Monetary Policy 2009-10
Dr. D. Subbarao, Governor, RBI, presented the Annual Policy Statement for the Year 2009-10 on 21 April. An analytical review of macroeconomic and monetary developments was issued a day in advance as a supplement to the policy.
The Monetary Policy is premised on 6 per cent GDP growth projection and a close to 4 per cent inflation. Incidentally, the economy growth for 2008-09 has now been assessed at 6.5-6.7 per cent, much lower compared to 8 per cent projected at the beginning of the year, based on these premises,
- M3 expansion projection has been lowered to 17 per cent, from 18.4 per cent in 2008-09.
- Deposit growth is also lowered from 19.8 per cent to 18 per cent.
- Notwithstanding lowered expected pace in broad money and deposits, non-food credit (adjusted for investment in corporate securities) is projected to accelerate from 17.2 per cent to around 20 per cent. The last year had started with a projection of 20 per cent in non-food credit, which was hiked to 24 per cent in the third quarter review of the monetary policy; the realized pace worked out to 17.2 per cent.
Policy Stance
The annual monetary policy statement has been set in the context of a deep global economic slump and financial market turmoil. Thus, the policy would continuously monitor global and domestic conditions and respond swiftly and effectively through policy adjustments as warranted so as to minimise the impact of adverse developments and reinforce the impact of positive developments. In particular, the policy would aim at credit expansion at viable rates supportive of price and financial stability while preserving credit quality so as to support the return of the economy to a high growth path.
Monetary Measures
In tune with the current assessment of macroeconomic and monetary conditions, the repo and reveres rates under the LAF have been pared by 25 basis points each from 5 per cent and 3.5 per cent respectively to 4.75 per cent and 3.25 per cent with immediate effect. There is no change in bank rate (6 per cent) and cash reserve ratio (CRR) (5 per cent of net demand and time liabilities).
Other proposed measures include:
- Allowing scheduled commercial banks to set up offsite ATMs รค Payment of interest on savings bank accounts by scheduled commercial banks on a daily product basis with effect from April 1, 2010.
- Constituting a Working Group to review the present BPLR system and suggest changes to make credit pricing more transparent. The Working Group would submit its report by end-August 2009.
- Extension till March 2010 of Special Refinance Facility of up to 1 per cent of NDTL, special 14 days term repo facility through relaxation of 1.5 per cent of NDTL in SLR, and enhanced limit of 50 per cent in liquidity facility to banks in terms of export credit refinance (ECR).
- Extension till December 2009 of Relaxation in respect of all-in-cost Ceilings for ECBs and Liberalisation in Buyback of FCCBs.
- Setting up a Task Force to implement the recommendations of the Committee on Financial Sector Assessment (CFSA).
Current policy and procedures governing the presence of foreign banks in India would continue till there is greater clarity regarding the stability of the global financial system and a shared understanding on the regulatory and supervisory architecture around the world.
Review of developments in 2008-09
The country has been impacted by global crisis much more than was expected. GDP growth has moderated reflecting lower industrial production, negative exports, deceleration in services activities, dented corporate margins and diminished business confidence. The fiscal stimulus packages of the government and monetary easing and regulatory action of the apex bank have helped to arrest the moderation in growth and keep financial markets functioning normally. The thrust of the monetary policy since mid-September 2008 is to provide ample rupee liquidity, ensure comfortable dollar liquidity and maintain continued credit flow to productive sectors. The policy measures have augmented actual/potential liquidity in the financial system by over Rs 4.20 trillion. Net borrowing by the Central Government in 2008-09 was nearly three times that in 2007-08 with a large and abrupt increase occurring in the last quarter of the fiscal.
Challenges
Immediate challenges facing the economy include: (a) supporting the drivers of aggregate demand to enable the economy to return to its high growth path; (b) boosting the flow of credit to all productive sectors of the economy; (c) managing the large government borrowing programme in 2009-10 in a non-disruptive manner; (d) restoring fiscal consolidation process; (e) ensuring an orderly withdrawal of large liquidity injected in the system since September 2008 and (f) preserving stability of financial system drawing from the lesson of the global crisis.
Industrial production
Factory output as measured by index of industrial production (IIP) declined 1.2 per cent in February 2009, according to "Quick Estimates" released by CSO: this was the second decline after December in the fiscal as also incidentally the entire time series spanning since 1993-94. The abysmal performance, though partly due to a high base effect of 9.5 per cent escalation a year ago, has dragged down the cumulative growth over April-February 2008-09 to 2.8 per cent, one-third the pace in this period a year ago and is no doubt a matter of concern.
The industry has apparently performed very poorly in the first 11 months of 2008-09, with past five months indicating almost stagnation in output. Still, there are some pointers that provide glimmers of hope. Thus, upward alterations in IIP data in first and second revisions have placed the annual changes for October and January in positive zone, against negative under quick estimates. Taking these as indicators, February and December may also find positive growth numbers when they are revised. Though this would not change materially the cumulative performance, which is indicative of steep loss in momentum in industrial production, it does point to some likelihood that growth numbers may look less scary when firmer data are available.
Similar optimism also rules when we look at sectoral data, where we find that all segments have not gone under: there are some sectors like cement, machinery and consumer goods that have stood their ground, coal production has improved upon year-ago feat and finished steel has moved into positive zone, after declines over October-December. Countering widespread perceptions that project investment has been hit very badly by global financial crisis, capital goods production was up double-digit in five out of 11 months and but for sub-1 per cent extreme slack in August and November, the average mount in the subdivision would have been well into double-digit number. Electrical and non-electrical machinery, the main component of sub-group increased robustly at 9.7 per cent. Consumer goods production, reflecting consumption demand, increased relatively at a steady 5 per cent.
The segments that suffered a rot included industrial intermediates, which declined 2.7 per cent and basic goods that weakened to 2.7 per cent. In major products, domestic crude oil production, food products, cotton textiles and leather & leather products (bearing impact of extremely frail export demand) and rubber, plastic petroleum and coal products have gone into red over the first 11 months of the fiscal. Electricity, the heavy weight as also basic infrastructure for manufacturing, turned in very weak data (barring 4+ per cent rise in July, September and October). Also, overall mining paled over December-February 2008-09.
All said and done, the fiscal 2008-09 is likely to end with around 2.8-3 per cent rise in industrial production, markedly lower than around 4.2 per cent factored by CSO from the sector for 7.1 per cent overall GDP growth.
Money supply
The y-o-y growth in broad money (M3) worked out to 20.5 per cent by 10 April, lower compared to 21.4 per cent a year ago. Net forex assets of banking sector declined marginally over the year, against 43 per cent bulge a year ago. RBI credit to government staged a turnaround; it shot up Rs 1.64 trillion, against Rs 1.56 trillion decline a year ago.
Bank deposits & credit
Aggregate deposits with SCB were up by 22.1 per cent (22.9 per cent) annually by 10 April 2009. Bank credit growth slowed more markedly from 22.9 per cent to 18.8 per cent. Banks' non-food credit and investments in corporate securities expanded 18.5 per cent. Reflecting steep decline in CRR, bank balances with RBI declined by Rs 65,667 crore, against Rs 91,438 crore bulge in the similar period a year ago. Banks' investment in government securities was up by Rs 81,981 crore, almost twice Rs 42,282 crore a year ago.
Interest rates
Overnight inter-bank call money rates ranged 1.87-4.58 in the first 22 days of April. The repo and reverse repo rates have been cut by 25 basis points to 4.75 per cent and 3.25 per cent, respectively. The cut-off yields on 91 days and 182 days T-bills were at 3.81per cent and 4.07 per cent at the auction on 15 April. Discount rates on commercial papers (CP) ranged 6.40-12.5 per cent on CP issued in the second fortnight of March. Yields to maturity (YTM) on longer-term Government of India securities traded in the secondary market were at 6.75-8.10 per cent in the second week of April. Prime lending rates of major banks ranged 11.5-12.25 per cent in the week ended 10 April. Deposit rates were at around 7-8.5 per cent. Cash Reserve Ratio (CRR) was 5 per cent.
Rupee was traded at 49.70/71 per USD on 17 April. Rupee depreciated annually by around 20-22 per cent against US$ and Yen and 2 per cent against Euro, but appreciated by 7 per cent against Pound Sterling.
Untitled Document
| Weighted Call Money Rates: April 2008-09 |
| |
Range (%) |
Apr-08 |
4.07-7.34 |
May-08 |
5.86-7.96 |
Jun-08 |
5.71-8.98 |
Jul-08 |
5.60-9.67 |
Aug-08 |
5.98-9.71 |
Sep-08 |
6.14-14.81 |
Oct-08 |
5.57-17.89 |
Nov-08 |
4.25-17.54 |
Dec-08 |
5.26-6.56 |
Jan-09 |
2.32-4.65 |
Feb-09 |
2.77-4.23 |
Mar-09 |
2.42-4.98 |
April (up to 22 April) |
1.87-4.58 |
Balance of Payments for Q3
As feared widely, the country's external account worsened sharply during October-December 2008. Export growth on payments basis turned negative for the first time after 2001-02 due to global economic slowdown and import growth fell to a single digit after a gap of almost 6 years. Trade deficit in merchandise on payments basis though lower by around $2 billion on q-over-q basis, shot up annually by around $10 billion to $36.3 billion. Invisibles of $21.7 billion stagnated at a year ago level and were 16 per cent lower than in the Q2. Invisibles, broadly service incomes, remittances, etc could finance trade deficit only partially with the result that the current account deficit (CAD) shot up two-fold to $14.5 billion-the highest quarterly level since 1990.
Adding to woes on current account transactions, capital flows, also fallout of global meltdown, turned negative to the tune of $3.2 billion during Q3, against $11 billion inflow in Q1 and $8 billion in Q2. The performance led to a drawdown of forex reserves by $17.9 billion over the quarter and twice this number if we factor in currency valuation effects. While CAD, typifying an equivalent foreign capital inflow to supplement domestic savings to finance domestic capital investment can be viewed favourably, the deficit with negative capital flow and the rundown in forex reserves prima facie makes the operation unsustainable.
The first three quarters have seen CAD swell cent per cent to $36 billion and a steep 80 per cent contraction in capital inflow. Mirroring the net result of external sector transactions at macro level, forex reserves with RBI declined by $20 billion till December in 2008-09, against $67 billion bulge in the corresponding period of the preceding fiscal. The decline in forex reserves after currency valuation effects worked out to $53.76 billion (increase of $76.14 billion a year ago).
The last quarter is not likely to be much different from Q3 and hence the country is likely to have ended 2008-09 with a CAD of around $50-53 billion, which would be three times that in 2007-08. Incidentally, as on 27 March, the forex reserves at $252 billion showed a decline of $58 billion over the fiscal.
Invisibles
Software exports gave $10.2 billion in Q3, 10 per cent less than in the Q2, but 16 per cent more relative to the year ago level. Erosion from the previous quarter was less than feared but the impact from global meltdown could be reflected more in next few quarters. At $2.4 billion, non-software business incomes showed 21 per cent decline from Q2 and stagnation at year ago level. However, these incomes were running at 27-28 per cent higher cumulatively in the first three quarters of 2008-09. Workers' remittances stagnated at year-ago level of around $10.4 billion and were 20 per cent less than in Q2. Around 45 per cent of workers' remittances in the first three quarters of 2008-09 comprised withdrawals from NRI deposits for domestic uses and rest were $ remittances. Also, withdrawals for local uses accounted for 63 per cent of drawdown in NRI deposits, which witnessed a net inflow of $2 billion over the period (outflow of $0.9 billion).
Capital flows
FDI into the country dropped to $6.7 billion during October-December 2008, from $8.8 billion in July-September, $11.9 billion during April-June and $7.9 billion in this quarter a year ago. Portfolio investment fell $5.8 billion, accelerating declines of previous two quarters. The Q3 of 2007-08 had seen a massive $14.9 billion inflow on this count. GDRs/ADRS almost drew blank, as compared to an inflow of $5.6 billion in Q3 of 2007-08, while external commercial borrowings ($3.8 billion) dropped to little less than a half. Interestingly, FDI overseas fared much better at $5.9 billion, relative to earlier quarters, though cumulatively it added less ($11 billion, against $13 billion a year ago).
External debt
The country's external debt was placed at $231 billion at the end of 2008 (+2.8 per cent).
Exports & imports
Exports declined by 22 per cent in February, according to invoice-based data from DGCI&S. This was the fifth and the steepest fall in 2008-09. The feat has pared the export growth to 7 per cent, from 31 per cent in H1, according to DGCI&S data.
Import dropped 23 per cent during February, the second decline in the fiscal. The cumulative growth worked out to 19 per cent. Cumulative oil imports were US$ 89.68 billion (+27 per cent) and non-oil imports $182 billion (+16 per cent).
Trade deficit
The trade deficit shot up from $82 billion to $115 billion.
Inflation
Annual inflation as measured by the overall Wholesale Price Index (WPI) worked out to 0.26 per cent by 10 April 2009, against a recent high of around 12 per cent in September last year. While the WPI of fuel & power subgroup was 6 per cent lower, that of primary articles was 6 per cent high and manufactured products 1 per cent. Consumer price index (CPI) for industrial workers and urban non-manual workers ran 9.6-9.9 per cent high in February. CPI of agricultural/rural workers soared 11 per cent.
Reflecting paling project investment coupled with high year-ago base, ERIL Index of Cost of Project Inputs declined 6 per cent by 10 April -against 12.5 per cent rise a year ago.
Projects investment
With import of machinery & equipment adding to $20.8 billion and their export to around $8.6 billion, net absorption of machinery from external trade for project investment could be around $12 billion during April-December. Import of electronic goods ($16.6 billion) was over four times their export. However, in transport equipment the country has emerged as net exporter with export at around $7.8 billion and import $6.3 billion. Iron & steel import expanded 15 per cent to $7.5 billion, while their export shot up 25 per cent to $4.8 billion.
Untitled Document
BoP over April-December (US $billion) |
| |
2008-09 |
2007-08 |
Trade account |
-105.34 |
-69.28 |
Invisibles |
68.87 |
53.77 |
Current Account Balance |
-36.47 |
-15.51 |
Capital Account |
16.09 |
82.68 |
Foreign Investment |
4.03 |
40.2 |
| Foreign Direct Investment |
15.37 |
6.91 |
Portfolio Investment |
-11.34 |
33.29 |
Banking Capital |
-0.13 |
5.93 |
External Commercial Borrowings |
7.11 |
17.41 |
Other items |
5.07 |
19.14 |
Valuation effects |
-33.38 |
8.96 |
Change in reserves |
-53.76 |
76.14 |
|