Review of monetary policy
Y. Venugopal Reddy, Governor, RBI, presented the
first quarter review of Annual Policy Statement on 29 July. The review
contained the following projections.
• GDP
growth projection for 2008-09 truncated from 8.0-8.5 per cent to around 8.0 per
cent.
• Inflation
to be brought down to below 5.0 per cent as soon as possible and around 3.0 per
cent over the medium-term, from 11.89 per cent on 12 July. But, realistic
policy endeavour would be to bring it down to close to 7.0 per cent by the
fiscal-end (against 5.5 per cent projected in Annual Policy Statement released
on 29 April).
• Money
supply growth to be moderated to around 17.0 per cent from 17-17.5 per cent
projected in Annual Policy Statement, while bank deposits could rise more by
17.5 per cent (17 per cent).
• There
is no change in 20 per cent rise forecast in non-food credit (including
investment in corporate securities).
Keeping these forecasts and current and emerging
conditions in view, the apex bank increased Repo Rate by 50 basis points to 9
per cent with immediate effect and hiked Cash Reserve Ratio (CRR) by 25 basis
points to 9 per cent with effect from the fortnight beginning August 30. Bank
rate and reverse repo rate have remained at 6 per cent.
South-west
monsoon
Cumulative rainfall from June 1 to August 20 in
south-west monsoon was placed 2 per cent above normal. A five-year high 31 out
of 36 meteorological subdivisions recorded excess/normal rains. Marathwada,
Vidarbha, Madhya Maharashtra and Saurashtra, Kutch & Diu were among the
regions that were still rain deficient.
IIP slows to half the year-ago pace
The annual growth in industrial
production as measured by index of industrial production (IIP) worked out to 5.4
per cent in June and the cumulative mount of 5.2 per cent over Q1 of 2008-09
was half the pace a year ago. Manufacturing rose 5.9 per cent in June and 5.6
per cent over Q1. Electricity the basic infrastructure limped with 2 per cent
(8.3 per cent), though mining put up a relatively better show with 4.7 per cent
increase (2.7 per cent). Coal production was up by 8.4 per cent, though
domestic crude oil continued to stagnate.
Capital goods production fell to 6.5
per cent, one-third the pace a yea ago. What is worse, the average mount for
May-June worked out to only 4.5 per cent, against 11 per cent in April.
Machinery & equipment (other than transport equipment) was up by 6.8 per
cent, but transport equipment & parts increased creditably by 11.9 per
cent. Basic metal & alloy industries increased
by 5 per cent, while non-metallic mineral products remained at year ago level. Finished
steel (carbon) production, covered under infrastructure IIP, was up by 4.5 per
cent and cement 5.8 per cent.
Among the two-digit level industry
groups (other than those covered above), only basic chemicals & chemical
products (except products of petroleum and coke) performed creditably with 12
per cent rise. Petroleum refinery output rose 3.3 per cent, one-fourth of the
feat a year ago.
Money
supply slows
The restrictive monetary policy measures seem to
be yielding results. Thus, broad money (M3) increased by 4.3 per cent till 1 August
in the current fiscal; slowing from 5.3 per cent in the corresponding period of
the preceding fiscal. The y-o-y growth also worked out lower to 19.6 per cent (21.8
per cent). Net bank credit to government
grew 7.1 per cent (10.6 per cent). Bank credit to commercial sector was up 3
per cent. Net forex assets of the banking sector rose 4.3 per cent, less compared
to 4.6 per cent a year ago. The y-o-y
growth in reserve money was, nevertheless, running 31 per cent high (24 per
cent) as on 15 August.
Bank
deposits & credit
Aggregate deposits with SCB were up by 4.8 per
cent by 1 August in the current fiscal, dwindling from 6 per cent a year ago.
The annual rise in deposits worked out less to 20.9 per cent (24.4 per cent). Bank
credit increased by Rs 65,676 crore, against Rs1,787 crore decline in the
corresponding period of 2007-08. The y-o-y mount worked out to 25.8 per cent (23.3
per cent). Non-food credit increased by Rs 65,729 crore (Rs 3,414 crore).
Interest rates
Overnight inter-bank call money rates ranged 6.2-9.56
per cent in the first 20 days of August, against 5.6-9.67 per cent in July. The
reverse repo rate was at 6 per cent and the repo rate 9 per cent. The cut-off
yields on 91 days and 182 days T-bills were at 9.23 per cent and 9.30 per cent
at the auction on 6 August. Discount rates on commercial papers (CP) ranged 9.6-12
per cent on CP issued in the second fortnight of July, against 9.5-12.25 per
cent in the first half. Yields to maturity (YTM) on longer-term Government of
India securities were at 8.81-9.89 per cent in the week ended 15 August. Prime
lending rates of major banks ranged 12.75-13.25 per cent in the week ended 8 August.
Deposit rates were at around 9.5 per cent. Cash Reserve Ratio (CRR) was hiked
by 25 basis points to 9 per cent with effect from the fortnight beginning 30
August.
Rupee was traded at 42.82/83 per USD on 14 August.
Rupee depreciated annually by around 5 per cent against US$ and 12-13 per cent
against Euro and Yen. The rupee appreciated by 2 per cent against Pound
Sterling.
Central government finance
The Central government finances in Q1 as revealed in monthly
data of Controller General of Accounts (CGA) indicated a gross fiscal deficit
(GFD) that was equivalent to 65 per cent of the annual budgeted number and the
revenue deficit (RD), which was 1.4 times the budgeted amount for the fiscal.
However, what is more relevant in such seasonal data, GFD dropped three-fourths
in June, compared to the year-ago number which made the cumulative GFD one-fourth smaller that in Q1 of 2007-08.
Tax receipt for the quarter was 30 per cent better. While
corporate tax, personal income-tax, customs duty and service tax showed healthy
growth, excise duty receipt was lower, bearing testimony to slowdown in
industrial production. Total expenditure worked out 6 per cent lower.
Exports
& imports
Exports increased by 22 per cent (provisional-over-provisional
data) to US$42.85 billion during April-June 2008. With rupee back on slide vis-à-vis US dollar, the mount in
rupee terms worked out higher to 24 per cent.
Total imports were up by 30 per cent to US$73.28
billion. Oil imports were US$ 25.53 billion (+50 per cent) and non-oil imports
US$47.75 billion (+21 per cent).
Trade
deficit
The trade deficit was estimated at US$30.43
billion (US$21.47 billion).
Inflation
Annual inflation as measured by the overall
Wholesale Price Index (WPI) was at 12.63 per cent by 9 August 2008. The WPI of primary articles and manufactured
products rose 11-12 per cent and that of fuel & power 18 per. Consumer
price indices for industrial workers and urban non-manual employees ran 7+ per
cent higher in June and those of agricultural/rural workers around 9+ per cent
in July. The composite ERIL Index of Cost of Project Inputs showed 12.8 per
cent escalation. The WPI of iron &
steel subgroup shot up 35 per cent.
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