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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
Developments in External Sector
34. During 2004-05 (up to February), India’s exports in US dollar terms increased by 27.1 per cent as compared with 16.4 per cent in the previous year. Imports showed a higher increase of 36.4 per cent as compared with 25.0 per cent in the previous year. While the increase in oil imports was even higher at 44.6 per cent as compared with 15.7 per cent in the previous year, non-oil imports showed an increase of 33.3 per cent as compared with 28.8 per cent in the previous year. Consequently, the trade deficit widened to US $ 23.8 billion as compared with US $ 13.7 billion in the previous year.
35. At a further disaggregated level, non-oil trade balance registered a deficit of US $ 4.8 billion during 2004-05 (April-January) as against a surplus of US $ 1.3 billion in the corresponding period of the previous year. Non-oil imports, excluding gold and silver, increased by 33.8 per cent as compared with an increase of 24.8 per cent in the corresponding period of the previous year. Import of gold and silver increased by 60.8 per cent over and above a growth of 50.9 per cent in the corresponding period last year. Import of capital goods showed an increase of 32.1 per cent as compared with an increase of 30.1 per cent in the corresponding period of the previous year, reflecting strength of investment demand. Growth in exports was generally broad-based with primary products showing an increase of 24.7 per cent and manufactured goods expanding by 22.2 per cent; particularly, engineering goods, gems & jewellery and chemicals were the key drivers in manufacturing exports.
36. The current account of the balance of payments (BoP) had remained in surplus consecutively over the past three years (2001-04). During 2004-05 (April-December), the current account showed a deficit of US $ 7.4 billion as against a surplus of US $ 4.8 billion in the corresponding period of the previous year, reflecting widening of trade deficit. The trade deficit (on payments basis) of US $ 28.4 billion was partially offset by net invisible receipts of US $ 21.0 billion. Major items of net invisible receipts included software services (US $ 12.2 billion) and private transfers (US $ 15.5 billion). However, increase in capital inflows more than offset the current account deficit. While net invisible receipts remain robust, the current account for the year as a whole is likely to exhibit a deficit on account of widening of trade deficit.
37. The net capital inflows at US $ 20.7 billion during April-December 2004 comprised portfolio investment (US $ 5.1 billion), direct investment (US $ 2.2 billion), external commercial borrowings (US $ 4.1 billion), short-term credit (US $ 2.7 billion) and other capital (US $ 4.3 billion), while NRI deposits registered net outflows (US $ 1.3 billion). As a result, net accretion to foreign exchange reserves, including valuation changes, amounted to US $ 18.2 billion during April-December 2004.
38. During 2004-05, the Indian foreign exchange market witnessed orderly conditions with Rupee exhibiting two-way movements. The Rupee came under some pressure during April-July 2004 on account of adverse developments in the Indian equity market, rising global oil prices and a fall in capital inflows. The exchange rate of the Rupee which stood at Rs.43.39 per US dollar at end-March 2004 depreciated by 6.6 per cent to Rs.46.45 per US dollar by end-July 2004. The Rupee recovered and stood at Rs.43.75 per US dollar at end-March 2005. During 2004-05, the Rupee depreciated by 0.8 per cent against the US dollar, 6.2 per cent against Euro, 3.1 per cent against Pound sterling but appreciated by 1.9 per cent against Japanese yen. India’s foreign exchange reserves increased by US $ 28.5 billion from US $ 113.0 billion at end-March 2004 to US $ 141.5 billion by end-March 2005.
39. 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.
Return to main page of Annual Policy Statement for the Year 2005-06
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