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Full Text of First Quarter Review of Annual Monetary Policy for the Year 2007-08 click here

First Quarter Review of Annual Monetary Policy for the Year 2007-08

I. Assessment of Macroeconomic and Monetary Developments Domestic Developments

2. At the end of May 2007, the Central Statistical Organisation (CSO) released quarterly real GDP growth estimates for January-March 2007 at 9.1 per cent as against 10.0 per cent a year ago. Along with revisions for the preceding three quarters, real GDP growth in 2006-07 was raised to 9.4 per cent from 9.2 per cent in the CSO’s February 2007 advance estimates. In the revised estimates, real GDP originating in agriculture, industry and services sectors increased by 2.7 per cent, 11.0 per cent and 11.0 per cent, respectively, in 2006-07 as against 6.0 per cent, 8.0 per cent and 10.3 per cent in 2005-06. Over the four-year period starting in 2003-04 when the current expansionary phase began, real GDP growth has averaged 8.6 per cent, up from 5.1 per cent in the preceding four years and also above the average of 5.7 per cent achieved in the 1990s.

3. The progress of the 2007 south-west monsoon season has been satisfactory so far, despite initial delays in its onset over the western, north-western and central regions. Of the normal area of 71.9 million hectares under kharif foodgrain crops, 30.1 million hectares were covered by sowing by July 20 this year, which is comparable with 30.0 million hectares in the corresponding period of the preceding year. Also, 12.2 million hectares were covered under major oilseeds as against 11.7 million hectares last year. While area sown under cotton (7.2 million hectares) was higher, that under sugarcane (4.4 million hectares) and jute (0.8 million hectares) was somewhat lower as compared with the previous year. During June 1 to July 25, 2007 rainfall has been 4 per cent above the long-period average (LPA) and excess/normal in 29 of the 36 meteorological subdivisions, according to the India Meteorological Department (IMD). The IMD has updated its initial forecast released on April 19, 2007 and has placed the rainfall for the south-west monsoon season at 93 per cent of the LPA for the country as a whole in its latest forecast released on June 29, 2007.

4. The general index of industrial production (IIP) rose by 11.7 per cent in April-May 2007 from 10.8 per cent a year ago. The acceleration in industrial activity in the current financial year was led by manufacturing output which rose by 12.7 per cent as against 12.2 per cent in April-May 2006. Electricity generation and mining activity increased by 9.0 per cent and 3.0 per cent, respectively, as against 5.5 per cent and 3.2 per cent a year ago. Within manufacturing, industries such as machinery and equipment, food products, basic metals and alloys and chemicals emerged as growth drivers in 2007-08 (up to May). In terms of the use-based classification, production of capital goods increased by 18.6 per cent (20.6 per cent a year ago), while the production of basic goods and intermediate goods rose by 9.4 per cent (9.2 per cent) and 10.5 per cent (10.5 per cent), respectively. Consumer goods output increased by 12.7 per cent (9.7 per cent). The six infrastructure industries, comprising nearly 27 per cent of the IIP, posted a growth of 8.1 per cent during April-May 2007 as against 7.2 per cent a year ago. Output growth picked up in respect of petroleum products and electricity, whereas some deceleration was recorded in steel, coal and cement output and crude petroleum production declined marginally.

5. Private corporate activity has gained strength and resilience, extending an unprecedented run of high growth that began in late 2002-03. Full information on corporate sector performance in 2006-07 that is now available for select private non-financial companies indicates that sales growth was of the order of 26.2 per cent, the highest since the 1980s. The pick-up in activity in 2006-07 was aided by improvements in operational efficiency, increased plant automation, cost control through better product mix, capacity utilisation and economies of scale, rising incomes from financial activity and return of pricing power. The growth in net profits of these companies was also high at 45.2 per cent as compared with 24.2 per cent a year ago. Over the period 2003-07, annual sales growth of select private non-financial companies averaged 20.8 per cent, while annual growth in net profits of these companies was 45.1 per cent. Early results for the first quarter of 2007-08 present a complex picture. Demand and investment conditions continue to be favourable. There is some deceleration in sales and profit growth, relative to the levels recorded in the preceding year. This may be reflecting some increase in input and staff costs.

6. In the Reserve Bank’s Industrial Outlook Survey conducted during May 2007, nearly 60 per cent of respondent companies reported no change in capacity utilisation and a majority also indicated no change in the financial situation, working capital finance requirements and availability of finance. Responses relating to export orders, imports and profits were somewhat mixed. The business expectations index for April-June 2007 declined by 7.1 percentage points from its level in the preceding quarter and by 6.0 percentage points from its level a year ago. The outlook for July-September 2007 appears to be optimistic with 54 per cent of the respondents expecting an improvement in the overall business situation on the back of increase in production, order books and capacity utilisation. As in April-June 2007 a majority of respondents expect no change in the financial situation, working capital finance requirements, availability of finance and in profit margins. The overall business expectations index for July-September 2007 declined by 3.8 percentage points from its level in the previous quarter and by 5.4 percentage points from a year ago.

7. Business sentiment polled by other surveys presents a varied response, with optimism relating to sales volume, order books and net profits being tempered by the impact of exchange rate changes on services sector companies as well as export industries with relatively low import content. According to one survey, business confidence for July 2007 continues to be high but has declined by 8.8 per cent from its level in April-June 2007 and by 2.7 per cent year-on-year. Seasonally adjusted purchasing managers’ indices for the first quarter of 2007-08 indicate favourable operating conditions in the manufacturing sector with the growth of output and new orders being maintained, a modest rise in staff hiring and selling prices, some easing of input price inflation and a build-up in pre-production and finished goods inventory levels. These indices also reflect some optimism about the general business scenario among micro, small and medium enterprises with more than 90 per cent planning higher capital investment.

8. Services sector activity has expanded in the first quarter of 2007-08 as reflected in lead indicators. The communication sector has recorded robust growth with 8,18,000 new lines being added to the switching capacity of telephone exchanges and total telephone connections (fixed plus cellular) registering an increase of 77.6 per cent in April-May 2007 on a year-on-year basis. In the transport sector, cargo handled at major ports increased by 17.8 per cent, whereas railway revenue earnings from freight traffic increased by 6.0 per cent. In civil aviation, handling of import cargo and export cargo increased by 21.7 per cent and 1.6 per cent, respectively. Passengers handled at domestic and international terminals increased by 24.4 per cent and 13.1 per cent, respectively, as against 47.2 per cent and 14.1 per cent a year ago.

9. The CSO’s end-May 2007 release provides estimates of expenditure components of GDP in 2006-07, which contain information on the evolution of the constituents of aggregate demand. As a proportion to GDP, real private final consumption expenditure declined to 57.2 per cent during 2006-07 from 58.9 per cent in the previous year. On the other hand, real gross fixed capital formation (GFCF) increased to 27.9 per cent of GDP from 26.7 per cent, indicating that the acceleration of growth in the Indian economy is mainly investment-driven, despite domestic private consumption remaining the major component of aggregate demand. As regards external demand, net exports at (-) 2.8 per cent of GDP in 2006-07 were comparable to (-) 3.0 per cent in the previous year. Over the four-year period from 2003-04 to 2006-07, private consumption and gross capital formation increased in real terms by 6.3 per cent and 16.3 per cent per annum, respectively.

10. Turning to monetary and financial conditions, the year-on-year non-food credit growth of scheduled commercial banks (SCBs) at 24.4 per cent (Rs.3,67,258 crore) on July 6, 2007 was lower than 32.8 per cent (Rs.3,70,899 crore) a year ago. On a financial year basis, non-food credit declined by Rs.12,094 crore (0.6 per cent) during 2007-08 (up to July 6, 2007), in contrast to an increase of Rs.36,654 crore (2.5 per cent) in the corresponding period of the previous year. Food credit registered a decline of Rs.2,292 crore as against a decline of Rs.2,837 crore in the corresponding period last year.

11. Provisional information on the sectoral pattern of bank credit available up to March 2007 indicates some rebalancing of credit deployment, particularly in January-March 2007. During 2006-07, bank credit to agriculture recorded the highest growth (32.4 per cent), followed by the services sector (31.0 per cent), personal loans (26.5 per cent) and industry (25.7 per cent). Growth in housing and real estate loans decelerated modestly to 24.6 per cent and 69.8 per cent, respectively, although continuing to remain at elevated levels. Incremental credit off-take, however, was the highest in respect of industry (36.1 per cent), followed by services (25.2 per cent), personal loans (24.3 per cent) and agriculture (14.4 per cent). Within the industrial sector, sizeable credit off-take was recorded in respect of infrastructure (26.8 per cent), textiles (34.2 per cent), basic metals and metal products (26.7 per cent), petroleum (41.0 per cent), food processing (27.9 per cent), engineering (24.5 per cent), chemicals (14.2 per cent) and construction (46.7 per cent). The share of textiles, infrastructure and basic metal and metal products in total credit to industry increased marginally from 10.6 per cent, 20.5 per cent and 12.0 per cent, respectively, to 11.3 per cent, 20.7 per cent and 12.1 per cent, while the share of engineering remained stable at 6.3 per cent. The share of industrial credit to chemicals declined from 8.8 per cent to 8.0 per cent. Priority sector advances grew by 24.0 per cent with a reduction in their share in outstanding non-food gross bank credit to 35.2 per cent in March 2007 from 36.4 per cent a year ago. Provisional information for May 2007 indicates continuing high credit growth to agriculture and the industrial sector and deceleration in credit to housing, real estate and personal loans.

12. On a year-on-year basis, commercial banks’ investments in shares, bonds/debentures and commercial paper (CP) declined by Rs.809 crore (1.0 per cent) as compared with a decline of Rs.9,961 crore (11.1 per cent) a year ago. On a financial year basis, such investments by banks fell by Rs.4,145 crore (5.2 per cent) during 2007-08 so far (up to July 6), as against an increase of Rs.593 crore (0.7 per cent) in the corresponding period of 2006-07. Banks, however, invested Rs.45,048 crore in instruments issued by mutual funds as against only Rs.15,902 crore in the corresponding period of 2006-07. The year-on-year growth in total flow of resources from SCBs to the commercial sector was 23.1 per cent (Rs.3,66,450 crore), lower than 29.5 per cent (Rs.3,60,938 crore) a year ago.

13. The year-on-year increase in aggregate deposits of SCBs at 24.4 per cent (Rs.5,31,881 crore) up to July 6, 2007 was higher than 20.9 per cent (Rs.3,77, 392 crore) a year ago. The outflow of long-term deposits during the preceding two years has been arrested and there were fresh accretions to long-term deposits in April-June 2007 which augurs well for banks’ asset-liability management. On a financial year basis, aggregate deposits increased by Rs.1,05,534 crore (4.0 per cent) during 2007-08 up to July 6, 2007 as against an increase of Rs.72,913 crore (3.5 per cent) in the corresponding period of the previous year. The accretion to bank deposits during the current financial year so far (April-July 6, 2007) is at a 14-year high. The incremental annual non-food credit-deposit ratio as on July 6, 2007 declined to 69.0 per cent from 98.3 per cent a year ago.

14. By the beginning of the current financial year, several banks had drawn down holdings of statutory liquidity ratio (SLR)-eligible securities close to the statutory floor to accommodate the sustained non-food credit demand over the last three years. Reflecting the ongoing shifts in banks’ portfolios to comply with the statutory requirements in view of this depletion, investment in Government and other approved securities by SCBs increased by Rs.59,515 crore during the current year so far (up to July 6, 2007) as against an increase of Rs.51,776 crore in the corresponding period of 2006-07. Exclusive of liquidity adjustment facility (LAF) operations, however, banks’ investments in Government and other approved securities increased by Rs.27,331 crore as compared with an increase of Rs.751 crore a year ago. On July 6, 2007 commercial banks’ holdings of Government and other approved securities was 28.7 per cent of the banking system’s net demand and time liabilities (NDTL) as against 28.0 per cent at end-March 2007 and 31.5 per cent a year ago. Such investments were Rs.1,10,207 crore above the statutory minimum of 25 per cent of NDTL. It may be recalled that the Union Budget, 2006-07 announced the unwinding of the entire outstanding amount of recapitalisation bonds/special securities of Rs.20,809 crore issued to nationalised banks. Accordingly, bonds/securities issued to 19 nationalised banks worth Rs.8,709 crore were converted into marketable securities on February 15, 2007 and made eligible for SLR purposes. This conversion augmented the stock of SLR-eligible securities in the system which would increase even further with the conversion of the remaining recapitalisation bonds/special securities during the course of 2007-08.

15. Money supply (M3) increased by 21.6 per cent on a year-on-year basis on July 6, 2007 which was above the projected trajectory of 17.0-17.5 per cent indicated in the Annual Policy Statement for 2007-08 and higher than 19.0 per cent a year ago. On a financial year basis, M3 increased by 3.8 per cent (Rs.1,24,365 crore) during 2007-08 up to July 6, 2007 as compared with the increase of 3.5 per cent (Rs.95,488 crore) in the corresponding period of the previous year.

16. Reserve money increased by 29.1 per cent on a year-on-year basis on July 20, 2007 which was higher than 17.2 per cent a year ago. During the current financial year up to July 20, 2007 reserve money increased by 6.2 per cent (Rs.43,659 crore) as compared with the increase of 1.8 per cent (Rs.10,069 crore) in the corresponding period of the previous year. Among the components, currency in circulation increased by 2.1 per cent (Rs.10,380 crore) as compared with 4.6 per cent (Rs.19,630 crore). Among the sources of reserve money, the Reserve Bank’s net foreign currency assets increased by Rs.29,653 crore as against an increase of Rs.85,084 crore in the corresponding period last year. Adjusted for revaluation effects, the Reserve Bank’s net foreign currency assets increased by Rs.72,947 crore as against an increase of Rs.30,663 crore in the corresponding period of 2006-07. Net Reserve Bank credit to the Central Government increased by Rs.18,875 crore as against a decline of Rs.6,356 crore.

17. Over the first quarter of 2007-08, generally easy conditions of liquidity were interspersed with sporadic and transient periods of tightness. Build-up of the Central Government’s cash balances by the third week of March 2007 and balance sheet adjustments by banks at the end of March necessitated daily injections of liquidity through the LAF between March 16 and April 8. With the two-stage 50 basis point increase in the CRR announced on March 30 becoming effective on April 14 and April 28, repo operations were conducted again through April 16 - May 6. Throughout this period, contrastingly, market participants took recourse to reverse repos on a daily basis within the ceiling of Rs.3,000 crore set since March 5, 2007. During the quarter, an amount of Rs.18,377 crore was sterilised through the Market Stabilisation Scheme (MSS), warranted by strong capital inflows. By April 27, 2007 the Central Government slipped into drawal of ways and means advances (WMA) which deteriorated into overdraft during May 30-June 8. Call rates remained high during most part of April and May and ruled above the LAF repo rate.

18. From May 28, 2007 the system shifted into a phase of large surplus liquidity with continuous reverse repos on a daily basis, capped at Rs.3,000 crore, except on June 28-29, 2007 when the Reserve Bank injected money through repos to assuage liquidity tightness due to advance tax outflows. While the Central Government vacated overdrafts from June 9, it continued to avail of WMA until June 17, 2007. There was a brief return to surplus cash balances during June 18-28 but recourse to WMA resumed thereafter, turning into overdrafts during July 3-8 and July 18, 2007 onwards. Additional market borrowings beyond the calendar were resorted to in order to finance, in part, the purchase of the Reserve Bank’s stake in the State Bank of India. The amount of Rs.35,351 crore has been received by the Reserve Bank on June 29, 2007. The customary surplus transferable to the Central Government from the Reserve Bank for the year ending June 2007 is likely to be credited to the account of the Central Government in mid-August 2007.

19. The suffusion of liquidity flows in the financial markets mainly on account of the sharp depletion of the Central Government’s cash balances was reflected in call rates plunging to close to one per cent levels, going even below on several occasions. The total overhang of liquidity under the LAF, the MSS and cash balances of the Central Government taken together declined from an average of Rs.97,449 crore in March 2007 to Rs.72,823 crore on July 27, 2007. An assessment of the total liquidity overhang, however, should also account for the transfer of Rs.35,351 crore from the Central Government to the Reserve Bank during this period. It also needs to be noted that in view of the ceiling on daily LAF reverse repos, the overhang as defined here provides the magnitude of liquidity impounded only through these instruments and it captures the overhang only when the Reserve Bank injects liquidity under the LAF. On a net basis, average daily LAF repos declined from Rs.11,858 crore in March 2007 to average daily reverse repo of Rs.2,117 crore in July 2007 (up to July 27, 2007). The outstanding balances under MSS increased from Rs.64,863 crore at end-March 2007 to Rs.90,030 crore on July 27. Cash balances of the Centre with the Reserve Bank declined from an average of Rs.55,893 crore in March 2007 to a debit of Rs.20,199 crore on July 27, 2007.

20. Inflation, measured by variations in the wholesale price index (WPI) on a year-on-year basis, declined from 5.9 per cent at end-March 2007 to 4.4 per cent as on July 14, 2007. Prices of primary articles and manufactured products rose by 10.0 per cent and 4.6 per cent, respectively, as against the increase of 3.8 per cent and 3.9 per cent a year ago. Prices of the fuel group declined by 1.4 per cent as against an increase of 7.2 per cent a year ago. On an annual average basis, WPI inflation was 5.5 per cent up to July 14, 2007 as against 4.3 per cent a year ago.

21. Inflationary pressures emerging from supply constraints in the agricultural sector eased somewhat in the first quarter of 2007-08. The total stock of foodgrains with public agencies increased to 25.1 million tonnes on May 1, 2007 as against the buffer stock norm of 16.2 million tonnes and was also higher than 22.8 million tonnes a year ago. Year-on-year inflation in terms of foodgrains prices decelerated from 13.5 per cent in mid-December 2006 to 7.4 per cent by mid-July 2007. There has, however, been hardening in the prices of oilseeds since November 2006 with second-round effects on prices of edible oils and oil cakes. These three items, which together have a weight of 6.8 per cent in the WPI, contributed 28.7 per cent of headline inflation as on July 14, 2007. The easing of inflation in terms of prices of manufactures since end-March 2007 from 6.1 per cent to 4.6 per cent by the second week of July has been mainly on account of decline in the prices of sugar and some deceleration in prices of basic metals and alloys and textiles.

22. The recent surge in global prices of several agricultural commodities is attributed partly to transitory factors such as drought-related supply shortfalls and low stocks. Weather-related setbacks to production occurred in a number of countries such as the US, the EU, Canada, Russia, Ukraine and most notably in Australia, where production fell by more than 50 per cent in 2006-07. According to the projections made by the Organisation for Economic Co-operation and Development (OECD)–Food and Agricultural Organisation (FAO), global prices of agricultural commodities are likely to rule higher than their historic equilibrium levels over the next ten years on account of various factors including the rapidly expanding bio-fuel industry which is pushing up the prices of agricultural commodities through spill-over effects. Growing cereal use for ethanol has caused reduction in acreage of oilseeds, particularly in the US, in favour of maize with adverse price effects. Indirectly, the prices of livestock products have also gone up due to rising feed costs. These developments have major implications for India to the extent of dependence on imports of edible oils and wheat for meeting domestic shortfalls.

23. The global dairy market has been facing an increasing demand for premium products which is likely to continue over the near-term. In Asia, particularly in China, and in Latin America, demand for milk products has gone up rapidly. US milk prices increased by 20 per cent during March-June 2007 fuelled by export demand and drought-related supply disruptions in Australia and New Zealand. Milk futures in the Chicago Mercantile Exchange have risen by 60 per cent. The US Department of Agriculture expects milk prices to remain firm over the rest of 2007 and in 2008 as well. In India, milk prices reflected in the WPI increased by 7.7 per cent as on July 14, 2007, on a year-on-year basis, contributing 7.2 per cent to the headline WPI inflation.

24. Notwithstanding the higher production of foodgrains expected during 2006-07, there is a need for regular stock-taking, assessment and planning for ensuring the adequate availability of essential food articles in view of the global outlook. A comprehensive approach in this regard may take cognisance of changes in population, consumption patterns and the evolving trends in international trade.

25. During 2007-08 so far, West Texas Intermediate (WTI) prices have moved in a range of US $ 61-77 per barrel with UK Brent prices above the WTI by US $ 4.1 per barrel, while the premium of the WTI over the Dubai variety was US $ 1.40 per barrel. In tandem with the hardening of international crude prices, the average price of the Indian crude basket increased from US $ 56.2 per barrel in January-March 2007 to US $ 66.2 per barrel in April-June and to around US $ 73.5 per barrel on July 27, 2007, i.e., an increase of 32.9 per cent over the level in February 2007. Domestic prices of petrol and diesel have, however, remained unchanged since mid-February; prices of aviation turbine fuel, which are market-determined, have increased by 11.3 per cent in the same period. Excluding the fuel group, year-on-year inflation was 6.1 per cent on July 14, 2007 and was higher than headline inflation. According to the US Energy Information Administration (EIA), global demand is expected to increase by 1.3 million barrels a day during 2007, while the supply is likely to increase only by 0.6 million barrels a day. WTI prices are expected to average US $ 65.7 per barrel in 2007.

26. On a year-on-year basis, inflation based on the consumer price index (CPI) for agricultural labourers and rural labourers increased to 7.8 per cent and 7.5 per cent, respectively, in June 2007 from 7.2 per cent each a year ago. Year-on-year inflation based on CPI for industrial workers and urban non-manual employees was placed at 6.6 per cent and 6.1 per cent, respectively, in May and June 2007 as against 6.3 per cent and 6.5 per cent, a year ago. The softening of food prices is being reflected in a reduced difference between inflation rates based on the CPI and the WPI.

27. In terms of proportions to budget estimates (BE), revenue receipts of the Central Government increased to 5.3 per cent during April-May 2007 from 4.8 per cent in April-May 2006. Total expenditure at 13.3 per cent was lower than 16.3 per cent a year ago. Both Plan and non-Plan expenditures were lower as proportions to BE than a year ago. Accordingly, the gross fiscal deficit (GFD) declined to 41.2 per cent from 48.5 per cent a year ago. The revenue deficit at 83.0 per cent of the BE in April-May 2007 was marginally higher than 81.0 per cent in the corresponding period last year.

28. Gross market borrowings (dated securities and 364-day Treasury Bills) of the Central Government during 2007-08 at Rs.85,628 crore up to July 27, 2007 (Rs.70,813 crore a year ago) constituted 45.4 per cent of the BE while net market borrowings at Rs.46,047 crore (Rs.34,822 crore) constituted 42.0 per cent of the BE. Additional borrowings of Rs.6,000 crore through 182-day Treasury Bills and Rs.18,500 crore through 91-day Treasury Bills were undertaken in June 2007 in order to, inter alia, support the special operation of funding the transfer of the Reserve Bank’s stake in the State Bank of India to the Government of India. Against the allocated net borrowing programme of Rs.23,359 crore for 2007-08, State Governments have raised a net amount of (-) Rs.645 crore (gross Rs. 8,541 crore; repayment: Rs.9,186 crore) during the current year (up to July 27, 2007).

29. During the first quarter of 2007-08, financial markets experienced sizeable fluctuations in liquidity and attendant episodes of volatility. Call money rates stayed firm during most part of April and May 2007, due to the usual tightening of liquidity at the end of March 2007 which were accentuated by CRR increases referred to earlier. Call rates stayed above the LAF corridor for prolonged periods with intermittent fluctuations. In June, market conditions shifted into surplus liquidity, engendered by large drawdown of the Central Government’s cash balances during end-May and early June and capital inflows. Call rates hovered around one per cent for most part of June and July (up to July 27) except on June 28-29, 2007 when advance tax outflows briefly pushed up call rates above the LAF repo rate. Overnight rates in the call, market repo and collateralised borrowing and lending obligations (CBLO) segments have displayed close co-movement. The interest rate in the call market declined from an average of 14.07 per cent in March 2007 to 8.33 per cent, 6.96 per cent and 2.42 per cent in April, May and June 2007 and further to 0.90 per cent in July 2007. Interest rates in the market repo (outside the LAF) and CBLO segments declined from 8.13 per cent and 7.73 per cent, respectively, in March 2007 to 6.76 per cent and 6.12 per cent in April 2007 and further to 0.26 per cent and 0.07 per cent in July 2007. The daily average volume (one leg) in the call money market declined from Rs.11,608 crore in March 2007 to Rs.8,687 crore in July 2007. The corresponding volumes in the market repo were Rs.8,646 crore and Rs.12,070 crore, respectively, whereas in the CBLO segment, the volumes were Rs.17,662 crore and Rs.18,509 crore, respectively. As on July 27, 2007 the weighted average interest rate for CBLO, market repo and call rate stood at 0.02 per cent, 0.18 per cent and 0.22 per cent, respectively.

30. In the primary market, the yield on 91-day Treasury Bills declined from 7.97 per cent at end-March 2007 to 4.46 per cent by July 25, 2007. The yield on 364-day Treasury Bills also recorded a decline from 7.98 per cent to 6.58 per cent by July 18, 2007. There was a marked increase in commercial paper (CP) issuances and the outstanding amount increased to Rs.26,256 crore by end-June 2007 from Rs.17,688 crore at end-March 2007. The weighted average discount rate on CP declined from 11.33 per cent to 8.93 per cent over this period.

In the market for certificates of deposit (CDs), the weighted average discount rate declined from 10.75 per cent at the end of March 2007 to 9.37 per cent by end-June and the outstanding amount increased from Rs.93,272 crore to Rs.98,337 crore over this period.

31. In the secondary market, the yield on government securities with one-year residual maturity moved down from 7.55 per cent at end-March 2007 to 6.84 per cent by July 27, 2007. The yields on Government securities with 10-year and 20-year residual maturity also eased during this period from 7.97 per cent to 7.89 per cent and from 8.23 per cent to 8.21 per cent, respectively. Consequently, the yield spread between 10-year and one-year Government securities widened from 42 basis points to 105 basis points whereas the spread between 20-year and one-year Government securities widened from 68 basis points to 137 basis points over this period.

32. Banks had generally increased their deposit rates by about 25-50 basis points across various maturities between March 2007 and June 2007, but reduced them during July 2007, especially in the shorter maturities. The majority of public sector banks (PSBs) adjusted their deposit rates upwards by 10-25 basis points on maturities above one year, particularly at the longer end. Interest rates offered by the PSBs on deposits of above one-year maturity moved up from 7.25-9.50 per cent in March 2007 to 7.25-9.60 per cent in July 2007. Private sector banks’ deposit rates for one year and up to three years maturity moved from 6.75-9.75 per cent in March 2007 to 6.75-10.25 per cent in July 2007, while interest rates on deposits greater than three years maturity increased from 7.75-9.60 per cent to 7.50-10.00 per cent over the same period. The range of interest rates offered by foreign banks on deposits of maturities above one year remained largely unchanged at 2.50-9.50 per cent in July 2007 compared to 3.50-9.50 per cent in March 2007. The benchmark prime lending rates (BPLRs) of PSBs and private sector banks moved from a range of 12.25-12.75 per cent and 12.00-16.50 per cent to 12.50-13.50 per cent and 13.00-17.25 per cent, respectively, in the same period. The range of BPLRs for foreign banks was 10.00-15.50 per cent during the period.

33. In the foreign exchange market, large surplus conditions in the spot market were accompanied by a sharp increase in average daily turnover in the foreign exchange market to US $ 38.2 billion from a level of US $ 23.6 billion a year ago. While the inter-bank turnover increased from US $ 17.1 billion to US $ 27.7 billion, the merchant turnover increased from US $ 6.5 billion to US $ 10.5 billion. Forward premia spiked in April 2007 but in subsequent months, there has been a softening across all maturities. The six-month forward premia eased from 3.60 per cent in March 2007 to 2.53 per cent by end-June 2007 and further to 1.28 per cent as on July 27, 2007.

34. The equity markets were buoyant on the back of strong corporate profitability, a positive investment climate and sound fundamentals. The BSE Sensex (1978-79=100) increased from 13,072 at end-March 2007 to cross the 15,000 level on July 9, 2007 and reached 15,795 on July 24, 2007. On July 27, 2007 the BSE Sensex declined to 15,235.

Click Here For Highlights of First Quarter Review of its Annual Policy Statement for 2007-08

Click Here For Macroeconomic and Monetary Developments: First Quarter 2007-08

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