4.3 2.4 1.2 8.7 4.0 2.0 0.8 0.1 0.1 7.4 1.8 3.5 1.6 Foodgrains Off-take PDS OWS 8 9 OMS Exports - Domestic 10 0.2 1.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 _ _ _ 11 1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 _ _ _ Total 12 41.5 42.2 36.8 21.5 21.4 2.8 3.0 3.1 3.1 3.1 2.8 2.7 2.9 3.0 3.1 3.1 3.2 2.8 3.0 3.1 3.3 3.1 3.0 3.0 _ _ _ Closing Norms Stock 13 18.0 16.6 17.8 14 29.7 10.6 31.4 9.8 31.6 5.1 18.4 3.1 19.3 2.1 2.5 2.5 2.5 2.7 2.7 2.3 2.4 2.5 2.6 2.7 2.7 2.7 2.5 2.8 2.7 2.9 2.8 2.7 2.7 _ _ _ 0.3 0.4 0.6 0.4 0.4 0.5 0.3 0.4 0.3 0.4 0.5 0.5 0.2 0.2 0.4 0.4 0.3 0.3 0.3 _ _ _ 22.8 22.3 20.5 17.1 15.5 12.6 18.7 17.8 17.5 18.1 19.1 17.8 25.1 25.9 23.9 21.2 18.0 15.6 19.7 _ _ _ 16.2 26.9 16.2 20.0 16.2 26.9 16.2 PDS: Public Distribution System. OWS: Other Welfare Schemes. OMS : Open Market Sales. _ : Not Available. # : Procurement up to January 9, and offtake up to October 31. *: Procurement up to January 9, 2008. Note : Closing stock figures may differ from those arrived at by adding the opening stocks and procurement and deducting offtake, as stocks include coarse grains also. Source : Ministry of Consumer Affairs, Food and Public Distribution, Government of India. 5 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Chart 2: Industrial Production Index of Industrial Production 300 17.0 15.0 280 Year-on-Year Growth Index (1993-94=100) Per cent April June September November December February October January August March May July 13.0 11.0 9.0 7.0 5.0 260 240 220 April June September 2006-07 2007-08 2006-07 The manufacturing sector recorded a lower growth of 9.8 per cent during April-November 2007 as compared with 11.8 per cent during April-November 2006. Mining sector recorded a growth of 4.9 per cent as compared with 4.2 per cent, while the electricity sector moderated to 7.0 per cent as compared with 7.3 per cent during April-November 2006 (Table 6). Table 6: Index of Industrial Production: Sectoral and Use-Based Classification of Industries (Per cent) Industry Group Weight in IIP April-March 2006-07 1 Sectoral Mining Manufacturing Electricity Use-Based Basic Goods Capital Goods Intermediate Goods Consumer Goods (a+b) a) Consumer Durables b) Consumer Non-durables General 10.5 79.4 10.2 35.6 9.3 26.5 28.7 5.4 23.3 100.0 5.3 12.5 7.3 10.3 18.2 12.0 10.1 9.2 10.4 11.5 4.2 11.8 7.3 9.4 17.4 11.1 9.9 12.4 8.9 10.9 4.9 9.8 7.0 8.4 20.8 10.1 5.2 -1.7 7.8 9.2 3.4 91.1 5.5 27.2 17.6 27.0 28.5 6.7 21.8 100.0 2.8 91.2 6.0 26.8 17.1 27.2 29.2 9.7 19.4 100.0 3.6 89.9 6.6 27.6 25.4 29.3 18.0 -1.6 19.7 100.0 2 3 Growth Rate April-November 2006-07 4 2007-08 P 5 Weighted Contribution# April-March 2006-07 6 April-November 2006-07 7 2007-08 P 8 P : Provisional. # : Figures may not add up to 100 due to rounding off. Source: Central Statistical Organisation. 6 November 2007-08 December February October January August March May July 3.0 The Real Economy The moderation in manufacturing sector growth was due to decelerated/ negative growth of eleven out of the seventeen manufacturing industry groups accounting for 49.3 per cent weight in the IIP (Table 7). These, among others, included 'machinery and equipment', 'basic metal and alloy industries', 'rubber, plastic, petroleum and coal products','cotton textiles', 'non-metallic mineral products', and 'transport equipment and parts'. 'Metal products and parts' group recorded a decline due to the perfomance of tin metal containers, welded link chains and razor blades. The 'leather and leather and fur products' group, however, made a turnaround to register positive growth during the period. In terms of use-based classification, the capital and intermediate goods sectors recorded double digit growth during April-November 2007 (see Table 6). Table 7: Growth of Manufacturing Groups (Per cent) Industry Group Weight in IIP Growth Rate April-March 2006-07 1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Food products Machinery and equipment other than transport equipment Chemicals and chemical products except products of petroleum and coal Basic metal and alloy Industries Wood and wood products, furniture and fixtures Rubber, plastic, petroleum and coal products Non-metallic mineral products Beverages, tobacco and related products Cotton textiles Transport equipment and parts Textile products (including wearing apparel) Leather and leather and fur products Metal products and parts (except machinery and equipment) Jute and other vegetable fibre textiles (except cotton) Wool, silk and man-made fibre textiles Paper and paper products and printing, publishing and allied activities Other manufacturing industries Manufacturing - Total 2 9.1 9.6 14.0 7.5 2.7 5.7 4.4 2.4 5.5 4.0 2.5 1.1 2.8 0.6 2.3 3 8.7 14.2 9.4 22.9 29.1 12.9 12.9 11.1 14.8 15.0 11.5 0.4 11.4 -15.8 8.1 Weighted Contribution# April-November 2006-07 7 1.5 20.0 16.0 15.8 0.2 6.4 7.4 5.7 4.7 9.5 3.7 -0.3 1.5 0.1 2.0 2007-08 P 8 4.4 20.3 19.3 15.7 7.4 6.9 5.6 5.1 2.4 2.0 1.8 1.1 -1.1 0.4 1.4 April-November April-March 2006-07 2006-07 2007-08P 4 2.5 15.0 9.2 20.5 2.4 12.0 13.6 13.1 13.1 16.3 12.2 -3.4 7.0 2.3 7.6 5 6.8 12.2 9.4 15.6 72.6 10.8 8.4 9.5 5.5 2.7 4.9 12.2 -4.4 13.3 4.5 6 5.7 18.2 15.0 16.6 2.4 6.4 6.6 4.5 4.8 8.2 3.2 0.0 2.3 -0.4 1.9 17. 2.7 2.6 79.4 8.4 7.7 12.5 8.9 10.8 11.8 1.6 19.1 9.8 2.3 2.4 100.0 2.5 3.4 100.0 0.5 7.2 100.0 P : Provisional. # : Figures may not add up to 100 due to rounding off. Source: Central Statistical Organisation. 7 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 The sustained high growth in the capital goods sector was driven by increased capital expenditure undertaken by manufacturing firms to augment their production capacities. Growth in the intermediate goods sector was driven by increased production of particle board, plywood commercial, PVC pipes and tubes and metalise bopp films. Growth of the consumer goods sector decelerated to 5.2 per cent during April-November 2007 from 9.9 per cent during April-November 2006 _ largely reflecting the sharp decline in the consumer durables segment. The negative growth in the consumer durables was on account of decline in production of telephone instruments, T.V. receiver, motorcycles, etc. The growth of the basic goods sector moderated to 8.4 per cent during April-November 2007 from 9.4 per cent during April-November 2006 due to decelerated growth in the cement sector and some aluminium and steel products. Infrastructure During April-November 2007, the infrastructure sector recorded a lower growth of 6.0 per cent than a year ago (8.9 per cent) reflecting slow down in all the sectors (Chart 3). High base, decline in refinery output in some public sector refineries and lower capacity utilisation led to the moderation in growth of petroleum refinery products. A sharp deceleration in crude oil production was attributable to decline in production in some of the Oil and Natural Gas Corporation (ONGC) and Oil India Limited wells. Lower growth in the coal sector was mainly on account of decline in production in some of the subsidiaries of Coal India Limited. Capacity constraints faced by major steel producers combined with high base slowed down the growth of the steel sector. High base coupled with capacity constraints have led to moderation in cement sector. 8 The Real Economy Table 8 : Growth in Services Sectors (Contribution to real GDP growth; percentage points) Year/Quarter Construction Trade, Hotels, Financing, Insurance, Community, Social Transport and Real Estate and and Personal Communication Business Services Services 3 1.6 2.0 2.1 2.9 2.7 2.7 3.4 3.2 3.7 3.3 3.4 3.1 3.1 4 0.5 0.9 1.1 0.8 1.2 1.5 1.5 1.5 1.6 1.4 1.3 1.6 1.6 5 0.7 0.6 0.6 0.8 1.1 1.1 1.1 1.6 1.3 0.9 0.8 1.1 1.2 Total Services 6 3.2 3.8 4.2 5.2 5.9 6.2 6.7 7.0 7.4 6.3 6.2 6.5 6.6 1 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2006-07: Q1 2006-07: Q2 2006-07: Q3 2006-07: Q4 2007-08: Q1 2007-08: Q2 2 0.4 0.2 0.5 0.7 0.9 0.9 0.7 0.7 0.8 0.7 0.8 0.7 0.8 Services Sector During the first half of 2007-08, the services sector continued to record double digit growth of 10.5 per cent, though lower than that of 11.6 per cent growth during the corresponding period of the previous year. The services sector continued to be the main driver of growth of the economy, contributing 72.1 per cent to real GDP growth. Services sector activity was led by the sub-sector 'trade, hotel, transport and communication' which contributed nearly 47.5 per cent to growth in services sector during the first half of 2007-08 (Table 8). The 'construction' sub-sector grew by 11.1 per cent during the second quarter of 2007-08, thereby recording double digit growth for eighteen consecutive quarters. Leading indicators of service sector activity for April-October 2007 show that growth rates in revenue earning freight traffic of the railways, commercial vehicles production, new cell phone connections, passengers handled by civil aviation at domestic terminals, cement and steel moderated albeit over a high base (Table 9). Aggregate Demand Growth of the Indian economy continued to be driven by domestic demand, particularly gross fixed capital formation (GFCF). While private final consumption demand contributed 36.3 per cent to the incremental growth in real GDP during July-September 2007 (34.9 per cent during July-September 2006), the contribution of real GFCF was 49.4 per cent (34.6 per cent a year ago). The growth rate of private final consumption expenditure (PFCE) was estimated at 5.6 per cent in the second quarter of 2007-08 as compared with 6.3 per cent in the 9 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Table 9: Indicators of Service Sector Activity (Growth rates in per cent) Sub-sector 1 Tourist arrivals Commercial vehicles production # Railway revenue earning freight traffic New cell phone connections Cargo handled at major ports Civil aviation a) Export cargo handled b) Import cargo handled c) Passengers handled at international terminals d) Passengers handled at domestic terminals Cement * * Steel * * Aggregate deposits Non-food credit 2005-06 2 12.4 10.6 10.7 89.4 10.4 7.3 15.8 12.8 27.1 10.7 10.8 18.1 31.8 2006-07 3 13.6 33.0 9.2 85.4 9.5 3.6 19.4 12.1 34.0 9.1 8.0 23.7 28.4 April-November 2006 2007 4 5 12.2 11.9 29.5 * 5.3 * 10.1 8.0 121.0 44.6 8.0 13.1 4.6 19.8 11.7 37.4 10.6 11.6 13.2 @ 17.5 @ 0.2 22.3 13.4 25.9 7.6 5.9 14.6 @ 11.8 @ * : April-October. @: Up to January 4, 2008. # : Leading indicator for transportation. * * : Leading indicators for construction. Source: Ministry of Tourism, Ministry of Commerce and Industry, Ministry of Statistics and Programme Implementation, Reserve Bank of India and Centre for Monitoring Indian Economy. corresponding quarter of 2006-07. The growth rate of real GFCF accelerated to 15.2 per cent from 13.3 per cent in the corresponding period of 2006-07 (Table 10). The expenditure composition of real GDP indicates a decline in the share of real PFCE to 55.2 per cent in the second quarter of 2007-08 from 56.9 per cent in the corresponding period of 2006-07. On the other hand, share of real GFCF, as per cent to GDP, increased to 30.3 per cent from 28.6 per cent. Table 10: Disposition of National Income (At 1999-2000 prices) (Growth rates in per cent) Item 2005-06 2006-07 QE R E 2 7.2 6.7 9.8 15.3 69.0 0.4 5.9 10.3 9.2 3 6.6 6.2 9.0 14.6 10.2 38.0 8.6 11.4 9.4 2006-07 Q1 4 11.8 6.5 47.6 15.8 10.2 38.4 10.3 11.7 8.1 Q2 5 3.7 6.3 -9.7 13.3 10.6 47.1 18.9 18.7 10.7 Q3 6 5.1 6.0 0.4 15.5 9.7 29.8 -1.9 4.8 9.0 Q4 7 6.1 6.0 6.6 14.1 10.3 37.8 8.7 11.3 9.6 2007-08 Q1 8 6.5 5.6 10.5 15.9 8.4 10.5 5.5 16.1 9.2 Q2 9 6.5 5.6 12.0 15.2 8.6 19.6 4.4 -0.5 8.8 2006-07 10 7.8 6.4 15.8 14.5 10.4 42.5 14.4 15.1 9.4 2007-08 11 6.5 5.6 11.1 15.5 8.5 15.0 5.0 7.9 9.0 April-September 1 1. Total Final Consumption Expenditure a) Private Final Consumption Expenditure (PFCE) b)Government Final Consumption Expenditure 2. Gross Fixed Capital Formation (GFCF) 3. Change in Stocks 4. Valuables 5. Exports 6. Imports Memo: Real GDP at market prices QE: Quick Estimates. RE: Revised Estimates. Source : Central Statistical Organisation. 10 The Real Economy Corporate Performance The performance of non-government non-financial companies slowed somewhat in the two quarters of 2007-08 (Table 11). Sales during the second quarter of 2007-08 grew by 16.0 per cent as compared with 29.2 per cent in second quarter of 2006-07. The growth in net profits moderated sharply to 22.7 per cent from 49.4 per cent a year ago. The growth in gross profits at 22.1 per cent during the second quarter of 2007-08 was the lowest in the last six quarters. Business Expectation Survey Despite continued strength in domestic fundamentals, business confidence indices compiled by various agencies indicate some softening of sentiment against the backdrop of elevated international crude oil prices and global uncertainties (Table 12). According to the latest business confidence survey conducted by the Federation of Indian Chambers of Commerce and Industry (FICCI) in December 2007, the overall business confidence index during October 2007-March 2008 declined both over the previous quarter and over a year ago, reflecting mainly concerns Table 11: Corporate Financial Performance (Growth rates in per cent) Item 2005-06 2006-07 2006-07 2007-08 Q1 5 17.4 16.9 15.1 28.1 10.1 31.1 6 2006-07 Q2 7 29.2 26.6 16.4 45.9 18.0 49.4 15.9 11.0 2.0 12.8 7.8 Q3 8 30.3 26.9 16.8 51.8 11.9 59.5 15.8 11.0 2.0 12.5 8.0 Q4 9 22.5 19.5 18.1 39.2 32.3 39.6 15.3 10.6 2.0 13.0 7.7 2007-08 Q1 10 19.2 19.3 18.1 28.6 4.4 33.9 Q2 11 April-September 1 2 16.3 16.7 8.1 24.6 -2.0 32.8 12.2 8.2 2.2 18.1 5.5 3 26.2 23.5 15.4 41.5 17.4 45.2 15.6 10.7 2.1 13.3 7.5 4 27.4 25.6 16.1 39.8 20.8 41.6 15.6 10.6 2.2 14.1 7.1 Sales Total Expenditure Depreciation Gross Profits Interest Payments Profits After Tax Gross Profits to Sales Profits After Tax to Sales Interest to Sales Interest to Gross Profits Interest Coverage(Times) Memo: 25.6 24.6 14.9 33.9 19.9 34.7 Select Ratios 16.9 15.6 11.7 10.6 2.0 2.2 11.9 13.9 8.4 7.2 No. of Companies 2,730 2,388 2,053 2,082 2,228 2,263 2,258 2,356 Sales 7,35,216 10,41,894 4,24,565 5,36,358 2,34,610 2,51,125 2,60,064 2,94,223 Expenditure 6,43,826 8,72,168 3,53,505 4,45,086 1,95,556 2,09,437 2,16,053 2,48,740 Depreciation Provision 28,961 37,095 15,710 19,347 8,449 8,892 9,172 10,338 Gross Profits 90,179 1,62,017 66,265 90,472 36,567 40,041 41,169 45,108 Interest Payments 16,302 21,500 9,358 10,760 5,083 5,121 5,162 5,862 Profits After Tax 60,236 1,11,107 44,927 62,846 24,845 27,710 28,698 31,251 16.0 15.5 15.8 22.1 18.4 22.7 (Per cent) 16.7 16.6 11.6 11.5 2.0 2.1 11.7 12.6 8.5 7.9 (Amount in Rs. crore) 2,342 2,228 2,80,814 2,97,110 2,34,596 2,47,425 10,173 10,576 46,925 49,228 5,504 6,194 32,699 34,266 Notes: 1. Data for 2005-06 are based on audited balance sheet, while those for 2006-07 and 2007-08 are based on abridged financial results of the select non-Government non-financial public limited companies. 2. Growth rates are per cent changes in the level for the period under reference over the corresponding period of the previous year for common set of companies. 3. The quarterly data may not add up to annual data due to differences in the number and composition of companies covered in each period. 11 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Table 12: Business Expectations Surveys Agency Period 1 NCAER FICCI RBI Dun & Bradstreet 2 October 2007-March 2008 October 2007-March 2008 January-March 2008 January-March 2008 Business Expectations Index 3 Business Confidence Index Business Confidence Index Business Expectation Index Business Optimism Index Growth over a year ago 4 -4.3 -15.1 -6.2 -13.2 (Per cent) Growth over previous round 5 5.8 -10.5 -4.7 -12.6 over rupee appreciation, hardening of interest rates, rising cost of raw materials, particularly oil, and global uncertainties. Fifty-three per cent of the respondents who participated in the survey indicated the current overall economic conditions to be 'moderately to substantially better' than in the preceding six months as against 70 per cent reported in the last survey. According to the survey by the National Council of Applied Economic Research (NCAER) conducted in October 2007, the overall business confidence index (BCI) for the next six months declined on a year-on-year basis, but improved over the previous round of the survey. A component-wise analysis shows that while expectation about present capacity utilisation (being close to or above optimal level) registered a marginal decline, the other three major components, viz., overall economic conditions, investment climate, financial position of the firms recorded an improvement over the previous round. Amongst the various industry sectors, the maximum gain in business confidence was noticed in the capital goods and services sectors, while the minimum gain was expected in the consumer non-durable sector. According to the Reserve Bank's latest Industrial Outlook Survey, the business expectations indices based on assessment for October-December 2007 and on expectations for January-March 2008 declined by 2.5 per cent and 4.7 per cent, respectively, over the previous quarters. The decline in expectations index for January-March 2008 emanated from lower net responses for major parameters of the survey such as the overall business situation, availability of finance, production, order books, capacity utilisation, employment, exports and profit margins over the previous quarter (Table 13 and Chart 4). Purchasing Managers Index The ABN-AMRO Purchasing Managers' Index (PMI), which provides the indicators related to the performance of the manufacturing sector, however, rose by 1.6 per cent in December 2007 over the preceding month, signalling a marked improvement in the health of the Indian manufacturing sector. The rise in the PMI was underpinned by sharp increases in new business volumes and a marked expansion of production. Employment levels and stocks of purchases also continued to rise. The seasonally adjusted Output Index increased by 0.6 per cent in 12 The Real Economy Table 13: Reserve Bank's Survey - Net Response on 'A Quarter Ahead' Expectations About the Industrial Performance Parameter Response OctDec. 2006 2 3 Better 51.8 (41.2) Better 41.9 (50.6) Increase 35.4 (58.3) Improve 33.4 (57.8) Increase 49.7 (39.6) Increase 46.3 (42.6) Below normal -2.1 (81.7) Decrease -49.2 (46.4) Below average -6.1 (83.5) Below average -4.9 (83.5) Increase 33.2 (56.6) Above normal 10.9 (76.6) More than adequate Increase Increase Increase Increase Increase at lower rate Increase 5.1 (79.7) 17.9 (73.3) 34.2 (57.2) 23.4 (68.1) 16.8 (68.0) 14.5 (67.0) 9.2 (60.6) JanMarch 2007 4 53.7 (40.7) 44.5 ( 49.9) 36.2 (59.2) 36.2 (56.6) 50.7 (40.1) 47.3 (43.1) -2.7 (82.9) -41.7 (51.0) -7.1 (83.8) -5.2 (84.5) 33.3 (57.7) 12.8 (76.4) 4.8 (81.8) 18.1 (73.7) 32.6 (57.3) 20.8 (68) 14.2 (69.2) 10.5 (68.1) 11.6 (61.7) AprJune 2007 5 51.7 (43.3) 43.8 (49.8) 35.3 (59.2) 35.2 (57.2) 47.8 (41.6) 45.7 (45.4) -2.2 (82.8) -42.1 (52.0) -7.3 (85.0) -4.4 (85.2) 29.4 (60.4) 11.5 (77.1) 4.0 (82.2) 18.3 (73.3) 33.4 (56.8) 21.6 (68.4) 15.5 (68.9)( 12.1 (66.7) 9.9 (62.5) JulySept 2007 6 49.5 (41.2) 41.3 (49.8) 34.5 (59.2) 32.1 (58.6) 46.6 (41.1) 43.6 (46.1) 2.2 (82.6) 46.0 (49.7) 5.4 (85.0) 2.7 (87.1) 27.0 (61.4) 9.4 (76.5) 3.0 (82.2) 17.4 (73.5) 32.6 (55.6) 23.7 (68.2) 19.0 (67.1) 10.4 (65.0) 7.5 (62.6) (Per cent) Oct- JanDec. Mar 2007 2008 7 8 50.2 47.7 (42.1) (42.9) 40.1 40.3 (51.3) (50.3) 32.2 34.7 (62.6) (60.3) 33.8 31.1 (58.8) (59.5) 49.0 43.9 (40.9) (42.3) 44.1 37.1 (46.0) (48.6) -3.5 0.4 (82.4) (80.2) -42.4 -44.1 (51.0) (49.2) -6.3 -7.3 (85.0) (84.8) -3.5 -4.5 (86.4) (86.1) 28.4 24.2 (61.5) (62.3) 10.7 6.4 (77.2) (78.3) 4.2 4.7 (83.0) (83.8) 16.7 (74.1) 31.4 (55.9) 20.8 (68.6) 13.0 (68.5) 3.7 (58.9) 14.6 (75.6) 24.3 (58.3) 20.1 (70.5) 14.9 (67.1) 13.3 (66.7) 1 1. 2. 3. 4. 5. 6. 7. 8. 9. Overall business situation Financial situation Working capital finance requirement Availability of finance Production Order books Pending orders, if applicable Cost of raw material Inventory of raw material 10. Inventory of finished goods 11. Capacity utilisation (Main product) 12. Level of capacity utilisation (Compared to the average in the preceding four quarters) 13. Assessment of the production capacity (With regard to expected demand in the next six months) 14. Employment in the company 15. Exports, if applicable 16. Imports, if any 17. Selling prices are expected to 18. If increase expected in selling prices 19. Profit margin 9.6 5.4 (59.6) (60.0) Notes: 1. 'Net response' is measured as the percentage share differential between the companies reporting 'optimistic' (positive) and 'pessimistic' (negative) responses; responses indicating status quo (no change) are not reckoned. Higher 'net response' indicates higher level of confidence and vice versa. 2. Figures in parentheses are the percentages of respondents with 'no change over the preceding quarter' as responses. December 2007 over the preceding month. Reports from the survey panel suggested favourable market conditions, leading to a sharp rise in volumes of incoming new business, and inventory build up. 13 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Chart 4: Reserve Bank s Industrial Outlook Survey Business Expectation Index 130.0 125.0 120.0 Index 115.0 110.0 105.0 Jan-Mar 2001 Jan-Mar 2003 Jan-Mar 2005 Jan-Mar 2002 April-June 2000 Jan-Mar 2004 Assessment Expectations Forecasts by various agencies for real GDP growth in 2007-08 are set out in Table 14. Table : 14 : Projections of Real GDP for India by various Agencies - 2007-08 (per cent) Latest Projection Agency Overall Agriculture Industry Services Growth 2 9.0 8.6 8.8 9.0 9.3 8.6 8.4 9.1 8.9 8.9 8.5 8.9 * 8.5 Around 8.5 3 3.5 2.6 4.0 3.0 3.4 2.7 3.9 3.8 3.6 4 10.0 9.8 9.5 10.0 9.2 8.5 9.4 9.0 9.7 5 10.5 10.0 10.0 11.0 10.0 10.1 10.7 10.6 10.3 Month of Projection 6 December 2007 September 2007 September 2007 September 2007 September 2007 December 2007 October 2007 January 2008 October 2007 January 2008 September 2007 October 2007 September 2007 Overall Growth 7 8.5-8.7 8.0 8.5 8.5 9.3 7.9-8.4 8.4 9.1 8.5 9.0 9.0 * 8.0 Earlier Projection Month 8 August 2007 March 2007 March 2007 April 2007 April 2007 March/ June 2007 March 2007 December 2007 August 2007 July 2007 July 2007 March 2007 July 2007 1 ASSOCHAM JP Morgan Merrill Lynch ICRA Citigroup CRISIL Indicus Analytics CMIE NCAER Economic Advisory Council UNCTAD IMF ADB RBI - : Not Available. * : Calendar year. October 2007 Around 8.5 14 Jan-Mar 2006 Jan-Mar 2007 Jan-Mar 2008 100.0 II. FISCAL SITUATION Combined Government Finances: 2007-08 The combined finances of the Central and State Governments for 2007-08 are expected to improve with the fiscal rule-based consolidation process that is underway. The key deficit indicators are budgeted to decline over the revised estimates for 2006-07, both in absolute terms and as percentage of GDP. The improvement in combined finances during 2007-08 would be largely brought about by the strengthening of the State Governments' finances, with the consolidated revenue account of the States envisaged to record a surplus. Buoyant tax revenue is expected to raise the revenue receipts in 2007-08, despite sluggishness in nontax revenue. Non-developmental revenue expenditure is expected to be curtailed, thereby reducing the revenue expenditure. Consequently, the combined revenue deficit in 2007-08 is budgeted to decline by 0.8 per cent of GDP, enabling a reduction in the combined gross fiscal deficit (GFD) by 0.9 per cent of GDP in 2007-08 (Table 15). Table 15: Key Fiscal Indicators (Per cent to GDP) Year 1 Primary Deficit 2 Revenue Deficit 3 Gross Fiscal Deficit 4 5.9 4.5 4.0 4.1 3.7 (3.5) 3.3 4.1 4.4 3.4 2.5 2.8 2.3 9.5 8.4 7.5 6.7 6.4 5.5 Outstanding Liabilities* 5 63.6 62.9 63.9 63.4 61.5 59.2 32.0 33.0 32.9 32.7 30.8 29.8 80.2 81.1 81.9 80.7 77.5 74.8 Centre 2002-03 1.1 4.4 2003-04 -0.03 3.6 2004-05 -0.04 2.5 2005-06 0.4 2.6 2006-07 RE 0.2 2.0 (-0.2) (1.9) 2007-08 BE -0.2 1.5 States 2002-03 1.2 2.3 2003-04 1.5 2.3 2004-05 0.7 1.3 2005-06 0.2 0.2 2006-07 RE 0.4 0.1 2007-08 BE 0.1 -0.3 Combined 2002-03 3.1 6.7 2003-04 2.0 5.8 2004-05 1.4 3.8 2005-06 1.0 2.8 2006-07 RE 0.9 2.1 2007-08 BE 0.2 1.3 RE: Revised Estimates. BE: Budget Estimates. *: Includes external liabilities at historical exchange rates. Note: 1. Figures in parentheses relate to provisional accounts. 2. Negative sign indicates surplus. 3. Data in respect of States relate to 28 States. 15 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Centre's Fiscal Situation According to the latest information on Central Government finances for 200708 (April-November), key deficit indicators, viz., revenue deficit and GFD, were placed lower than those in the corresponding period of the previous year, both in absolute terms as well as per cent of budget estimates (BE) (Chart 5). Revenue deficit during April-November 2007 was placed lower than that in April-November 2006 on account of higher revenue receipts and lower revenue expenditure, as per cent of BE. Apart from the lower revenue deficit, contraction in defence capital outlay also moderated the fiscal deficit. There was a primary surplus of Rs. 7,374 crore during the first eight months of 2007-08 as compared with the budgeted surplus of Rs. 8,047 crore. During April-November 2007, tax revenue, as per cent of BE, was higher than a year ago on account of impressive growth in income tax, corporation tax, customs duties and services tax. Receipts from new taxes, particularly fringe benefit tax and securities transaction tax, also remained buoyant in the first eight months of 200708. Union excise duties, however, continued to remain subdued. Non-tax revenue, as per cent of BE, was higher than a year ago on account of higher interest receipts, and dividends and profits. Aggregate expenditure (adjusted for acquisition cost of Reserve Bank's stake in SBI), as per cent of BE, was lower than a year ago. Capital outlay in the first eight months of 2007-08 showed a modest decline. While expenditure on interest payments and subsidies increased, the overall non-plan expenditure (adjusted for acquisition cost of Reserve Bank's stake in SBI) as a per cent of BE, was lower than a year ago. Non-debt capital receipts (adjusted for profit on sale of Reserve Bank's stake in SBI) were higher than the comparable budget estimate due to higher than budgeted recoveries of loans and advances, and disinvestment proceeds (Table 16). Chart 5: Key Deficit Indicators of the Centre Gross Fiscal Deficit 160000 140000 120000 Acquisition of RBI's stake in SBI Profit on sale of RBI's stake in SBI 100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 Revenue Deficit* Rupees crore 100000 80000 60000 40000 20000 April June February January March August September November December October April May June July September November 2006-07 2006-07 2007-08 2007-08 *: Figure for August 2007 adjusted to net out profit on sale of RBI's stake in SBI, shown earlier under non-tax revenue but subsequently under non-debt capital receipts. 16 December February October January August March May July 0 Rupees crore Fiscal Situation Table 16 : Central Government Finances during April-November 2007 (Rupees crore) Item 2007-08 (Budget Estimates) 2 4,86,422 4,03,872 82,550 43,151 (3,151) 4,75,421 (4,35,421) 1,58,995 96,000 51,247 38,403 2,05,100 5,57,900 1,22,621 (82,621) 6,80,521 (6,40,521) 71,478 1,50,948 -8,047 April-November 2006 3 2,21,190 1,76,956 44,234 7,148 2,45,393 2007 4 2,74,633 2,20,372 54,261 40,468 (6,160) 2,98,756 (2,63,225) 1,03,648 40,328 46,222 22,428 1,12,619 3,44,607 66,768 (31,237) 4,11,375 (3,75,844) 69,974 96,274 (95,051) -7,374 (-8,597) Per cent of Budget Estimates April-November 2006 2007 5 6 54.8 56.5 54.1 54.6 58.0 65.7 60.4 93.8 (195.5) 62.7 62.8 (60.5) 62.9 48.5 81.5 69.4 52.8 62.6 40.7 59.7 99.7 72.8 _ 65.2 42.0 90.2 58.4 54.9 61.8 54.5 (37.8) 60.5 (58.7) 97.9 63.8 (63.0) _ 1 1. Revenue Receipts (i + ii) i) Tax Revenue ii) Non-tax Revenue 2. Non-Debt Capital Receipts 3. Non-Plan Expenditure of which: i) Interest Payments ii) Defence iii) Subsidies iv) Grants to States & UTs 4. Plan Expenditure 5. Revenue Expenditure 6. Capital Expenditure 7. Total Expenditure 8. Revenue Deficit 9. Gross Fiscal Deficit 10. Gross Primary Deficit Note: 87,943 43,184 36,505 24,538 91,146 3,05,673 30,866 3,36,539 84,483 1,08,201 20,258 Figures in parentheses are net of transactions relating to transfer of Reserve Bank's stake in SBI to the Government. Source: Controller General of Accounts, Ministry of Finance, Government of India. Mid-Year Review by the Government of India During the first half of 2007-08, fiscal and revenue deficits (as per cent of BE) were higher than the targets prescribed under the Fiscal Responsibility and Budget Management (FRBM) rules. However, the Government had comfortably met the halfyearly target for total non-debt receipts as a proportion to BE. Fiscal deficit as a proportion of BE was also lower than that in the corresponding period of the previous year. However, there was a slippage in terms of revenue deficit as a proportion to BE. The Mid-Year Review for 2007-08 of the Central Government indicated that this was due to expenditure pressures resulting from higher subsidies as well as higher interest payments on account of larger borrowing under the Market Stabilisation Scheme (MSS). The faster pace of growth in expenditure during the first-half of 2007-08 was also attributed to front-loading, reflecting the seasonality of expenditure in certain sectors, embedded institutional factors relating to transfers to States and Union Territories and cash management measures to avoid parking of funds and rush in expenditure at the year-end. The Mid-Year Review also noted that in contrast, taxes/duties have more back-loaded payment schedules, leading to a gap 17 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 between expenditures and receipts during the first half of the year. The Government expressed confidence in meeting the annual FRBM targets on the strength of fiscal consolidation measures in conjunction with growth dividends. Table 17: Central Government Securities Issued during 2007-08 (Amount in Rupees crore/Maturity in years/Yield in per cent) Sr. No. 1 1. 2. 3. 4. 5. 2 April 5-12, 2007 April 20-27,2007 May 4-11, 2007 May 18-25, 2007 June 1-8, 2007 Borrowings as per Issuance Auction Calendar Period of Auction Amount 3 6,000 4,000 6,000 6,000 4,000 5,000 3,000 6,000 3,000 6,000 6,000 4,000 6,000 3,000 6,000 4,000 5,000 2,000 4,000 3,000 6,000 4,000 4,000 4,000 5,000 3,000 3,000 4,000 5,000 2,000 6,000 4,000 Residual Maturity 4 5-9 20 and above 10-14 10-14 20 and above 5-9 15-19 10-14 20 and above 10-14 10-14 and above 5-9 and above 10-14 and above 5-9 10-14 10-14 and above 10-14 and above 5-9 15-19 10-14 and above 10-14 15-19 10-14 and above 10-14 and above 5 April 12, 2007 April 12, 2007 April 27, 2007 May 11, 2007 May 11, 2007 May 25, 2007 May 25, 2007 June 5, 2007 June 5, 2007 June 12, 2007 * June 15, 2007 July 6, 2007 July 7, 2007 July 20, 2007 July 20, 2007 August 3, 2007 August 3, 2007 August 24, 2007 August 24, 2007 September 7, 2007 September 7, 2007 October 12, 2007 October 12, 2007 October 26, 2007 October 26, 2007 November 8, 2007 November 8, 2007 November 23, 2007 November 23, 2007 December 14, 2007 December 14, 2007 January 11, 2008 January 11, 2008 Period of Auction Actual Borrowings Amount 6 6,000 4,000 6,000 6,000 4,000 5,000 3,000 6,000 3,000 5,000 6,000 6,000 4,000 6,000 3,000 6,000 4,000 5,000 2,000 4,000 3,000 6,000 4,000 4,000 4,000 5,000 3,000 3,000 4,000 5,000 2,000 6,000 4,000 Residual Maturity 7 8.39 29.15 9.71 9.92 29.06 8.26 14.96 9.86 29.00 9.84 9.83 10.00 28.91 6.10 25.10 9.93 24.87 6.02 9.89 14.43 28.74 9.73 24.87 5.84 14.54 14.26 28.57 9.62 14.47 9.56 28.47 9.49 28.40 Yield 8 8.16 8.58 8.16 8.31 8.64 8.24 8.40 8.18 8.52 8.44 8.35 7.99 8.45 7.59 8.34 7.93 8.45 7.87 7.91 8.16 8.41 7.91 8.45 7.74 8.13 8.26 8.39 7.90 8.20 7.92 8.26 7.55 7.89 6. 7. 8. 9. June 15-22,2007 July 6-13, 2007 July 20-27,2007 August 3-10, 2007 20 20 20 10. August 17-24,2007 11. September 7-14, 2007 12. October 5-12, 2007 14. October 19-26, 2007 15. November 2-8, 2007 16. November 16-23, 2007 17. December 7-14, 2007 18. January 4-11, 2008 Memo: 20 20 20 20 20 Year 2003-04 2004-05 2005-06 2006-07 2006-07 (up to January 18, 2007) 2007-08 (up to January 18, 2008) * : Not scheduled. Weighted Average Maturity 14.94 14.13 16.90 14.72 14.56 14.57 Weighted Average Yield 5.71 6.11 7.34 7.89 7.86 8.15 18 Fiscal Situation Extra-Budgetary Items The Central Government, besides providing explicit subsidies on petroleum, food and fertiliser, has also been periodically issuing special bonds to the oil marketing companies (since 1997-98), the Food Corporation of India (FCI) (in 200607) and fertiliser companies (in 2007-08) to support them. The issuance of these bonds per se is considered to be fiscal deficit neutral since they do not involve cash flow and are, therefore, not treated as part of budgetary expenditure/receipts. However, these bonds have fiscal implications as they add to the fiscal liabilities of the Government. Furthermore, as interest payments on such bonds are treated as part of the revenue expenditure, they affect the revenue deficit and, thereby, the fiscal deficit on a continuing basis. During 2005-06 and 2006-07, special bonds were issued by the Government to oil marketing companies amounting to Rs.17,263 crore and Rs.24,121 crore, respectively, as compensation for their under recoveries on account of sale of sensitive petroleum products. In addition, special bonds amounting to Rs.16,200 crore were issued to FCI in 2006-07. During 2007-08, special bonds amounting to Rs.7,500 crore and Rs.23,457 crore, respectively, are envisaged to be issued to fertiliser companies and oil marketing companies. During the current fiscal year (up to January 18, 2008), special bonds amounting to Rs.3,890 crore and Rs.11,257 crore, respectively, were issued to fertiliser companies (as compensation for fertiliser subsidy) and to oil marketing companies (towards estimated under recoveries during 2007-08). Cash Management and Central Government Market Borrowings During 2007-08 (up to January 18, 2008), the actual issuances of dated securities amounted to Rs.1,47,000 crore as against Rs.1,42,000 crore scheduled in the calendar for the same period. All auctions were reissuances of existing securities, barring one new issue (10-year security) for Rs.6,000 crore on July 9, 2007. For the first time during the current year so far, an amount of Rs.957 crore devolved on the primary dealers (PDs) during the month of November 2007. Gross and net market borrowings (including 364-day Treasury Bills) during 2007-08 (up to January 18, 2008) amounted to Rs.1,73,429 crore and Rs.1,03,977 crore, respectively, accounting for 91.8 per cent and 94.9 per cent of the estimated borrowings for the year. The weighted average maturity of dated securities issued during 2007-08 (up to January 18, 2008) at 14.57 years was marginally higher than that of 14.56 years during the corresponding period of the previous year. The weighted average yield of dated securities issued during the same period was 8.15 per cent, as compared with 7.86 per cent (Table 17). Commencing the year 2007-08 with a surplus cash balance of Rs.50,092 crore, the Central Government took recourse to Ways and Means Advance (WMA) during the greater part of the first quarter of the year on account of higher than anticipated spending, coupled with decline in investments in Treasury Bills by the States resulting from lower collections under the National Small Saving Fund 19 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 (NSSF). The Central Government also resorted to overdraft during this period. A surplus was, however, built up in June 2007, ahead of acquisition of Reserve Bank's stake in SBI, which was used up by the month-end to meet this expenditure and the Central Government reverted to WMA. With the transfer of surplus from the Reserve Bank on August 9, 2007, the Centre's cash balance returned to a surplus mode and remained so thereafter. As on January 18, 2008, the surplus cash balance was placed at Rs.59,723 crore. During 2007-08 (up to January 18, 2008), the Centre took recourse to WMA for 91 days as compared with 39 days during the same period in 2006-07. The average utilisation of WMA/OD during 2007-08 (up to January 15, 2008) was Rs.5,315 crore as compared with Rs.500 crore in the corresponding period of the previous year. State Finances State Governments in their budgets for 2007-08 have committed to bring further improvement in their fiscal position in line with their Fiscal Responsibility Legislations. Notwithstanding some variations across the States, the consolidated revenue balance (of 28 State Governments) is budgeted to show a noticeable improvement in 2007-08, with a surplus of 0.3 per cent of GDP as compared with a deficit of 0.1 per cent of GDP in 2006-07 (RE). As a result, the GFD is estimated to decline to 2.3 per cent of GDP in 2007-08 (BE) from 2.8 per cent of GDP during 2006-07(RE). The consolidated primary deficit for the 28 States is budgeted at 0.1 per cent of GDP in 2007-08. Cash Management and State Governments' Market Borrowings The net allocation (provisional) for the market borrowings of the State Governments during 2007-08 was placed at Rs.28,781 crore. Taking into account repayment of Rs.11,555 crore during the year, and additional allocation of Rs.37,483 crore (of which Rs. 35,358 crore was on account of allocation made by the Central Government in view of expected shortfall in NSSF collection), the gross allocation of market borrowings was placed at Rs.77,818 crore for the year 2007-08. Up to January 18, 2008, the States raised market loans amounting to Rs.39,671 crore (51.0 per cent of gross allocation) through auctions, as compared with Rs.12,989 crore (48.8 per cent of gross allocation) during the corresponding period of the previous year. The cut-off yield ranged between 8.00-8.90 per cent. The weighted average interest rate on market loans firmed up to 8.35 per cent during 2007-08 (up to January 18, 2008) from 7.99 per cent in the corresponding period of the previous year (Table 18). The average daily utilisation of WMA and overdraft by the States during 2007-08 (up to December 2007) was Rs.834 crore, as against Rs.262 crore during the corresponding period of 2006-07 (Chart 6). Eight States availed of WMA and three States resorted to overdrafts during 2007-08 (up to December 2007) as 20 Fiscal Situation Table 18: Market Borrowings of State Governments - 2007-08 Item 1 Auctions i. First ii. Second iii. Third iv. Fourth v. Fifth vi. Sixth vii. Seventh viii. Eighth xi. Ninth x. Tenth xi. Eleventh xii. Twelfth xiii. Thirteenth Grand Total Memo: Year 2003-04 2004-05 2005-06 2006-07 2006-07 (up to January 18, 2007) 2007-08 (up to January 18, 2008) Source: Reserve Bank of India. Weighted Average Yield (per cent) 6.13 6.45 7.63 8.10 7.99 8.35 Date 2 April 19, 2007 May 10, 2007 May 17, 2007 June 19, 2007 July 26, 2007 August 16, 2007 September 20, 2007 October 4, 2007 October 8, 2007 November 13, 2007 November 30, 2007 December 18 ,2007 January 7, 2008 Cut-off Rate (Per cent) 3 8.30 8.34 8.40 8.45-8.57 8.00-8.25 8.30-8.90 8.14-8.50 8.20 8.31-8.40 8.39-8.69 8.45-8.50 8.39-8.58 8.03-8.12 Tenor (Years) 4 10 10 10 10 10 10 10 10 10 10 10 10 10 Amount Raised (Rupees crore) 5 1,837 350 1,400 3,566 1,389 3,485 3,074 590 4,672 5,300 5,212 2,963 5,833 39,671 compared with six States and two States, respectively, during the corresponding period of the previous year. Chart 6: Utilisation of WMA and Overdraft by States* 2000 1800 1600 1400 1200 1000 800 600 400 200 0 Rupees crore April June January September 2006-07 * Average of daily outstandings 2007-08 21 November December February August October March May July Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 The cash surplus position of the States, as reflected in their investments in Treasury Bills (14-day and auction Treasury Bills), remained sizeable, although it decreased from Rs.73,403 crore at end-March 2007 to Rs.69,764 crore on January 18, 2008. The average investment by the States in Treasury Bills during April-December 2007 amounted to Rs.70,528 crore as against Rs.60,583 crore in the corresponding period of the previous year (Chart 7). Chart 7: Investments in Treasury Bills by State Governments* 90,000 80,000 70,000 Rupees crore 60,000 50,000 40,000 30,000 20,000 10,000 0 April June January September 2006-07 *Average of Friday outstandings 2007-08 22 November December February August October March May July III. MONETARY AND LIQUIDITY CONDITIONS Expansion in monetary and liquidity aggregates has remained strong during 2007-08 so far. Accretion to bank deposits, led by time deposits, remained buoyant. Year-on-year (y-o-y) growth of broad money (M3) as on January 4, 2008 was higher than that at end-March 2007, and was also above the indicative trajectory of 17.0-17.5 per cent for 2007-08 set out in the Annual Policy Statement (April 2007). Growth in bank credit moderated, consistent with policy projections. Banks' investments in SLR securities, as a proportion of their net demand and time liabilities (NDTL), were higher than at end-March. The Reserve Bank continued with the policy of active management of liquidity through increases in the cash reserve ratio (CRR), issuances of securities under the Market Stabilisation Scheme (MSS), operations under the liquidity adjustment facility (LAF) and conduct of open market operations (OMO). Monetary Survey Broad money growth (M3), year-on-year (y-o-y), was higher at 22.4 per cent on January 4, 2008, as compared with 21.3 per cent at end-March 2007 and 20.8 per cent a year ago. This reflected a strong expansion in aggregate deposits, which on a year-on-year basis, remained higher than the projected trajectory of Rs.4,90,000 crore for 2007-08 set out in the Reserve Bank's Annual Policy Statement. Monetary expansion was mainly driven by sizeable accretion of net foreign exchange assets. The other major source of monetary expansion, i.e., bank credit to the commercial sector decelerated during the same period. Non-food credit (inclusive of non-SLR investments) decelerated and was close to the policy projection of 24.0-25.0 per cent. Expansion in the residencybased new monetary aggregate (NM3) - which does not directly reckon nonresident foreign currency deposits such as FCNR(B) deposits - also accelerated to 22.5 per cent on January 4, 2008 from 20.0 per cent a year ago, mainly reflecting the decline in non-resident foreign currency deposits during this period. Growth in liquidity aggregate, L1, at 22.4 per cent at end-December 2007 was also higher than that of 19.4 per cent a year ago (Table 19 and Chart 8). Taking into consideration the trends in monetary aggregates and in order to absorb excess liquidity from the system, the Reserve Bank has increased the CRR by 250 basis points since December 2006. The ceiling on the outstanding amount under the Market Stabilisation Scheme (MSS) for the year 2007-08 was also successively raised on four occasions to Rs.2,50,000 crore. 23 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Table 19 : Monetary Indicators (Amount in Rupees crore) Item Outstanding as on January 04, 2008 2 Variation (year-on-year) January 05, 2007 Absolute Per cent 3 1,06,877 1,35,416 5,26,566 66,845 4,59,021 67,871 3,91,150 10,341 5,12,266 2,499 5,08,857 13,166 5,08,857 5,10,771 25,976 -19,253 -19,845 45,228 4,28,305 1,84,656 -487 1,11,883 4 20.0 18.2 20.8 16.8 21.5 19.9 21.8 18.7 20.0 3.1 19.4 13.0 19.3 19.3 March 31, 2007 January 04, 2008 Absolute Per cent Absolute Per cent 5 1,35,961 1,38,820 5,80,733 70,352 5,09,754 67,841 4,41,913 7,833 5,71,550 2,692 5,83,181 11,631 5,83,181 5,85,255 6 23.7 16.8 21.3 17.0 22.1 16.7 23.2 13.2 20.8 3.2 20.5 11.2 20.4 20.3 9.3 -29.3 -58.6 9.8 25.4 25.7 -5.3 23.2 7 1,96,231 1,33,759 6,86,925 70,245 6,17,035 63,869 5,53,166 -7,608 6,91,978 7,699 7,01,133 2,629 7,01,133 7,02,478 39,069 -1,49,280 -1,49,358 1,88,349 3,95,215 2,71,263 697 19,319 8 30.6 15.2 22.4 15.1 23.8 15.6 25.3 -11.6 22.5 9.2 22.4 2.3 22.3 22.2 4.8 23.3 20.2 32.1 8.5 3.5 25.2 22.2 1 I. Reserve Money* 8,38,050 10,12,613 II. Narrow Money (M1) 37,50,334 III. Broad Money (M3) a) Currency with the Public 5,35,191 b) Aggregate Deposits 32,10,170 i) Demand Deposits 4,72,448 ii) Time Deposits 27,37,721 of which: Non-Resident Foreign Currency Deposits 58,143 37,64,344 IV. NM 3 of which: Call Term Funding from FIs 91,561 38,37,283 V. a) L1 of which: Postal Deposits 1,16,994 38,40,215 b) L2 38,66,183 c) L3 VI. Major Sources of Broad Money 8,46,043 a) Net Bank Credit to the Government (i+ii) i) Net Reserve Bank Credit to Government -1,49,592 of which: to the Centre -1,50,278 ii) Other Banks' Credit to Government 9,95,635 b) Bank Credit to Commercial Sector 23,55,379 c) Net Foreign Exchange Assets 11,15,219 8,851 d) Government Currency Liability to Public e) Net Non-Monetary Liabilities of the Banking Sector 5,75,158 Memo: Aggregate Deposits of SCBs Non-food Credit of SCBs 3.3 71,582 -2,384 -3,024 5.9 73,967 28.0 4,30,358 28.0 1,86,985 -5.6 -467 25.2 1,07,725 22.9 4,99,260 31.9 4,16,006 29,88,207 4,44,241 21,05,235 4,16,418 23.7 6,00,761 28.4 3,82,155 * : Data pertain to January 18, 2008. SCBs: Scheduled Commercial Banks. FIs: Financial Institutions. NBFCs: Non-Banking Financial Companies. NM3 is the residency-based broad money aggregate and L1, L2 and L3 are liquidity aggregates compiled on the recommendations of the Working Group on Money Supply (Chairman: Dr. Y.V. Reddy, 1998). L1 = NM3 + Select deposits with the post office saving banks. L2 = L1 +Term deposits with term lending institutions and refinancing institutions (FIs)+ Term borrowing by FIs + Certificates of deposit issued by FIs. L3 = L2 + Public deposits of NBFCs. Note : 1. Data are provisional. Wherever data are not available the estimates for the last available month have been repeated. 2. Liquidity aggregates pertain to end-December 2007. On a year-on-year basis, currency with the public increased by 15.1 per cent, lower than the growth of 16.8 per cent in the corresponding period of the previous year. Growth in demand deposits was also lower than a year ago as well as that at end-March 2007. Growth in narrow money (M1), y-o-y, was 24 Monetary and Liquidity Conditions Chart 8: Money Supply Broad Money Growth rate (y-o-y, per cent) Growth rate (y-o-y, per cent) 26 24 22 20 18 16 14 12 10 24 22 20 18 16 14 12 Monetary and Liquidity Aggregates 16-Sep-05 24-Jun-05 9-Dec-05 1-Apr-05 27-Apr-07 26-May-06 18-Aug-06 M3 Currency with the Public Aggregate Deposits with Banks 10-Nov-06 12-Oct-07 2-Feb-07 20-Jul-07 3-Mar-06 4-Jan-08 15.2 per cent as on January 4, 2008 as compared with 18.2 per cent a year ago and 16.8 per cent at end-March 2007. The growth in broad money was higher, reflecting buoyancy in time deposits which accelerated from 21.8 per cent on January 5, 2007 to 23.2 per cent at end-March 2007 and further to 25.3 per cent on January 4, 2008. Concomitantly, the accretion to postal deposits decelerated significantly during the year (Chart 9). The higher order of increase in time deposits can be attributed, inter alia, to robust economic activity, increase in interest rates on bank deposits, unchanged interest rates on postal deposits and extension of tax benefits under Section 80C for bank deposits. In order to Chart 9: Time Deposits Growth Time Deposits Growth Rate 30 28 24 15 13 Growth rate (y-o-y, per cent) Per cent (y-o-y) 27 24 21 18 15 12 1 3 5 7 9 11 13 15 17 19 21 23 25 Fortnight 2005-06 2006-07 2007-08 IMD Redemption 20 16 12 8 4 0 9 7 5 3 Mar-05 Dec-05 Sep-05 Jun-05 Mar-07 Mar-06 Small Savings Growth Rate (left scale) Time Deposits Growth Rate (left scale) Small Savings Interest Rate (PPF, right scale) Time Deposits Interest Rate (right scale) 25 Dec-06 Dec-07 Sep-06 Sep-07 Jun-06 Jun-07 Per cent Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 M3 NM3 L1 11 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 revive saving interest in postal deposits, the Government of India announced in December 2007, incentives including tax benefits for certain postal deposits. Growth in M3, on a financial year basis, during 2007-08 (up to January 4, 2008) at 13.3 per cent was higher than that of 12.2 per cent in the corresponding period of the previous year. Notwithstanding a sharp accretion during the third quarter of 2007-08 on account of festive season currency demand in November, currency with the public decelerated during the current financial year so far (up to January 4, 2008) (Table 20). Growth in bank credit to the commercial sector moderated somewhat during 2007-08 (up to January 4, 2008) from the strong pace of the previous Table 20 : Monetary Aggregates - Variations (Rupees Crore) Item 2006-07 2007-08 up to up to Jan. 05 Jan. 04 2 3,33,864 (12.2) 51,828 (12.5) 2,83,577 (12.3) 2,192 (0.5) 2,81,385 (14.8) -1,541 3 2006-07 Q1 4 Q2 5 Q3 6 Q4 7 Q1 8 2007-08 Q2 9 Q3 10 1 M3 (1+2+3 = 4+5+6+7-8) Components 1. Currency with the Public 2. Aggregates Deposits with Banks 2.1 Demand Deposits with Banks 2.2 Time Deposits with Banks 3.'Other' Deposits with Banks Sources 4. Net Bank Credit to Government 4,40,056 55,411 1,68,401 62,951 2,93,970 (13.3) 51,721 (10.7) 3,90,858 (13.9) -1,780 (-0.4) 3,92,638 (16.7) -2,523 23,797 -2,878 27,587 21,847 76,191 1,97,025 1,19,300 17,434 -14,231 59,194 2,12,735 58,255 47,535 72,520 -5,577 78,098 -756 33,227 1,70,827 35,866 2,69,833 -42,399 43,794 -8,252 74,697 -42,505 75,626 1,27,033 44,118 1,95,136 1,01,698 1,54,480 -1,613 452 -502 2,291 -436 -1,479 40,379 7,866 23,431 14,175 -13,204 47,180 24,833 16,479 -38,624 (5.3) (0.9) 4.1 RBI's Net Credit to Government -8,448 -1,55,344 53 2,826 -12,754 7,490 -25,483 -54,695 -65,787 4.1.1 RBI's Net credit to Centre -6,079 -1,52,413 3,071 2,584 -12,568 3,889 -21,825 -55,588 -65,078 4.2 Other Banks' Credit to Government 48,828 1,63,210 23,378 11,349 -451 39,690 50,315 71,174 27,164 5. Bank Credit to Commercial Sector 2,67,159 2,32,017 14,930 1,44,204 78,099 1,93,125 -31,817 1,46,814 92,490 (15.8) (10.9) 6. NFEA of Banking Sector 1,17,762 2,02,040 58,087 20,197 43,160 65,542 -17,945 1,18,249 94,681 6.1 NFEA of RBI 1,06,806 2,18,422 71,845 11,392 27,250 82,682 -2,745 1,19,430 94,681 7. Government's Currency Liabilities to the Public -600 564 -920 155 166 132 140 354 70 8. Net Non-Monetary liabilities of the Banking Sector 90,837 2,431 40,117 10,330 45,269 12,009 -1,00,980 84,870 29,318 Memo : 1 Non-resident Foreign Currency Deposits with SCBs 2. SCB' Call-term Borrowing from Financial Institutions 3. Overseas Borrowing by SCBs 6,476 719 -4,088 -8,965 5,725 1,958 3,917 3,118 3,301 1,671 1,233 1,011 5,618 5,229 -3,849 -2,984 -6,928 -1,181 5,756 7,830 -3,392 6,943 3,366 -1,576 -4,468 -3,685 -2,774 SCBs: Scheduled Commercial Banks. Note: 1. Figures in parentheses are percentage variations. NFEA: Net Foreign Exchange Assets. 26 Monetary and Liquidity Conditions Chart 10: Scheduled Commercial Banks' Credit Growth* Non-food Credit 36 Growth Rate (Per cent) Incremental Credit Deposit Ratio 120 110 100 Per cent 33 30 27 24 21 18 1 3 5 7 9 11 13 15 17 19 21 23 25 Fortnight 2005-06 2006-07 2007-08 90 70 80 60 50 1 3 5 7 9 11 13 15 17 19 21 23 25 Fortnight 2005-06 2006-07 2007-08 * : Year-on-year basis, excluding conversion of a non-bankng entity into a banking entity on October 11, 2004. three years. Non-food credit by scheduled commercial banks (SCBs) expanded by 22.2 per cent, y-o-y, as on January 4, 2008 as compared with 28.4 per cent at end-March 2007 and 31.9 per cent a year ago. The deceleration in credit growth coupled with the acceleration in deposit growth led to a decline in the incremental credit-deposit ratio (y-o-y) of SCBs to 63.3 per cent as on January 4, 2008 from 93.7 per cent a year ago (Chart 10). Disaggregated sectoral data available up to November 23, 2007 show that about 43 per cent of incremental non-food credit (y-o-y) was absorbed by industry, as compared with 34 per cent in the corresponding period of the previous year. The expansion of incremental non-food credit to industry during this period was led by infrastructure (power, port and telecommunication), iron and steel, textiles, engineering, food processing, vehicles, petroleum, chemicals and construction industries. The infrastructure sector alone accounted for over 28 per cent of the incremental credit to industry as compared with 18 per cent in the corresponding period of the previous year. The agricultural sector absorbed around 12 per cent of the incremental non-food bank credit expansion. Personal loans accounted for nearly 23 per cent of incremental non-food credit as compared with 29 per cent a year ago; within personal loans, the share of incremental housing loans stood at 40 per cent. Growth in loans to commercial real estate remained high, notwithstanding some moderation (Table 21). Apart from bank credit, the corporate sector continued to meet its funding requirements from non-bank sources such as capital markets, external commercial borrowings and internal generation of funds. Resources raised through domestic equity issuances during the first nine months of 2007-08 (Rs.31,897 crore) were higher by 40 per cent than the corresponding period of 27 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Table 21 : Deployment of Non-food Bank Credit (Amount in Rupees Crore) Sector/Industry Outstanding as on November 23, 2007 2 19,26,550 2,32,124 7,55,440 1,30,284 4,88,413 2,46,689 39,269 16,951 18,992 9,081 4,50,573 29,614 24,861 1,11,835 50,660 53,400 Agriculture and Allied Activities Industry (Small, Medium and Large) Small Scale Industries Personal Loans Housing Advances against Fixed Deposits Credit Cards Education Consumer Durables Services Transport Operators Professional & Other Services Trade Real Estate Loans Non-Banking Financial Companies Year-on-Year Variation November 24, 2006 Absolute 3 3,66,638 45,788 1,22,984 16,850 1,05,034 53,198 1,671 3,564 4,157 957 92,832 9,676 6,480 23,613 16,603 6,850 Per cent 4 30.4 31.5 25.6 21.1 35.0 33.4 5.4 43.3 47.4 11.2 33.3 81.4 52.8 34.4 77.7 25.5 November 23, 2007 Absolute 5 3,52,287 40,863 1,52,346 33,259 81,451 32,424 6,360 5,157 5,856 -419 77,627 7,903 5,941 16,828 12,563 18,555 Per cent 6 22.4 21.4 25.3 34.3 20.0 15.1 19.3 43.7 44.6 -4.4 20.8 36.4 31.4 17.7 33.0 53.3 1 Non-food Gross Bank Credit (1 to 4) 1. 2. 3. 4. Memo: Priority Sector Industry (Small, Medium and Large) Food Processing Textiles Paper & Paper Products Petroleum, Coal Products & Nuclear Fuels Chemical and Chemical Products Rubber, Plastic & their Products Iron and Steel Other Metal & Metal Products Engineering Vehicles, Vehicle Parts and Transport Equipments Gems & Jewellery Construction Infrastructure 6,61,459 7,55,440 42,966 83,478 12,262 34,936 56,284 9,266 76,367 21,149 48,500 26,091 24,380 21,754 1,63,754 1,10,030 1,22,984 6,493 15,602 2,110 9,368 9,682 1,438 15,349 5,110 4,950 2,079 3,640 4,549 22,034 25.1 25.6 24.4 30.3 25.6 46.2 23.4 23.6 36.5 36.5 15.1 12.4 19.2 39.3 22.2 1,11,851 1,52,346 9,916 16,376 1,973 5,277 5,224 1,740 18,703 2,100 10,734 7,248 1,823 5,880 42,030 20.4 25.3 30.0 24.4 19.2 17.8 10.2 23.1 32.4 11.0 28.4 38.5 8.1 37.0 34.5 Note : 1. Data are provisional and relate to select scheduled commercial banks. 2. Owing to change in classification of sectors/industries and coverage of banks, data for 2006 are not comparable with earlier data. the previous year. Mobilisation in the form of equity issuances through American depository receipts (ADRs) and global depository receipts (GDRs) during AprilDecember 2007 (Rs.11,439 crore) were higher by 43 per cent than a year ago. Net mobilisation through external commercial borrowings (ECBs) during AprilSeptember 2007 increased by nearly 50 per cent over the corresponding period of the previous year. Internal generation of funds continued to provide strong support to the funding requirements of the corporate sector, with the profit 28 Monetary and Liquidity Conditions after tax of sample non-financial non-government companies during the first and second quarters of 2007-08 being higher than during the corresponding quarters of the previous year (Table 22). Growth in deposits, issuances of fresh capital and internal generation of funds by banks on the one hand, and moderation in credit growth on the other, enabled banks to deploy their funds in Government and other approved securities, which increased by 24.7 per cent, y-o-y, as on January 4, 2008 as compared with 5.9 per cent a year ago (Table 23). Commercial banks' holdings of such securities as on January 4, 2008 increased to 29.1 per cent of their NDTL from 28.0 per cent at end-March 2007 and 28.6 per cent a year ago (Chart 11). Excess SLR investments of SCBs, thus, increased to Rs.1,33,017 crore on January 4, 2008 from Rs.84,223 crore at end-March 2007 and Rs. 95,975 crore a year ago. Banks' balances with the Reserve Bank expanded, reflecting the impact of the increase in their NDTL as well as the increase in the CRR. Investments by SCBs in non-SLR securities (such as shares/bonds/commercial papers) increased substantially during the year. As regards banks' exposure to the external sector, while banks' overseas borrowings expanded, their holdings of foreign currency assets declined. Table 22 : Select Sources of Funds to Industry (Rupees Crore) Item 2005-06 2006-07 Q1 1 A. Bank Credit to Industry # B. Flow from Non-banks to Corporates 1. Capital Issues (i+ii) i) Non-Government Public Ltd. Companies (a+b) a) Bonds/Debentures b) Shares ii) PSUs and Government Companies 2. ADR/GDR Issues 3. External Commercial Borrowings (ECBs) 4. Issue of CPs C. Depreciation Provision + D. Profit after Tax + # 13,408 245 13,163 373 7,263 -1,517 28,961 29,180 585 28,595 0 16,184 4,970 37,095 10,627 0 10,627 0 4,965 6,931 8,449 1,882 10,840 0 0 2,130 4,795 8,892 491 0 924 -908 9,172 28,698 1,882 10,349 5,831 13,261 94 0 8,165 -5,848 10,338 0 527 1,251 8,568 5,737 13,261 4,236 14,400 0 1,990 9,899 7,358 0 0 289 7,811 @ 4,236 14,400 13,781 29,180 10,627 1,882 10,840 5,831 13,788 6,226 14,400 2 1,26,804 3 1,41,543 4 Variation During 2006-07 Q2 5 Q3 6 28,415 Q4 7 Q1 8 2007-08 Q2 9 Q3 10 -2,336 49,290 66,174 -15,603 59,776 13,933 * 52,877 1,04,046 24,063 20,867 26,036 33,080 37,321 29,604 10,173 10,576 60,236 1,11,107 24,845 27,710 31,251 32,699 34,266 : Not Available. *: Up to November 23, 2007. @: Up to December 15, 2007. : Data pertain to select scheduled commercial banks. Figures for 2005-06 are not comparable with those for the latter period due to increase in number of banks selected in the sample. + : Data for 2005-06 are based on audited balance sheet, while those for 2006-07 and 2007-08 are based on abridged finanicial result of the select non-Government non-financial public limited companies. The quaterly data may not add up to annual data due to differences in the number and composition of companies covered in each period. Note: 1. Data are provisional. 2. Data on capital issues pertain to gross issuances excluding issues by banks and financial institutions and are not adjusted for banks' investments in capital issues, which are not expected to be significant. 3. Data on ADR/GDR issues exclude issuances by banks and financial institutions. 4. Data on external commercial borrowings include short-term credit. Data for 2005-06 are exclusive of the IMD redemption. 29 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Table 23 : Scheduled Commercial Bank s Survey (Amount in Rupees Crore) Item Outstanding as on Jan. 04, 2008 1 Sources of Funds 1. Aggregate Deposits 2. Call/Term Funding from Financial Institutions 3. Overseas Foreign Currency Borrowings 4. Capital 5. Reserves Uses of Funds 1. Bank Credit of which: Non-food Credit 2. Investments in Government and Other Approved Securities a) Investments in Government Securities b) Investments in Other Approved Securities 3. Investments in non-SLR Securities 4. Foreign Currency Assets 5. Balances with the RBI Note: Data are provisional. 2 29,88,207 91,561 33,863 38,768 2,20,432 21,46,518 21,05,235 9,54,889 9,35,579 19,310 1,73,749 31,243 2,29,581 Variation (Year-on-Year) As on Jan. 05, 2007 Amount 3 4,44,241 2,499 -4,991 2,620 25,750 4,16,401 4,16,418 42,836 45,379 -2,543 10,650 12,122 29,223 Per Cent 4 22.9 3.1 -16.2 8.8 18.4 30.8 31.9 5.9 6.4 -14.1 8.4 30.8 28.9 As on Jan. 04, 2008 Amount 5 6,00,761 7,699 8,116 6,301 54,493 3,80,356 3,82,155 1,89,349 1,85,524 3,825 35,623 -20,236 99,241 Per Cent 6 25.2 9.2 31.5 19.4 32.8 21.5 22.2 24.7 24.7 24.7 25.8 -39.3 76.1 Reserve Money Survey Reserve money growth at 30.6 per cent, y-o-y, as on January 18, 2008 was higher than 20.0 per cent a year ago (Chart 12). Adjusted for first round effect1 of the hike in CRR, the reserve money growth was 21.5 per cent as Chart 11: SLR Investments by Scheduled Commercial Banks 50 46 Per cent of NDTL 42 38 34 30 26 1-Apr-05 4-Feb-05 27-May-05 22-Jul-05 16-Sep-05 11-Nov-05 30-Mar-07 2-Feb-07 25-May-07 14-Sep-07 20-Jul-07 28-Apr-06 1 The CRR was increased by 250 basis points in stages between December 2006 and November 2007. The first round impact of the increase in CRR is estimated to have impounded banks' resources of Rs.74,500 crore. 20-Aug-04 30 18-Aug-06 30-Apr-04 10-Dec-04 25-Oct-04 13-Oct-06 25-Jun-04 23-Jun-06 9-Nov-07 6-Jan-06 3-Mar-06 8-Dec-06 4-Jan-08 Monetary and Liquidity Conditions Chart 12: Reserve Money Growth 35 30 25 Per cent 20 15 10 5 0 1 3 5 7 9 2005-06 11 13 Fortnight 2006-07 15 17 2007-08 19 21 23 25 compared with 17.5 per cent a year ago. Intra-year movements in reserve money largely reflected the Reserve Bank's market operations and hikes in the CRR. Growth in reserve money during the financial year 2007-08 (up to January 18, 2008) was 18.2 per cent (11.6 per cent adjusted for the first round effect of the hikes in the CRR) as compared with 12.0 per cent in the corresponding period of 2006-07. Bankers' deposits with the Reserve Bank expanded by 35.4 per cent during 2007-08 (up to January 18, 2008) as compared with 9.1 per cent during the corresponding period of 2006-07 mainly reflecting the hike in the CRR by 150 basis points during April-December, 2007. Currency in circulation expanded by 12.3 per cent as compared with 13.4 per cent during the corresponding period of the previous year (Table 24). Expansion in reserve money during 2007-08 (up to January 18, 2008) continued to be driven largely by foreign currency assets (adjusted for revaluation), which rose by Rs.3,11,941 crore as compared with Rs.80,166 crore during the corresponding period of the previous year (Chart 13). Movements in the Reserve Bank's net credit to the Central Government largely reflected the liquidity management operations by the Reserve Bank and movements in Government deposits with the Reserve Bank. Reserve Bank's holdings of Central Government dated securities declined on account of absorption of liquidity in recent period under the liquidity adjustment facility (LAF). The sterilisation operations of the Reserve Bank under the MSS led to an increase in Central Government deposits with the Reserve Bank. Surplus balances of the Central Government with the Reserve Bank also increased. Reflecting these developments, the Reserve Bank's net credit to the Centre declined by Rs.1,57,815 crore during 2007-08 (up to January 18, 2008) as against an increase of Rs. 6,963 crore during the corresponding period of the previous year. 31 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Table 24 : Reserve Money - Variations (Amount in Rupees Crore) 2006-07 2006-07 Aprilup to March Jan. 19 1 Reserve Money Components (1+2+3) 1. Currency in Circulation 2. Bankers' Deposits with RBI 3. 'Other' Deposits with the RBI Sources (1+2+3+4-5) 1. RBI's net credit to Government of which: to Centre (i+ii+iii+iv-v) i. Loans and Advances ii. Treasury Bills held by the RBI iii.RBI's Holdings of Dated Securities iv. RBI's Holdings of Rupee coins v. Central Government Deposits 2. RBI's credit to banks and commercial sector 3. NFEA of RBI of which: FCA, adjusted for revaluation 4. Governments' Currency Liabilities to the Public 5. Net Non-Monetary liabilities of RBI Memo: LAF- Repos (+) / Reverse Repos (-) Net Open Market Sales # * Centre's Surplus Mobilisation under MSS Net Purchases(+)/Sales(-) from Authorised Dealers NFEA/Reserve Money @ NFEA/Currency @ 1,18,994 122.2 171.8 48,402 122.7 161.2 2,15,605 ^ 21,545 133.3 197.3 127.0 164.4 0 125.0 167.7 19,776 126.5 164.0 77,673 122.2 171.8 38,873 1,01,814 119.8 165.7 125.8 193.6 74,918 ^ 133.4 194.4 36,435 5,125 1,164 33,912 19,060 3,656 -400 11,429 -41,120 -1,793 9,658 98,084 -23,060 1,536 -27,320 4,062 28,395 1,176 13,313 8,940 22,195 389 38,713 -3,315 8,905 -32,182 2,024 24,225 1,246 19,643 -23,542 -34,597 9,067 1,560 15,376 48,856 16,300 -3,919 54,765 31,192 -467 56,347 -550 51,657 564 -42,357 -920 54,376 155 -1,184 166 2,524 132 140 354 3,145 70 3,398 632 -46,142 1,64,601 80,166 3,11,941 28,107 10,948 31,634 93,913 47,728 1,18,074 1,00,888 1,990 1,93,170 (28.7) 2,528 1,14,337 (17.0 ) -3,282 2,51,026 (29.0) -3,135 71,845 3,107 11,392 2,065 27,250 -47 82,682 -6,450 -1256 848 94,681 -2,745 1,19,430 26,763 -143 29,644 10,615 -37 3,615 -52,149 93 1,05,759 -27,610 9 -30,672 24,944 -107 22,253 22,733 97 35,398 6,696 -34,284 -142 128 2,665 -12,330 4,019 20 59,627 20,874 3 85,956 -2,384 -3,024 0 0 4,106 6,963 0 0 -1,61,631 -1,57,815 0 0 53 3,071 0 0 2,826 2,584 0 0 -12,754 -12,568 0 0 7,490 -25,483 3,889 -21,825 0 0 0 0 -54,695 -65,787 -55,588 -65,078 0 0 0 0 73,549 (17.1) 61,784 (45.6) 628 (9.1) 57,726 (13.4) 12,319 (9.1) -1,280 (-18.6) 61,964 (12.3) 69,760 (35.4) -2,690 (-35.9) -1,613 452 -502 2,291 -436 -1,479 -756 -7,204 20,224 -12,165 60,929 -4,800 75,464 -19,369 22,283 -2,011 26,871 26,405 16,840 -13,297 46,539 2 1,35,961 (23.7) 3 68,764 (12.0) 2007-08 up to Jan. 18 4 1,29,034 (18.2) Variation Q1 5 13,466 2006-07 Q2 Q3 6 18,665 7 14,204 Q4 8 89,626 Q1 9 11,604 2007-08 Q2 Q3 10 60,688 11 26,414 NFEA: Net Foreign Exchange Assets. FCA: Foreign Currency Assets. LAF: Liquidity Adjustment Facility. *: At face value. # : Excludes Treasury Bills @ : Per cent, end of period. ^ : Up to November 23, 2007 Note: 1. Data are based on March 31 for Q4 and last reporting Friday for all other quarters. 2. Figures in parentheses are percentage variations during the fiscal year. Liquidity Management The Reserve Bank continued to ensure the maintenance of appropriate liquidity in the system during 2007-08 so far such that all legitimate requirements of credit were met, particularly for productive purposes, consistent with the objective of price and financial stability. In order to achieve this objective, the Reserve Bank used the various policy instruments at its disposal 32 Monetary and Liquidity Conditions Chart 13: Accretion to RBI's Net Foreign Assets 50000 40000 30000 20000 10000 0 -10000 -20000 -30000 -40000 IMD Redemption Rupees crore 16-Sep-05 24-Jun-05 9-Dec-05 1-Apr-05 27-Apr-07 26-May-06 18-Aug-06 in a flexible manner to manage liquidity. Capital flows and variation in cash balances of the Central Government remained the key drivers of liquidity conditions. The first quarter of 2007-08 was generally characterised by easy liquidity conditions interspersed with transient periods of tightness (Table 25). The LAF operations shifted gradually from an injection mode to an absorption mode. However, as the liquidity absorption through reverse repos had been capped at Rs. 3,000 crore under the modified arrangement of LAF between March 5 and August 5, 2007, the Reserve Bank predominantly managed liquidity through the two-stage 50 basis points increase in CRR in April 2007 and increased issuances of government securities under the MSS. The ceiling for outstandings under the MSS was raised from Rs.80,000 crore to Rs.1,10,000 crore on April 27, 2007 (Chart 14). The brief periods of liquidity tightness witnessed during this quarter were assuaged through repos under LAF (Chart 15). In the second quarter, consequent upon the withdrawal of the ceiling on daily reverse repos under the LAF with effect from August 6, 2007, the Reserve Bank absorbed liquidity through large daily reverse repos under LAF in addition to sizeable absorptions under MSS. The ceiling for outstandings under the MSS was raised to Rs.1,50,000 crore in August 2007. The cumulative impact of the hike in CRR by 50 basis points to 7.0 per cent in August 2007 and also market operations under the MSS moderated the daily reverse repos bids by the close of the quarter. The liquidity conditions mostly remained easy in early September 2007 due to decline in Government cash balances. Some tightness was, however, observed during the end of the month mainly on account of quarterly advance tax outflows and there were liquidity injections through repo window on September 21 and 28, 2007. 33 10-Nov-06 12-Oct-07 2-Feb-07 20-Jul-07 3-Mar-06 4-Jan-08 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Table 25 : Reserve Banks Liquidity Management Operations (Amount in Rupees Crore) Variation 2006-07 AprilMarch 2 2006-07 Q1 3 Q2 4 Q3 5 Q4 6 Q1 7 Q2 8 2007-08 Q3 9 Oct. 10 Nov. 11 Dec. 12 1 A. Drivers of Liquidity (1+2+3+4+5) 61,739 36,247 -16,896 -25,641 68,028 51,924 1,10,645 - 37,306 3,531 1.RBI's net Purchases from Authorised Dealers 1,18,994 21,545 0 22,461 74,988 39,791 1,00,896 - 48,795 31,583 2.Currency with the Public -70,352 -19,648 -1,270 -27,033 -22,400 -12,143 8,940 -46,944 -19,187 -17,041 -10,715 3.Surplus Cash balances of the Centre with the Reserve Bank -1,164 40,207 -26,199 -30,761 15,590 49,992 -30,771 -49,820 7,036 -12,933 -43,923 4.WMA and OD 0 0 0 0 0 15,159 -15,159 0 0 0 0 5.Others (residual) 14,260 -5,856 10,574 9,693 -150 -40,876 46,739 663 1,922 B. Management of Liquidity (6+7+8+9) 6.Liquidity impact of LAF Repos 7.Liquidity impact of OMO(Net)* 8.Liquidity impact of MSS 9.First round liquidity impact due to CRR change C. Bank Reserves (A+B) # (+) # * @ Note -24,257 -39,003 36,435 -35,315 720 545 -33,912 -4,233 -27,500 37,482 0 -2,756 32,026 40,650 145 -8,769 0 15,130 31,625 -48,905 -53,943 33,600 -2,500 -20,290 25 5 10 4,750 -25,660 -18,163 -6,750 -20,750 -15,500 5,984 19,123 -2,019 -68,621 -11,189 -67,009 6,264 49,556 -2,825 27,795 -24,205 19,455 32,545 40 5,260 0 0 5,260 -50,336 -28,244 -42,804 2,809 11,751 -15,500 -16,000 0 -16,000 9,795 0 6,971 42,024 -12,937 -29,703 : Not Available. WMA: Ways and means advances OD: Overdraft : Indicates injection of liquidity into the banking system. (-): Indicates absorption of liquidity from the banking system. : Includes vault cash with banks and adjusted for first round liquidity impact due to CRR change. : Adjusted for Consolidated Sinking Funds (CSF) and including private placement. : Excludes minimum cash balances with the Reserve Bank in case of surplus. : For end-March, data pertain to March 31; for all other months data pertain to last Friday. The third quarter commenced with surplus liquidity due to a decline in surplus balances of the Central Government and net purchase of foreign exchange by the Reserve Bank. Daily absorption under the LAF averaged Rs.36,665 crore in October 2007. The continued inflow of foreign capital 300000 250000 Chart 14: Market Stabilisation Scheme Rupees crore 200000 150000 100000 50000 0 Jun-05 Aug-05 Dec-05 Apr-05 Feb-05 Oct-05 Aug-07 Jun-07 Aug-04 Limits Actuals 34 Aug-06 Dec-04 Dec-06 Dec-07 Feb-07 Apr-04 Apr-06 Apr-07 Feb-06 Oct-04 Oct-06 Oct-07 Jun-04 Jun-06 Monetary and Liquidity Conditions Chart 15: Repo (+)/ Reverse Repo (-) under LAF 60000 40000 20000 Rupees crore 0 -20000 -40000 -60000 -80000 Note: Additional LAF on March 31, 2006 and March 31, 2007 are shown under second LAF. LAF on January 18, 2008 includes special LAF. necessitated an upward revision in the ceiling for outstandings under MSS to Rs.2,00,000 crore on October 4, 2007 and further to Rs.2,50,000 crore on November 7, 2007. Liquidity conditions came under some stress towards the end of October and early part of November 2007 on account of festive season currency demand and increase in Central Government balances with the Reserve Bank. Liquidity absorption under the reverse repo window of the LAF, therefore, declined to Rs.10,384 crore during November 1-11, 2007. Liquidity conditions tightened from November 12, 2007 due to impact of CRR hike of 50 basis points to 7.5 per cent with effect from the fortnight beginning November 10, 2007 and the increase in surplus balances of the Central Government. The Reserve Bank, therefore, had to inject liquidity; the average daily net liquidity injection under LAF was at Rs.10,341 crore during November 12-30, 2007. The investment of Central government surplus cash balances in dated securities (up to Rs.20,000 crore) which was temporarily suspended between October 4, 2007 and November 19, 2007 was restored with a tightening of liquidity conditions. The tight liquidity conditions continued in December 2007 on account of quarterly advance tax outflows. Average daily net injection under the LAF amounted to Rs.10,804 crore in December 2007. Liquidity conditions started easing from the beginning of January 2008 partly on account of reduction in surplus balances of the Central Government with the Reserve Bank. The average liquidity absorption under the reverse repo was Rs.18,057 crore during January 1-23, 2008. The steady increase in MSS outstandings is reflected in the significant build up of liquidity overhang since 35 2-Nov-05 25-Nov-05 19-Dec-05 10-Jan-06 3-Feb-06 28-Feb-06 23-Mar-06 20-Apr-06 15-May-06 6-Jun-06 28-Jun-06 20-Jul-06 11-Aug-06 5-Sep-06 27-Sep-06 20-Oct-06 15-Nov-06 7-Dec-06 2-Jan-07 24-Jan-07 21-Feb-07 15-Mar-07 11-Apr-07 7-May-07 29-May-07 20-Jun-07 13-Jul-07 6-Aug-07 30-Aug-07 21-Sep-07 16-Oct-07 7-Nov-07 30-Nov-07 26-Dec-07 17-Jan-08 First LAF Second LAF Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 August 2007. The outstandings under the MSS amounted to Rs.1,61,058 crore as on January 18, 2008 (Table 26). During the course of 2007-08, the stock of Government securities in Reserve Bank's portfolio got reduced by Rs. 12,485 crore (up to January 18, 2008) mainly on account of periodic redemptions. In order to replenish its stock of Government securities the Reserve Bank resorted to purchases of government securities through open market operations, beginning December 2007. During 2007-08 (up to January 18, 2008) the total amount of Government securities purchased under open market operations was Rs. 8,070 crore. Such operations are liquidity neutral up to the amount of redemption of Government securities in the portfolio of the Reserve Bank. Table 26 : Liquidity Management (Rupees crore) Outstanding as on Last Friday 1 2006 January February March* April May June July August September October November December 2007 January February March * April May June July August September October November December 2008 January (up to Jan. 18) LAF 2 -20,555 -12,715 7,250 47,805 57,245 42,565 44,155 23,985 1,915 12,270 15,995 -31,685 -11,445 6,940 -29,185 -9,996 -4,690 -8,895 2992 16,855 -6,070 18,135 -1,320 -33,865 11,935 MSS 3 37,280 31,958 29,062 24,276 27,817 33,295 38,995 42,364 42,064 40,091 37,917 37,314 39,375 42,807 62,974 75,924 87,319 81,137 88,010 1,06,434 1,31,473 1,74,277 1,71,468 1,59,717 1,61,058 Centre s Surplus with the RBI @ 4 39,080 37,013 48,828 5,611 -1,203 8,621 8,770 26,791 34,821 25,868 31,305 65,582 42,494 53,115 49,992 -980 -7,753 -15,159 -20,199 20,807 30,771 23,735 36,668 80,591 59,650 Total (2 to 4) 5 55,805 56,256 85,140 77,692 83,859 84,481 91,920 93,140 78,800 78,229 85,217 71,211 70,424 1,02,862 83,781 64,948 74,876 57,083 70,803 1,44,096 1,56,174 2,16,147 2,06,816 2,06,443 2,32,643 @ : Excludes minimum cash balances with the Reserve Bank in case of surplus. * : Data pertain to March 31. Note : 1. Negative sign in column 2 indicates injection of liquidity through LAF repo. 2. Between March 5 and August 5, 2007, daily reverse repo absorptions were restricted to a maximum of Rs.3,000 crore comprising Rs.2,000 crore in the First LAF and Rs.1,000 crore in the Second LAF. 3. Negative sign in column 4 indicates injection of liquidity through WMA/overdraft. 36 IV. PRICE SITUATION Headline inflation firmed up in major economies during the third quarter of 2007-08 reflecting the combined impact of higher food and fuel prices as well as strong demand conditions, especially in emerging markets. The monetary policy response during the quarter, however, was mixed in view of heightened concerns about the implications of credit crunch arising out of the US sub-prime crisis on financial stability. Since end-September 2007, several central banks (such as the US Federal Reserve System, Bank of England, Bank of Canada, Bank Indonesia, Central Bank of Philippines and Central Bank of the Republic of Turkey) cut their policy rates aimed at promoting financial stability and supporting growth notwithstanding persistence of inflationary pressures. The US Federal Reserve System also reduced the discount rate to improve market liquidity. Apart from independent actions, there has also been a coordinated move by five major advanced country central banks in terms of injection of short-term liquidity aimed at easing strains on the money markets. On the other hand, some central banks [such as the Reserve Bank of Australia, Norges Bank (Norway), Sveriges Riksbank (Sweden), South African Reserve Bank and the People's Bank of China] have further raised policy rates to contain inflation and inflationary expectations. The central banks of China and Russia also raised cash reserve requirements to address concerns regarding excess liquidity. In India, inflation based on the wholesale price index (WPI) has remained below 4 per cent since mid-August 2007 (3.8 per cent as on January 5, 2008), partly reflecting moderation in the prices of primary food articles and some manufactured products items as well as base effects. Pre-emptive monetary measures since mid-2004 accompanied by fiscal and supply-side measures have also helped in containing inflation. Consumer price inflation also eased during the third quarter of 2007-08 but continued to remain above the WPI inflation, mainly reflecting the impact of food prices and their higher weights in the CPI vis- -vis WPI. Various measures of consumer price inflation were placed in the range of 5.1-5.9 per cent during November/December 2007 as compared with 5.7-7.9 per cent in September 2007 and 6.7-9.5 per cent in March 2007. It may, however, be noted that since pass-through of higher international oil prices to domestic prices remains incomplete, inflation has remained suppressed. Elevated international food prices also pose potential inflationary pressures in the period ahead. Global Inflation Headline inflation in major advanced economies firmed up beginning September 2007, mainly reflecting the hardening of food and fuel prices. Amongst major economies, headline inflation in December 2007 was 4.1 per cent in the US, 2.1 per cent in the UK and 3.1 per cent in the euro area as compared with 37 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Chart 16: Consumer Price Inflation Headline CPI Inflation 5 4 3 3.0 2.5 2.0 CPI Excluding Food & Energy* Per cent 2 1 0 -1 Per cent 1.5 1.0 0.5 0.0 Jan-05 Nov-05 Jun-05 Dec-05 Mar-06 Dec-04 Mar-05 Mar-04 Japan UK US Euro Area * : Data for Japan is excluding fresh food only. Source : International Financial Statistics, IMF and official website of respective countries. 2.8 per cent, 1.8 per cent and 2.1 per cent, respectively, in September 2007 (Chart 16). Inflation increased to 3.3 per cent in November, 2007 in the OECD countries from 2.2 per cent in September 2007 and 2.0 per cent a year ago. Core inflation also remained firm in major economies, reflecting high commodity prices and strong demand conditions, especially in emerging markets. In the US, CPI inflation (excluding food and energy) was 2.4 per cent in December 2007 as compared with 2.1 per cent in September 2007. In the OECD countries, CPI inflation (excluding food and energy) was 2.0 per cent in November 2007, as compared with 1.9 per cent in September 2007. The fallout of the US sub-prime crisis and correction in the housing markets, however, has raised concerns about credit squeeze in many advanced economies, including the UK and the euro area. Notwithstanding the underlying inflationary pressures, many central banks in advanced economies resorted to monetary easing in order to forestall the adverse impact of the tightening credit conditions on the broader economy. In the US, headline inflation firmed up to 4.1 per cent in December 2007 from 2.5 per cent a year earlier mainly due to higher food and energy prices. Notwithstanding the modest improvement in the readings on core inflation, the Federal Open Market Committee (FOMC) in its meeting held on December 11, 2007 judged that inflation risks remained and indicated that it would continue to monitor inflation developments carefully. According to the FOMC, however, incoming information suggested that economic growth was slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending and increasing strains in financial markets in the recent past. Recognising that the recent developments, including the deterioration in financial market Dec-06 Mar-07 Dec-07 38 Dec-07 Jun-05 Sep-05 Jun-04 Sep-04 Jun-06 Sep-06 Jun-07 Sep-07 Apr-06 Sep-06 Feb-07 Jul-07 -2 -0.5 Price Situation conditions, increased the uncertainty surrounding the outlook for economic growth and inflation, the FOMC cut its target for the federal funds rate further by 50 basis points during the October-December 2007 quarter - 25 basis points each on October 31, 2007 and December 11, 2007 - to 4.25 per cent to promote moderate growth over time. The discount rate was also cut further by 50 basis points during the quarter to 4.75 per cent to improve market liquidity. Apart from lowering the discount rate, the US Fed also injected liquidity by auctioning term funds to depository institutions against a wide variety of collaterals at the discount window and through a broader range of counterparties and established foreign exchange swap lines with the European Central Bank (ECB) and the Swiss National Bank. In view of a weakening of the economic outlook and increasing downside risks to growth, the FOMC cut the target for the federal funds rate further by 75 basis points to 3.5 per cent on January 22, 2008. The discount rate was also reduced by 75 basis points to 4.0 per cent. The FOMC, however, noted that it would continue to assess the effects of financial and other developments and would act in a timely manner as needed to address those risks. In the UK, there are signs of growth beginning to slow and forwardlooking surveys of households and business suggest moderation in spending. According to the Monetary Policy Committee (MPC), conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is posing downside risks to the outlook for both output and inflation further ahead. Although higher energy and food prices are expected to keep inflation above the target in the short-term, the MPC is of the view that slowing demand growth should ease the pressures on supply capacity bringing inflation back to target in the medium term. The Bank of England, therefore, cut its policy rate by 25 basis points on December 6, 2007 to 5.5 per cent and left it unchanged thereafter (Table 27). In the euro area, inflation, based on the Harmonised Index of Consumer Prices (HICP), rose sharply in December 2007 to 3.1 per cent from 1.9 per cent a year ago largely due to upward pressures from energy and food prices. According to the Governing Council of the ECB, there were upside risks to price stability over the medium term from further rises in oil and agricultural prices, increases in administered prices and indirect taxes beyond those foreseen by then as well as the possibility of stronger than currently expected wage growth and increases in pricing power in market segments with low competition. The Council also noted that although the economic fundamentals of the euro area remained sound and money and credit growth very vigorous, the reappraisal of risk in financial markets was evolving and was accompanied by continued uncertainty about the potential impact on the real economy. The ECB observed that firmly anchoring medium and long term inflation expectations in line with price stability was all the more important at times of financial market volatility and increased uncertainty and left the key policy rates unchanged during the quarter. In its meeting held on January 10, 2008, 39 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Table 27: Global Inflation Indicators (Per cent) Country/ Region Key Policy Rate Policy Rate (As on January 23, 2008) Changes in Policy Rate (basis points) 2005-06 (AprilMarch) 2006-07 (AprilMarch) 5 CPI Inflation (y-o-y) Real GDP Growth (y-o-y) 2006 2007 (Q3) (Q3) 1 2 Developed Economies Australia Canada Euro area Cash Rate Overnight Rate Interest Rate on Main Refinancing Operations Uncollateralised Overnight Call Rate Official Bank Rate Federal Funds Rate 3 4 Since Dec. Dec. end- 2 0 0 6 2 0 0 7 March 2007 6 7 8 9 10 6.75 (Nov.7, 2007) 4.00 (Jan. 22, 2008) 0 125 75 50 50 (-) 25 3.9 1.4 1.9 # 2.5 * 2.2 2.5 4.3 2.9 4.00 (June 6, 2007) 0.50 (Feb. 21, 2007) 5.50 (Dec. 6, 2007) 3.50 (Jan. 22, 2008) 50 0 ** (-)25 200 125 50 75 50 25 0 25 (-)175 1.9 0.3 3.0 2.5 3.1 0.6 * 2.1 4.1 2.8 1.6 2.9 2.4 2.7 1.9 3.2 2.8 Japan UK US Developing Economies Brazil India Selic Rate Reverse Repo Rate Repo Rate Benchmark 1-year Lending Rate BI Rate Key Rate Overnight Call Rate Reverse Repo Rate Refinancing Rate 11.25 (Sep. 5, 2007) 6.00 (July 25, 2006) 7.75 (Mar. 31, 2007) (-)275 75 50 (0) (-)375 50 125 (100) (-)150 0 0 (150) 3.1 6.3 4.5 5.5 * 3.2 10.2 5.7 8.9 China 7.47 (Dec. 21, 2007) 8.00 (Dec. 6, 2007) 4.25 (Dec. 24, 2007) 5.00 (Aug. 9, 2007) 5.25 (Dec. 20, 2007)+ 10.00 (June 19, 2007) 11.00 (Dec. 11, 2007) 5.00 (June 7, 2006) 3.25(July 18, 2007) Indonesia Israel Korea Philippines Russia South Africa Repo Rate Thailand 14-day Repurchase Rate 1-day Repurchase Rate @ ** ^ # + Note : : : : : : 81 (250) 425 @ (-)375 125 (-)75 75 50 (80) 75 0 (-)100 (-)150 (150) (-)50 200 225 50 108 1.9 (450) (-)100 6.6 25 -0.1 50 2.1 (-)225 (-)50 (100) 200 4.3 9.0 5.4 6.9 * 6.6 3.4 3.6 3.9 11.9 8.4 * 10.7 11.5 5.5 4.6 4.6 4.8 6.5 4.5 6.5 4.8 5.2 6.6 7.6 5.1 (-)44 ^ (-)125 3.5 3.2 4.5 5.1 Source Bank Indonesia adopted BI rate as the reference rate with the formal adoption of inflation targeting in July 2005. The Bank of Japan decided on March 9, 2006 to change the operating target of money market operations from the outstanding balance of current accounts at the Bank to the uncollateralised overnight call rate. Change over January 16, 2007. Effective January 17, 2007, the 1-day repurchase rate replaced the 14-day repurchase rate as the policy rate. Q3 of 2007. * : November 2007. The tiering system on placement with the BSP was removed and interest rates were adjusted to 6.0 per cent for the reverse repo rate and 8.0 per cent for the repo rate effective July 13, 2007. 1. For India, data on inflation pertain to CPI for Industrial Workers. 2. Figures in parentheses in column (3) indicate the date when the policy rates were last revised. 3. Figures in parentheses in columns (5) and (6) indicate the variation in cash reserve ratios during the period. : International Monetary Fund, websites of respective central banks and the Economist. 40 Price Situation 9 8 7 6 Chart 17 : Central Bank Policy Rates Per cent 5 4 3 2 1 0 Jan-05 Apr-05 Oct-05 Jul-05 Apr-07 Apr-06 Oct--04 Apr-04 US (Fed Funds Rate) UK (Official Bank Rate) Euro Area (Interest Rate on Main Refinancing Operations) Oct-06 India (Reverse Repo Rate) India (Repo Rate) while leaving the policy rate unchanged, the ECB noted that it remains prepared to act pre-emptively so that second-round effects and upside risks to price stability over the medium term do not materialise. The policy rates were last raised by 25 basis points on June 6, 2007 (Chart 17). Although Japan's economy is expected to continue to expand moderately, the pace of growth is likely to slow mainly due to the drop in housing investment. The year-on-year rate of change in consumer prices is projected to follow a positive trend due to the rise in prices of petroleum products and food products in the short run and the positive output gap in the longer run. Against this backdrop, the Bank of Japan (BoJ) kept its policy rate unchanged at each of its meetings held since February 2007 when it had raised the uncollateralised overnight call rate (the operating target of monetary policy since March 2006) by 25 basis points to 0.50 per cent. Amongst other major advanced economies, the policy rate was cut by 50 basis points (including 25 basis points in January 2008) by the Bank of Canada while the Reserve Bank of Australia, the Sveriges Riksbank (Sweden) and Norges Bank (Norway) raised policy rates by 25 basis points each during the third quarter of 2007-08. Notwithstanding the appreciation of exchange rates, inflation pressures remained firm in major emerging market economies (EMEs) on the back of strong growth and ample liquidity. Consumer price inflation in China increased to 6.9 per cent in November 2007 from 6.2 per cent in September 2007 (and 1.9 per cent a year earlier) mainly due to higher food prices (Chart 18). Economic activity in China has remained buoyant in 2007 so far with real GDP growth accelerating to 11.5 per cent during the third quarter of 2007 from 10.7 per cent a year ago. In order to address the excess liquidity in the banking system and ease pressures on money and credit expansion, the People's Bank of China (PBC) increased the benchmark 1-year lending rate further by 18 basis points 41 Oct-07 Jan-07 Jan-06 Jan-08 Jul-04 Jul-06 Jul-07 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Chart 18: Consumer Price Inflation - Emerging Market Economies Select Asian Economies 9 8 7 6 6 10 8 Other Emerging Markets Per cent Per cent 5 4 3 2 1 0 4 2 0 -2 Mar-05 Dec-05 Jun-05 Sep-05 Dec-04 Dec-06 Mar-05 Jun-05 Sep-05 Dec-05 Mar-04 Mar-06 Jun-06 China Korea Mar-07 Jun-07 Sep-04 Dec-04 Sep-06 Dec-06 Thailand Malaysia Sep-07 Dec-07 Jun-04 Mar-04 Mexico Mar-06 Brazil South Africa Mar-07 Israel India (CPI-Industrial Workers) effective December 21, 2007 to 7.47 per cent, i.e., a total hike of 189 basis points since April 2006. Apart from continued issuances of its own bills to mop up liquidity, the PBC raised the cash reserve ratio (CRR) by another 200 basis points since end-September 2007 - 50 basis points effective October 25, 2007, 100 basis points effective December 25, 2007 and 50 basis points to be effective on January 25, 2008 - to 14.5 per cent. The CRR has, thus, been increased by 700 basis points since July 2006. According to the PBC, these adjustments are conducive to prevent the economy from overheating and structural price rises from evolving into apparent inflation. In Russia, consumer price inflation remained high, increasing from 7.4 per cent in March 2007 to 9.4 per cent in September 2007 and further to 11.9 per cent in December 2007 amidst strong growth. Growth in money supply (M2) accelerated to 52 per cent, year-on-year, as on December 1, 2007 from 47 per cent a year ago. The Bank of Russia raised the required reserve ratio on credit institutions' liabilities to non-resident banks in roubles and foreign currency by another 100 basis points to 4.5 per cent effective January 15, 2008 (it was earlier reduced by 100 basis points effective October 11, 2007). The refinancing rate has remained unchanged since June 2007, when it was reduced by 50 basis points to 10.0 per cent. The South African Reserve Bank has raised its policy rate by 100 basis points since end-September 2007 - 50 basis points each effective October 12, 2007 and December 7, 2007 - to 11.0 per cent. The policy rate has thus been raised by 400 basis points since the tightening began in June 2006 to ensure that the short-term impact of higher inflation does not allow inflation expectations to become entrenched at higher levels. After keeping the policy rate unchanged during the third quarter of 2007-08, the Bank of Israel raised 42 Dec-07 Jun-04 Sep-04 Jun-06 Sep-06 Jun-07 Sep-07 -4 Price Situation its policy rate by 25 basis points to 4.25 per cent effective January 2008 in view of the rise in inflationary pressures on account of continued rapid growth and closing of output gaps as well as rise in import prices, especially of food and energy. In Korea, inflation increased to 3.6 per cent in December 2007 from 2.3 per cent in September 2007 (and 2.1 per cent a year ago) mainly due to high oil prices. Although the upward trend of real estate prices has flattened out, financial institutions' lending continues to show a steady increase. Although financial markets are characterised by ample liquidity, financial prices have shown increased volatility following the international financial market unrest. According to the MPC, although the domestic economy is likely to maintain its upward trend, future economic developments are surrounded with a high degree of uncertainty largely due to the run-up in international oil prices and the prolonged international financial market unrest. The Bank of Korea, therefore, has left its policy rate unchanged at 5.0 per cent since August 9, 2007 (when it was last raised by 25 basis points). In Thailand, inflation accelerated in line with rising international oil and commodity prices to 3.2 per cent in December 2007 from 2.1 per cent in September 2007 (it was 3.5 per cent a year ago). Real GDP growth also started to recover reflecting improvement in both consumption and investment. According to the MPC, the overall growth momentum improved although risks to growth remained, particularly from the global economy. Notwithstanding increased risks to inflation, core inflation was expected to remain within the target range for the next eight quarters. The MPC, therefore, has left 1-day repurchase rate unchanged at 3.25 per cent since July 18, 2007 (when it was last cut by 25 basis points). After reducing its policy rate by 850 basis points between September 2005 and September 2007, the central bank of Brazil left it unchanged during the third quarter of 2007-08 at 11.25 per cent. Inflation has increased in recent months (4.5 per cent in December 2007) and the pace of demand expansion remained robust signifying inflationary pressures on short-term inflation. Against this backdrop, the Monetary Policy Committee emphasised the time lags in the transmission of monetary policy and noted that the evaluation of alternative monetary policy stances should necessarily focus on the prospective inflation scenario and its risks, instead of current inflation indicators. Amongst other emerging economies, economic expansion in Indonesia is likely to maintain its pace driven by rising consumption and exports. Inflation in 2007 was expected to come within the target range of 6 1 per cent. According to Bank Indonesia, the impact on economic expansion and inflation brought about by external shocks and surging oil prices remain manageable. Despite looming inflationary pressures in 2008, overall progress is expected to be consistent with a long-term declining trend. Accordingly, the Bank Indonesia lowered its policy rate further by 25 basis points to 8.0 per cent on December 6, 2007 - a total of 475 basis points since May 2006. The lower rate is expected 43 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 to deliver an economic stimulus and sustain momentum for stronger economic growth while maintaining macroeconomic stability. The central bank of Turkey also cut its policy rates, i.e., overnight borrowing and lending rates by 150 basis points and 225 basis points, respectively, since end-September 2007 to support economic activity. The MPC noted that aggregate demand conditions continued to support the disinflation process and notwithstanding the risks related to energy and food prices, inflation is expected to decelerate. An assessment of key macroeconomic indicators in select EMEs shows that consumer price inflation was in the range of 3.2-11.9 per cent during November/December 2007. Inflation in India was the fifth highest amongst the select EMEs. Real policy rates in most countries ranged between 0.0 and 2.6 per cent in December 2007 (Table 28). Major EMEs, except India Table 28: Key Macroeconomic Indicators: Emerging Markets (Per cent) Country Consumer Price Current Account Inflation Balance (per cent to GDP) Dec. Dec. 2006 2006 2007 2005 2 3.1 1.9 6.3 (5.9) 6.6 -0.1 2.1 4.3 9.0 5.4 3.5 3 4.5 6.9 * 5.5 * (3.5) 6.6 3.4 3.6 3.9 11.9 8.4 * 3.2 4 1.6 7.2 -1.2 (-6.4) 0.1 3.3 1.9 2.0 11.1 -4.0 -4.5 5 1.2 9.4 -1.1 (-6.9) 2.7 5.6 0.7 4.3 9.7 -6.5 1.6 Real Efective Exchange Rate (REER) Dec. 2006 6 2.1 -0.9 0.0 7.6 1.0 5.9 6.1 8.6 -12.7 11.1 Dec. 2007 7 15.3 5.1 7.7 -4.4 0.4 -5.9 14.0 6.1 1.4 0.8 Central Govt. Fiscal Balance (per cent of GDP) 2005 8 -3.4 -1.3 (17.9) -4.1 (63.4) -0.5 (46.5) -2.9 1.9 (29.5) -2.7 7.5 __ 0.2 (26.1) 2006 9 -3.2 -0.6 (17.3) -3.5 (61.5) -1.0 (40.9) -2.7 1.8 (32.2) -1.0 7.4 __ 0.1 (27.3) Real Policy Rate Dec. 2006 10 10.2 3.3 0.4 (1.4) 3.2 5.1 2.4 3.2 2.0 3.2 1.5 Dec. 2007 11 6.8 0.6 2.3 (4.3) 1.4 0.6 1.4 1.4 -1.9 2.6 0.0 Real GDP Growth 2005 12 2.9 10.4 9.0 5.7 5.3 4.2 4.9 6.4 5.1 4.5 2006 13 3.7 11.1 9.4 5.5 5.2 5.0 5.4 6.7 5.0 5.0 1 Brazil China India Indonesia Israel Korea Philippines Russia South Africa Thailand *: November 2007. Note : 1. For India, data pertain to fiscal years 2005-06 and 2006-07. 2. Consumer price inflation data are on a year-on-year basis. Data for India are for CPI-Industrial Workers. 3. Real policy rate is the policy rate less year-on-year consumer price inflation. For India, repo rate is used. 4. Figures in parentheses in columns (2) and (3) refer to wholesale price inflation. 5. Figures in parentheses in columns (4) and (5) refer to trade balance/GDP ratio. 6. Data on fiscal balance for Korea and Israel pertain to general government balance. 7. Figures in parentheses in columns (8) and (9) refer to central government debt/GDP ratio. For China, data refer to public sector debt. 8. Figures in parentheses in columns (10) and (11) for India are based on wholesale price inflation. 9. Data on REER refer to year-on-year variation in broad indices (CPI-based) compiled by the Bank for International Settlements. A positive figure indicates appreciation, while a negative figure indicates depreciation. For India, data are based on movements in 6-currency indices. Source : International Monetary Fund, Asian Development Bank, Bank for International Settlements, World Bank, the Economist and official websites of respective central banks. 44 Price Situation and South Africa, recorded surplus in current accounts in 2006. The real effective exchange rate (REER) for the select EMEs, barring the currencies in Indonesia and Korea, underwent real appreciation, on a year-on-year basis, in December 2007. Although the Centre's fiscal deficit in India declined during 2006-07 and was budgeted to decline further during 2007-08, it was likely to remain higher than that in most EMEs. Global Commodity Prices Global commodity prices firmed up during the third quarter of 2007-08 led by food and crude oil prices, although there was some moderation in prices of metals (Table 29 and Chart 19). International crude oil prices, represented by the West Texas Intermediate (WTI), rose sharply during the third quarter of 2007-08, reflecting tight supplydemand balance, geo-political tensions, weakening of the US dollar against major currencies and increased interest from investors and financial market players (Table 30). WTI prices touched a historical peak of US $ 99.6 a barrel level on January 2, 2008 and eased somewhat subsequently but continued to remain high and volatile (US $ 89.9 a barrel on January 23, 2008). Table 29: International Commodity Prices Commodity Unit 2004 2004 2005 Index 2006 2007 Mar. 1 Energy Coal Crude oil (Average) Non-Energy Commodities Palm oil Soybean oil Soybeans Rice Wheat Sugar Cotton A Index Aluminium Copper Gold Silver Steel cold-rolled coil/sheet Steel hot-rolled coil/sheet Tin Zinc 2 $/mt $/bbl 3 53.0 37.7 4 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 5 90 142 90 88 90 120 97 138 89 111 128 109 110 121 126 87 132 6 93 170 102 97 88 128 122 206 93 150 235 148 173 114 119 103 313 7 124 188 165 143 125 137 163 141 102 154 248 170 200 107 109 171 309 8 105 161 132 117 105 134 127 146 94 161 225 160 197 107 109 163 312 2007 Jun. 9 116 181 171 135 118 136 142 130 98 156 261 160 197 107 109 166 344 Variation (Per cent) Dec. 2007 Dec. 2007 over over Sep. Dec. Mar. 2007 Dec. 2006 10 129 203 177 156 139 137 208 136 110 139 267 174 193 107 109 176 275 11 172 237 12 64.3 47.7 13 82.9 46.8 61.7 65.8 73.4 17.9 80.4 -7.8 16.0 -15.4 -1.3 27.5 7.6 0.0 0.0 45.7 -46.6 $/mt 471.3 $/mt 616.0 $/mt 306.5 $/mt 237.7 $/mt 156.9 c/kg 15.8 c/kg 136.6 $/mt 1716.0 $/mt 2866.0 $/toz 409.2 c/toz 669.0 $/mt 607.1 $/mt 502.5 c/kg 851.3 c/kg 104.8 200 51.6 188 60.9 168 59.9 151 12.8 235 85.1 149 2.2 111 18.2 139 -13.8 230 2.1 196 22.6 214 8.7 107 0.0 109 0.0 191 17.1 225 -28.1 $: US dollar. c: US cent. bbl: barrel. mt: metric tonne. kg: Kilogram. toz: troy oz. Source : Based on World Bank's actual commodity price data. The year 2004 has been taken as the base to better exhibit price trends over the relevant period. 45 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 280 240 Chart 19: International Commodity Prices March 2004 =100 200 160 120 80 Mar-05 Dec-05 Sep-05 Jun-05 Dec-04 Dec-06 Mar-04 Mar-06 Non - Fuel Commodities Source : International Monetary Fund. Food Metals Crude Oil Agricultural Raw Materials In view of the tight demand supply-balance, prices are expected to remain firm. According to the US Energy Information Administration (EIA), world oil demand will grow much faster than oil supply outside of the Organisation of the Petroleum Exporting Countries (OPEC), leading to the possibility of upward pressure on prices. However, in its meeting in Abu Dhabi on December 5, 2007, the OPEC decided Table 30: International Crude Oil Prices (US dollars per barrel) Year/Month 1 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 March 2004 March 2005 March 2006 March 2007 April 2007 May 2007 June 2007 July 2007 August 2007 September 2007 October 2007 November 2007 December 2007 Dubai Crude 2 21.8 25.9 26.9 36.4 53.4 60.9 30.5 45.6 57.7 59.1 63.8 64.5 65.8 69.5 67.2 73.3 77.1 86.7 85.8 UK Brent 3 23.2 27.6 29.0 42.2 58.0 64.4 33.8 53.1 62.3 62.1 67.4 67.5 71.3 77.2 70.8 77.1 83.0 92.5 91.5 US WTI 4 24.1 29.2 31.4 45.0 59.9 64.7 36.7 54.2 62.9 60.6 63.9 63.5 67.5 74.1 72.4 79.9 85.9 94.8 91.4 Average Crude Price 5 23.0 27.6 29.1 41.3 57.1 63.3 33.7 50.9 60.9 60.6 65.1 65.2 68.2 73.6 70.1 76.8 82.2 91.3 89.5 Indian Basket 6 Price 22.4 26.6 27.8 38.9 55.4 62.4 31.9 48.8 59.6 60.4 65.4 65.8 68.2 72.8 68.8 74.9 79.6 89.2 88.2 Source : International Monetary Fund and the World Bank. 46 Mar-07 Dec-07 Sep-04 Sep-06 Sep-07 Jun-04 Jun-06 Jun-07 Price Situation Table 31: World Supply-Demand Balance of Oil Item 1 Demand 1. OECD 2. Non-OECD of which: China 3. Total (1+2) Supply 4. Non-OPEC 5. OPEC 6. Total (4+5) Stock Changes 48.9 30.7 79.6 0.3 50.1 32.9 83.1 -0.6 50.3 34.2 84.5 -0.5 49.3 35.3 84.6 0.1 49.4 35.5 84.8 1.1 50.2 37.5 87.7 -0.2 49.5 37.0 86.5 1.2 49.9 37.1 87.0 -0.6 50.4 37.9 88.2 -1.2 51.1 37.8 88.9 -0.2 48.7 31.2 5.6 79.9 49.5 33.0 6.5 82.5 49.6 34.4 6.9 84.0 49.3 35.4 7.3 84.7 49.1 36.7 7.7 85.9 49.5 37.9 8.1 87.5 50.5 37.2 7.8 87.7 48.4 38.0 8.1 86.4 49.0 38.1 8.2 87.0 50.2 38.5 8.4 88.7 2003 2 2004 3 2005 4 2006 5 2007 (P) 6 2008 (P) 7 (Million barrels per day) 2008 (P) Q2 Q3 Q4 Q1 8 9 10 11 P : Projections. Source : US Energy Information Administration, January 8, 2008. to maintain its existing production quotas observing that the global oil market continued to be well supplied. The EIA expects WTI (average) prices to firm up further to US $ 87.2 per barrel during 2008 from US $ 72.3 a barrel during 2007. Futures markets also suggest that WTI prices are expected to remain firm at around US $ 87-88 a barrel levels during the period February-July 2008. High and volatile international crude oil prices, thus, pose another major risk to the global inflation outlook (Table 31). Metal prices eased further during the third quarter of 2007-08, reflecting lower demand and some improvement in supply. Between September 2007 and December 2007, prices of copper, zinc, lead and nickel fell by 14 per cent, 18 per cent, 20 per cent and 12 per cent, respectively, reflecting concerns about US slowdown and lower Chinese demand. On the other hand, tin prices increased by about 8 per cent over the same period. As a result, the IMF's metals price index declined by 7.0 per cent between September-December 2007 on top of about 12 per cent decline between June-September 2007. On a year-on-year basis, in December 2007, while prices of lead (50 per cent) and tin (46 per cent) continued to show sharp increases, prices of other metals such as nickel, zinc, copper and aluminium witnessed declines. Steel prices have remained flat during the year reflecting higher global production led by China and Brazil. Food prices firmed up further during the third quarter of 2007-08 led by wheat and oilseeds/edible oils, reflecting surging demand (both consumption demand and demand for non-food uses such as bio-fuels production) and low stocks of major crops, partly on account of weather related disturbances on 47 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Chart 20: Prices of Rice, Wheat and Maize 600 500 US $ per tonne 400 300 200 100 0 Jan-80 Oct-80 Jul-81 Apr-82 Jan-83 Oct-83 Jul-84 Apr-85 Jan-86 Oct-86 Jul-87 Apr-88 Jan-89 Oct-89 Jul-90 Apr-91 Jan-92 Oct-92 Jul-93 Apr-94 Jan-95 Oct-95 Jul-96 Apr-97 Jan-98 Oct-98 Jul-99 Apr-00 Jan-01 Oct-01 Jul-02 Apr-03 Jan-04 Oct-04 Jul-05 Apr-06 Jan-07 Oct-07 Rice Wheat Maize production in some major producing regions such as Australia (Chart 20). Reflecting these factors, international prices of wheat, soybeans, soybean oils and palm oils increased by 80 per cent, 73 per cent, 66 per cent and 62 per cent, respectively, year-on-year, in December 2007. Consequently, the IMF food price index increased by 26.4 per cent on a year-on-year basis and surpassed the level which was last seen in the late 1980. The supply side pressures on global food prices do not appear to be abating, especially in the case of wheat and oilseeds/edible oils. According to the US Department of Agriculture (USDA) in January 2008, global wheat stocks are expected to decline further by almost 11 per cent (on top of almost 16 per cent decline during 2006-07) during 2007-08 to about 111 million tonnes - their lowest levels since 1981-82. Global oilseeds stocks are also expected to decline by almost 25 per cent during 2007-08 to 53.2 million tonnes. This mainly reflects expected fall in global oilseeds production, mostly caused by a shift of plantings from soybean to maize in northern hemisphere countries and increase in global utilisation of oilseed products. Global vegetables oil stocks are also expected to decline further by about 7 per cent during 2007-08 (to 8.1 million tonnes) on top of almost 15 per cent decline witnessed last year, partly due to growing demand from the biofuel industry. Notwithstanding higher coarse grains production, mainly on account of record production of maize in the US following record high prices, the world's year-ending stocks are projected to decline by almost 8 per cent due to forecast about increase in feed use of coarse grains, especially corns. Rice prices also increased 48 Price Situation during the third quarter of 2007-08 (around 10 per cent), reflecting low stocks. According to the USDA, rice stocks are expected to decline by about 4 per cent in 2007-08. Global barley stocks are also projected to decline to their lowest levels in 42 years at 15.1 million tonnes during 2007-08. Thus, global food prices are likely to remain firm given the prospects for various crops and their lower levels of year-ending stocks. International sugar prices remained largely range bound during the third quarter of 2007-08, reflecting higher production in traditional importing countries. Prices in December 2007 were 41 per cent lower than the recent peak touched in February 2006. According to the International Sugar Organisation, global sugar production is estimated to increase further by 4.3 million tonnes to 170.3 million tonnes during 2007-08 (October-September) season, exceeding global consumption by 11.1 million tonnes. On the other hand, global cotton prices increased marginally during September-December 2007 on top of an increase of about 12 per cent during June-September 2007, reflecting shortfalls in production. According to the latest assessment by the International Cotton Advisory Committee (ICAC), the Cotlook A index is expected to increase by about 13 per cent during 2007-08 due to an estimated decline in world cotton stocks by about 12 per cent to 11.2 million tonnes in 2007-08. World cotton production is, however, expected to increase by about 5 per cent in 2008-09, reflecting expected rise in yields. In response to high food prices, especially of wheat, corns and oilseeds/ edible oils and their implications for headline inflation and inflationary expectations, Governments in both developed and developing countries have resorted to numerous market interventions in the form of price controls, reduction of import barriers and/or imposition of export restrictions to contain price increases and prevent consumption from falling. Inflation Conditions in India The Annual Policy Statement for 2007-08 (April 2007) of the Reserve Bank had observed that the stance of monetary policy in 2007-08 would be conditioned by the patterns in which the global and, more particularly, the domestic environment unfolds. It had also reaffirmed the resolve to respond swiftly with all possible measures to developments impinging on inflation expectations and the growth momentum. Noting that the overarching policy challenge was to manage the transition to a higher growth path while containing inflationary pressures, the policy preference for the period ahead was indicated as strongly in favour of price stability and well-anchored inflation expectations with the endeavour being to contain inflation close to 5.0 per cent in 2007-08 and to the range of 4.0-4.5 per cent over the medium-term. This objective, according to the Statement, would be conducive for maintaining self-accelerating growth over the medium-term. 49 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 The First Quarter Review of Annual Statement on Monetary Policy for 2007-08 (July 2007) noted that there were indications that the combination of lagged and cumulative effects of monetary policy actions and fiscal and administrative measures for supply management had had a salutary effect on inflation expectations, and headline inflation had turned benign in sharp contrast to the last quarter of 2006-07. Going forward, the Review added that monetary management would need to be watchful of movements in commodity prices, particularly oil prices, the elevated levels of asset prices and the reemergence of pricing power among producers as potential threats to inflation expectations. The outlook for inflation in 2007-08 was, however, left unchanged in the Review. Furthermore, the Reserve Bank reiterated its resolve to continue with its policy of active demand management of liquidity through the use of all the policy instruments at its disposal flexibly, as and when the situation warranted. On a review of the liquidity situation, the cash reserve ratio (CRR) was raised further by 50 basis points each with effect from the fortnight beginning August 4, 2007 and November 10, 2007 (Table 32). Table 32: Movement in Key Policy Rates and Inflation in India (Per cent) Effective since 1 March 31, 2004 September 18, 2004 October 2, 2004 October 27, 2004 April 29, 2005 October 26, 2005 January 24, 2006 June 9, 2006 July 25, 2006 October 31, 2006 December 23, 2006 January 6, 2007 January 31, 2007 February 17, 2007 March 3, 2007 March 31, 2007 April 14, 2007 April 28, 2007 August 4, 2007 November 10, 2007 Reverse Repo Rate 2 4.50 4.50 4.50 4.75 (+0.25) 5.00 (+0.25) 5.25 (+0.25) 5.50 (+0.25) 5.75 (+0.25) 6.00 (+0.25) 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 Repo Rate 3 6.00 6.00 6.00 6.00 6.00 6.25 (+0.25) 6.50 (+0.25) 6.75 (+0.25) 7.00 (+0.25) 7.25 (+0.25) 7.25 7.25 7.50 (+0.25) 7.50 7.50 7.75 (+0.25) 7.75 7.75 7.75 7.75 Cash Reserve Ratio 4 4.50 4.75 (+0.25) 5.00 (+0.25) 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.25 (+0.25) 5.50 (+0.25) 5.50 5.75 (+0.25) 6.00 (+0.25) 6.00 6.25 (+0.25) 6.50 (+0.25) 7.00 (+0.50) 7.50 (+0.50) WPI Inflation 5 4.6 7.9 7.1 7.4 6.0 4.5 4.2 4.9 4.7 5.3 5.8 6.4 6.7 6.0 6.5 5.9 6.3 6.0 4.4 3.2 Note : 1. With effect from October 29, 2004, the nomenclature of repo and reverse repo was changed in keeping with international usage. Now, reverse repo indicates absorption of liquidity and repo signifies injection of liquidity. Prior to October 29, 2004, repo indicated absorption of liquidity, while reverse repo meant injection of liquidity. The nomenclature in this document is based on the new usage of terms even for the period prior to October 29, 2004. 2. Figures in parentheses indicate change in policy rates. 50 Price Situation The Mid-term Review of the Annual Policy for 2007-08 (October 2007) noted that while the headline inflation outcomes in the recent past, juxtaposed with expectations survey results and information from financial markets, were indicative of reasonably well-anchored inflation expectations, some of the developments had shown that there were major risks to this assessment that were evolving. Threats to inflation in the future emanated not only from domestic liquidity conditions but also from the underlying global pressures. The possible impact of injection of liquidity by central banks to meet the recent turbulence in global financial markets on global inflation was not clear. In any case, globally, pressures on future inflation were embedded in the high and volatile levels of international crude prices as well as prices of food and metals. A key issue going forward in this regard, according to the Review, was the timing of the pass-through in the context of the expected path of headline inflation. Hence, over the next twelve to eighteen months, risks to inflation and inflation expectations would continue to demand priority in policy monitoring. Accordingly, on a review of the then prevailing liquidity situation, it was considered desirable to increase the CRR by 50 basis points to 7.5 per cent with effect from the fortnight beginning November 10, 2007. The Mid-term Review further noted that the policy resolve going forward should be to consolidate the success in lowering inflation on an enduring basis so that an environment of stability prevails to nurture and protect the transition to higher growth. Accordingly, it reiterated the policy endeavour of containing inflation close to 5.0 per cent in 2007-08. In recognition of India's evolving integration with the global economy and societal preferences in this regard, it further resolved to condition expectations in the range of 4.0-4.5 per cent so that an inflation rate of around 3.0 per cent becomes a mediumterm objective consistent with India's broader integration into the global economy. Wholesale Price Inflation Headline inflation, based on movement in the wholesale price index (WPI), was 3.8 per cent on January 5, 2008 (3.4 per cent at end-September 2007) as compared with 5.9 per cent at end-March 2007 (and 6.4 per cent a year ago). The easing in inflation from a year ago was mainly led by primary food articles and some manufactured products items. The y-o-y inflation, excluding fuel, at 3.8 per cent, came closer to the headline inflation rate (Table 33 and Chart 21). Headline inflation has moved in a range of 3.0-6.4 per cent during 2007-08 so far. The annual average WPI inflation rate (average of 52 weeks) for the week ended January 5, 2008 eased to 4.7 per cent from 5.3 per cent at end-September 2007 and 4.9 per cent a year ago. Primary articles' inflation, y-o-y, eased to 4.1 per cent on January, 5 2008 from 6.2 per cent at end-September 2007 and 9.4 per cent a year ago (10.7 per cent at end-March 2007). The deceleration was mainly due to easing of food articles' inflation to 2.7 per cent from 9.5 per cent a year ago, which 51 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Table 33: Wholesale Price Inflation in India (year-on-year) Commodity Weight 1 All Commodities 1. Primary Articles Food Articles i. Rice ii. Wheat iii. Pulses iv. Vegetables v. Fruits vi. Milk vii. Eggs, Fish and Meat Non-Food Articles i. Raw Cotton ii. Oilseeds iii. Sugarcane Minerals 2. Fuel, Power, Light and Lubricants i. Mineral Oils ii. Electricity iii. Coal Mining 2 100.0 22.0 15.4 2.4 1.4 0.6 1.5 1.5 4.4 2.2 6.1 1.4 2.7 1.3 0.5 14.2 7.0 5.5 1.8 2006-07 (March 31) Inflation WC 3 5.9 10.7 8.0 5.7 7.3 12.5 1.2 5.7 8.4 9.4 17.2 21.9 31.6 1.1 17.5 1.0 0.5 2.3 0.0 6.1 6.1 -12.7 14.1 -1.0 3.9 3.6 1.8 11.3 8.1 9.0 11.6 8.1 12.9 2.0 4 100.0 39.0 20.8 2.1 1.8 1.4 0.3 1.8 5.8 3.8 15.6 3.5 11.0 0.3 2.6 4.0 1.1 2.8 0.0 57.3 10.5 -6.6 4.7 -0.6 1.3 7.1 1.0 17.4 6.0 3.6 3.2 8.6 6.7 1.2 2006-07 (January 6) Inflation WC 5 6.4 9.4 9.5 5.3 17.4 26.0 2.2 12.6 8.2 2.0 9.6 -3.9 22.9 1.1 7.0 3.6 3.4 4.9 0.0 6.3 4.0 -4.0 12.7 3.4 2.4 2.6 1.8 15.1 11.4 14.1 19.4 8.0 11.9 1.2 6 100.0 32.4 23.0 1.8 3.9 2.6 0.5 3.6 5.2 0.8 8.4 -0.7 7.6 0.3 1.1 12.9 7.1 5.7 0.0 54.6 6.6 -1.9 4.0 1.8 0.8 4.7 0.9 21.2 7.7 4.8 4.5 7.9 5.7 0.7 (Per cent) 2007-08 (P) (January 5) Inflation WC 7 3.8 4.1 2.7 7.2 -2.2 -9.2 7.1 -10.6 9.5 2.3 8.4 24.5 10.0 0.0 1.9 3.7 5.4 -0.7 8.8 3.7 5.3 -10.3 8.9 -7.2 3.3 5.5 1.5 2.3 7.6 8.7 10.7 5.2 8.1 2.1 8 100.0 24.5 11.1 4.0 -0.9 -1.8 2.4 -5.4 10.4 1.5 12.7 6.2 6.5 0.0 0.5 21.2 18.1 -1.4 4.5 54.9 14.3 -7.4 5.1 -6.2 1.7 16.0 1.3 5.8 9.1 5.4 4.7 8.7 6.8 1.9 3. Manufactured Products 63.8 i. Food Products 11.5 of which: Sugar 3.6 Edible Oils 2.8 ii. Cotton Textiles 4.2 iii. Man Made Fibres 4.4 iv. Chemicals and Chemical Products 11.9 3.7 of which : Fertilisers v. Basic Metals, Alloys and Metal Products 8.3 of which: Iron and Steel 3.6 vi. Non-Metallic Mineral Products 2.5 of which: Cement 1.7 vii. Machinery and Machine Tools 8.4 5.0 of which: Electrical Machinery viii. Transport Equipment and Parts 4.3 Memo: Food Items (Composite) WPI Excluding Food WPI Excluding Fuel WC : Weighted Contribution. 26.9 73.1 85.8 7.3 5.5 7.4 31.2 68.8 96.0 7.3 6.0 7.2 29.7 70.3 87.1 3.7 3.8 3.8 25.4 74.6 78.8 P : Provisional. was led by the decline in the prices of wheat, pulses, fruits, and condiments and spices, partly offset by increase in the prices of rice and milk. Wheat prices declined by 2.2 per cent, year-on-year, as on January 5, 2008 as against 52 Price Situation Chart 21: Annual WPI Inflation Wholesale Price Inflation 9 8 7 6 Per cent 12 9 15 Major Groups' Inflation 5 4 3 2 1 0 31-Dec-05 1-Oct-05 2-Jul-05 2-Oct-04 1-Jan-05 2-Apr-05 29-Dec-07 29-Sep-07 30-Jun-07 31-Mar-07 30-Dec-06 30-Sep-06 1-Jul-06 1-Apr-06 3-Jul-04 3-Apr-04 Per cent 6 3 0 -3 1-Oct-05 31-Dec-05 1-Jan-05 2-Apr-05 2-Jul-05 Year-on-year Average Primary Articles Manufactured Products Fuel Group Year-on-year excluding fuel an increase of 17.4 per cent a year ago, reflecting expectations about improved production following the normal monsoon and supply-side measures undertaken by the Government. Notwithstanding the y-o-y decline, domestic wheat prices remained at elevated levels. These along with firm international prices, lower acreage under the domestic rabi wheat crop (which is down by about 2 per cent, y-o-y, as per the latest data available up to January 18, 2008) and sluggish yield raise concerns, especially as domestic consumption is rising. Rice prices increased by 7.2 per cent, y-o-y, on top of 5.3 per cent a year ago, reflecting lower stocks (at around 10.7 million tonnes as on November 1, 2007 which was lower than 12.5 million tonnes a year ago). Elevated rice prices continued to be a matter of concern in view of the decline in stocks, low productivity and exposure of the crop to frequent weather-related disturbances in the main producing regions as well as other structural factors. Prices of oilseeds, y-o-y, increased by 10.0 per cent on top of an increase of 22.9 per cent a year ago, which could be attributed to higher demand, lower domestic production during 2006-07 season, lower acreage under the current rabi crop (which is down by almost 11 per cent, y-o-y, as per the latest data available up to January 18, 2008) as well as rising global prices. Raw cotton prices were 24.5 per cent higher, y-o-y, as on January 5, 2008 as against a decline of 3.9 per cent in the corresponding period of previous year, in line with international price movements; as noted earlier, the Cotlook A index is expected to increase by 13 per cent during 2007-08 (Chart 22). Fuel group inflation, which was negative during June-November 2007, turned positive from the beginning of December 2007 (3.7 per cent on January 5, 2008) partly reflecting the base effects of fuel (petrol and diesel) price cuts 53 31-Mar-07 30-Dec-06 29-Dec-07 30-Sep-06 29-Sep-07 30-Jun-07 3-Apr-04 1-Apr-06 2-Oct-04 3-Jul-04 1-Jul-06 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Chart 22: Primary Articles Prices 230 Wholesale Price Index (Base: 1993-94=100) 220 210 200 190 180 170 Sep Aug May Nov Dec Apr Feb 2007-08 Jul Jun Oct Jan 2003-04 2004-05 2005-06 2006-07 last year and increase in the prices of some petroleum products such as naphtha, furnace oil and aviation turbine fuel. In this context it may be noted that domestic prices of petrol and diesel have remained unchanged since February 2007, when domestic prices were last cut, even as international crude prices (Indian basket) increased by almost 56 per cent from US $ 56.6 a barrel in February 2007 to US $ 88.2 a barrel level by December 2007. Furthermore, domestic prices of kerosene and liquefied petroleum gas (LPG) have also not been raised by the Government since April 2002 and November 2004, respectively, on grounds of societal concerns. Thus, headline inflation has remained suppressed at the current juncture and inflation risks on account of oil prices remain incipient. Manufactured products inflation, y-o-y, eased to 3.7 per cent on January 5, 2008 from 4.5 per cent at end-September 2007 and 6.1 per cent at end-March 2007; it was 6.3 per cent a year ago. The deceleration in manufactured products inflation, y-o-y, was mainly due to decline in the prices of non-ferrous metals by 9.3 per cent (against an increase of 43.3 per cent a year ago), textiles by 3.5 per cent (2.4 per cent) and sugar by 10.3 per cent (as compared with a decline of 4.0 per cent). Within the manufactured products group, price of edible oils (increase of 8.9 per cent), oil cakes (42.9 per cent), chemicals (5.5 per cent), cement (10.7 per cent), iron and steel (7.6 per cent) and electrical machinery (8.1 per cent) increased, on a year-on-year basis, on January 5, 2008 (see Table 33). These commodities together contributed 57 per cent to the overall WPI inflation on January 5, 2008. While domestic non-ferrous metals prices have declined in line with the international trends, domestic iron 54 Mar Price Situation Chart 23: Edible Oils Inflation 110 90 70 Per cent 50 30 10 -10 Aug-05 Dec-05 Apr-05 International Palm oil International Soybean Oil Aug-06 Edible Oils (India) and steel prices have increased even as international steel prices remained flat during the year. Higher prices of cement could be attributed largely to the strong demand from the construction sector and high capacity utilisation rates in the cement industry [94 per cent during 2007-08 (April-December) as compared with 92 per cent a year ago]. The hardening of electrical machinery prices reflected higher input prices as well as investment demand. The firming up of domestic edible oils and oil cakes prices reflected stagnant domestic production, increased demand and rise in international prices (Chart 23). It may be noted that India imported a record 4.7 million tonnes of edible and non-edible oils during the year November 2006-October 2007 according to the Solvent Extractors Association of India. Edible oils and oil cakes along with oilseeds accounted for more than one-fourth of headline inflation on January 5, 2008. Overall, manufactured products were the major driver of annual year-onyear WPI inflation as on January 5, 2008 (with weighted contribution of 54.9 per cent), followed by primary articles (24.5 per cent) and the fuel group (21.2 per cent) (Chart 24). In order to contain inflationary pressures, the Government initiated a number of fiscal and supply-augmenting measures during 2007-08. On April 3, 2007, the Government decided to exempt import of portland cement from countervailing duty and special additional customs duty; it was earlier exempted from basic customs duty in January 2007. As per the principle of equitable burden sharing among the different stakeholders, the Government, on October 11, 2007, decided to bear the burden to the extent of 42.7 per cent of the under-recoveries in the retail sale of petroleum products by oil marketing companies through issuance of oil bonds. Furthermore, the subsidy schemes 55 Aug-07 Dec-06 Oil Cakes (India) Dec-07 Apr-06 Apr-07 -30 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 140 120 100 80 Chart 24: Major Groups' Weighted Contribution to WPI Inflation (year-on-year) Per cent 60 40 20 0 -20 -40 Mar-05 Dec-05 Sep-05 Jun-05 Mar-07 Mar-06 Primary Articles Dec -04 Mar-04 Fuel Group Manufactured Products for kerosene and LPG, which were available through the public distribution system (PDS) till March 2007, were extended till March 2010. The Government has also taken several measures with the aim of containing food price inflation. The Government reduced customs duty on palm oils by 10 percentage points in April 2007 and by another 5 percentage points in July 2007, and import duty on various edible oils in a range of 5-10 percentage points in July 2007 as well as withdrew the 4 per cent additional countervailing duty on all edible oils. Import of wheat at zero duty, which was available up to end-December 2006, was extended further to end-December 2007. Customs duty on import of pulses was reduced to zero on June 8, 2006 and the period of validity of import of pulses at zero duty, which was initially available up to March 2007, was first extended to August 2007 and further to March 2009. A ban was imposed on export of pulses with effect from June 22, 2006 and the period of validity of prohibition on exports of pulses, which was initially applied up to end-March 2007, was further extended up to end-March 2008. In order to increase the availability of onion, the National Agricultural Cooperative Marketing Federation of India Ltd. (NAFED) increased the minimum export price (MEP) by US $ 100 per tonne for all destinations from August 20, 2007 and by another US $ 50 per tonne with effect from October 2007 for restricting exports and augmenting availability in the domestic market. The minimum support price (MSP) for paddy has been raised by Rs. 65 per quintal (with an additional incentive bonus of Rs. 100) and for wheat by Rs. 250 per quintal for this year. These measures have supplemented the various pre-emptive monetary measures undertaken by the Reserve Bank since mid-2004 and helped in containing inflation and inflationary expectations. 56 Dec-06 Dec-07 Sep-04 Sep-06 Sep-07 Jun-04 Jun-06 Jun-07 Price Situation Consumer Price Inflation Inflation based on year-on-year variation in consumer price indices (CPIs) also eased during November/December 2007 (from a year ago) but continued to remain above the WPI inflation, mainly reflecting the impact of food prices and their higher weights in the CPI vis- -vis WPI (Table 34). The measures of Table 34: Consumer Price Inflation : Major Groups (Year-on-year variation in per cent) CPI Measure 1 Weight 2 March March 2003 2004 3 4 March 2005 5 March 2006 6 March 2007 7 June 2007 8 Sep. 2007 9 Oct. 2007 10 Nov. Dec. 2007 2007 11 12 CPI-IW (Base: 2001=100)# General Food Group Pan, Supari etc. Fuel and Light Housing Clothing, Bedding etc. Miscellaneous 100.0 46.2 2.3 6.4 15.3 6.6 23.3 4.1 3.7 1.9 6.3 5.4 1.5 5.3 3.5 3.1 4.2 6.5 3.9 2.1 3.2 4.2 1.6 2.1 4.9 20.4 2.3 3.9 4.9 4.9 3.1 -2.9 6.6 3.0 4.6 6.7 12.2 4.4 3.2 4.1 3.7 3.3 5.7 8.1 9.6 1.6 4.1 4.4 4.0 6.4 8.7 10.3 2.3 4.0 5.3 4.0 5.5 7.8 10.3 1.5 4.0 4.4 4.8 5.5 -------------- CPI-UNME (Base: 1984-85=100) General Food Group Fuel and Light Housing Clothing, Bedding etc. Miscellaneous 100.0 47.1 5.5 16.4 7.0 24.0 3.8 2.6 3.1 6.3 2.6 6.0 3.4 3.0 3.2 5.2 2.6 2.8 4.0 2.2 9.6 7.5 2.0 4.4 5.0 5.3 1.9 5.5 2.9 5.1 7.6 10.9 6.4 5.6 3.6 4.4 6.1 7.7 7.2 5.6 4.3 3.7 5.7 7.7 7.0 4.9 4.0 3.2 5.5 6.8 6.6 4.7 3.9 3.2 5.1 5.9 6.2 4.7 4.2 3.4 5.1 6.2 5.4 4.7 4.1 3.8 CPI-AL (Base: 1986-87=100) General Food Group Pan, Supari etc. Fuel and Light Clothing, Bedding etc. Miscellaneous 100.0 69.2 3.8 8.4 7.0 11.7 4.9 6.0 3.5 4.8 3.0 3.1 2.5 1.6 4.7 3.0 4.1 2.7 2.4 2.2 -1.3 3.0 2.5 5.5 5.3 5.5 6.6 4.3 2.2 5.5 9.5 11.8 5.7 6.9 3.5 6.8 7.8 8.8 9.1 7.4 2.7 6.7 7.9 8.8 11.1 7.2 1.9 5.5 7.0 7.8 10.8 6.9 1.6 5.5 6.2 6.4 6.6 1.3 5.2 5.9 6.2 6.3 1.3 5.2 11.0 11.3 CPI-RL (Base: 1986-87=100) General 100.0 Food Group 66.8 Pan, Supari etc. 3.7 Fuel and Light 7.9 Clothing, Bedding etc. 9.8 Miscellaneous 11.9 Memo: WPI Inflation (End of period) GDP Deflator based Inflation* # * IW AL 4.8 5.6 3.5 4.8 3.3 3.1 6.5 3.9 2.5 1.9 4.7 3.0 3.4 3.0 4.6 3.7 2.4 1.9 -1.0 2.9 2.8 5.5 5.1 4.2 5.3 5.8 6.3 4.0 2.7 5.2 4.1 4.4 9.2 11.5 5.7 6.9 3.1 6.3 5.9 5.3 7.5 8.5 9.3 7.4 2.6 6.2 4.4 5.2 7.6 8.8 11.6 7.2 2.1 5.3 3.4 4.2 6.7 7.6 11.0 6.9 2.1 5.3 3.1 5.9 5.6 6.2 6.2 11.1 11.5 6.9 6.3 2.3 2.6 5.2 5.0 3.0 3.5 -- : Data prior to January 2006 are based on the old series (Base: 1982=100) : Data for March pertain to full year. : Industrial Workers. UNME : Urban Non-Manual Employees. : Agricultural Labourers. RL : Rural Labourers. 57 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Chart 25: Asset Price Movements 360 320 March 2004 =100 280 240 200 160 120 80 Mar-05 Dec-05 Sep-05 Jun-05 Mar-07 Mar-06 Mar-04 Dec-04 BSE Sensex Gold Price (Mumbai) consumer price inflation were placed in the range of 5.1-5.9 per cent during November/December 2007 as compared with 5.7-7.9 per cent in September 2007 (and 6.7-9.5 per cent in March 2007). Disaggregated data show that food group inflation in various CPI measures (except for industrial workers) eased to 6.2 per cent during December 2007 from 7.7-8.8 per cent in September 2007; it was in the range of 10.9-12.2 per cent in March 2007. Asset Prices Domestic equity prices recorded further gains during the third quarter of 2007-08, amidst intermittent corrections (see Chapter V). This reflected a number of factors such as strong domestic growth, healthy corporate performance, liquidity support from both FIIs and domestic mutual funds. Bullion prices also firmed up during the third quarter in line with international trends (Chart 25). Domestic gold prices have increased by about 10 per cent since September 2007 to an average of around Rs. 10,298 per 10 grams in December 2007 (these were Rs. 9,369 per 10 grams in March 2007) in line with movement in international prices, which increased by almost 13 per cent over the same period. International gold prices touched a high of US $ 840 per ounce on November 9, 2007, reflecting weakening of US dollar, hardening of oil prices and uncertainties surrounding the global financial markets. International gold prices rose further to a peak of US $ 893 per ounce on January 16, 2008. 58 Dec-06 Dec-07 Sep-04 Sep-06 Sep-07 Jun-04 Jun-06 Jun-07 V. FINANCIAL MARKETS International Financial Markets During 2007-08, international financial markets remained volatile as uncertainties about the US sub-prime mortgage market and other credit markets exposures persisted. To ease liquidity conditions, major central banks continued to inject liquidity in a more collaborative manner. Elevated inflationary pressures in many economies reflected historical peaks in crude oil prices. Share prices in advanced economies fell, while those in emerging market economies (EMEs) recorded gains though with intermittent corrections due to country-specific factors. Long-term government bond yields in advanced economies softened, reflecting flight to safety by investors and easing of monetary policy in the US. In the currency markets, the US dollar depreciated against major currencies. Financial markets in the recent period have witnessed heightened uncertainty, triggered by a sharp repricing of risk following problems in the US sub-prime mortgage market. Recent financial market developments have unfolded against the backdrop of an expanded period of strong broad-based global growth and overall financial stability. The congruence of favourable macroeconomic conditions, abundant liquidity and low nominal rates generated low perception of financial risks. Investor appetite for high returns in a low interest rate environment encouraged market participants to undertake progressively higher risks, stimulated further technological development for unbundling and distributing risks through financial markets and boosted demand for a range of high yielding and complex financial products. Greater appetite for structured instruments was evident in the rapid rise in the issuance of collateralised debt obligations (CDOs). Delinquency rates on sub-prime mortgages (residential loans extended to individuals with poor credit histories) had started rising markedly after mid-2005. However, the trigger for deterioration in the credit market was provided by the news that two hedge funds, which were active in the structured markets for credit instruments that had sub-prime exposure, had suffered heavy losses and almost lost their capital. The market value of credit products based on sub-prime mortgages also declined1. These losses were aggravated by a sharp fall in financial market liquidity as investors became reluctant to invest in such products. These events resulted in a tightening in underwriting standards, with fewer households qualifying for sub-prime loans. Losses on mortgage exposures worsened following adverse developments in the US housing market. There was further downgrading of asset backed securities (ABS) with underlying assets as US sub-prime residential 1 Cash flows generated by sub-prime mortgages were often repackaged into structured credit products and sold to investors. 59 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 mortgages. Many issuers of asset-backed commercial paper (ABCP) programs found it extremely difficult to roll over maturing asset backed paper into new longerterm paper. The uncertainty over financial system exposures spread to banks and hedge funds outside the US as they indicated their exposures to this market. The rating agencies also announced that they would be downgrading ABSs with underlying pools of sub-prime mortgages. In the credit market, the US five-year CDX high-yield index rose by 270 basis points to around 525 between end-May and late July 2007, while the corresponding US investment grade index widened by about 45 basis points to a high of 81 in early August 2007. In Europe, the five-year iTraxx Crossover CDS index climbed by 280 basis points to 471 in late July, 2007, while the headline iTraxx Europe investment grade index increased by 48 basis points to a high of 68. These increases in credit spreads coincided with a significant reduction in investor risk tolerance. In the wake of these events, activity in ABCP dwindled, while concerns about banks being forced to take ABCP exposures on to their balance sheets generated apprehensions about an impending credit crunch. Inability of commercial paper issuing vehicles to finance at longer maturities induced them to seek liquidity needs from their sponsor banks, which in turn, prompted banks to hoard liquidity. The uncertainty about the quality of counterparty assets also aggravated the situation. The disturbances, thus, spilled over into short-term money markets, causing steep increases in overnight interest rates in major economies in August 2007. The UK witnessed some of the sharpest increases in the interbank rates as liquidity problems at the mortgage lender Northern Rock became more pronounced eventually triggering a bank run. The government bond yields in industrialised countries declined sharply with the yield on the 10-year paper in the US dropping by around 65 basis points, and those in the euro area and Japan by around 40 basis points each by late August 2007 over first half of June 2007 as markets sold off and investors retreated from risky assets. In August 2007, central banks in the US and other affected economies, therefore, injected liquidity to stabilise inter-bank markets. Open market operations of increased size and maturity were undertaken by the Bank of England, European Central Bank (ECB) and the US Federal Reserve System. The types of securities against which banks could borrow were broadened by the US Fed and ECB to include mortgage backed securities. The US Fed also decided to accept ABCP as collateral. On August 17, 2007, the US Federal Open Market Committee (FOMC) lowered its discount rate by 50 basis points to 5.75 per cent, bringing in some calmness in markets. The Bank of England provided emergency liquidity assistance to Northern Rock bank. The US FOMC, at its meeting held on September 18, 2007, decided to cut the fed funds target rate by 50 basis points from 5.25 per cent to 4.75 per cent and correspondingly the federal discount rate from 5.75 per cent to 60 Financial Markets 5.25 per cent. While the primary concern of the FOMC till August 2007 was the existence of inflationary pressures, the risks to economic growth were indicated an added concern in its September 18, 2007 statement. As a consequence of successive central bank liquidity injections into the inter-bank money markets and lower policy rates in the US, the credit markets recovered briefly in early October 2007. Renewed concerns about the uncertainty in the US housing market and direct and indirect exposures to associated economic and financial risks from mid-October 2007 led to widening of credit spreads. Mirroring the developments in the US, the credit spreads widened in the Euro area. Market conditions weakened for structured instruments, reflecting the deteriorating asset quality and uncertainties about valuation of structured credit products. This also reflected worsening of sentiment in the money market beginning mid-October 2007 as liquidity conditions became adverse leading to rise in inter-bank rates. The swap spreads between three-month inter-bank interest rates and overnight index swaps rose sharply reflecting greater preference for liquidity and rising counterparty risk premia. Market participants evinced keen interest in government paper. Bond yields also fell in anticipation of weakening of economic activity and expectations of further monetary policy easing in the United States. In order to improve liquidity, the US Federal Reserve Board reduced its fed funds target rate by 25 basis points each on October 31, 2007 and December 11, 2007. The Bank of England and the Bank of Canada also reduced their policy rates. In the situation of heightened tensions and serious impairment of functioning of the money markets, five central banks, viz., the Bank of Canada, the Bank of England, the European Central Bank, the US Federal Reserve System and the Swiss National Bank announced measures on December 12, 2007 in a collaborative manner to address elevated pressures. Actions taken by the US Federal Reserve included the establishment of a temporary Term Auction Facility (TAF) and the establishment of foreign exchange swap lines with the European Central Bank and the Swiss National Bank. The TAF allowed a potentially much larger pool of banks to bid for funds direct from the US Fed. The goal of the TAF was to reduce the incentive for banks to hold cash and increase their willingness to provide credits to households and firms. The ECB announced that the Eurosystem would conduct two US dollar liquidity-providing operations, in connection with the US dollar TAF, against ECB-eligible collateral for a maturity of 28 and 35 days. The Bank of England expanded the amount of reserves offered at three months maturity in its longterm repo open market operations scheduled on December 18, 2007 and January 15, 2008. It also widened the range of collateral accepted for funds advanced at this maturity. The Bank of Canada announced that it would enter into term purchase and resale agreements extending over the calendar year-end. In the UK, the Government had to extend guarantees to depositors of Northern Rock bank to avoid contagion in the banking system. The Northern Rock bank was also provided a large loan by the Bank of England. Under a fresh rescue plan 61 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 under current consideration of the authority, the money lent to Northern Rock bank could be converted into government bonds, a move that would allow a private buyer to reduce the burden of heavy loan repayment immediately. The downside risks to economic growth in the US are becoming increasingly more pronounced in the wake of likely softening in consumer spending due to higher energy prices, lower equity prices and housing downturn. Business investments in equipment and software as well as non-residential construction are also expected to slow down. In view of these concerns, equity markets in several countries in Asia declined sharply on January 21, 2008. In the wake of further worsening of the baseline outlook for real activity in 2008 and increasing downside risks to growth, the US Fed reduced the fed funds target rate sharply by 75 basis points to 3.50 per cent on January 22, 2008, taking the total reduction to 175 basis points beginning September 18, 2007. The Bank of Canada also lowered its benchmark overnight rate by 25 basis points to 4.0 per cent on January 22, 2008. Recent financial market developments raise several issues and concerns. First, while the practices of increased use of innovative credit instruments and complex layering of risk diffusion have reduced information costs, they have also enabled the investor or risk taker to become progressively remote from the ultimate borrowers where the actual risks reside. With a host of intermediaries in the form of mortgage brokers, mortgage companies and societies, packaging their mortgage assets including non-conforming loans and selling down to different categories of investors, including Special Investment Vehicles (SIVs), and hedge funds, the identification and location of risks in the whole chain is becoming increasingly challenging. Second, the role of rating agencies has also come under scrutiny. The issues such as small number of rating agencies and the possible conflict of interest clearly suggest that the reliance only on rating agencies for risk assessment needs to be avoided. Third, the confidence is also falling in the strength of the insurers that guarantee payments on bonds (monoline industry). Two major bond insurers are reportedly have huge exposures in securities backed by assets, including sub-prime mortgages. Some of the bond insurers in fact, have already been downgraded by the rating agencies because of the losses on the sub-prime mortgage bonds they had insured. The cost of buying protection against defaults by US companies has also risen. Fourth, as far as role of central banks is concerned, on one hand, there is a view that increased credibility of monetary policy has enhanced expectations for stability in both inflation and interest rates, which has led to the mispricing of risk and hence enhanced risk taking. On the other hand, another view is the repeated assurances of stability and guidance to markets about the future path of interest rates by the central banks, coupled with the availability of ample liquidity have led markets to underprice risks. 62 Financial Markets Recent developments have highlighted the need for central banks to improve the understanding of the continuously evolving financial system. There is also a need to reassess the issue of separation of monetary policy and bank supervision with the growing impact of endogenous liquidity as such separation would inhibit rather than facilitate the conduct of monetary policy. Furthermore, there is a need to strengthen, directly or indirectly, scrutiny of financial activities that have migrated outside their formal jurisdiction. There is also a need for the central banks to operate monetary policy with varied instruments both rate and quantum at their disposal. The recent financial market developments have also highlighted the vulnerabilities created by off-balance sheet exposures, and issues relating to liquidity risk management by banks. The spreads of even the investment grade corporate bonds in the international markets have widened significantly in the recent period. This would have implications for the corporate sector in India as they, in the recent period, have increased their reliance on external commercial borrowing (ECB). The money and credit markets in India have so far remained relatively insulated from the international financial market developments. India's exposure to troubled sub-prime assets and related derivatives is negligible in comparison with many other economies. Notwithstanding some reports of accelerated emergence of non-performing assets with regard to consumer credit, housing and real estate in a few banks, preliminary assessment showed that they do not have systemic implications either in terms of solvency or liquidity. This has reflected the nuanced and gradual approach in India's financial sector reform process with building up of appropriate safeguards to ensure stability, while taking account of the prevailing governance standards, risk management systems and incentive frameworks in financial institutions in the country. Although the equity market in India has been impacted by global uncertainties and the trends in equity markets in advanced and other EMEs, the overall conditions in financial markets have, by and large, remained orderly. The Reserve Bank continues to maintain enhanced vigilance so as to respond appropriately to the prevailing uncertainties in global financial conditions. The policy challenge is to continue to ensure financial stability in India during the period of heightened uncertainties, while maintaining the momentum of high growth and ensuring price stability. Developments during the Third Quarter of 2007-08 Short-term interest rates in the US declined during the third quarter of 2007-08 reflecting the monetary easing. Short-term interest rates in the EMEs witnessed a mixed trend, firming up in Argentina, China, South Korea and Thailand, while softening in Hong Kong and Philippines (Table 35). Bangko Sentral 63 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Table 35 : Short-term Interest Rates (Per cent) Region/Country March 2006 March 2007 1 Advanced Economies Euro Area Japan Sweden UK US Emerging Market Economies Argentina Brazil China Hong Kong India Malaysia Philippines Singapore South Korea Thailand 2 2.80 0.04 1.99 4.58 4.77 9.63 16.54 2.40 4.47 6.11 3.51 7.38 3.44 4.26 5.10 3 3.91 0.57 3.21 5.55 5.23 9.63 12.68 2.86 4.17 7.98 3.64 5.31 3.00 4.94 4.45 June 2007 4 4.16 0.63 3.42 5.92 5.27 9.25 11.93 3.08 4.43 7.39 3.62 6.19 2.55 5.03 3.75 End of September 2007 December 2007 January 2008* 5 4.73 0.73 3.54 6.28 4.72 12.31 11.18 3.86 4.97 7.19 3.62 6.94 2.56 5.34 3.55 6 4.88 0.73 4.02 6.41 4.16 14.50 11.18 4.35 3.73 7.35 3.62 6.56 2.56 5.71 3.90 7 4.51 0.74 4.02 5.58 3.74 12.94 11.18 4.48 3.12 7.10 3.62 6.25 1.75 5.86 3.55 *: As on January 16, 2008. Note : Data for India refer to 91-day Treasury Bills rate and for other countries 3-month money market rates. Source : The Economist. ng Pilipinas (Philippines) lowered its key policy rates on December 20, 2007. The Bangko Sentral ng Pilipinas had earlier also reduced its key policy rates on October 4, 2007 and November 15, 2007. Central banks in China, Taiwan, South Africa and Norway, however, increased their policy rates during the quarter to contain inflation and stabilise inflationary expectations. Long-term Government bond yields softened in major advanced economies during the third quarter of 2007-08, reflecting lower investor appetite for riskier assets in the wake of deteriorating housing market, turmoil in the credit market and monetary policy easing in the US (Chart 26). Between end-September 2007 and end-December 2007, 10-year yield declined by 49 basis points in the US, 33 basis points in the UK, 14 basis points in Japan and 6 basis points in the Euro area. Between end-March 2007 and end-December 2007, 10-year yield declined by 50 basis points in the US, 18 basis points in the UK and 16 basis points in Japan, while it increased by 29 basis points in the Euro area. Equity markets in the EMEs recorded further gains during the third quarter of 2007-08 amidst intermittent corrections due mainly to strong portfolio flows, buoyant merger and acquisition activity, continued higher GDP growth and healthy corporate earnings. Equity markets in the advanced economies, however, declined somewhat on account of sub-prime losses, credit squeeze, slump in the US home sales, concerns over slowdown in the US economy, depreciation of the US dollar against major currencies, dismal performance of 64 Financial Markets Chart 26: 10-year Government Bond Yields 5.5 5.0 2.1 1.9 Per cent 4.5 1.7 4.0 3.5 3.0 1.5 1.3 14-Feb-07 17-May-07 17-Aug-07 02-Oct-07 14-May-06 14-Aug-06 UK 14-Nov-06 US Euro Japan (right scale) the financial sector and increase in international crude oil prices. Between end-March 2007 and January 16, 2008, the MSCI emerging market index increased by 25.6 per cent, while the MSCI world (developed) market index declined by 2.7 per cent. The gains in EMEs were led by stock markets in China (66.5 per cent), India (54.2 per cent), Egypt (51.0 per cent), Indonesia (44.0 per cent), Brazil (32.1 per cent) and Hong Kong (25.0 per cent) (Chart 27). In the foreign exchange market, the US dollar depreciated against major currencies during 2007-08 (up to January 17, 2008) (Table 36). The sub-prime crisis, declining capital inflows to the US, fed rate cuts, weaker US housing Chart 27: Variation in International Stock Market Indices 142 112 Per cent 82 52 22 EMEs (MSCI) World (MSCI) FTSE UK 100 Honk-Kong Variation between end-March 2006 and end-March 2007 Variation between end-March 2007 and January 16, 2008 65 South Africa South Korea Nikkei 255 NASDAQ Singapore Brazil Turkey Hungary DJIA Argentina Euro area Malaysia Colombia China India Indonesia Thailand Russia Egypt -8 17-Nov-07 29-Mar-06 30-Dec-06 01-Apr-07 29-Sep-06 29-Jun-06 02-Jan-08 02-Jul-07 Per cent Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Table 36: Appreciation (+)/Depreciation (-) of the US dollar vis- -vis other Currencies (Per cent) Currency 1 Euro Pound Sterling Japanese Yen Chinese Yuan Russian Rubble Turkish Lira Indian Rupee Indonesian Rupiah Malaysian Ringgit South Korean Won Thai Baht Argentine Peso Brazilian Peso Mexican Peso South African Rand @: Year-on-year variation. End-March 2006 @ 2 7.1 8.5 9.4 -3.1 -0.6 -2.0 2.2 -4.3 -3.0 -4.7 -0.7 5.4 -18.1 -2.6 -0.5 *: Variation over end-March 2007. End-March 07 @ 3 -9.1 -11.4 0.2 -3.4 -6.1 3.2 -2.5 0.5 -6.2 -3.7 -9.9 0.7 -6.4 1.3 17.2 January 17, 2008 * 4 -9.3 -0.2 -9.0 -6.2 -5.8 -15.2 -9.9 3.6 -5.1 -0.2 -5.4 1.5 -14.2 -0.8 -3.6 data and lower consumer confidence led the US dollar to depreciate against other major currencies, touching a historic low against the euro during October 2007. The US dollar also weakened against the Canadian dollar and the Australian dollar mainly due to surge in crude oil prices. The US dollar's weakness against the Chinese yuan reflected widening of floating band from 0.3 per cent to 0.5 per cent by the Chinese authority in May 2007. The US dollar's weakness against the Thai baht reflected the Thai currency's appreciation largely due to the growing current account surpluses. Domestic Financial Markets Indian financial markets remained generally orderly for the most part of the third quarter of 2007-08 except for some volatility in overnight interest rates and in the equity market. Swings in cash balances of the Government and capital flows were the main drivers of liquidity conditions in the financial markets and volatility in overnight interest rates. Interest rates in the overnight money markets mostly remained within the informal corridor set by reverse repo and repo rates during the third quarter of 2007-08. Interest rates in the collateralised segment of the overnight money market hardened but remained below the call rate during the quarter. In the foreign exchange market, the Indian rupee generally appreciated during the quarter. Yields in the Government securities market remained range-bound. The stock markets remained buoyant and the benchmark indices reached new highs (Table 37). The stock markets, however, witnessed some volatility beginning mid-January 2008 reflecting, inter alia, global uncertainties. The primary market segment of the capital market witnessed increased activity in the third quarter of 2007-08. 66 Financial Markets Table 37: Domestic Financial Markets at a Glance Year/ Month Call Money Average Daily Turnover (Rs. crore) Government Securities Average Daily Interbank Turnover (US $ million) 6 8,892 12,738 18,540 17,600 17,712 18,420 15,310 14,325 15,934 18,107 16,924 20,475 19,932 21,171 20,298 25,992 28,131 P 24,843 P 30,122 P 32,119 P 33,445 P 36,557 P 39,453 P 30,677 P _ Foreign Exchange Average Exchange Rate (Rs. per US $) RBI's net Foreign Currency Sales (-)/ Purchases (+) (US $ million) 8 20,847 ## 8,143 ## 26,824 ## 8,149 4,305 504 0 0 0 0 0 3,198 1,818 2,830 11,862 2,307 2,055 4,426 3,192 11,428 1,815 11,867 12,544 7,827 _ Liquidity Management Average Average Average Average 3-month MSS Daily Daily Forward OutLAF BSE Premia standing# Out- Turnover (Per (Rs. standing (Rs. crore) cent) crore) (Rs. crore) 9 1.66 1.60 2.14 3.11 1.31 0.87 0.73 0.83 1.22 1.31 1.67 2.07 3.20 4.22 3.71 4.51 6.91 4.58 2.59 1.12 1.59 1.45 1.12 1.40 1.64 10 11 12 2,050 3,248 3,832 5,398 4,860 4,355 3,131 2,605 2,867 3,411 3,481 4,629 4,276 4,380 4,676 3,716 3,935 4,706 4,537 5,684 4,820 6,157 9,049 7,756 8,606 Equity Average Average Average Daily BSE S & P NSE Sensex** CNX Turnover Nifty** (Rs. crore) Average Average Average Call Turnover 10-year Rates* in Govt. Yield@ (Per Securities (Per cent) (Rs. cent) crore)+ 3 4 5 6.22 7.12 7.78 7.40 7.45 7.58 7.86 8.26 8.09 7.76 7.65 7.52 7.55 7.71 7.90 8.00 8.10 8.15 8.20 7.94 7.95 7.92 7.92 7.94 7.91 1 2004-05 2005-06 2006-07 Mar 2006 Apr 2006 May 2006 Jun 2006 Jul 2006 Aug 2006 Sep 2006 Oct 2006 Nov 2006 Dec 2006 Jan 2007 Feb 2007 Mar 2007 Apr 2007 May 2007 Jun 2007 Jul 2007 Aug 2007 Sep 2007 Oct 2007 Nov 2007 Dec 2007 * : @ : ** : LAF : BSE : P : Note : 2 7 44.93 44.27 45.25 44.48 44.95 45.41 46.06 46.46 46.54 46.12 45.47 44.85 44.64 44.33 44.16 44.03 42.15 40.78 40.77 40.41 40.82 40.34 39.51 39.44 39.44 13 14 15 14,170 4.65 4,826 17,979 5.60 3,643 21,725 7.22 4,863 18,290 6.58 2,203 16,909 5.62 3,685 18,074 5.54 3,550 17,425 5.73 2,258 18,254 5.86 2,243 21,294 6.06 5,786 23,665 6.33 8,306 26,429 6.75 4,313 25,649 6.69 10,654 24,168 8.63 5,362 22,360 8.18 4,822 23,254 7.16 4,386 23,217 14.07 2,991 29,689 8.33 4,636 20,476 6.96 4,442 16,826 2.42 6,250 16,581 0.73 13,273 23,603 6.31 6,882 21,991 6.41 5,859 18,549 6.03 5,890 20,146 6.98 4,560 16,249 7.50 7,704 46,445 35,592 58,792 10,986 37,698 21,973 29,652 -6,319 25,709 46,088 26,457 59,505 31,845 48,610 36,936 48,027 40,305 36,326 40,018 25,862 41,537 12,983 38,099 9,937 38,148 -1,713 39,553 -10,738 40,827 648 52,944 -11,858 71,468 -8,937 83,779 -6,397 83,049 1,689 82,996 2,230 1,00,454 21,729 1,17,674 16,558 1,58,907 36,665 1,75,952 -2,742 1,64,606 -10,804 4,506 5741 1805 6,253 8280 2513 7,812 12277 3572 9,518 10857 3236 9,854 11742 3494 9,155 11599 3437 6,567 9935 2915 5,652 10557 3092 5,945 11305 3306 6,873 12036 3492 6,919 12637 3649 8,630 13416 3869 8,505 13628 3910 8,757 13983 4037 9,483 14143 4084 7,998 12858 3731 8,428 13478 3947 9,885 14156 4184 9,221 14334 4222 12,147 15253 4474 10,511 14779 4301 13,302 16046 4660 20,709 18500 5457 18,837 19260 5749 19,283 19827 5964 Average of daily weighted call money borrowing rates. + : Average of daily closing rates. # : Average of daily closing indices. ## : Liquidity Adjustment Facility. MSS : Bombay Stock Exchange Limited. NSE : Provisional : In column 11, (-) indicates injection of liquidity, while (+) Average of daily outright turnover in Central Government dated securities. Average of weekly outstanding MSS. Cumulative for the financial year. Market Stabilisation Scheme. National Stock Exchange of India Limited. Not available. indicates absorption of liquidity. Money Market Following the withdrawal of the ceiling of Rs.3,000 crore on daily reverse repo acceptance under the LAF and the discontinuation of the Second LAF with effect from August 6, 2007, the weighted average rate in the call money market moved into the informal corridor set by reverse repo and repo rates till the first week of November 2007 (Chart 28). In the wake of relative tightness in the money market from the second week of November 2007, however, the call/ notice money market rates edged up and moved around the upper bound of the informal corridor. This was mainly because of festive season demand for currency, increase in Government cash balances with the Reserve Bank and hike in the cash reserve ratio (CRR) by 50 basis points to 7.5 per cent with effect from the fortnight beginning November 10, 2007. The average call/notice money market 67 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Chart 28: Liquidity Adjustment Facility and the Call Rate 2006-07 40000 50 2000 40 60 50000 35000 20000 2007-08 15 Rupees crore Per cent Rupees crore 0 -20000 -40000 -60000 31-Mar-06 23-Apr-06 16-May-06 8-Jun-06 1-Jun-06 16-Nov-06 24-Jan-07 16-Feb-07 11-Mar-07 24-Oct-06 24-Jul-06 6-Aug-06 9-Dec-06 1-Jan-07 8-Sep-06 1-Oct-06 5000 -10000 -25000 10 30 20 10 0 5 -40000 -55000 16-Oct-07 29-May-07 21-Aug-07 13-Nov-07 11-Dec-07 3-Apr-07 18-Sep-07 1-May-07 26-Jun-07 24-Jul-07 8-Jan-08 -80000 -70000 0 Reverse Repo Amount Call Rate (right scale) Repo Amount Repo Rate (right scale) Reverse Repo Rate (right scale) rate rose to 6.98 per cent in November 2007 from 6.03 per cent in October 2007. In December 2007, the call/notice rate moved around the repo rate and the average call/notice rate for December 2007 was at 7.50 per cent. Since the first week of January 2008 the call/notice money market rates softened hovering around the reverse repo rate as liquidity conditions eased. The average call/ notice rate was 6.22 per cent as on January 22, 2008. Interest rates in the collateralised segment of the money market _ market repo (outside the LAF) and collateralised borrowing and lending obligation (CBLO) _ increased in line with call rates, but remained below the call money rate during October-December 2007 (Chart 29). During October- Chart 29: Money Market Interest Rates 15.0 12.0 Per cent 9.0 6.0 3.0 0.0 May-05 Mar-05 Sep-05 Jul-05 Nov-05 May-07 Mar-07 Sep-07 Jan-07 Jul-07 May-06 Call Money Market Repo (Non-RBI) Reverse Repo Rate CBLO * : Weighted average of interest rates in call money, CBLO and market repo segments. Nov-06 Weighted Average* Repo Rate 68 Nov-07 Mar-06 Sep-06 Jan-06 Jul-06 Per cent Financial Markets Table 38: Activity in Money Market Segments (Rupees crore) Average Daily Volume (One Leg) Year/ Month Call Money Market Repo Collateralised Market Borrowing (Outside and Lending the LAF) Obligation (CBLO) 3 4,284 5,296 8,419 7,991 5,479 9,027 10,563 9,671 7,764 9,185 9,721 9,374 7,170 6,591 7,794 8,687 7,173 8,965 10,295 12,322 16,688 17,876 15,300 12,729 13,354 4 3,349 10,020 16,195 17,888 16,329 17,147 13,809 15,670 15,589 14,771 16,964 16,069 15,512 15,758 19,063 17,662 18,086 20,810 20,742 20,768 26,890 29,044 29,579 28,614 30,087 Commercial Paper Certificates of Deposit Total Term Outstanding WADR Outstanding WADR (2+3+4) Money (per cent) (per cent) Market 1 2004-05 2005-06 2006-07 Mar 2006 Apr 2006 May 2006 Jun 2006 Jul 2006 Aug 2006 Sep 2006 Oct 2006 Nov 2006 Dec 2006 Jan 2007 Feb 2007 Mar 2007 Apr 2007 May 2007 Jun 2007 Jul 2007 Aug 2007 Sep 2007 Oct 2007 Nov 2007 Dec 2007 2 7,085 8,990 10,863 9,145 8,455 9,037 8,713 9,127 10,647 11,833 13,214 12,825 12,084 11,180 11,627 11,608 14,845 10,238 8,413 8,290 11,802 10,995 9,275 10,073 8,124 5 14,718 24,306 35,477 35,024 30,263 35,211 33,085 34,468 34,000 35,789 39,899 38,268 34,766 33,529 38,484 37,957 40,104 40,013 39,450 41,380 55,380 57,915 54,154 51,416 51,565 6 263 417 506 669 447 473 628 432 510 568 466 348 481 515 467 739 440 277 308 288 319 265 221 184 509 7 11,723 17,285 21,372 12,718 16,550 17,067 19,650 21,110 23,299 24,444 23,171 24,238 23,536 24,398 21,167 17,838 18,759 22,024 26,256 30,631 31,527 33,614 42,183 41,308 41,425 @ 8 5.34 6.46 8.08 8.59 7.30 6.89 7.10 7.34 7.31 7.70 7.77 7.88 8.52 9.09 10.49 11.33 10.52 9.87 8.93 7.05 8.30 8.95 7.65 9.45 9.48 @ 9 10 6,052 27,298 65,021 8.23 43,568 8.62 44,059 7.03 50,228 7.17 56,390 7.19 59,167 7.65 65,621 7.77 65,274 7.80 65,764 7.73 68,911 7.99 68,619 8.28 70,149 9.22 72,795 9.87 93,272 10.75 95,980 10.75 99,715 9.87 98,337 9.37 1,05,317 7.86 1,09,224 8.67 1,18,481 8.57 1,24,232 7.91 1,27,142 8.48 1,25,326 * 8.60 * -: Not available. WADR: Weighted Average Discount Rate. *: As on December 7, 2007. @: As on December 15, 2007. December 2007, interest rates averaged 6.84 per cent, 6.54 per cent and 6.73 per cent, respectively, in the call, CBLO and market repo segments (7.36 per cent, 6.64 per cent and 6.79 per cent, respectively, a year ago). The weighted average rate in all the three money market segments combined together was 6.64 per cent during October-December 2007 (6.92 per cent a year ago). The collateralised market remained the predominant segment of the money market, accounting for about 83 per cent of the total volume during the third quarter of 2007-08 (Table 38). In both the CBLO and market repo segments, mutual funds have been the major lenders, while banks and primary dealers (PDs) have been the major borrowers. Certificates of Deposit The outstanding amount of certificates of deposit (CDs) increased to Rs. 1,25,326 crore (5.8 per cent of deposits of issuing banks) as on December 7, 69 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Table 39: Commercial Paper - Major Issuers (Rupees crore) Category of Issuer March 2006 1 Leasing and Finance Manufacturing Financial Institutions Total 2 9,400 (73.9) 1,982 (15.6) 1,336 (10.5) 12,718 (100.0) March 2007 3 12,569 (70.5) 2,754 (15.4) 2,515 (14.1) 17,838 (100.0) June 2007 4 18,260 (69.5) 3,956 (15.1) 4,040 (15.4) 26,256 (100.00) End of September 2007 5 24,396 (72.6) 5,538 (16.5) 3,680 (10.9) 33,614 (100.0) December 2007@ 6 27,856 (67.2) 9,804 (23.7) 3,765 (9.1) 41,425 (100.0) @ : As on December 15, 2007. Note: Figures in parentheses are percentage shares in the total outstanding. 2007 from Rs.93,272 crore at end-March 2007 (4.8 per cent of aggregate deposits) (see Table 38). Mutual funds were the major investors in CDs. As on December 7, 2007, the weighted average discount rate (WADR) declined to 8.60 per cent from 10.75 per cent as at end-March 2007 in tandem with the decline in other money market rates. Commercial Paper Issuances of commercial paper (CP) increased in the third quarter of 200708. Commercial paper outstanding rose to Rs.41,425 crore by December 15, 2007 from Rs. 17,838 crore at end-March 2007 (see Table 38). The weighted average discount rate (WADR) on CP declined to 9.48 per cent as on December 15, 2007 from 11.33 per cent at end-March 2007 following the easing of the liquidity conditions in the short-term money market. The most preferred maturity of CP was for period ranging from '6-month to 12-month'. Leasing and financing companies continued to be the major issuers of CP partly reflecting the policy decision to phase out the access of these companies to public deposits (Table 39). Treasury Bills The primary market yields on Treasury Bills (TBs) softened during the third quarter of 2007-08, especially in October 2007, reflecting easy liquidity conditions and cut in the fed funds target rate (Chart 30). Yields hardened again in November 2007 with hike in the CRR by 50 basis points with effect from November 10, 2007. The yield spread between 364-day and 91-day TBs declined to 28 basis points in December 2007 from 40 basis points in September 2007 (17 basis points in March 2007) (Table 40). Foreign Exchange Market During the third quarter of 2007-08, the Indian rupee generally appreciated vis- -vis the US dollar. Between end-March 2007 and January 23, 70 Financial Markets 8.5 7.5 Chart 30: Yields on Treasury Bills Per cent 6.5 5.5 4.5 23-May-07 14-Aug-07 10-May-06 29-Mar-06 Date of Auction 364-day- TBS 91-day- TBS Reverse Repo Rate Repo Rate 2008, the rupee moved in the range of Rs.39.26-43.15 per US dollar. The rupee's appreciation reflected, inter alia, large capital inflows, weakening of Table 40: Treasury Bills in the Primary Market Month Notified Amount (Rupees crore) 2 Average Implicit Yield at Minimum Cut-off Price (Per cent) 91-day 3 182-day 4 364-day 5 91-day 6 Average Bid-Cover Ratio 182-day 7 364-day 8 2.52 2.45 2.66 3.36 2.02 1.69 2.11 3.12 3.48 2.92 2.02 2.49 3.34 1.74 3.16 3.87 3.16 2.33 3.97 4.56 2.46 2.83 3.23 1.88 3.67 1 2004-05 1,38,500 @ 4.91 5.16 2.43 2005-06 1,55,500 @ 5.68 5.82 5.96 2.64 2.65 2006-07 1,86,500 @ 6.64 6.91 7.01 1.97 2.00 Mar 2006 6,500 6.51 6.66 6.66 4.17 3.43 Apr 2006 5,000 5.52 5.87 5.98 5.57 4.96 May 2006 18,500 5.70 6.07 6.34 1.88 1.84 Jun 2006 15,000 6.15 6.64 6.77 1.63 1.35 Jul 2006 16,500 6.42 6.75 7.03 1.82 1.55 Aug 2006 19,000 6.41 6.70 6.96 2.03 2.71 Sep 2006 15,000 6.51 6.76 6.91 1.35 1.80 Oct 2006 15,000 6.63 6.84 6.95 1.31 1.20 Nov 2006 18,500 6.65 6.92 6.99 1.33 1.22 Dec 2006 15,000 7.01 7.27 7.09 1.19 1.29 Jan 2007 19,000 7.28 7.45 7.39 1.02 1.35 Feb 2007 15,000 7.72 7.67 7.79 2.48 2.56 Mar 2007 15,000 7.73 7.98 7.90 2.08 2.15 Apr 2007 15,000 7.53 7.87 7.72 2.87 3.36 May 2007 18,500 7.59 7.70 7.79 2.33 2.57 Jun 2007 35,000 7.41 7.76 6.67 3.23 4.11 Jul 2007 12,500 5.07 5.94 6.87 4.48 2.70 Aug 2007 20,500 6.74 7.37 7.42 2.11 1.41 Sep 2007 25,000 7.08 7.33 7.48 2.07 2.91 Oct 2007 28,500 7.11 7.45 7.37 2.16 1.73 Nov 2007 22,500 7.47 7.65 7.75 1.63 1.38 Dec 2007 7,500 7.41 7.60 7.69 4.41 4.61 @: Total for the financial year. Note:1. 182-day TBs were reintroduced with effect from April 2005. 2. Notified amounts are inclusive of issuances under the Market Stabilisation Scheme (MSS). 71 19-Dec-07 17-Jan-07 28-Feb-07 4-Jul-07 26-Sep-07 11-Apr-07 26-Oct-06 13-Sep-06 21-Jun-06 2-Aug-06 7-Nov-07 6-Dec-06 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Chart 31: Movement of Rupee vis-a-vis Major Currencies 90.0 47.0 Rs. per Pound sterling 10-Jan-08 87.5 85.0 82.5 80.0 77.5 75.0 Rs. per US dollar 45.0 43.0 41.0 39.0 19-Feb-07 19-Feb-07 29-Jun-07 31-Mar-06 31-Mar-06 16-Dec-06 12-Oct-06 16-Dec-06 12-Oct-06 25-Apr-07 42.0 59.5 Rs. per Euro 40.0 57.0 Rs. per 100 Yen 38.0 36.0 34.0 32.0 54.5 52.0 25-Apr-07 29-Jun-07 19-Feb-07 31-Mar-06 16-Dec-06 12-Oct-06 19-Feb-07 31-Mar-06 16-Dec-06 12-Oct-06 US dollar vis- -vis other currencies and strong domestic stock markets. The exchange rate of the rupee was Rs.39.57 per US dollar as on January 23, 2008. At this level, the Indian rupee appreciated by 10.2 per cent over its level on March 31, 2007. Over the same period, the rupee appreciated by 10.5 per cent against the Pound sterling, 0.4 per cent against the Euro and 3.1 per cent against the Chinese yuan, while depreciated by 0.5 per cent against the Japanese yen (Chart 31). On an average basis, the 36-currency trade weighted nominal effective exchange rate (NEER) and real effective exchange rate (REER) of Indian rupee appreciated by 7.5 per cent and 7.6 per cent, respectively, between March 2007 and October 2007. Over the same period, the 6-currency trade weighted NEER and REER appreciated by 7.5 per cent and 7.8 per cent, respectively (Table 41). The 6-currency NEER and REER, however, depreciated by 0.8 per cent and 1.3 per cent, respectively, between end-September 2007 and January 17, 2008. Forward premia remained lower than their end-March 2007 levels (Chart 32). However, the one-month and three-month forward premia increased from 0.75 per cent each at end-September 2007 to 2.60 per cent and 2.34 per cent, respectively, as on January 17, 2008. The average daily turnover in the foreign exchange market increased to US $ 45.9 billion during April-November 2007 from US $ 23.8 billion in the 25-Apr-07 29-Jun-07 72 25-Apr-07 10-Jan-08 8-Aug-06 6-Nov-07 29-Jun-07 10-Jan-08 2-Sep-07 8-Aug-06 6-Nov-07 2-Sep-07 4-Jun-06 4-Jun-06 10-Jan-08 2-Sep-07 6-Nov-07 2-Sep-07 8-Aug-06 8-Aug-06 6-Nov-07 4-Jun-06 4-Jun-06 Financial Markets Table 41: Nominal and Real Effective Exchange Rate of the Indian Rupee (Trade Based Weights) Year/Month Base : 1993-94 (April-March) = 100 6-Currency Weights NEER 1 1993-94 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 (P) Mar 2006 Apr 2006 May 2006 Jun 2006 Jul 2006 Aug 2006 Sep 2006 Oct 2006 Nov 2006 Dec 2006 Jan 2007 (P) Feb 2007 (P) Mar 2007 (P) Apr 2007 (P) May 2007 (P) Jun 2007 (P) Jul 2007 (P) Aug 2007 (P) Sep 2007 (P) Oct 2007 (P) Nov 2007 (P) Dec 2007 (P) January 17, 2008 2 100.00 76.04 71.27 69.97 69.58 72.28 68.93 72.45 71.04 68.79 68.21 67.59 67.08 67.84 69.11 69.34 68.82 69.77 69.88 69.70 72.18 74.64 74.83 74.62 73.91 74.11 74.92 73.82 74.17 74.11 REER 3 100.00 102.71 97.68 99.17 101.78 107.30 105.47 107.41 105.75 103.48 103.06 102.25 102.14 104.75 107.25 107.82 106.39 107.70 107.71 107.41 111.59 115.67 115.28 115.27 114.24 115.14 115.80 114.03 114.54 114.51 36-Currency Weights NEER 4 100.00 91.58 89.12 87.14 87.31 89.85 85.88 89.52 87.73 85.43 85.11 84.22 83.61 84.65 86.18 86.50 85.89 87.05 87.20 87.11 91.50 94.38 93.24 93.09 92.64 92.93 93.68 REER 5 100.00 100.86 98.18 99.56 100.09 102.35 98.50 101.25 98.19 96.42 96.57 95.73 95.61 97.98 99.94 100.32 99.16 100.73 100.71 100.75 103.79 107.22 107.28 107.46 106.90 107.66 108.43 - NEER: Nominal Effective Exchange Rate. REER: Real Effective Exchange Rate. P: Provisional. -: Not available. Note: Rise in indices indicates appreciation of the rupee and vice versa. corresponding period of 2006. While inter-bank turnover increased to US $ 31.9 billion from US $ 17.2 billion, the merchant turnover increased to US $ 14.0 billion from US $ 6.6 billion (Chart 33). The ratio of inter-bank to merchant turnover was 2.4 during April-November 2007 as compared with 2.6 a year ago. Credit Market Interest rates of public sector banks (PSBs) on deposits of maturity of one year to three years were placed in the range of 8.00-9.25 per cent in January 2008 as compared with the range of 7.25-9.50 per cent in March 2007, while those on deposits of maturity of above three years were placed in the range of 73 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 10.0 8.0 6.0 4.0 2.0 0.0 Chart 32: Movement in Forward Premia Per cent per annum May-07 Sep-07 Jan-07 Jul-07 May-06 1-month Nov-06 3-month 6-month 8.00-9.00 per cent as compared with the range of 7.50-9.50 per cent during the same period. Benchmark Prime Lending Rates (BPLRs) of PSBs increased from the range of 12.25-12.75 per cent in March 2007 to the range of 12.50-13.50 per cent in January 2008. BPLRs of private sector banks also increased to the range of 13.00-16.50 per cent in January 2008 from 12.00-16.50 per cent in March 2007. The range of BPLRs of foreign banks, however, remained unchanged during this period (Table 42 and Chart 34). The weighted average BPLR of PSBs and private sector banks increased from 12.43 per cent and 14.34 per cent, respectively, in March 2007 to 13.07 per cent Chart 33 : Turnover in Foreign Exchange Market 40 4.0 Nov-07 3.0 2.0 1.0 0.0 30 US $ billion Mar-06 Mar-07 Sep-06 Jul-06 20 10 0 May-06 May-07 Nov-06 Merchant Inter-bank Inter-bank to merchant turnover ratio (right scale) 74 Nov-07 Mar-06 Mar-07 Sep-06 Sep-07 Jan-07 Jul-06 Jul-07 Ratio Financial Markets Table 42: Deposit and Lending Rates (Per cent) Item 1 1. Domestic Deposit Rate Public Sector Banks Up to 1 year More than 1 year and up to 3 years More than 3 years Private Sector Banks Up to 1 year More than 1 year and up to 3 years More than 3 years Foreign Banks Up to 1 year More than 1 year and up to 3 years More than 3 years 2. Benchmark Prime Lending Rate Public Sector Banks Private Sector Banks Foreign Banks 3. Actual Lending Rate* Public Sector Banks Private Sector Banks Foreign Banks March 2006 2 March 2007 3 June 2007 4 September 2007 5 December 2007 6 January 2008 7 2.25-6.50 5.75-6.75 6.00-7.25 3.50-7.25 5.50-7.75 6.00-7.75 3.00-6.15 4.00-6.50 5.50-6.50 2.75-8.75 7.25-9.50 7.50-9.50 3.00-9.00 6.75-9.75 7.75-9.60 3.00-9.50 3.50-9.50 4.05-9.50 2.75-8.75 7.25-9.75 7.75-9.75 3.00-9.50 6.75-10.25 7.50-10.00 0.25-9.00 3.50-9.50 4.05-9.50 12.50-13.50 13.00-17.25 10.00-15.50 4.00-17.75 4.00-26.00 2.98-28.00 2.75-8.50 8.00-9.00 8.00-9.50 2.50-9.25 6.25-10.00 7.25-10.00 2.00-9.00 2.00-9.50 2.00-9.50 12.50-13.50 13.00-16.50 10.00-15.50 4.00-17.75 4.00-24.00 2.00-28.00 2.75-8.50 8.00-9.25 8.00-9.00 2.50-8.50 7.25-9.60 7.25-10.00 2.00-9.25 2.00-9.75 2.00-9.50 2.75-8.50 8.00-9.25 8.00-9.00 2.50-8.50 7.25-9.60 7.25-10.00 2.00-9.25 2.00-9.75 2.00-9.50 10.25-11.25 12.25-12.75 11.00-14.00 12.00-16.50 10.00-14.50 10.00-15.50 4.00-16.50 3.15-20.50 4.75-26.00 4.00-17.00 3.15-25.50 5.00-26.50 12.50-13.50 12.50-13.50 13.00-16.50 13.00-16.50 10.00-15.50 10.00-15.50 - - : Not available. * : Interest rate on non-export demand and term loans above Rs.2 lakh excluding lending rates at the extreme five per cent on both sides. and 15.14 per cent in December 2007. The weighted average BPLR of foreign banks also increased from 12.63 per cent to 14.00 per cent during the same period. Chart 34: Deposit and Lending Rates-Public Sector Banks 14 12 Per cent 10 8 6 4 Jan-07 May-07 Mar-07 Sep-07 Jul-07 May-06 Deposit of 1-3 Years maturity (lower band) Benchmark Prime Lending Rate (lower band) Nov-06 Deposit of 1-3 Years maturity (upper band) Benchmark Prime Lending Rate (upper band) 75 Nov-07 Mar-06 Sep-06 Jul-06 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Chart 35: Yields on Central Government Securities Movement of 10-Year Yields 8.5 8.5 Yield Curve 8.0 Per cent 7.5 7.0 6.5 13-May-07 23-Aug-07 23-Mar-07 13-Oct-07 31-Jan-07 21-May-06 21-Oct-06 31-Aug-06 31-Mar-06 11-Dec-06 11-Jul-06 3-Dec-07 3-Jul-07 Per cent 8.0 7.5 7.0 13 5 7 9 11 13 15 17 19 21 23 25 27 29 Residual Maturity (Number of Years) 31-Mar-07 30-Sep-07 31-Dec-07 Government Securities Market Yields in the Government securities market remained range-bound during the third quarter of 2007-08, partly reflecting global trends in yields, lower inflation and easy liquidity conditions (Chart 35). Yields softened since the first week of January 2008 reflecting easy liquidity conditions and lower inflation. The 10year yield moved in a range of 7.42-8.32 per cent during 2007-08 (up to January 23, 2008). As on January 23, 2007, the yield was 7.42 per cent, 55 basis points lower than that at end-March 2007. The spread between 1-10 year yields was 19 basis points at end-December 2007 as compared with 52 basis points at endSeptember 2007 (42 basis points at end-March 2007). The spread between 10year and 30-year yields was 31 basis points at end-December 2007 as compared with 49 basis points at end-September 2007 (37 basis points at end-March 2007). The turnover in the Government securities market declined in November 2007 after increasing in October 2007 on account of hike in the CRR. The turnover, however, increased in December 2007 (Chart 36). The yield on 5-year AAA-rated corporate bonds softened during the third quarter of 2007-08. The credit spread between the yields on 5-year AAA-rated bonds and 5-year Government securities narrowed to 127 basis points at endDecember 2007 from 157 basis points at end-September 2007 (142 basis points at end-March 2007) (Chart 37). Equity Market Primary Market Resources raised through public issues increased sharply during AprilDecember 2007 over the corresponding period of last year. Cumulative resources raised through public issues during April-December 2007 increased by 101.9 per cent to Rs. 49,215 crore. The number of issues increased from 79 76 Financial Markets Chart 36: Government Securities Turnover and Yields (Monthly Average) 8.5 450 Rupees thousand crore 8.0 350 250 150 7.5 7.0 50 6.5 Jan-07 Jul-07 May-07 Mar-07 Sep-07 May-06 Turnover Nov-06 10-year Yield (right scale) in April-December 2006 to 91 in April-December 2007 (Table 43). The average size of public issues also increased to Rs.541 crore during April-December 2007 from Rs.309 crore during April-December 2006. All public issues during AprilDecember 2007 were in the form of equity, barring one. Out of 91 issues during April-December 2007, 65 issues were initial public offerings (IPOs), accounting for 49.8 per cent of total resource mobilisation. Mobilisation of resources through private placement increased by 25.6 per cent to Rs.94,386 crore during April-September 2007 over the corresponding period of the previous year (Table 43). Resources mobilised by private sector entities increased by 45.1 per cent, while those by public sector entities increased by Chart 37 : Credit Spreads 11.0 10.0 Per cent 9.0 8.0 7.0 6.0 31-Mar-07 31-Jan-07 31-May-07 31-Jul-07 30-Sep-07 Nov-07 Jul-06 Mar-06 Sep-06 31-May-06 Five-year Gilt Yield 30-Nov-06 Five-year AAA Bond 77 30-Nov-07 31-Mar-06 31-Jul-06 30-Sep-06 Per cent Table 43: Mobilisation of Resources from the Primary Market (Amount in Rupees crore) Item 2006-07 (April-December) No. of Issues 1 A. Prospectus and Rights Issues* 1. Private Sector (a+b) a) Financial b) Non-financial 2. Public Sector (a+b+c) a) Public Sector Undertakings b) Government Companies c) Banks/Financial Institutions 3. Total (1+2) of which: (i) Equity (ii) Debt B Private Placement . 1. Private Sector a) Financial b) Non-financial 2. Public Sector a) Financial b) Non-financial 3. Total (1+2) of which: (i) Equity (ii) Debt Memo: C. Euro Issues (Apr-Dec) # P : Provisional. - : Nil/Negligible. 718 269 449 66 54 12 784 783 1 40,639 23,630 17,009 34,501 28,882 5,619 75,140 75,083 57 824 423 401 52 39 13 876 876 15 58,977 35,346 23,631 35,409 26,131 9,278 94,386 94,386 14,417 79 6 73 79 77 2 24,381 1,032 23,349 24,381 23,625 756 88 9 79 3 2 1 91 90 1 45,883 13,986 31,897 3,332 2,516 816 49,215 48,715 500 2 Amount 3 2007-08 (April-December) P No. of Issues 4 Amount 5 2006-07(April-September) 2007-08 (April-September) 35 8,840 * : Excluding offers for sale. # : Includes ADRs and GDRs only. only 2.6 per cent during April-September 2007. Financial intermediaries (both from public sector and private sector) accounted for the bulk (65.1 per cent) of the total resource mobilisation from the private placement market during AprilSeptember 2007 (69.9 per cent during April-September 2006). Resources raised through Euro issues _ American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) _ by Indian corporates during AprilDecember 2007 at Rs.14,417 crore were substantially higher than those during the corresponding period of previous year (Table 43). During April-December 2007, net mobilisation of resources by mutual funds increased by 55.6 per cent to Rs.1,23,993 crore over the corresponding period of 2006 (Table 44). Scheme-wise, 81.5 per cent of net mobilisation of funds was 78 Table 44 : Resource Mobilisation by Mutual Funds (Rupees crore) Category April-March 2006-07 Net Mobilisation @ 1 Private Sector Public Sector * Total 2 79,038 14,947 93,985 Net Assets# 3 2,62,079 64,213 3,26,292 2006-07 Net Mobilisation @ 4 64,140 15,568 79,708 Net Assets # 5 2,56,725 66,873 3,23,598 April-December 2007-08 Net Mobilisation @ 6 1,05,868 18,125 1,23,993 Net Assets # 7 4,47,174 1,02,762 5,49,936 @: Net of redemptions. #: End-period. *: Including UTI Mutual fund. Note: Data exclude funds mobilised under Fund of Funds Schemes. Source: Securities and Exchange Board of India. under income/debt market-oriented schemes, out of which bulk of the resources were mobilised through debt other than assured return schemes. Growth-oriented schemes accounted for only 15.3 per cent of net resource mobilisation during April-December 2007. Secondary Market The domestic stock markets recorded further gains during the third quarter of 2007-08 amidst intermittent corrections (Chart 38). Liquidity support from both foreign institutional investors (FIIs) and domestic mutual funds on the back of strong GDP growth, healthy corporate profitability and decline in the domestic inflation rate aided the market sentiment. The upward trend in EMEs equity markets, increase in ADR prices in the US markets and rise in global metal prices were the other factors that enthused the domestic stock markets. The uptrend in the domestic stock markets, however, was interspersed by corrections Chart 38: Indian Stock Markets 21500 19500 6500 6100 5700 17500 15500 13500 11500 9500 7500 5300 4900 4500 4100 3700 3300 2900 2500 21-Feb-07 16-Jan-07 29-May-07 23-Mar-07 25-Apr-07 10-Oct-06 31-Mar-06 13-Nov-06 13-Dec-06 SENSEX NIFTY 79 28-Jun-07 5-May-06 10-Jan-08 5-Oct-07 7-Aug-06 2-Aug-07 6-Nov-07 7-Dec-07 7-Sep-06 4-Sep-07 6-Jun-06 6-Jul-06 S&P CNX Nifty (Base: Nov. 3, 1995=1000) BSE Sensex (Base: 1978-79=100) in mid-August and mid-December 2007 mainly on account of downward trend in advanced economies equity markets on account of worries over sub-prime losses and credit crunch in the US and Europe, concerns over the slowdown in the US economy, depreciation of the US dollar against major currencies and increase in global crude oil prices to record high levels. Between end-March 2007 and January 23, 2008, the BSE Sensex moved in a range of 12455.37-20873.33. The BSE Sensex closed at a record high of 20873.33 on January 8, 2008, an increase of 59.7 per cent over end-March 2007. The S&P CNX Nifty also reached a record high of 6287.85 on January 8, 2008. Since mid-January 2008 the domestic stock markets, however, witnessed sharp corrections mainly on account of downward trend in the major international equity markets amidst fears of recession in the US economy and depreciation of the US dollar against major currencies. Liquidity squeeze from the secondary market in the wake of the biggest IPO by Reliance Power, heavy net sales by FIIs in the Indian equity market, decline in ADR prices and fall in metal prices on the London Metal Exchange also dampened the market sentiment. The BSE Sensex closed at 17594.07 on January 23, 2008, witnessing a gain of 34.6 per cent over end-March 2007. According to the data released by the Securities and Exchange Board of India (SEBI), FIIs have invested Rs.61,234 crore (US $ 14.9 billion) in the Indian equity market during 2007-08 so far (up to January 18, 2008) as compared with net purchases of Rs.18,045 crore (US $ 3.9 billion) during the corresponding period of the previous year (Chart 39). Mutual funds have made net investments of Rs. 9,788 crore during 2007-08 so far (up to January 18, 2008) as compared with net investments of Rs.12,595 crore during the corresponding period of last year. The major gainers in the domestic stock markets during the current financial year so far (up to January 18, 2008) were metal, capital goods, oil and Chart 39 : Institutional Investment and Stock Market 24000 19000 14000 19000 17000 15000 13000 -1000 -6000 11000 9000 4000 Jan-07 Mar-07 May-07 Jul-07 Sep-07 May-06 Nov-06 Nov-07 Mar-06 Jul-06 Sep-06 -11000 9000 FII Investment Mutual Fund Investment Average BSE Sensex (right scale) 80 BSE Sensex (Base: 1978-79=100) Rupees crore Table 45: BSE Sectoral Stock Indices (Base: 1978-79=100) Sector End-March 2006@ 1 Fast Moving Consumer Goods Public Sector Undertakings Information Technology Auto Oil and Gas Metal Health Care Bankex Capital Goods Consumer Durables BSE 500 BSE Sensex @: Year-on-year variation. Source: Bombay Stock Exchange Limited. 2 109.9 44.0 49.2 101.2 61.1 40.3 51.2 36.8 156.0 115.4 65.2 73.7 Variation (per cent) End-March 2007@ 3 -21.4 -3.2 21.6 -8.5 30.5 -4.3 -5.4 24.2 11.1 11.1 9.7 15.9 #: Variation over end-March 2007. January 18, 2008 # 4 32.4 63.1 -22.6 5.7 96.2 103.3 10.3 73.8 102.0 63.7 60.9 45.5 gas, banking, consumer durables, public sector undertakings, fast moving consumer goods and auto sector stocks (Table 45). Reflecting the upward trend in stock prices, the price-earnings (P/E) ratios of the 30 scrips included in the BSE Sensex rose sharply from 20.3 at end-March 2007 to 27.7 at end-December 2007. The market capitalisation of the BSE increased sharply by 102.3 per cent between end-March 2007 and end-December 2007. The volatility in the stock market also increased during April-December 2007 (Table 46). The combined turnover of BSE and NSE in the cash segment during April-December 2007 was higher by 75.7 per cent than the corresponding period of 2006. Table 46: Stock Market Indicators BSE Indicator 2005-06 2006-07 April-December 2006 1 2 3 13072 12277 11.1 20.3 5.1 1.3 4,821 9,56,185 59,007 4 13787 11845 10.4 22.8 5.2 1.2 4,796 7,01,710 2007 5 20287 16174 14.1 27.7 6.7 0.8 4,887 11,60,248 6 3403 2513 15.6 20.3 5.2 1.3 1,069 15,69,556 48,24,174 28,13,201 7 3822 3572 10.4 18.4 4.9 1.3 1,228 19,45,285 73,56,242 33,67,350 2005-06 2006-07 NSE April-December 2006 8 3966 3454 9.7 21.3 5.1 1.2 1,158 14,22,014 53,31,531 34,26,236 2007 9 6139 4770 15.0 27.6 6.4 0.8 1,353 25,70,712 99,16,166 65,43,272 1. BSE Sensex / S&P CNX Nifty (i) End-period 11280 (ii) Average 8280 2. Coefficient of Variation 16.7 3. Price-Earning Ratio (end-period)* 20.9 4. Price-Book Value Ratio* 5.1 5. Yield* (per cent per annum) 1.2 6. Listed Companies 4,781 7. Cash Segment Turnover 8,16,074 (Rupees crore) 8. Derivative Segment Turnover (Rupees crore) 9 9. Market Capitalisation 30,22,191 (Rupees crore) @ 18,065 1,78,882 71,69,985 35,45,041 36,24,357 * : Based on 30 scrips included in the BSE Sensex and 50 scrips included in the S&P CNX Nifty. Source: Bombay Stock Exchange Ltd. (BSE) and National Stock Exchange of India Ltd. (NSE). @: End-period. 81 VI. THE EXTERNAL ECONOMY India's balance of payments position continued to remain comfortable during the first half of 2007-08 (April-September), notwithstanding some deceleration in exports and higher growth in non-oil imports. Merchandise exports maintained the growth momentum during April-November 2007, although there was some moderation as compared with the growth rate during April-November 2006. Imports during April-November 2007 posted a high growth rate; oil imports, however, witnessed a sharp deceleration from the strong growth recorded during the corresponding period of the previous year. Net invisibles surplus remained buoyant during the first half of 2007-08, led by higher growth in private transfers and offset a large part of the trade deficit. The current account deficit during April-September 2007 was marginally higher than that during April-September 2006. Net capital inflows were substantially higher than those in the corresponding period of 2006-07, resulting in a sharp increase in foreign exchange reserves of US $ 85.7 billion during 2007-08 (up to January 18, 2008). International Developments Global economic activity remained strong in 2007, although it moderated from very buoyant conditions in 2006. Supported by strong economic conditions in emerging markets, the global economy expanded at a robust pace in the third quarter of 2007 after recording a modest growth in the second quarter (Table 47). As regards developed economies, the United States experienced significant economic stress due to the ongoing housing market correction and associated financial market turmoil. However, according to the advance release, there was acceleration in real GDP growth in the US by 0.4 percentage point, on a year-on-year basis, to 2.8 per cent in the third quarter of 2007, primarily on account of acceleration in exports, personal consumption expenditure (PCE) and private inventory investment that was partly offset by an upturn in imports, a larger decrease in residential fixed investment and a deceleration in nonresidential structures. In Japan, economic activity continued to recover in 2007, supported by domestic demand and strong exports. The Japanese economy witnessed acceleration of 0.3 percentage point in real GDP growth in the third quarter, on a year-on-year basis, attributable to rise in demand both at home and abroad. In the United Kingdom, according to preliminary estimates, real GDP growth remained robust at 3.2 per cent during the third quarter of 2007 mainly on account of firm household consumption and gross fixed capital formation growth. The sustained economic growth experienced in the euro area 82 The External Economy Table 47 : Growth Rates - Global Scenario Region/Country 1 Advanced Economies Euro area Japan Korea UK US OECD Countries Emerging Economies Argentina Brazil China India Indonesia Malaysia Thailand 2005 2006 2 1.5 1.9 4.2 1.8 3.1 2.5 9.2 2.9 10.4 9.0 5.7 5.2 4.5 3 2.8 2.2 5.0 2.8 2.9 2.9 8.5 3.7 11.1 9.4 5.5 5.9 5.0 2007P 4 2.5 2.0 4.8 3.1 1.9 2.7 7.5 4.4 11.5 8.9 6.2 5.8 4.0 2008P Q1 5 2.1 1.7 4.6 2.3 1.9 2.7 6 2.2 3.0 6.3 2.4 3.3 3.2 2006 Q2 Q3 7 2.7 2.1 5.1 2.7 3.2 3.3 8 2.8 1.6 4.6 2.9 2.4 2.8 Q4 9 3.3 2.2 4.0 3.0 2.6 3.1 Q1 10 3.0 2.6 4.0 3.0 1.5 2.6 (Per cent) 2007 Q2 Q3 11 2.5 1.6 5.0 3.1 1.9 2.5 12 2.7 1.9 5.2 3.2 2.8 2.9 8.7 5.7 11.5 8.9 6.5 6.7 5.1 5.5 8.6 7.9 8.7 8.6 8.0 8.7 4.0 3.9 1.1 3.2 4.4 4.3 5.4 10.0 10.3 10.9 10.7 10.7 11.1 11.5 8.4 10.0 9.6 10.2 8.7 9.1 9.3 6.1 5.0 5.0 5.5 6.1 6.0 6.3 5.6 6.0 6.1 6.0 5.7 5.3 5.7 4.5 6.1 5.0 4.5 4.3 4.3 4.4 P : IMF Projections. Note : Data for India in columns 2 and 3 refer to fiscal years 2005-06 and 2006-07, respectively. Source : International Monetary Fund; The Economist; and the OECD. in the first half of 2007 continued through the third quarter, attributable to consumption growth in line with developments in real disposable income, as continued employment growth provided supportive conditions. Furthermore, continued strong external demand provided support to euro area exports and investment. In emerging Asia, economic activity continued to be resilient, especially in the larger economies of the region. In China, in particular, the economy expanded at a strong pace with real GDP growing at an annual rate of 11.5 per cent in the third quarter of 2007. According to the projections made by the IMF (World Economic Outlook, October 2007), the growth rate of the global economy is likely to moderate to 5.2 per cent in 2007 and 4.8 per cent in 2008 from 5.4 per cent in 2006 (Table 48). The extent of the likely impact of housing slowdown in the US on the global economy is still unclear. However, a global economic slowdown of modest nature, as is widely predicted, cannot be ruled out. Risks to the global outlook, however, are firmly on the downside, centred around the concern that financial market strains could deepen and trigger a more pronounced global slowdown. Additional risks to the outlook include potential inflation pressures arising from commodity price rise and volatile oil markets and the impact of likely stronger foreign exchange inflows on emerging markets. As per the IMF projections, growth in world trade is expected to moderate to 6.6 per cent in volume terms in 2007 from 9.2 per cent in the preceding 83 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Table 48 : Select Economic Indicators - World Item 1 I. World Output (Per cent change) # i) Advanced economies of which: Developing Asia II. Consumer Price Inflation (Per cent) i) Advanced economies of which: Developing Asia III. Net Capital Flows* (US $ billion) i) Net private capital flows (a+b+c)** a) Net private direct investment b) Net private portfolio investment c) Net other private capital flows ii) Net official flows IV. World Trade @ i) Volume 0.2 -3.5 -3.8 1.3 6.3 3.5 1.2 -4.4 2.4 4.8 5.5 10.4 -4.8 2.8 8.3 10.8 9.5 -5.5 3.6 11.7 7.5 5.7 -6.1 7.2 19.4 9.2 4.8 -6.2 9.4 19.7 6.6 7.0 -5.7 11.7 16.7 6.7 2.4 -5.5 12.2 16.0 ii) Price deflator (in US dollars) V. Current Account Balance (Per cent to GDP) i) US ii) China iii) Middle East 80.6 185.9 -79.8 -25.8 0.1 90.1 168.3 239.4 154.7 164.4 191.5 -91.3 26.0 -2.7 -11.7 14.5 -48.7 21.1 25.1 271.1 262.7 -17.0 220.9 258.3 73.6 495.4 291.3 302.2 293.9 20.6 -93.1 171.0 88.8 2.1 2.7 1.5 5.7 2.0 1.8 5.7 2.5 2.0 5.4 4.1 2.3 5.2 3.6 2.3 5.1 4.0 2.1 5.9 5.3 2.0 5.3 4.4 ii) Other emerging market and developing countries 6.5 2001 2 2.5 (1.5) 1.2 6.0 2002 3 3.1 (1.9) 1.6 5.1 7.0 2003 4 4.0 (2.6) 1.9 6.7 8.3 2004 5 5.3 (3.9) 3.2 7.7 8.8 2005 6 4.8 (3.3) 2.5 7.5 9.2 2006 2007P 2008P 7 5.4 (3.8) 2.9 8.1 9.8 8 5.2 (3.5) 2.5 8.1 9.8 9 4.8 (3.3) 2.2 7.4 8.8 ii) Other emerging market and developing countries 4.3 23.3 -111.9 -67.2 -146.4 -165.8 -132.1 -141.2 P : IMF Projections. # : Growth rates are based on exchange rates at purchasing power parities. Figures in parentheses are growth rates at market exchange rates. Please also see Note . * : Net capital flows to emerging market and developing countries. ** : On account of data limitations, flows listed under 'Net private capital flows' may include some official flows. @ : Average of annual percentage change for world exports and imports of goods and services. Note : The IMF has revised downward its estimates for global growth by around 0.5 percentage point each year during 2002-07, based on new statistical calculations of purchasing power parity (PPP) exchange rates published in December 2007 by the International Comparison Programme (ICP). Thus, the IMF s estimate for growth in 2007 has been revised down to 4.7 per cent from 5.2 per cent. Source : World Economic Outlook, October 2007, International Monetary Fund. year (see Table 48). Exports of other emerging market and developing countries are projected to grow by 9.2 per cent in 2007 (11.0 per cent a year ago), while those of advanced countries are expected to grow by 5.4 per cent (8.2 per cent a year ago). World exports (in US dollar terms) in the first nine months of 2007 (January-September) posted a growth of 13.8 per cent (14.6 per cent a year ago), with industrial countries registering a growth of 13.1 per cent (10.9 per cent a year ago). Developing countries witnessed a moderation in export growth at 15.7 per cent during January-October 2007 as compared with 19.2 per cent registered a year ago (Table 49). 84 The External Economy Table 49 : Growth in Exports - Global Scenario (Per cent) Region/ Country 2005 2006 2006 2007 January-October 1 World Industrial Countries USA France Germany Japan Developing Countries Non-Oil Developing Countries China India Indonesia Korea Malaysia Singapore Thailand 2 14.0 8.5 10.8 3.8 7.3 5.2 22.0 19.3 28.4 29.9 22.9 12.0 12.0 15.6 14.5 3 15.6 12.6 14.5 10.1 15.1 9.2 19.5 19.9 27.2 21.3 19.0 14.4 14.0 18.4 18.7 4 14.6 * 10.9 * 14.8 10.4 11.0 * 8.1 19.2 19.6 26.8 22.1 # 19.1 14.6 # 13.2 20.1 17.8 5 13.8 * 13.1 * 11.9 10.4 18.9 * 8.9 15.7 17.1 26.5 19.5# 14.2 14.1# 9.1 9.7 16.7 * : January-September # : January-November. Source: International Financial Statistics, International Money Fund; DGCI&S for India. Merchandise Trade As per the provisional data released by the Directorate General of Commercial Intelligence and Statistics (DGCI&S), India's merchandise exports posted a growth of 21.9 per cent during April-November 2007, moderating from the growth of 26.2 per cent during the corresponding period of 2006-07. Growth in imports at 26.9 per cent was marginally lower than that of 27.4 per cent recorded a year ago (Chart 40). Non-oil imports recorded a substantial increase of 35.3 per cent (21.3 per cent a year ago) and contributed about 88 per cent to overall import growth. Oil imports during April-November 2007 showed a sharp deceleration in growth (9.8 per cent as against 42.0 per cent in April-November 2006). Merchandise trade deficit during April-November 2007 aggregated US $ 52.8 billion, an increase of US $ 14.3 billion over a year ago (US $ 38.5 billion). Commodity-wise data available for April-September 2007 show that petroleum products, engineering goods, and gems and jewellery remained as the drivers of export growth, together constituting about 67 per cent of the overall export growth. With the exception of gems and jewellery which showed an increase (21.2 per cent as against a decline of 1.0 per cent during AprilSeptember 2006), all the other major commodity groups recorded deceleration (Table 50). Destination-wise, the US continued to be the major market for India's exports during 2007-08, though its share declined from 15.3 per cent in AprilSeptember 2006 to 13.7 per cent in April-September 2007. The US was followed 85 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 50 40 Chart 40: India's Merchandise Trade Growth rate (per cent) 30 20 10 0 Feb-07 Mar-07 Apr-07 May-07 Sep-07 Oct-07 6 Jan-07 Jul-07 May-06 Aug-06 Nov-06 Exports Imports by the UAE (10.3 per cent), China (5.3 per cent), the UK (4.3 per cent) and Singapore (4.2 per cent). Among the major regions, India's exports to European Union (EU) showed accelerated growth, while exports to North America, OPEC and developing countries showed moderation during April-September 2007 (Table 51). Commodity-wise details on imports available for April-September 2007 revealed that capital goods and gold and silver were the main drivers of growth in non-oil imports. Capital goods increased by 26.9 per cent while imports of gold and silver increased by 71.0 per cent over April-September 2006. Non-oil Table 50 : Exports of Principal Commodities Commodity Group US $ billion 2006-07 2006-07 2007-08 April-September 1 1. Primary Products of which: a) Agriculture and Allied Products b) Ores and Minerals 2. Manufactured Goods of which: a) Chemicals and Related Products b) Engineering Goods c) Textiles and Textile Products d) Gems and Jewellery 3. Petroleum Products 4. Total Exports Memo: Non-oil Exports Source: DGCI&S. 107.7 51.2 59.3 17.7 18.6 15.8 2 19.7 12.7 7.0 84.9 17.3 29.6 17.4 16.0 18.7 126.4 3 8.5 5.6 2.9 40.9 8.3 14.0 8.6 7.7 10.0 61.1 4 9.8 6.4 3.4 46.7 9.2 16.9 8.7 9.4 12.6 71.9 5 20.2 24.2 13.6 17.0 17.4 36.1 5.9 2.9 60.5 22.6 Variation (per cent) 2006-07 2006-07 2007-08 April-September 7 15.3 15.1 15.7 14.1 11.4 20.8 1.3 21.2 26.8 17.6 Aug-07 18.4 24.0 8.8 18.3 22.0 37.8 11.6 -1.0 103.5 27.3 86 Nov-07 Oct-06 Dec-06 Apr-06 Sep-06 Jun-06 Jun-07 Jul-06 The External Economy Table 51 : Direction of India s Exports Group/Country 2006-07 US $ billion 2006-07 2007-08 April-September 1 1. OECD Countries of which: a) European Union b) North America US 2. OPEC of which: UAE 3. Developing Countries of which: Asia People's Republic of China Singapore 4. Total Exports Source : DGCI&S. 2 52.0 25.8 20.0 18.9 20.7 12.0 49.9 36.7 8.3 6.1 126.4 3 25.0 12.2 10.0 9.4 10.4 6.2 24.5 18.2 3.4 3.5 61.1 4 28.3 14.6 10.4 9.9 12.5 7.4 29.3 21.0 3.8 3.0 71.9 5 13.5 15.1 8.7 8.7 35.8 40.0 25.5 18.5 22.7 11.9 22.6 Variation (per cent) 2006-07 2006-07 2007-08 April-September 6 16.1 16.8 14.7 14.7 55.8 65.2 30.6 24.7 18.8 30.1 27.3 7 13.3 19.7 4.9 5.0 19.7 19.7 19.7 15.2 9.8 -13.1 17.6 imports net of gold and silver increased at an accelerated pace of 28.2 per cent (19.2 per cent during April-September 2006). During the period, while the share of capital goods, and metalliferrous ores and metal scrap in imports growth declined, the contribution of gold and silver, coal, coke and briquettes, pearls, precious and semi-precious stones, chemicals, and iron and steel showed increase (Table 52). Table 52 : Imports of Principal Commodities Commodity Group US $ billion 2006-07 2006-07 2007-08 April-September 1 Petroleum, Petroleum Products and Related Material Edible Oil Iron and Steel Capital Goods Pearls, Precious and Semi-Precious Stones Chemicals Gold and Silver Total Imports Memo: Non-oil Imports Non-oil Imports excluding Gold and Silver Mainly Industrial Inputs* 128.6 114.0 104.7 57.8 51.1 47.2 77.0 65.5 60.1 22.2 21.4 19.6 16.1 19.2 19.5 33.2 28.2 27.4 2 57.1 2.1 6.4 47.1 7.5 7.8 14.6 185.7 3 29.6 1.0 2.9 19.8 3.6 3.9 6.7 87.4 4 34.6 1.4 4.4 25.1 4.7 4.7 11.5 111.6 5 30.0 4.2 40.5 25.0 -18.0 12.1 29.4 24.5 Variation (per cent) 2006-07 2006-07 2007-08 April-September 6 41.2 -11.8 16.9 39.1 32.8 9.5 -3.1 23.5 7 16.9 32.9 52.8 26.9 30.6 21.4 71.0 27.7 * : Non-oil imports net of gold and silver, bulk consumption goods, manufactured fertilisers and professional instruments. Source : DGCI&S. 87 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Table 53 : India s Merchandise Trade (US $ billion) Item 2005-06 2 103.1 149.2 44.0 105.2 -46.1 -13.8 2006-07 3 126.4 185.7 57.1 128.6 -59.4 -20.9 2006-07 4 80.6 119.1 39.4 79.7 -38.5 -11.9 2007-08 5 98.3 151.1 43.3 107.8 -52.8 .. April-November 1 Exports Imports Oil Non-oil Trade Balance Non-Oil Trade Balance Variation (per cent) Exports Imports Oil Non-oil .. : Not Available. Source : DGCI&S. 23.4 33.8 47.3 28.8 22.6 24.5 30.0 22.2 26.2 27.4 42.0 21.3 21.9 26.9 9.8 35.3 Source-wise, China was the major source of imports in April-September 2007, accounting for 11.2 per cent of total imports (oil plus non-oil imports), followed by Saudi Arabia (7.2 per cent), the US (5.8 per cent), Switzerland (5.6 per cent), the UAE (5.5 per cent), Iran (4.2 per cent) Australia (4.0 per cent) and Germany (3.8 per cent). Trade deficit during April-November 2007 widened to US $ 52.8 billion, an increase of US $ 14.3 billion over the corresponding period a year ago (US $ 38.5 billion) (Table 53). Trade deficit on the oil account increased by US $ 2.3 billion during April-September 2007 to reach US $ 22.0 billion, while non-oil trade deficit increased by US $ 11.1 billion to US $ 17.7 billion. Current Account Net surplus under invisibles (services, transfers and income taken together) was higher at US $ 31.7 billion in April-September 2007 (US $ 23.4 billion in April-September 2006), reflecting mainly the rise in remittances from the overseas Indians, higher interest income on reserves and relatively moderate rise in payments of business services (Table 54). Growth in invisible receipts as well as invisible payments decelerated in April-September 2007 mainly on account of deceleration in exports of software and business services. The major components of invisible payments were travel payments, transportation, business service payments such as business and management consultancy, engineering and other technical services, and dividend and profit payments. 88 The External Economy Table 54 : Invisibles Account (Net) (US $ million) Item 2006-07 PR April-March 1 Services Travel Transportation Insurance Government, not included elsewhere Software Other Services Transfers Investment Income Compensation of Employees Total PR : Partially Revised 2 31,810 2,438 -18 560 -153 29,033 -50 28,168 -6,018 -555 53,405 AprilJune 3 7,579 220 -282 109 -39 6,624 947 6,873 -1,367 -133 12,952 2006-07 PR JulySept. 4 6,918 -16 32 161 -61 6,716 86 5,385 -1,668 -153 10,482 AprilSept. 5 14,497 204 -250 270 -100 13,340 1,033 12,258 -3,035 -286 23,434 AprilJune PR 6 8,029 207 -639 232 -16 7,884 361 8,327 -801 -62 15,493 2007-2008 JulySept. P 7 6,660 169 -675 81 -62 7,213 -66 10,116 -440 -141 16,195 AprilSept. P 8 14,689 376 -1,314 313 -78 15,097 295 18,443 -1,241 -203 31,688 P : Preliminary. The net invisible surplus offset a large part of the trade deficit (74.7 per cent during April-September 2007 as compared with 69.4 per cent during April-September 2006). Despite large merchandise trade deficit, the higher net invisible surplus, mainly emanating from private transfers, contained the current account deficit at US $ 10.7 billion in the first half of 2007-08 (US $10.3 billion in April-September 2006) (Chart 41 and Table 55). Net of remittances, the current account deficit was US $ 29.1 billion during AprilSeptember 2007 (US $ 22.6 billion a year ago). Chart 41: Movement in Current Account Balance 20 15 10 5 0 -5 US $ billion -10 -15 -20 Oct-Dec 2005 Jan-Mar 2005 Apr-Jun 2005 Jul-Sep 2005 Jan-Mar 2007 -25 Oct-Dec 2004 Trade Balance Invisible Balance Current Account Balance 89 Oct-Dec 2006 Jan-Mar 2006 Apr-Jun 2004 Apr-Jun 2006 Apr-Jun 2007 Jul-Sep 2004 Jul-Sep 2006 Jul-Sep 2007 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 Table 55 : India s Balance of Payments Item 2006-07 PR April-March 1 Exports Imports Trade Balance Invisible Receipts Invisible Payments Invisibles, net Current Account Capital Account (net)* of which: Foreign Direct Investment Portfolio Investment External Commercial Borrowings + Short-term Trade Credit External Assistance NRI Deposits Change in Reserves # Memo: Current Account net of -37,707 -10,959 -11,646 -22,605 -13,537 -15,596 29,133 Private Transfers (-4.1) P : Preliminary. PR : Partially Revised. * : Includes errors and omissions. # : On balance of payments basis (excluding valuation); (-) indicates increase. + : Medium and long-term borrowings. @ : Includes Non-resident Rupee Deposits for April-June 2007. Note : Figures in parentheses are percentages to GDP. 2 128,083 191,254 -63,171 (-6.9) 115,074 61,669 53,405 (5.8) -9,766 (-1.1) 46,372 8,479 7,062 16,155 6,612 1,767 4,321 -36,606 AprilJune 3 29,614 46,631 -17,017 24,946 11,994 12,952 -4,065 10,444 1,579 -506 3,974 1,182 49 1,302 -6,379 2006-07 PR JulySept. 4 31,836 48,593 -16,757 24,953 14,471 10,482 -6,275 8,545 2,912 2,150 1,761 2,683 337 908 -2,270 AprilSept. 5 61,450 95,224 -33,774 49,899 26,465 23,434 -10,340 18,989 4,491 1,644 5,735 3,865 386 2,210 -8649 AprilJune PR 6 35,790 56,480 -20,690 29,379 13,886 15,493 -5,197 16,397 1,738 7,458 6,963 2,153 276 -447@ -11,200 (US $ million) 2007-2008 JulySept. P 7 AprilSept. P 8 37,875 73,665 59,586 116,066 -21,711 -42,401 32,213 16,018 16,195 -5,516 34,752 2,142 10,876 3,594 3,558 453 369 -29,236 61,592 29,904 31,688 -10,713 51,149 3,880 18,334 10,557 5,711 729 -78 -40,436 Capital Flows During the financial year 2007-08 (up to November 2007), various components of foreign investment in India recorded increased inflows. The inflows under foreign direct investment (FDI) were US $ 13.8 billion during April-November 2007 as against US $ 10.1 billion during the corresponding period of the previous year (Table 56). Source-wise data on FDI to India revealed that Mauritius was the largest source of FDI during April-November 2007, followed by Singapore and the US. Net inflows by foreign institutional investors (FIIs) aggregated to US $ 26.8 billion during the current financial year so far (up to January 11, 2008). The number of FIIs registered with the SEBI increased from 997 at end-March 2007 to 1,219 at end-December 2007. Capital inflows on account of American depository receipts (ADRs)/global depository receipts (GDRs) amounted to US $ 5.7 billion during April-November 2007. 90 The External Economy Table 56 : Capital Flows (US $ million) Item 1 Foreign Direct Investment into India FIIs ( net) ADRs/GDRs External Assistance (net) External Commercial Borrowings (net) (Medium and long-term) Short-term Trade Credits (net) NRI Deposits (net) April-September April-September April-November 5,735 3,865 2,971 10,557 5,711 -433 Period 2 April-November April-January * April-November April-September 2006-07 3 10,113 2,491 1,850 386 2007-08 4 13,783 26,807 5,674 729 * : Up to January 11. Note : Data on FIIs presented in this table represent inflows into the country. They may differ from data relating to net investment in stock exchanges by FIIs. During the current financial year 2007-08 (April-September), the inflows (net) under external commercial borrowings (ECBs) amounted to US $ 10.6 billion. Net short-term trade credit was US $ 5.7 billion (inclusive of suppliers' credit up to 180 days) in April-September 2007. Out of total short-term trade credit, the suppliers' credit up to 180 days amounted to US $ 1.9 billion during April-September 2007. Non-Resident Indian (NRI) deposits recorded a net outflow of US $ 433 million during April-November 2007. Although there were inflows under Foreign Currency Non-Resident (Banks) [FCNR(B)] deposits and Non-Resident Ordinary Rupee (NRO) account schemes, there were outflows under Non-Resident External Rupee Account [NR(E)RA] deposits scheme. With net capital flows being substantially higher than the current account deficit, the overall balance of payments recorded a surplus of US $ 40.4 billion during April-September 2007 (US $ 8.6 billion during April-September 2006). In response to net capital flows remaining well in excess of the current account financing need, a multi-pronged approach has been followed in India to deal with such flows. The policy responses have included, inter alia, liberalisation of capital outflows for residents, modulation of interest rates on non-resident deposits along with increase in minimum maturities, prepayments of external loans, and greater flexibility in exchange rate movements. Sterilisation operations through the use of the cash reserve ratio and open market operations, including the liquidity adjustment facility and the market stabilisation scheme, have also been used to manage capital flows. A survey of major EMEs, such as Brazil, China and Russia shows that central banks in all these countries intervene in the foreign exchange markets. These 91 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 EMEs sterilise their foreign exchange intervention, either fully or partially. With regard to monetary policy, different instruments are used, including increase in reserve requirements, restrictions on bank credit and other traditional monetary policy instruments designed to maintain low inflation and price stability. With respect to capital account management, different countries have initiated measures to increase outflows; in some cases inflows have also been restricted. Foreign Exchange Reserves India's foreign exchange reserves were US $ 284.9 billion as on January 18, 2008, showing an increase of US $ 85.7 billion over end-March 2007. The increase in reserves was mainly due to an increase in foreign currency assets from US $ 191.9 billion during end-March 2007 to US $ 276.1 billion as on January 18, 2008 (Table 57). India holds the third largest stock of reserves among the emerging market economies after China and Russia. The overall approach to the management of India's foreign exchange reserves in recent years reflects the changing composition of the balance of payments and the 'liquidity risks' associated with different types of flows and other requirements. Taking these factors into account, India's foreign exchange reserves continued to be at a comfortable level and consistent with the rate of growth, the share of external sector in the economy and the size of risk-adjusted capital flows. Table 57 : Foreign Exchange Reserves (US $ million) Month 1 March 1995 March 2000 March 2005 March 2006 March 2007 April 2007 May 2007 June 2007 July 2007 August 2007 September 2007 October 2007 November 2007 December 2007 January 2008* * : As on January 18, 2008. Gold 2 4,370 2,974 4,500 5,755 6,784 7,036 6,911 6,787 6,887 6,881 7,367 7,811 8,357 8,328 8,328 SDR 3 7 4 5 3 2 11 1 1 12 2 2 13 3 3 3 Foreign Currency Assets 4 20,809 35,058 135,571 145,108 191,924 196,899 200,697 206,114 219,753 221,509 239,955 256,427 264,725 266,553 276,134 Reserve Position in the IMF 5 331 658 1,438 756 469 463 459 460 455 455 438 441 435 432 433 Total (2+3+4+5) 6 25,517 38,694 141,514 151,622 199,179 204,409 208,068 213,362 227,107 228,847 247,762 264,692 273,520 275,316 284,898 92 The External Economy External Debt India's total external debt was placed at US $ 190.5 billion at endSeptember 2007, recording an increase of US $ 20.9 billion (12.3 per cent) over end-March 2007 (Table 58). The increase in external debt during the period was mainly on account of higher external commercial borrowings, followed by higher short-term trade credit and NRI deposits. The increase in outstanding debt to an extent was also due to a positive valuation impact (around US $ 5 billion), reflecting the depreciation of the US dollar vis- -vis other major international currencies. About 52.8 per cent of the external debt stock was denominated in US dollars followed by the Indian rupee (17.6 per cent), Japanese yen (11.5 per cent) and SDR (11.1 per cent). The coverage of short-term debt has been made more comprehensive with the inclusion of (i) suppliers' credits up to 180 days and (ii) investment by Foreign Institutional Investors (FII) in short-term debt instruments, beginning with the quarter ended March 2005. As a result, the short-term debt at end-June 2007 was revised to US $ 28.6 billion from US $ 13.0 billion (preliminary). As at endSeptember 2007, short-term debt increased to US $ 30.8 billion, accounting for 16.2 per cent of the total external debt. Among the debt sustainability indicators, the ratio of short-term to total debt increased between end-March 2007 and end-September 2007 while the ratio of short-term debt to reserves declined over the same period. Foreign exchange reserves remained in excess of the stock of external debt at end-September 2007. Table 58 : India s External Debt (US $ million) Item EndMarch 1995 2 28,542 20,270 4,300 6,629 12,991 12,383 9,624 94,739 4,269 99,008 EndMarch 2005 3 31,744 17,034 0 5,022 26,405 32,743 2,302 115,250 17,723 132,973 EndMarch 2006 4 32,620 15,761 0 5,450 26,415 36,282 2,032 118,560 19,569 138,129 EndMarch 2007 5 35,337 16,062 0 7,083 41,722 41,240 1,946 143,390 26,239 169,629 EndJune 2007 6 36,058 15,841 0 7,747 47,729 42,603 2,032 152,010 28,568 180,578 EndSept. 2007 7 37,067 16,659 0 8,505 51,770 43,643 2,081 159,725 30,791 190,516 (per cent) 30.8 4.3 16.9 45.3 25.4 25.9 .. : Not Available. 18.6 13.3 12.5 30.9 106.4 6.1 17.3 14.2 12.9 28.6 109.8 9.9 17.9 15.5 13.2 23.3 117.4 4.8 .. 15.8 13.4 21.9 118.2 4.6 .. 16.2 12.4 21.4 130.0 4.5 1 1. Multilateral 2. Bilateral 3. International Monetary Fund 4. Trade Credit (above 1 year) 5. External Commercial Borrowings 6. NRI Deposit 7. Rupee Debt 8. Long-term (1 to 7) 9. Short-term Total (8+9) Memo : Total debt /GDP Short-term/Total debt Short-term debt/Reserves Concessional debt/Total debt Reserves/ Total debt Debt Service Ratio* * : Relates to the fiscal year. 93 Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 International Investment Position India's net international liabilities increased by US $ 15.5 billion between end-March 2007 and end-June 2007, as the increase in international liabilities (US $ 31.6 billion) exceeded the increase in international assets (US $ 16.1 billion) (Table 59). While the increase in the liabilities was mainly due to large capital inflows under portfolio investments, direct investments and external commercial loans, the increase in international assets was on account of an increase of US $ 14.2 billion in reserve assets between end-March 2007 and end-June 2007, followed by direct investment abroad (US $ 5.4 billion). International liabilities reflected increases in direct and portfolio investment at end-June 2007 from their levels in end-March 2007. A major part of the liabilities like direct and portfolio investment reflects cumulative inflows, which are at historical prices. Table 59 : International Investment Position of India (US $ billion) Item 1 A. Assets 1. Direct Investment 2. Portfolio Investment 2.1 Equity Securities 2.2 Debt securities 3. Other Investment 3.1 Trade Credits 3.2 Loans 3.3 Currency and Deposits 3.4 Other Assets 4. Reserve Assets B. Liabilities 1. Direct Investment 2. Portfolio Investment 2.1 Equity Securities 2.2 Debt securities 3. Other Investment 3.1 Trade Credits 3.2 Loans 3.3 Currency and Deposits 3.4 Other Liabilities C. Net Position (A-B) March 2004 R 2 136.0 (21.3) 7.8 0.4 0.2 0.2 14.8 0.5 1.7 9.5 3.1 113.0 (17.7) 183.2 (29.0) 38.2 (6.0) 43.7 (6.9) 33.9 9.8 101.3 (16.1) 6.3 61.9 32.2 1.0 -47.2 (-7.6) March 2005 PR 3 166.8 (23.3) 10.0 0.5 0.3 0.2 14.8 1.1 1.9 8.4 3.4 141.5 (19.8) 210.8 (29.5) 44.5 (6.2) 56.0 (7.8) 43.2 12.8 110.3 (15.5) 9.6 65.9 33.6 1.2 -44.0 (-6.2) March 2006 PR 4 182.8 (22.9) 13.0 1.0 0.5 0.5 17.2 -0.3 2.6 11.6 3.3 151.6 (19.0) 232.0 (29.0) 51.1 (6.4) 64.6 (8.1) 54.7 9.9 116.3 (14.6) 10.5 67.9 37.3 0.6 -49.2 (-6.2) March 2007 PR 5 243.6 (25.7) 24.0 0.8 0.4 0.4 19.6 2.5 2.6 10.3 4.2 199.2 (21.0) 290.6 (30.7) 72.3 (7.6) 79.2 (8.4) 63.3 15.9 139.1 (14.7) 13.7 82.2 42.3 0.9 -47.0 (-5.0) June 2007 PR 6 259.7 .. 29.4 0.8 0.4 0.4 16.2 1.9 2.0 8.1 4.2 213.4 .. 322.2 .. 83.0 .. 93.5 .. 75.2 18.3 145.7 .. 14.7 86.0 43.8 1.2 -62.5 .. PR : Partially Revised. P : Provisional. .. : Not Available. Note : Figures in parentheses represent percentage to GDP. 94

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