First Quarter Review of Annual Monetary Policy for 2008-09
I. Assessment of Macroeconomic and
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Developments in the External Sector
36. Balance of payments data for January-March 2008 as well as for the full year 2007-08 were released by the Reserve Bank at end-June 2008. In US dollar terms, merchandise exports recorded an increase of 23.7 per cent during 2007-08 on a payments basis, as against 21.8 per cent in the previous year. Commodity-wise data released by the Directorate General of Commercial Intelligence and Statistics (DGCI&S) for 2007-08 indicate a pick-up in the growth of exports of primary products as well as manufactured goods. Agriculture and allied products, engineering goods, gems and jewellery and petroleum products contributed about 69 per cent of export growth during 2007-08.Merchandise imports on a payments basis rose by 29.9 per cent in 2007-08 as compared with 21.8 per cent in 2006-07. Imports of petroleum, oil and lubricants (POL) increased by 39.4 per cent on top of the growth of 30.0 per cent in 2006-07 mainly on account of an increase of 27.4 per cent in the average price of the Indian basket of crude oil during the year. POL imports in terms of quantity, however, showed a relatively moderate growth of 10.1 per cent. Non-oil import payments increased by 24.4 per cent, mainly on account of strong growth in imports of capital goods and gold and silver. As a result, the merchandise trade deficit widened to US $ 90.1 billion (7.7 per cent of GDP) on a payments basis in 2007-08 from US $ 63.2 billion (6.9 per cent of GDP) in the previous year.
37. During 2007-08, gross invisible receipts comprising services, current transfers and income at US $ 145.2 billion recorded an increase of 26.2 per cent and amounted to nearly 92 per cent of merchandise exports. There was sustained growth in software exports, travel and transportation along with steady inflows of remittance from overseas Indians. Private transfer receipts, mainly comprising remittances from Indians working overseas, amounted toUS $ 42.6 billion as compared with US $ 29.0 billion in 2006-07. Invisible payments increased by 17.7 per cent during 2007-08, mainly on account of a surge in travel payments related to outbound tourist traffic as also the impact of liberalisation of outward foreign exchange remittance for individuals, business and management consultancy services, engineering and technical services as well as dividend, profit and interest payouts. During 2007-08, the net invisibles surplus was US $ 72.7 billion as compared with US $ 53.4 billion in the previous year. Accordingly, the current account deficit (CAD) amounted to US $ 17.4 billion (1.5 per cent of GDP), up from US $ 9.8 billion (1.1 per cent of GDP) in 2006-07.
38. Gross capital inflows to India amounted to US $ 428.7 billion, while gross capital outflows were of the order of US $ 320.7 billion during 2007-08. Net capital flows at US $ 108.0 billion were 2.4 times and 4.2 times higher than net capital inflows during 2006-07 and 2005-06, respectively. Sizeable increases in net inflows were received under portfolio investment, external commercial borrowings (ECB), foreign direct investment (FDI), short-term credit and banking capital excluding non-resident Indian (NRI) deposits. Net FDI inflows amounted to US $ 15.5 billion in 2007-08, sizeably higher than US $ 8.5 billion in 2006-07. Inward FDI were channelised into sectors such as manufacturing, construction, business and computer services. Net ECBs of US $ 22.2 billion were higher than US $ 16.2 billion in the previous year and were enabled by finer spreads and rising financing requirements. Net portfolio inflows were significantly higher at US $ 29.3 billion than US $ 7.1 billion in 2006-07, mainly due to net foreign institutional investment (FII) inflows at US $ 20.3 billion as against US $ 3.2 billion, reflecting net purchases in the Indian stock market as well as resource mobilisation by the Indian companies through their global offerings of American Depository Receipts/Global Depository Receipts (ADRs/GDRs) in view of the favourable external market conditions. Driven by increased financing requirements of crude oil imports, net short-term trade credit increased by US $ 17.7 billion againstUS $ 6.6 billion in the previous year. Net accretion to NRI deposits increased marginally by US $ 0.2 billion as compared with US $ 4.3 billion in the previous year.
39. Reflecting the movements in current and capital accounts of the balance of payments, the accretion to foreign exchange reserves (excluding valuation) amounted to US $ 92.2 billion during 2007-08 which was much higher thanUS $ 36.6 billion in 2006-07. Foreign exchange reserves amounted toUS $ 309.7 billion at end-March 2008.
40. India's external debt increased by 30.4 per cent during 2007-08 and amounted to US $ 221.2 billion at end-March 2008. The increase was mainly due to ECBs and short-term borrowings that contributed around 39.5 per cent and 34.8 per cent, respectively, of the total increase of US $ 51.5 billion in external debt. Multilateral and bilateral debt registered a moderate increase. Valuation effects, reflecting the depreciation of the US dollar against other major international currencies and the Indian rupee, accounted for US $ 9.9 billion. The US dollar had a dominant share of 57.1 per cent in India's external debt whereas rupee-denominated debt had a share of 14.5 per cent. The share of short-term debt in total debt increased to 20.0 per cent at end-March 2008 from 15.5 per cent a year ago.
41. Information released by the DGCI&S indicates that exports increased by 21.7 per cent in US dollar terms during the first two months of the current financial year, as compared with 24.2 per cent in the corresponding period of the previous year. Imports rose by 31.8 per cent as compared with 37.9 per cent in the corresponding period of the previous year. While non-POL imports moderated to 24.6 per cent from 43.8 per cent a year ago, POL imports increased by 48.6 per cent on account of the surge in crude oil prices as compared with 25.7 per cent in the corresponding period of the previous year. As a result, the merchandise trade deficit widened to US $ 20.7 billion during April-May 2008 from US $ 13.9 billion in the corresponding period last year.
42. Available information points to deceleration in capital flows during the current financial year so far. Portfolio investment in India recorded net outflows by FIIs amounting to US $ 6.5 billion during 2008-09 (up to July 18, 2008); on the other hand, ADR/GDR issues by Indian companies amounted to US $ 999 million during April-May 2008 as compared with US $ 16 million in the corresponding period last year. Gross FDI inflows during April-May 2008 were placed at US $ 7.7 billion as against US $ 3.8 billion a year ago. There were net inflows of US $ 292 million during April-May 2008 under NRI deposits as against net outflows of US $ 559 million a year ago. The foreign exchange reserves declined marginally by US $ 2.6 billion during the current financial year so far and stood at US $ 307.1 billion on July 18, 2008.
43. The exchange rate of the rupee against the US dollar, which was Rs.39.97 at end-March 2008, depreciated thereafter to Rs.43.37 per US dollar on July 8, 2008 before appreciating somewhat to Rs.42.23 on July 25, 2008. During the current financial year up to July 25, 2008 the rupee depreciated by 5.4 per cent against the US dollar, by 5.0 per cent against the euro, by 5.2 per cent against the pound sterling and by 1.3 per cent against the Japanese yen. As on July 25, 2008 the exchange rate of the rupee was Rs.42.23 per US dollar, Rs.66.41 per euro, Rs.83.39 per pound sterling and Rs.39.58 per 100 Japanese yen.
44. 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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