credit policy
overview
| coop banks
| basics
|
lending
|adv banking
| products
| IT
& banking
banking news |
banking software|
deposits|
bank directory|
internet banking|
IT directory|
our services
Click Here For Highlights of RBI's Annual Policy Statement for 2005-06
Part I. Annual Statement on Monetary Policy for the Year 2005-06
I. Review of Macroeconomic and Monetary Developments during 2004-05
Domestic Developments
4. The mid-term Review of the annual policy Statement released on October 26, 2004 had placed the real GDP growth for 2004-05 in the range of 6.0-6.5 per cent, lower than 6.5-7.0 per cent anticipated earlier in the annual policy Statement. The downward revision was prompted by the combined downside risk of high and uncertain oil prices and deficient monsoon rainfall on GDP growth.
5. The advance estimate of GDP released by the Central Statistical Organisation (CSO) in February 2005 has placed the GDP growth at 6.9 per cent during 2004-05, which is higher than the expectations of the mid-term Review but consistent with the projections of the annual policy Statement. The GDP growth of 6.9 per cent during 2004-05 is on top of a higher increase of 8.5 per cent in the previous year. During 2004-05, GDP from agriculture and allied activities is estimated to have increased by 1.1 per cent, despite deficient monsoon, as compared with 9.6 per cent in the previous year. GDP growth from the industrial sector at 8.3 per cent is higher than 6.5 per cent in the previous year reflecting higher growth in manufacturing. The services sector has expanded by 8.6 per cent as compared with 8.9 per cent in the previous year.
6. The annual inflation rate as measured by variations in the wholesale price index (WPI), on a point-to-point basis, peaked from 4.6 per cent at end-March 2004 to 8.7 per cent by end-August 2004 after which it registered a steady decline. As at end-March 2005, the annual point-to-point inflation rate stood at 5.0 per cent as compared with 4.6 per cent a year ago. The inflation rate turned out as projected in the annual policy Statement, but lower than the mid-term Review projection of 6.5 per cent. It may, however, be noted that the inflation rate would have been higher but for successful policy interventions which included fiscal as well as monetary measures, and, more importantly, the full pass-through of higher oil prices has not taken place. During 2004-05, the prices of manufactured products (weight: 63.8 per cent) registered an increase of 4.5 per cent as compared with 6.7 per cent in the previous year. The prices of primary articles (weight: 22.0 per cent) increased by 2.5 per cent as compared with 1.6 per cent in the previous year. There was a higher increase of 9.2 per cent in prices of ‘fuel, power, light and lubricants’ group (weight: 14.2 per cent) as compared with 2.5 per cent in the previous year.
7. On an average basis, the annual rate of inflation during 2004-05 was higher at 6.4 per cent as compared with 5.4 per cent in the previous year. The prices of manufactured products, on an average, increased by 6.1 per cent as compared with 5.6 per cent in the previous year. The prices of primary articles increased, on an average, by 3.8 per cent as compared with 4.2 per cent in the previous year. The prices of ‘fuel, power, light and lubricants’ group increased, on an average, by 10.0 per cent as compared with 6.3 per cent in the previous year.
8. The movements in WPI inflation rate during 2004-05 largely reflected the sharp increase in prices of a number of key commodities. In order to segregate the impact of supply shocks, the mid-term Review of October 2004 had made a contextual analysis of WPI on account of the increase in prices of four commodities, viz., iron ore, iron & steel, mineral oils and coal mining (combined weight of 12.6 per cent in WPI). The WPI inflation rate, excluding these four items, works out lower at 2.0 per cent on a point-to-point basis, as against 3.3 per cent a year ago. On an average basis, it was 3.1 per cent as against 3.7 per cent in the previous year. Excluding only mineral oils (weight: 7.0 per cent), WPI inflation works out to 3.5 per cent as against 4.7 per cent in the previous year. On an average basis, it was 4.8 per cent as against 4.6 per cent in the previous year.
9. During 2004-05, oil prices in the international markets remained high and volatile. The average price of a basket of major international crude varieties (Brent, WTI and Dubai Fateh) at around US $ 41.3 per barrel was about 42.3 per cent higher as compared with the average price of US $ 29.0 per barrel in the previous year. In contrast, the average domestic price of petrol and diesel increased by only 17.5 per cent over the previous year. Admittedly, a part of the impact of increase in global oil prices on domestic oil prices was cushioned by fiscal measures such as cuts in excise and customs duties and a part was absorbed by domestic oil companies.
10. The point-to-point inflation rate based on consumer price index (CPI) for industrial workers was 4.2 per cent in February 2005 as compared with 4.1 per cent a year ago. On an average basis, CPI inflation was 3.8 per cent during 2004-05 (up to February) as compared with 3.9 per cent a year ago.
11. Monetary and credit aggregates for the year 2004-05 reflect the impact of conversion of a financial institution into a bank. During 2004-05, money supply (M3) increased by 12.8 per cent (Rs.2,57,058 crore), net of conversion, as compared with 16.9 per cent (Rs.2,90,569 crore) in the previous year. The growth in aggregate deposits of scheduled commercial banks (SCBs) at 14.1 per cent (Rs.2,11,963 crore), net of conversion, was lower than 17.5 per cent (Rs.2,23,563 crore) in the previous year. The lower deposit growth could be partly attributed to reduction in non-resident Indian (NRI) deposits with the banking system. Deposit growth, adjusted for NRI deposits, was 16.3 per cent (Rs.2,20,509 crore), net of conversion, as against 18.3 per cent (Rs.2,09,147 crore) in the previous year. The expansion in currency with the public was also lower at 13.3 per cent (Rs.42,016 crore) as compared with 16.1 per cent (Rs.43,827 crore) in the previous year.
12.As regards the sources of change in M3, the increase in bank credit to the commercial sector at 21.7 per cent (Rs.2,21,870 crore), net of conversion, was higher than the increase of 13.5 per cent (Rs.1,21,494 crore) in the previous year. On the other hand, net bank credit to government increased by 0.9 per cent (Rs.6,638 crore) as against an increase of 9.9 per cent (Rs.67,143 crore) in the preceding year. This is attributable to the substantial decline in the net RBI credit to the Central Government. Banking sector’s net foreign exchange assets increased by 23.8 per cent (Rs.1,25,412 crore)primarily on account of an increase of 26.5 per cent (Rs.1,28,377 crore) in net foreign exchange assets of RBI.
13. The increase in reserve money during 2004-05 at 12.1 per cent (Rs.52,616 crore) was lower than the increase of 18.3 per cent (Rs.67,451 crore) in the previous year. As regards the components of reserve money, currency in circulation rose by 12.7 per cent (Rs.41,621 crore) as compared with 15.8 per cent (Rs.44,555 crore) in the previous year. Among the sources of reserve money, RBI’s foreign currency assets (adjusted for revaluation) increased by Rs.1,15,044 crore as compared with an increase of Rs.1,41,428 crore in the previous year. The expansionary impact of foreign currency assets, however, was neutralised to a large extent by substantial recourse to the market stabilisation scheme (MSS) in conjunction with reverse repo operations under the liquidity adjustment facility (LAF). Consequently, the net RBI credit to the Central Government declined by Rs.50,646 crore (adjusted for the Government’s deposit balances under MSS with RBI) as compared with a decline of Rs.76,065 crore in the previous year. The balances under MSS, to sterilise the impact of forex inflows, stood at Rs.64,211 crore at end-March 2005. RBI’s credit to banks and commercial sector declined by Rs.833 crore as compared with a decline of Rs.2,728 crore in the previous year. The ratio of net foreign exchange assets (NFEA) to currency rose from 148.1 per cent in March 2004 to 166.2 per cent in March 2005 reflecting accretion to reserves on a continuous basis. Adjusted for MSS, the ratio of NFEA to currency was 148.8 per cent in March 2005.
14. Scheduled commercial banks’ credit registered a strong increase of 26.0 per cent (Rs.2,18,623 crore), net of conversion, during 2004-05 as compared with 15.3 per cent (Rs.1,11,570 crore) in the previous year. Food credit increased by Rs.5,159 crore as against a decline of Rs.13,518 crore in the previous year. Non-food credit increased by 26.5 per cent (Rs.2,13,464 crore), net of conversion, as compared with 18.4 per cent (Rs.1,25,088 crore) in the previous year. The incremental non-food credit-deposit ratio was as high as 100.7 per cent, net of conversion, as compared with 56.0 per cent in the previous year. Incremental investment-deposit ratio fell commensurately to 25.1 per cent from 58.2 per cent in the previous year, thereby accommodating the higher credit demand to a large extent.
15. As observed in the mid-term Review of October 2004, in the recent years, the impetus to credit growth has emanated from non-agriculture non-industrial sectors, particularly, housing, small transport operators and retail loans. While credit flow to these sectors continues to remain buoyant, more recent indications are that credit to agriculture and industry has also picked up.
16. During 2004-05 (April-February), agricultural credit increased by 23.1 per cent as compared with 15.0 per cent in the corresponding period of the previous year. The flow of credit to industry increased by 12.6 per cent as compared with 3.5 per cent in the corresponding period of the previous year. The increase in credit flow to the infrastructure industries, viz., roads, ports, power and telecommunications was 38.6 per cent as compared with an increase of 33.2 per cent in the corresponding period of the previous year. There has also been a discernible increase in credit flow to industries like food processing, cotton textiles, iron & steel, other metal & metal products, drugs & pharmaceuticals, gems & jewellery, automobiles, petroleum, electricity and construction.
17. While there was substantial increase in credit extended by scheduled commercial banks (SCBs) during 2004-05, their investments in bonds/ debentures/shares of public sector undertakings and private corporate sector, commercial paper (CP) etc., declined by 2.9 per cent (Rs.2,573 crore), net of conversion, as compared with a decline of 3.9 per cent (Rs.3,669 crore) in the previous year. The total flow of funds from SCBs to the commercial sector, including their investments, increased by 23.6 per cent (Rs.2,10,891 crore), net of conversion, as against 15.7 per cent (Rs.1,21,419 crore) in the previous year. As such, flow of funds to the commercial sector during 2004-05 exceeded the growth of 19.0 per cent anticipated in the mid-term Review of October 2004.
18. During 2004-05, the Central Government’s net market borrowings at Rs.46,050 crore (gross Rs.1,06,501 crore) were significantly lower than such borrowings in the previous year. This could be partly attributed to receipts by the Centre from the States under the debt swap scheme (DSS). The state governments prepaid Rs.16,943 crore of central government debt through additional market borrowings over and above the prepayment from their small savings collection under DSS. Market borrowings by state governments under DSS were in addition to their normal market borrowings of Rs.15,649 crore (net) [Rs.20,772 crore (gross)] and Rs.1,387 crore for prepayment of RIDF loans to NABARD. During 2004-05, the combined market borrowings of the Centre and States were Rs.80,029 crore (net) [Rs.1,45,603 crore (gross)] with lower RBI support in the form of devolvement and private placement at Rs.1,197 crore due to comfortable liquidity conditions.
>> GO TO NEXT PAGE
Return to main page of Annual Policy Statement for the Year 2005-06
Advertise
| Book Store |
About us |
Contact us
| Terms of use | Disclaimer
© Banknet India |
All rights reserved worldwide.
Best viewed with IE 4.00 & above at a screen resolution of 800 x 600
or higher