Part I. Annual Statement on Monetary Policy for the Year 2008-09
Developments in the External Sector
38. The Reserve Bank's end-March 2008 release sets out the balance of payments data for April-December 2007. In US dollar terms, merchandise exports increased by 24.6 per cent during April-December 2007 from 23.9 per cent in April-December 2006. Provisional information on commodity-wise trade available from the Directorate General of Commercial Intelligence and Statistics (DGCI&S) shows that export growth in 2007-08 was driven by petroleum products, engineering goods and gems and jewellery. During the first nine months of 2007-08, merchandise import growth accelerated to 27.9 per cent from 27.7 per cent a year ago, mainly due to an increase of 29.9 per cent in non-oil imports from 22.7 per cent in April-December 2006. The growth in non-oil imports was mainly due to capital goods, pearls and precious stones, chemicals, and gold and silver. Oil imports increased by 24.0 per cent as against 39.4 per cent during April-December 2006 as the average price of the Indian basket of international crude recorded an annual increase of 15.9 per cent to US $ 74.7 per barrel in April-December 2007. On payments basis, the merchandise trade deficit increased to US $ 66.5 billion during April-December 2007 from US $ 50.3 billion in the corresponding period of 2006-07.
39. Net invisible earnings amounted to US $ 50.5 billion in April-December 2007 as against US $ 36.3 billion a year ago. The key contributors to invisibles were remittances from Indians working overseas, export of software services and travel earnings. Private transfers, comprising primarily remittances from overseas Indians, remained sizeable at US $ 28.8 billion as compared with US $ 20.2 billion a year ago. While the inward remittances for family maintenance increased by 39.0 per cent, local withdrawals from non-resident Indian (NRI) deposit accounts were higher by 49.0 per cent which may be attributed to higher returns domestically vis-à-vis NRI deposits. Software export proceeds amounted to US $ 27.5 billion as against US $ 21.8 billion in April-December 2006. Miscellaneous receipts, net of software exports, stood at US $ 18.1 billion in April-December 2007 as compared with US $ 17.6 billion a year ago, mainly on account of business services such as trade-related services, business and management consultancy, engineering and technical know-how. Invisible payments increased to US $ 49.7 billion during the first nine months of 2007-08 as compared with US $ 43.1 billion a year ago. The key components of invisible payments were travel payments, transportation, business and management consultancy, technical services, dividends, profit and interest payments. With invisible receipts rising faster than payments, the net invisible surplus increased from US $ 36.3 billion in April-December 2006 to US $ 50.5 billion in April-December 2007. Reflecting these developments in the merchandise and invisible accounts, the current account deficit (CAD) at US $ 16.0 billion was higher than US $ 14.0 billion in the corresponding period of the previous year.
40. Net capital inflows surged by 172 per cent to US $ 81.9 billion during April-December 2007 as compared with US $ 30.1 billion a year ago. While net foreign direct investment (FDI) increased by US $ 8.4 billion from US $ 7.6 billion in April-December 2006, portfolio investment recorded a substantial increase of US $ 33.0 billion from US $ 5.2 billion. Enabled by finer spreads and in response to rising financing requirements for domestic capacity expansion, net external commercial borrowings (ECBs) increased to US $ 16.3 billion as against an increase of US $ 9.8 billion in the previous year. During the first nine months of 2007-08, NRI deposits registered a net outflow of US $ 0.9 billion as against an increase of US $ 3.7 billion in April-December 2006, responding to the reduction in the ceiling on interest rate on NRI deposits in April 2007. Net short-term trade credit rose to US $ 10.8 billion as compared with US $ 5.7 billion a year ago. On the whole, debt flows (net) in the form of external assistance, ECBs, NRI deposits and short-term credit put together increased to US $ 27.5 billion in April-December 2007 from US $ 20.2 billion a year ago.
41. There was a large accretion of US $ 67.2 billion to foreign exchange reserves, excluding valuation changes, during April-December 2007 as against US $ 16.2 billion in April-December 2006. Valuation gains, reflecting the appreciation of major currencies against the US dollar, accounted for US $ 8.9 billion of the total accretion to the reserves during April-December 2007. Including these valuation effects, the foreign exchange reserves recorded an increase of US $ 76.1 billion and rose to reach a level of US $ 275.3 billion by end-December 2007. India's external debt increased by US $ 31.8 billion from end-March 2007 to US $ 201.4 billion at end-December 2007. The increase was mainly under ECBs (US $ 15.3 billion) and short-term credit (US $ 8.8 billion). Valuation changes due to the depreciation of the US dollar vis-à-vis major international currencies and the Indian rupee, accounted for US $ 6.0 billion of the increase in external debt during the period. In the total external debt stock, ECBs accounted for the highest share (28.3 per cent), followed by NRI deposits (21.4 per cent), multilateral debt (18.8 per cent) and bilateral debt (8.6 per cent). At end-2007, the ratio of short-term debt to total debt was 17.5 per cent. The share of US dollar-denominated debt in total debt was highest at 54.5 per cent, followed by 17.1 per cent in rupee-denominated debt and 11.2 per cent in Japanese yen-denominated debt.
42. Information available for subsequent months from the DGCI&S indicates that merchandise exports increased by 22.8 per cent in US dollar terms during April-February 2007-08 as compared with 23.2 per cent in the corresponding period of the previous year. On the other hand, imports showed an increase of 30.1 per cent as compared with 25.2 per cent. While the increase in oil imports was lower at 26.4 per cent as compared with 31.2 per cent, non-oil import recorded a higher growth of 31.8 per cent as compared with 22.6 per cent. During April-February 2007-08, the trade deficit widened to US $ 72.5 billion which was 46.8 per cent higher than the deficit of US $ 49.4 billion in the corresponding period of the previous year.
43. The sustained strength of capital flows during the year is noteworthy. Net portfolio flows on account of investments by FIIs surged to US $ 20.3 billion in 2007-08 from US $ 3.2 billion in the previous year. Net inflows in the form of FDI rose to US $ 25.5 billion in April-February 2007-08 from US $ 19.6 billion a year ago. Net inflows under ADRs/GDRs increased to US $ 8.7 billion from US $ 3.8 billion. On the other hand, net accretions to NRI deposits amounted to US $ 0.1 billion as against US $ 3.9 billion. During 2007-08, the foreign exchange reserves increased by US $ 110.5 billion to US $ 309.7 billion by end-March 2008 and stood at US $ 313.5 billion as on April 18, 2008.
44. The Indian foreign exchange market witnessed generally orderly conditions during 2007-08 with the exchange rate exhibiting two-way movements. The exchange rate of the rupee against the US dollar, which was Rs.43.59 at end-March 2007 appreciated by 5.6 per cent to Rs.41.29 at end-April 2007 and further to Rs.39.27 by January 8, 2008. In the subsequent period the exchange rate depreciated, easing to Rs.39.97 per US dollar by end-March 2008. The rupee-euro exchange rate depreciated from Rs.58.14 at end-March 2007 to Rs.63.09 by end-March 2008. Overall, during 2007-08, the rupee appreciated by 9.1 per cent against the US dollar and by 7.5 per cent against pound sterling but depreciated by 7.7 per cent against the Japanese yen, and by 7.8 per cent against the euro. As on April 25, 2008 the exchange rate of the rupee was Rs.40.18 per US dollar, Rs.62.90 per euro, Rs.79.25 per pound sterling and Rs.38.47 per 100 Japanese yen.
45. 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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