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Click here to return to main page of Annual Policy Statement 2008-09



Part I. Annual Statement on Monetary Policy for the Year 2008-09


Domestic Developments

4. The growth of real gross domestic product (GDP) in 2007-08 was placed at 8.7 per cent by the Central Statistical Organisation (CSO) in its advance estimates released in February 2008. Economic activity in 2007-08 has evolved in consonance with policy expectations set out in April 2007, albeit with some moderation as compared with 9.6 per cent in 2006-07. In retrospect, the slackening of momentum in 2007-08 appears to have set in as anticipated and moved gradually over the four quarters. Real GDP growth was 9.3 per cent, 8.9 per cent, 8.4 per cent and 8.4 per cent, respectively, in the four quarters of 2007-08 as against 9.6 per cent, 10.1 per cent, 9.1 per cent and 9.7 per cent in the corresponding quarters of 2006-07.

5. Real GDP originating in agriculture and allied activities is estimated to have risen by 2.6 per cent in 2007-08, lower than 3.8 per cent in the previous year. According to the third advance estimates of agricultural production released by the Ministry of Agriculture in April 2008, total foodgrains production is expected to increase to an all-time high of 227.3 million tonnes in 2007-08 from 217.3 million tonnes in 2006-07. Kharif foodgrains production is expected to have risen by 8.6 per cent, whereas rabi foodgrains production is expected to increase by 0.5 per cent. Output is estimated to have risen in the case of rice (2.5 per cent), wheat (1.3 per cent), coarse cereals (17.0 per cent) and pulses (7.0 per cent). Among the commercial crops, production is estimated to have increased under cotton (2.5 per cent), oilseeds (16.1 per cent) and jute (2.3 per cent) whereas the production of sugarcane declined by 3.2 per cent.

6. Real GDP originating in industry rose by 8.6 per cent in 2007-08 as compared with 10.6 per cent in the previous year. The index of industrial production (IIP) recorded an increase of 8.7 per cent during April-February 2007-08 vis--vis 11.2 per cent a year ago. In manufacturing, which contributed 89 per cent of the increase in industrial production, the growth of output was lower at 9.1 per cent than 12.2 per cent a year ago. Growth in mining at 5.1 per cent was comparable with 5.0 per cent a year ago, while growth in electricity generation moderated to 6.6 per cent as compared with 7.2 per cent. Production of beverages, tobacco and related products, wood and wood products, leather and leather products, basic chemicals and products and basic metals and alloys recorded double-digit growth in 2007-08 (up to February 2008). The industry groups that registered deceleration of growth include textiles, paper and paper products, non-metallic mineral products and transport equipments and parts. On the other hand, the production of metal products and parts except machinery and equipments recorded a decline.

7. In terms of the use-based classification of industries, the production of capital goods continued to expand at a sustained pace, increasing by 17.5 per cent during April-February 2007-08, over and above the increase of 18.3 per cent a year ago. The basic, intermediate and consumer non-durable goods segments recorded lower growth of 7.4 per cent, 9.2 per cent and 8.9 per cent, respectively, as compared with 10.1 per cent, 11.7 per cent and 9.5 per cent a year ago. Production of consumer durables declined by 1.0 per cent as against an increase of 9.7 per cent a year ago. The output of the six key infrastructure industries (with a weight of 26.7 per cent in the IIP) also registered a lower growth of 5.6 per cent during April-February 2007-08 as against 8.7 per cent in the corresponding period of the previous year.

8. Corporate activity experienced some moderation in growth relative to the recent past but continued to remain healthy during 2007-08. During April-December 2007, growth in sales of surveyed non-financial private companies decelerated to 17.4 per cent from 29.1 per cent in the corresponding period of the preceding year. Net profits growth was also lower at 29.8 per cent from 46.6 per cent a year ago due to a combination of several factors including escalation in input costs and compensation to employees. Corporates' interest burden continues to be low with the interest payment to gross profits ratio estimated at 11.8 per cent, 12.8 per cent and 15.3 per cent in the first three quarters of 2007-08 as against 18.1 per cent and 13.4 per cent in 2005-06 and 2006-07, respectively, and an average of 43.7 per cent in 2000-05. The differential between sales and expenditure growth shrank to 20 basis points from 280 basis points in April-December 2006, reflecting pressure on profits at the operating level, somewhat mitigated by strong support from income from non-core activities which rose by 75.5 per cent in April-December 2007 as compared with 20.9 per cent a year ago. Early results for the fourth quarter of 2007-08 indicate that growth in sales and net profits are lower than in the corresponding quarter a year ago. There was also a larger increase in expenditure on both raw materials and compensation to employees for the selected companies. Consequently, the difference between sales growth and the overall expenditure growth narrowed, resulting in lower profitability both in gross and net terms.

9. The Reserve Bank's Industrial Outlook Survey conducted during February 2008 indicates a mixed picture in the business sentiment. With a pickup in demand conditions (including exports), the assessment for January-March 2007-08 shows an improvement over the expectation for the quarter in the previous round of the survey. The business expectations index for April-June 2008 at 123.2 has moved up from 118.6 recorded in the previous quarter, against the seasonal decline, but is still lower than its level at 127.5 in the corresponding quarter of the previous year. Production, order book positions and capacity utilisation growth are expected to pick up in relation to the previous quarter and increasing number of respondent firms expect employment levels to go up. Price pressures are seen as rising mainly on the back of higher raw material costs. About 27 per cent of respondent firms expect to pass on the price increase to customers in April-June 2008 as compared with 23 per cent in the corresponding quarter of the previous year. While imports and exports are expected to pick up in April-June 2008 as compared with the previous quarter, the growth in exports would be lower than in the corresponding quarter of 2007-08. With nearly one in every four respondents perceiving higher profit margins and more than 60 per cent expecting status quo, the optimism on profit margins for April-June 2008 has improved in relation to January-March 2008, although it is still lower than in April-June 2007.

10. Business confidence surveys conducted by other agencies convey a somewhat tempered though overall positive outlook. One survey's Business Optimism Index indicates a sharp decline in the first quarter of 2008-09 with respect to the previous quarter and a much sharper fall when compared to April-June 2007, attributable to less optimistic sentiment in the services and capital goods sectors. According to another survey, however, the overall economic conditions for the next six months are seen to be positive, with production closely following expectations of growth in domestic sales and a clear upturn in import growth. Seasonally adjusted purchasing managers' indices reflect lower business sentiment for January-March 2008 with some ebbing in relation to the previous quarter but still higher than a year ago. All the surveys indicate sustained though somewhat slower growth of manufacturing with firms trying to protect their profit margins through improvement in productivity and by passing on cost increases into selling prices. Investment sentiment remains positive on expectations of improvement in the financial position, order books and capacity utilisation.

11. Real GDP originating in the services sector rose by 10.6 per cent during 2007-08 as compared with 11.2 per cent a year ago. Activity in construction and financing, insurance, real estate and business services sector expanded by 9.6 per cent and 11.7 per cent, respectively, as compared with 12.0 per cent and 13.9 per cent in 2006-07. The growth of trade, hotels and restaurants, transport, storage and communication was 12.1 per cent in 2007-08, marginally higher than 11.8 per cent in 2006-07. Growth in community, social and personal services at 7.0 per cent was comparable to 6.9 per cent in the previous year.

12. Aggregate demand conditions in 2007-08 continued to be dominated by investment spending as in recent years. The growth of real gross fixed capital formation (GFCF) accelerated to 15.7 per cent from 15.1 per cent in the previous year. Real private final consumption expenditure (PFCE) increased by 6.8 per cent as compared with 7.1 per cent in 2006-07. In nominal terms, PFCE marginally declined to 55.5 per cent of GDP at current market prices during 2007-08 from 55.8 in 2006-07 and 57.4 per cent in 2005-06. On the other hand, GFCF increased to 34.6 per cent of GDP from 32.5 per cent in 2006-07 and 31.0 per cent in 2005-06.

13. The overall moderation in real sector activity was reflected in the evolution of monetary and banking developments in 2007-08. Non-food credit extended by the scheduled commercial banks (SCBs) increased by 22.3 per cent (Rs.4,19,425 crore) as compared with 28.5 per cent (Rs.4,18,282 crore) in the previous year. The incremental non-food credit-deposit ratio for the banking system declined to 72.3 per cent during 2007-08 from 83.2 per cent in 2006-07, 109.3 per cent in 2005-06 and 130.0 per cent in 2004-05. Food credit of SCBs declined by Rs.2,121 crore in 2007-08 as against an increase of Rs.5,830 crore in the previous year.

14. Provisional information on the sectoral deployment of bank credit available up to February 2008 indicates, as anticipated, a gradual deceleration over the year. On a year-on-year basis, credit to services sector recorded the highest growth (28.4 per cent), followed by industry (25.9 per cent) and agriculture sector (16.4 per cent). On the other hand, growth in personal loans decelerated to 13.2 per cent (30.6 per cent). Growth in housing and real estate loans decelerated to 12.0 per cent (25.8 per cent) and 26.7 per cent (79.0 per cent), respectively. Within the industrial sector, there was a sizeable credit pick-up in respect of infrastructure (42.1 per cent as against 28.2 per cent a year ago), food processing (32.0 per cent as against 27.6 per cent) and engineering (26.2 per cent as against 18.1 per cent). There was moderation in credit growth to basic metals and metal products (19.0 per cent as against 33.3 per cent), textiles (23.0 per cent as against 35.5 per cent), petroleum (23.3 per cent as against 64.4 per cent) and chemicals (13.9 per cent as against 19.2 per cent). Credit to industry constituted 45.2 per cent of the total expansion in non-food bank credit up to February 2008, followed by services (29.8 per cent), personal loans (15.8 per cent) and agriculture (9.2 per cent). The share of infrastructure in total credit to industry increased from 20.5 per cent to 23.1 per cent. On the contrary, the share of credit to metals, textiles, chemicals and petroleum declined from 12.4 per cent, 11.3 per cent, 8.3 per cent and 4.9 per cent, respectively, to 11.7 per cent, 11.1 per cent, 7.5 per cent and 4.8 per cent. Priority sector advances grew by 16.9 per cent with a moderation in their share in outstanding gross bank credit to 33.3 per cent in February 2008 from 34.7 per cent a year ago.

15. SCBs' investments in bonds/debentures/shares of public sector undertakings and the private corporate sector and commercial paper (CP) increased by 14.2 per cent (Rs.11,830 crore) during 2007-08 as compared with an increase of 5.1 per cent (Rs.4,081 crore) in the previous year. As a result, the total flow of funds from SCBs to the commercial sector, including non-SLR investments, increased by 21.9 per cent (Rs.4,31,256 crore) in 2007-08 as against 27.3 per cent (Rs.4,22,363 crore) in 2006-07. Banks' investment in instruments issued by mutual funds increased by Rs.6,818 crore in 2007-08 as compared with Rs.1,315 crore in 2006-07.

16. Commercial banks' investment in Government and other approved securities increased by 22.9 per cent (Rs.1,81,222 crore) during 2007-08 significantly higher than 10.3 per cent (Rs.74,062 crore) in 2006-07. Accordingly, their stock of statutory liquidity ratio (SLR) eligible securities marginally increased to 27.4 per cent of the banking system's net demand and time liabilities (NDTL) in March 2008 from 27.3 per cent in March 2007. Bank's holdings of SLR securities in excess of the prescribed ratio of 25 per cent amounted to Rs.1,02,422 crore although several banks are operating their SLR portfolios close to the prescribed level. Adjusted for collateral securities under the liquidity adjustment facility (LAF) and issuances under the market stabilisation scheme (MSS), banks' investment in SLR-eligible securities would amount to 23.7 per cent of NDTL.

17. Aggregate deposits of SCBs increased by 22.2 per cent (Rs.5,80,208 crore) during 2007-08 as compared with 23.8 per cent (Rs.5,02,885 crore) in the previous year. Demand deposit growth at 20.2 per cent was higher than 17.9 per cent in 2006-07 but time deposit growth moderated to 22.6 per cent from 25.1 per cent in the previous year. In addition to the mobilisation of deposits, the banking sector's lendable resources were augmented substantially by capital raised through public issues and innovative capital instruments during 2007-08.

18. Money supply (M3) increased by 20.7 per cent (Rs.6,86,096 crore) in 2007-08 as compared with 21.5 per cent (Rs.5,86,548 crore) in 2006-07. Bank credit to the commercial sector increased by 20.3 per cent (Rs.4,32,574 crore) in 2007-08 as compared with the increase of 25.8 per cent (Rs.4,37,074 crore) a year ago. Net bank credit to Government recorded an increase of Rs.67,363 crore, with increase in banks' investment of Rs.1,83,338 crore in Government securities offset by a decline of Rs.1,15,975 crore (net) in Reserve Bank's credit to Government. The large increase in net foreign exchange assets of the Reserve Bank was reflected in the increase of 38.7 per cent (Rs.3,53,118 crore) in the banking sector's net foreign exchange assets.

19. Reserve money increased by 30.9 per cent (Rs.2,19,326 crore) during 2007-08 as compared with 23.7 per cent (Rs.1,35,935 crore) in the previous year. While currency in circulation rose by 17.2 per cent (Rs.86,606 crore) in 2007-08 as compared with the increase of 17.1 per cent (Rs.73,523 crore) in the preceding year, bankers' deposits with the Reserve Bank increased substantially by 66.5 per cent (Rs.1,31,152 crore) augmented by the increase of 150 basis points in cash reserve ratio (CRR) during the year as compared with the increase of 45.6 per cent (Rs.61,784 crore) in 2006-07. Among the sources of reserve money, the Reserve Bank's foreign currency assets (adjusted for revaluation) increased by Rs.3,70,550 crore as compared with the increase of Rs.1,64,601 crore in the previous year. The Reserve Bank's net credit to the Central Government (adjusted for the Government's deposit balances including the MSS proceeds) declined by Rs.7,070 crore in 2007-08 as against an increase of Rs.30,888 crore in 2006-07. Reflecting the liquidity conditions, the Reserve Bank's credit to banks and the commercial sector declined by Rs.2,794 crore as compared with an increase of Rs.1,990 crore in the previous year. The ratio of net foreign exchange assets (NFEA) to currency increased from 171.8 per cent in March 2007 to 209.2 per cent in March 2008.

20. During the year, the financial markets experienced alternating shifts in liquidity conditions. Tightness in liquidity on account of year-end adjustments in March 2007 persisted up to April-May, necessitating net repo injections under the LAF. There was substantial drawdown in the Centre's cash balances during May-July 2007 and a dip in MSS outstanding in June-July 2007 due to redemptions. The total overhang of liquidity as reflected in the balances under the LAF, the MSS and surplus cash balances of the Central Government taken together declined from an average of Rs.97,412 crore in March 2007 to Rs.63,994 crore in July 2007. The resumption of net issuances under the MSS, accretions to Centre's cash balances and the increase in CRR by 100 basis points during August-November 2007 led to a reduction in the liquidity in the banking system and intermittent net liquidity injections of Rs.2,742 crore and Rs.10,804 crore on a daily average basis in November and December 2007, respectively. Auctions of dated securities under MSS were discontinued between November 2, 2007-January 16, 2008 to ease the stringency in liquidity. The liquidity overhang ruled steady in the range of Rs.2,13,847 crore-Rs.2,18,224 crore during October-December 2007.

21. During the fourth quarter of 2007-08, even though liquidity conditions were comfortable in January 2008 and MSS auctions were resumed in mid-January 2008, some tightness emerged during February 18-28, on account of increase in the Centre's cash balances. In view of the scheduled advance tax payments in mid-March 2008 and the subsequent bank holidays (March 20-22, 2008), the Reserve Bank conducted additional three-day repo/reverse repo auctions on March 14, 2008 (afternoon) and another seven-day repo auction on March 17, 2008 (afternoon) over and above the normal LAF arrangements for smooth liquidity management. Injection of liquidity through LAF repo and redemption of MSS around mid-February 2008 onwards, mitigated the liquidity tightness. During March 17-31, 2008 there were shortages of liquidity in the wake of advance tax payments. Net LAF injections rose to a peak of Rs.53,995 crore on March 31, 2008; however, in the additional LAF operations conducted on that day with a view to meeting the banking sector's year-end liquidity management requirements, there was absorption of liquidity under the LAF to the tune of Rs.3,645 crore. The build-up of cash balances of the Central Government to a peak of Rs.1,04,741 crore on March 27, 2008 also aggravated the liquidity shortage with banks. The overall liquidity overhang increased to the intra-year peak of Rs.2,73,694 crore on March 27, 2008 before declining to Rs.2,43,879 crore on April 25, 2008.

22. On a net basis, average daily LAF repo injections which stood at Rs.4,568 crore in the first quarter of 2007-08 changed to net absorption through LAF reverse repo of Rs.13,472 crore in the second quarter which declined sharply to Rs.7,820 crore in the third quarter and further to Rs.2,116 crore during the fourth quarter of 2007-08. During 2008-09 (up to April 25, 2008), the average daily net absorption under LAF reverse repo increased to Rs.28,271 crore. The average outstanding balances under MSS increased from Rs.64,863 crore at end-March 2007 to Rs.1,70,554 crore by end-March 2008 and further to Rs.1,74,465 crore on April 25, 2008 indicating net issuance of Rs.1,05,691 crore during 2007-08. Cash balances of the Central Government with the Reserve Bank increased from an average of Rs.55,890 crore in March 2007 to Rs.79,409 crore in March 2008 before declining to Rs.36,649 crore as on April 25, 2008.

23. On a year-on-year basis, inflation based on the wholesale price index (WPI) stood at 7.4 per cent at end-March 2008 as compared with 5.9 per cent a year ago. During 2007-08, headline inflation declined from 6.4 per cent at the beginning of the financial year to a low of 3.1 per cent in mid-October before firming up from mid-February 2008 onwards. On an annual average basis, inflation at 4.7 per cent during 2007-08 was lower than 5.4 per cent in the previous year. As on April 12, 2008 the headline inflation stood at 7.3 per cent as against 6.3 per cent a year ago.

24. At a disaggregated level, prices of primary articles (weight: 22.0 per cent in the WPI basket) registered a year-on-year increase of 8.9 per cent at end-March 2008 as compared with 10.7 per cent a year ago. The increase in prices of primary articles during 2007-08 was led by the rise in prices of food articles and non-food articles such as cotton and oilseeds. As on February 1, 2008 the stock of foodgrains with public agencies stood at 21.4 million tonnes as against the buffer stock norm of 20.0 million tonnes applicable for January-March, 2008. The build-up in food stocks on the back of the jump in foodgrains production during 2007-08 provides some comfort for supply management. Wheat procurement during the current rabi marketing season has also risen by 20.6 per cent on a year-on-year basis, strengthening food security strategies and conditions for stabilisation of domestic food prices going forward.

25. Inflation in terms of prices of manufactured products (weight: 63.8 per cent) was 7.1 per cent as compared with 6.1 per cent a year ago. Prices of edible oils, oil cakes, basic metals, alloys and metal products and basic heavy inorganic chemicals contributed to the rise in manufacturing prices in 2007-08. On the other hand, prices of textiles, leather and leather products and non-ferrous metals declined during the year.

26. The year-on-year increase in prices of the 'fuel, power, light and lubricants' group (weight: 14.2 per cent) was 6.7 per cent at end-March 2008 as compared )with 1.0 per cent a year ago. Excluding the fuel group, headline inflation was 7.6 per cent (7.4 per cent a year ago). The average price of the Indian basket of international crude increased by 27.6 per cent from US $ 62.4 per barrel during 2006-07 to US $ 79.7 per barrel in 2007-08. While there has been no revision in prices of kerosene and domestic LPG during 2007-08, domestic retail prices of petrol and diesel have been revised upwards only once during 2007-08 with effect from February 15, 2008 by 4.5 per cent for petrol and by 3.25 per cent for diesel (average of four metros). Among the freely priced petroleum products, however, prices of naptha, bitumen, furnace oil and aviation turbine fuel, recorded increases of 33.7 per cent, 36.4 per cent, 37.6 per cent and 38.7 per cent, respectively, over their levels a year ago.

27. Inflation, on a year-on-year basis, based on the consumer price index (CPI) for industrial workers (IW) stood at 5.5 per cent in February 2008 as compared with 7.6 per cent a year ago. The CPI for urban non-manual employees (UNME), agricultural labourers (AL) and rural labourers (RL) also declined to 6.0 per cent, 7.9 per cent and 7.6 per cent, respectively, in March 2008 as compared with 7.6 per cent, 9.5 per cent and 9.2 per cent a year ago. On an annual average basis, inflation based on CPI for IW was 6.1 per cent in February 2008 compared with 6.6 per cent a year ago and that for UNME, AL and RL were 5.9 per cent, 7.5 per cent and 7.2 per cent, respectively, in March 2008 as compared with 6.6 per cent, 7.8 per cent and 7.5 per cent a year ago.

28. The revised estimates (RE) of the Central Government's finances for 2007-08 indicate ongoing improvement in the fiscal position and lowering of the key deficit indicators relative to budget estimates (BE). The revenue deficit estimated at 1.4 per cent of GDP (Rs.63,488 crore) was lower than 1.5 per cent of GDP in the BE for 2007-08 and 1.9 per cent of GDP in 2006-07. The gross fiscal deficit (GFD) for 2007-08 constituted 3.1 per cent of GDP (Rs.1,43,653 crore) as against the budget estimates of 3.3 per cent and 3.5 per cent in 2006-07. The improvement in key fiscal indicators was largely enabled by the sustained buoyancy in tax revenue which, at Rs.4,31,773 crore (RE) was 6.9 per cent higher than the budget estimates and recorded a growth of 22.9 per cent over the previous year.

29. During 2007-08, the Central Government's net market borrowing through dated securities at Rs.1,10,671 crore was 101.0 per cent of the budgeted amount of Rs.1,09,579 crore and gross market borrowing of Rs.1,56,000 crore through dated securities was 100.35 per cent of the budgeted amount of Rs.1,55,455 crore. The Central Government also issued additional securities amounting to Rs.38,050 crore, outside the market borrowing programme and the MSS, to public sector oil companies for partial compensation of under-recoveries, to the State Bank of India and to various fertiliser companies. During 2006-07, the Central Government had issued such securities amounting to Rs.40,321 crore. The State Governments and the Union Territory of Pondicherry raised Rs.67,779 crore (gross) and Rs.56,224 crore (net) during 2007-08 under their market borrowing programme. The combined issuance (net) of Government securities under the market borrowing programme of the Centre and States was Rs.1,66,895 crore in 2007-08 as against Rs.1,21,190 crore in 2006-07, Rs.1,10,825 crore in 2005-06, Rs.80,012 crore in 2004-05 and Rs.1,35,192 crore in 2003-04.

30. Out of 35 issuances under the market borrowing programme of the Central Government, one new 10-year paper was issued and the remaining 34 issues were reissuances intended to impart liquidity. The actual issuance of dated securities under the Centre's market borrowing programme was generally as per the advance calendar except for one occasion when, in consultation with the Central Government, securities for Rs.5,000 crore were issued on June 12, 2007 over and above the scheduled issuances in the indicative calendar for the first half of 2007-08. The weighted average yield on primary issuance of the Central Government's dated securities increased by 23 basis points to 8.12 per cent in 2007-08 from 7.89 per cent in the previous year whereas the weighted average maturity of the dated securities issued during the year increased to 14.90 years from 14.72 years in the previous year. In the case of market borrowing by State Governments, the weighted average yields firmed up by 15 basis points to 8.25 per cent in 2007-08 from 8.10 per cent in 2006-07, whereas the average maturity of these issues has remained the same at 10.0 years.

31. Movements in interest rates in the domestic financial markets reflected the factors driving changes in liquidity with the banking system during 2007-08. The weighted average call market rates declined from 8.33 per cent in April 2007 to 0.73 per cent in July 2007 coincident with a ceiling of Rs.3,000 crore placed on daily reverse repo from March 5, 2007. The rates moved up in August following the removal of the ceiling but generally stayed within the informal LAF rate corridor up to December 2007. As liquidity conditions tightened, call money rates strayed, albeit marginally, above the repo rate during the last fortnight of February and in March 2008. The daily weighted average call rate during March 2008 was much lower at 7.37 per cent as compared with 14.10 per cent in March 2007. In April 2008, call rates declined further and the weighted average call rate stood at 5.93 per cent as on April 25, 2008. Interest rates in the CBLO and market repo segments moved in sympathy with call rates and declined from December 2007 peaks to 6.37 per cent and 6.72 per cent, respectively, in March 2008 and further to 4.93 per cent and 5.45 per cent in April 2008 (up to April 25, 2008). The daily average volume (one leg) in the call money market declined from Rs.14,845 crore in April 2007 to Rs.11,182 crore in March 2008 and further to Rs.9,374 crore in April 2008 (up to April 25, 2008). The corresponding volumes in the market repo (outside the LAF) were Rs.7,173 crore, Rs.14,800 crore and Rs.11,911 crore respectively, whereas in the CBLO segment, the volumes were Rs.18,086 crore, Rs.37,413 crore and Rs.31,297 crore, respectively.

32. Mobilisation of resources through issuance of commercial papers (CPs) was stepped up during 2007-08 as the weighted average discount rate on CP declined by 95 basis points from 11.33 per cent at end-March 2007 to 10.38 per cent in end-March 2008 and the outstanding amount of CPs increased from Rs.17,688 crore to Rs.32,592 crore during this period. The weighted average discount rate for certificates of deposit (CDs) also declined from 10.75 per cent at end-March 2007 to 10.00 per cent in end-March 2008, accompanied by a significant increase in outstanding amounts from Rs.93,272 crore to Rs.1,47,792 crore.

33. In the Government securities market, primary market yields of 91-day, 182-day and 364-day Treasury Bills softened over the course of 2007-08, declining by 63-84 basis points to reach 7.23 per cent, 7.36 per cent and 7.35 per cent, respectively, by end-March 2008. By April 25, 2008 the primary market yields of 91-day, 182-day and 364-day Treasury Bills stood at 7.44 per cent, 7.60 per cent and 7.69 per cent, respectively. In the secondary market, the yield on Government securities with 1-year residual maturity declined from 7.55 per cent at end-March 2007 to 7.49 per cent in March 2008 before increasing to 7.84 per cent as on April 25, 2008. The yield on Government securities with 10-year residual maturity declined marginally from 7.97 per cent in March 2007 to 7.93 per cent before rising to 8.23 per cent by April 25, 2008 while the yield on Government securities with 20-year residual maturity increased from 8.23 per cent at end-March 2007 to 8.31 per cent at end-March 2008 and further to 8.63 per cent as on April 25, 2008. Consequently, the yield spread between 10-year and 1-year Government securities increased marginally from 42 basis points at end-March 2007 to 44 basis points at end-March 2008 before declining to 39 basis points as on April 25, 2008. Similarly, the yield spread between 20-year and 1-year Government securities increased from 68 basis points at end-March 2007 to 82 basis points at end-March 2008 and subsequently declined marginally to 79 basis points as on April 25, 2008.

34. Rapid growth in turnover in the foreign exchange market was sustained by large surplus conditions in the spot market. The average daily turnover increased to US $ 57.30 billion at end-March 2008 from US $ 33.18 billion at end-March 2007. With increasing volumes of current and capital account transactions, the merchant turnover for the period increased to US $ 16.37 billion from US $ 8.66 billion, while the inter-bank turnover increased to US $ 40.88 billion from US $ 24.52 billion. There was a general softening in forward premia across all maturities over end-March 2007 but some hardening was witnessed after September 2007. The six-month forward premia eased from 4.40 per cent in March 2007 to 2.55 per cent by end-June 2007 and further to 0.78 per cent by end-September before it increased to 2.50 per cent at end-March 2008 and further to 2.67 per cent by April 25, 2008.

35. During March 2007-March 2008, pubic sector banks (PSBs) readjusted their deposit rates downwards by 25-50 basis points, while those offering lower deposit rates for similar maturity earlier increased their deposit rates by 50-100 basis points. Similarly, PSBs paying higher interest rates earlier on shorter term deposits of up to one year maturity also revised their deposit rates downwards by 25 basis points. In particular, the interest rates offered by the PSBs on deposits of above one year maturity moved from the range of 7.25-9.50 per cent in March 2007 to 8.00-9.25 per cent in March 2008, while deposit rates for shorter term deposits of up to one year maturity decreased from the range of 2.75-8.75 per cent to 2.75-8.50 per cent during the same period. On the other hand, private sector banks increased their interest rates for long term deposits of above one year maturity from a range of 6.75-9.75 per cent to 7.25-9.75 per cent during the same period. Foreign banks set deposit rates lower for maturities of less than one year while they have marginally raised their rates for deposits of longer maturities.

36. On the lending side, the benchmark prime lending rates (BPLRs) of PSBs increased by 75 basis points from a range of 12.25-12.75 per cent to 12.25-13.50 per cent during 2007-08. The private sector banks increased their BPLR from a range of 12.00-16.50 per cent to a range of 13.00-16.50 per cent, in the same period. The range of BPLRs for foreign banks, however, remained unchanged at 10.00-15.50 per cent during the same period. The median lending rates for term loans (at which maximum business is contracted) in respect of PSBs moved from a range of 9.13-12.50 per cent in March 2007 to 10.00-13.00 per cent by March 2008.

37. The Indian equity market witnessed large swings during 2007-08. The BSE Sensex (1978-79=100) increased by 19.7 per cent during the year from 13072 at end-March 2007 to 15644 at end-March 2008. The intra-year peak of 20873 was recorded on January 8, 2008 whereas the intra-year trough of 12445 was recorded on April 2, 2007. Corporates mobilised large resources through public issues during the year. Sound macroeconomic fundamentals, private corporate profitability, institutional buying support and global macroeconomic conditions were the major factors determining the movements in equity prices. As on April 25, 2008 the BSE Sensex stood at 17126.

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