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Click here to return to main page of Annual Policy Statement 2007-08
Part I. Annual Statement on Monetary Policy for the Year 2007-08
I. Review of Macroeconomic and Monetary Developments during 2006-07
Developments in the External Sector
40.Balance of payments data released at the end of March 2007 indicate sustained strength and vibrancy in the external sector over the first nine months of 2006-07, reflecting the robust macroeconomic fundamentals. While merchandise export growth remained strong as in the past few years, it decelerated in US dollar terms to 22.5 per cent in April-December 2006 from 29.5 per cent in the corresponding period of 2005-06. The loss of momentum was mainly due to lower growth in exports of chemicals and related products, textile and related products, leather and manufactures and a decline in exports of handicrafts and gems and jewellery. Merchandise import growth also decelerated to 25.3 per cent from 36.2 per cent a year ago, mainly due to moderation of non-oil import growth to 18.6 per cent from 34.3 per cent in April-December 2005. Oil imports increased by 39.2 per cent as against 46.9 per cent during April-December 2005 with the persistent high growth in these imports due to elevated international crude oil prices and strong volume growth. Provisional information on commodity-wise imports available from the Directorate General of Commercial Intelligence and Statistics (DGCI&S) shows that imports of gold and silver increased by 21.3 per cent during April-November 2006 as against 27.4 per cent a year ago. The merchandise trade deficit increased to US $ 52.3 billion during April-December 2006 from US $ 40.1 billion in the corresponding period of 2005-06.
41.Net invisible earnings amounted to US $ 40.5 billion in April-December 2006 as against US $ 28.1 billion a year ago. Buoyant exports of software, transportation services, the continuing strength of remittances from Indians working overseas and the growing net exports of various professional and business services underpinned the strength of net invisible receipts. Within the category of invisible transactions, private transfers, comprising primarily remittances from Indians working overseas, remained sizeable at US $ 19.6 billion as compared with US $ 17.2 billion a year ago. Software export proceeds amounted to US $ 21.8 billion as against US $ 16.6 billion in April-December 2005. Non-software miscellaneous services also increased substantially to US $ 21.6 billion from US $ 14.7 billion a year ago. Invisible payments increased by 18.9 per cent mainly on account of payments for business services such as management consultancy, engineering, technical know-how and dividend and profit payouts. Reflecting these developments in the merchandise and invisible accounts, the current account deficit (CAD) at US $ 11.8 billion was broadly at the level in the corresponding period of the previous year.
42.Net capital inflows during April-December 2006 at US $ 27.3 billion comprised both debt and non-debt inflows. While net foreign direct investment (FDI) rose to US $ 5.8 billion from US $ 3.3 billion in April-December 2005, portfolio investment slowed down markedly from US $ 8.2 billion to US $ 5.2 billion over the same period, partly reflecting the impact of the stock market turbulence of May-June 2006. There was a major turnaround in external commercial borrowings (ECBs) which increased by US $ 9.1 billion as against a decline of US $ 1.2 billion in the previous year (which had included a one-off principal repayment of US $ 5.5 billion for India Millennium Deposits). Non-Resident Indian (NRI) deposits also registered a higher increase of US $ 3.2 billion than that of US $ 1.1 billion in April-December 2005. On the whole, debt flows (net) in the form of external assistance, external commercial borrowings (ECBs), NRI deposits and short-term credit put together increased substantially to US $ 14.5 billion in April-December 2006 from US $ 2.7 billion a year ago.
43.Net accretion to foreign exchange reserves, excluding valuation changes, amounted to US $ 16.2 billion during April-December 2006 as against US $ 1.8 billion in April-December 2005. Valuation gains, reflecting the appreciation of major currencies against the US dollar, accounted for US $ 9.4 billion of the total accretion to the reserves during April-December 2006 as against a valuation loss of US $ 6.1 billion in the corresponding period of 2005-06. The foreign exchange reserves, including valuation changes, recorded an increase of US $ 25.6 billion during April-December 2006 and rose to reach a level of US $ 199.2 billion by end-March 2007. As on April 13, 2007 the foreign exchange reserves stood at US $ 203.1 billion.
44.India’s external debt increased by US $ 16.2 billion from end-March 2006 to US $ 142.7 billion at end-December 2006. The increase was mainly under ECBs (US $ 9.1 billion) and NRI deposits (US $ 3.2 billion). The ratio of short-term debt to total debt increased from 6.9 per cent in March 2006 to 7.0 per cent at end-December 2006.
45.Information available for subsequent months from the DGCI&S indicates that merchandise exports in US dollar terms increased by 19.3 per cent during 2006-07 (April-February) as compared with 26.3 per cent in the previous year. Imports showed an increase of 27.8 per cent as compared with 32.7 per cent in the previous year. While the increase in oil imports was lower at 32.6 per cent as compared with 49.7 per cent in the previous year, non-oil import growth at 25.7 per cent was comparable to 26.4 per cent in the previous year. During April-February 2006-07, the trade deficit widened to US $ 55.8 billion which was 48.5 per cent higher than the deficit of US $ 37.6 billion in the corresponding period of the previous year.
46.Updated information on capital flows shows that net FDI flows, accretions to NRI deposits, and capital issues under American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs) continued to support capital inflows. Gross FDI inflows increased to US $ 16.4 billion during April-January 2006-07 from US $ 5.8 billion in the corresponding period in the previous year. It may be noted that the classification of flows under FDI includes sizeable investments from private equity funds and venture capital funds. Furthermore, one transaction amounting to US $ 3.1 billion involving swap of shares was reflected in both FDI inflows and outflows and, as such, did not have any net impact. Inflows on account of Foreign Institutional Investors (FIIs) moderated to US $ 3.2 billion during 2006-07 from US $ 9.9 billion during 2005-06. Net inflows under NRI deposits were US $ 3.7 billion during April-January 2006-07 as compared with inflows of US $ 1.7 billion during the corresponding period of 2005-06. ADR/GDR issues by Indian companies amounted to US $ 3.5 billion during April-January 2006-07 as compared with US $ 2.1 billion a year ago.
47.The Indian foreign exchange market has witnessed generally orderly conditions during 2006-07 and the current financial year so far with the exchange rate exhibiting two-way movements. The exchange rate of the rupee against the US dollar, which was Rs.44.61 at end-March 2006 depreciated to Rs.46.95 by July 19, 2006 but appreciated thereafter to Rs.43.59 by end-March 2007. The rupee-euro exchange rates depreciated from Rs.54.20 at end-March 2006 to Rs.58.14 by end-March 2007. Overall, during 2006-07, the rupee appreciated by 2.3 per cent against the US dollar and 2.7 per cent against the Japanese yen, but depreciated by 6.8 per cent against the euro and by 9.0 per cent against the pound sterling. As on April 20, 2007 the exchange rate of rupee was Rs.41.99 per US dollar, Rs.57.22 per euro, Rs.84.22 per pound sterling and Rs.35.36 per 100 Japanese yen.
48.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.
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