Mid-Term Review of the Annual Policy Statement for 2008-09, RBI Credit Policy, Reserve Bank of India: Banknet India

Main Page of Mid-Term Review of the Annual Policy Statement for 2008-09 click here

Mid-Term Review of the Annual Policy Statement for 2008-09

Part A-Mid-term Review of the Annual Statement on Monetary Policy for the Year 2008-09

I. Assessment of Macroeconomic and Monetary Developments during the First Half of 2008-09

Back to Domestic Developments

Developments in the Global Economy ... Click Here For Full Text
Overall Assessment ... Click Here For Full Text

Developments in the External Sector

34. Balance of payments data for the first quarter of 2008-09 released at end-September 2008 by the Reserve Bank indicate a widening of the merchandise trade deficit, a sustained increase in invisibles, some ebbing of net capital inflows and lower accretion to reserves. In US dollar terms, merchandise export growth was 22.2 per cent during April-June 2008 as compared with 20.7 per cent in the first quarter of the previous year. Commodity-wise data available from the Directorate General of Commercial Intelligence and Statistics (DGCI&S) for April-May 2008 indicate that engineering goods, agricultural and allied products and petroleum products, which together contributed 54.7 per cent of total exports, were the main drivers and contributed 66.5 per cent of overall export growth. Exports of primary products increased by 69.8 per cent, mainly due to the growth of 89.2 per cent in exports of agriculture and allied products. Exports of manufactures recorded a growth of 29.9 per cent as against 17.6 per cent a year ago. While the growth of exports of engineering goods and chemicals and related products was higher at 50.7 per cent and 26.0 per cent, respectively, as compared with 29.8 per cent and 16.7 per cent a year ago, there was a turnaround in the export of textiles and related products which increased by 20.1 per cent as against a decline of 0.5 per cent a year ago. Merchandise import payments recorded a higher growth of 33.3 per cent during the first quarter of the 2008-09 as compared with 21.1 per cent a year ago, due to higher payments for oil imports. Crude oil imports during April-June 2008 recorded a growth of 50.4 per cent as compared with 23.9 per cent a year ago, reflecting the impact of the increase in the price of the Indian basket of international crude which rose to US $ 118.8 per barrel in the first quarter of 2008-09 from US $ 66.4 per barrel in the corresponding quarter of the previous year. On the other hand, non-oil import payments rose by 20.9 per cent as compared with 45.1 per cent a year ago, indicative of some moderation in domestic demand. Capital goods were the main drivers of non-oil import growth during April-May 2008 along with import of fertiliser, chemicals, coal, coke and briquettes. Imports of gold and silver, however, showed a decline of 15.7 per cent as against a growth of 88.4 per cent a year ago. Imports of export-related items like pearls, precious and semi-precious stones also showed a decline in April-May 2008. China remained the single largest source of imports in April-May 2008, accounting for 11.1 per cent of total imports and 17.7 per cent of non-oil imports. On a payments basis, the merchandise trade deficit widened to US $ 31.6 billion during the first quarter of 2008-09 from US $ 20.7 billion a year ago.

35. During the first quarter of 2008-09, gross invisible receipts at US $ 37.7 billion amounted to nearly 86 per cent of merchandise exports, recording a year-on-year increase of 29.7 per cent. There was an increase in receipts under private transfers along with the steady growth in exports of software services, travel and transportation. On the other hand, invisible payments increased by 14.8 per cent as compared with 22.6 per cent a year ago. While transportation payments rose by 33.1 per cent as compared with 24.8 per cent a year ago, reflecting the rising volume of imports and the hardening of freight rates, payments relating to a number of business and professional services moderated. On a net basis, the invisible account recorded a surplus of US $ 20.9 billion during the first quarter of 2008-09, financing nearly 66 per cent of the trade deficit. Reflecting the movements in merchandise trade and invisible accounts, the current account deficit (CAD) amounted to US $ 10.7 billion as compared with US $ 6.3 billion in the first quarter of 2007-08.

36. Net capital flows amounted to US $ 13.2 billion during the first quarter of 2008-09 as compared with US $ 17.3 billion a year ago. Net ECB inflows at US $ 1.6 billion accounted for only 11.8 per cent of total net capital flows during April-June 2008 as compared with US $ 6.9 billion or 40.3 per cent a year ago. Net inward foreign direct investment (FDI) remained buoyant at US $ 12.1 billion during April-June 2008 as compared with US $ 7.0 billion in the corresponding period last year, reflecting the positive investment climate and continuing liberalisation of the payments regime. Net outward FDI, however, moderated to US $ 2.0 billion from US $ 4.3 billion a year ago with the slowdown in global business activities. There were outflows under net portfolio investment by foreign institutional investors (FIIs) of the order of US $ 5.2 billion during the first quarter of 2008-09 as against a net inflow of US $ 7.1 billion during April-June 2007. Inflows under American Depository Receipts/Global Depository Receipts (ADRs/GDRs) amounted to US $ 1.0 billion in April-June 2008 as against US $ 0.3 billion a year ago. Non-resident Indians (NRI) deposits recorded a net inflow of US $ 0.8 billion in the first quarter of 2008-09, a turnaround from net outflows of US $ 0.5 billion in April-June 2007.

37. These developments in current and capital accounts of the balance of payments resulted in an accretion to foreign exchange reserves (excluding valuation) of US $ 2.2 billion during the first quarter of 2008-09 as compared with US $ 11.2 billion a year ago. Taking into account the valuation gain of US $ 0.2 billion, the level of foreign exchange reserves amounted to US $ 312.1 billion at the end of June 2008.

38. India’s external debt increased marginally by US $ 0.6 billion during April-June 2008 and amounted to US $ 221.3 billion at end-June 2008. While multilateral debt registered a moderate increase of US $ 0.4 billion, there was a decline of US $ 0.9 billion in bilateral debt. ECBs declined by US $ 0.6 billion; however, there was an increase of US $ 2.2 billion under short-term trade credits. Valuation gains on account of the appreciation of the US dollar vis-à-vis other major international currencies and the Indian rupee resulted in a decline in external debt by US $ 4.5 billion. The US dollar continued to have a dominant share of 52.3 per cent in India’s external debt whereas rupee-denominated debt accounted for another 14.1 per cent. The ratio of short-term debt to total debt increased to 20.8 per cent at end-June 2008 from 19.9 per cent at end-March 2008. The ratio of foreign exchange reserves to external debt increased marginally to 141.0 per cent at the end of June 2008 from 140.3 per cent at end-March 2008.

39. These developments have extended into the second quarter of 2008-09. Information released by the DGCI&S indicates that exports increased by 35.3 per cent in US dollar terms during April-August 2008 as compared with 19.3 per cent in the corresponding period of the previous year. Imports rose by 38.0 per cent as compared with 34.2 per cent in the corresponding period of the previous year. While non-POL imports decelerated to 28.3 per cent from 42.7 per cent a year ago, the surge in international crude oil prices resulted in POL imports increasing by 60.0 per cent as compared with 17.9 per cent in the corresponding period of the previous year. As a result, the merchandise trade deficit widened to US $ 49.3 billion during April-August 2008 from US $ 34.6 billion in the corresponding period last year with the increase in the oil import bill alone amounting to US $ 17.3 billion.

40. Available information on components of capital flows presents a mixed picture. While inward FDI doubled over the corresponding flows last year and there was a positive turnaround in NRI deposits, net ECBs were much lower this year and there was a large outflow of FII investments. As a result, the deceleration in capital flows witnessed in the first quarter of 2008-09 continued during the second quarter. Portfolio investment by FIIs recorded net outflows amounting to US $ 7.3 billion during the current financial year up to October 10, 2008 as compared with net inflows of US $ 18.9 billion in the corresponding period last year. ADR/GDR issues by Indian companies were lower at US $ 1.1 billion during April-August 2008 as compared with US $ 2.8 billion in the corresponding period last year. On the other hand, gross FDI inflows during April-August 2008 were placed at US $ 16.7 billion as against US $ 8.5 billion a year ago. There were net inflows of US $ 0.3 billion during April-August 2008 under NRI deposits as against net outflows of US $ 0.2 billion a year ago. The foreign exchange reserves declined by US $ 35.8 billion during the current financial year so far and stood at US $ 273.9 billion on October 17, 2008.

41. The exchange rate of the rupee against the US dollar, which was Rs.39.97 at end-March 2008, depreciated sharply thereafter to Rs.49.29 per US dollar by October 22, 2008. During the current financial year so far, the rupee depreciated by 18.9 per cent against the US dollar, by 0.4 per cent against the euro, by 1.1 per cent against the pound sterling and by 19.1 per cent against the Japanese yen. As on October 22, 2008 the exchange rate of the rupee was Rs.49.29 per US dollar, Rs.63.35 per euro, Rs.80.40 per pound sterling and Rs.49.53 per 100 Japanese yen.

42. The exchange rate policy in recent years has been guided by the broad principles of careful monitoring and management of exchange rates with flexibility, without a fixed target or a pre-announced target or a band, coupled with the ability to intervene, if and when necessary. The overall approach to the management of India’s foreign exchange reserves takes into account the changing composition of the balance of payments and endeavours to reflect the ‘liquidity risks’ associated with different types of flows and other requirements.

Click here for Highlights of Mid-Term Review of the Annual Policy Statement

Click Here For Macroeconomic and Monetary Developments Mid-Term Review 2008-09