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Full Text of First Quarter Review of Annual Monetary Policy for 2008-09 click here



First Quarter Review of Annual Monetary Policy for 2008-09


I. Assessment of Macroeconomic and Monetary Developments

Developments in the External Sector... Click Here
Developments in the Global Economy ... Click Here
Overall Assessment... Click Here

Domestic Developments

24. Within primary articles, both food and non-food articles contributed to the price rise with milk, oilseeds, raw cotton and iron ore being the major components. Year-on-year inflation in terms of foodgrains prices increased to 5.6 per cent as on July 12, 2008 from 7.4 per cent in the corresponding period of the previous year. Prices of some key food items have decelerated in recent months as record agricultural production has augmented supply conditions including higher stock of foodgrains with public agencies. There has, however, been continuous hardening of the prices of oilseeds since November 2006 due to both domestic and global factors with a consequential increase in the prices of edible oils and oil cakes. Iron ore prices also rose on account of high domestic and export demand.

25. The large contribution of petroleum products, both administered and freely-priced, in the recent spurt in inflation needs to be seen in the context of the fact that the pass-through of oil prices has not been happening on a continuous basis. The price of the Indian basket of crude oil increased fromUS $ 99.4 per barrel in March 2008 to US $ 129.8 in June 2008 and further to US $ 141.5 on July 3, 2008 before declining to US $ 121.9 on July 25, 2008. While international crude (Indian basket) prices increased by 129 per cent in US dollar terms and 122 per cent in rupee terms during February 2007-June 2008, the domestic prices of freely priced products increased by about 76 per cent and the prices of administered products increased by only around 14 per cent over the same period.

26. On a year-on-year basis, inflation based on the consumer price index (CPI) for agricultural labourers and rural labourers increased to 8.8 per cent and 8.7 per cent, respectively, in June 2008 from 7.8 per cent and 7.5 per cent a year ago. Year-on-year inflation based on CPI for industrial workers and urban non-manual employees stood at 7.8 per cent and 6.8 per cent, respectively, in May 2008 as compared with 6.6 per cent and 6.8 per cent a year ago. The CPI-based inflation measures have increased in the range of 2.0-3.2 percentage points over their levels in January 2008.

27. In terms of proportions to budget estimates (BE), revenue receipts of the Central Government increased to 6.0 per cent in April-May 2008 from 5.3 per cent during April-May 2007. Plan expenditure was higher whereas non-Plan expenditure was marginally lower resulting in the total expenditure rising to 14.6 per cent of BE in April-May 2008 from 13.3 per cent of BE a year ago. Accordingly, the gross fiscal deficit (GFD) increased to 54.9 per cent of BE from 41.2 per cent of BE a year ago. The revenue deficit at 122.7 per cent of the BE during April-May 2008 was higher than 83.0 per cent in the corresponding period last year.

28. The gross market borrowings of the Central Government through dated securities at Rs.72,000 crore (Rs.73,000 crore a year ago) during 2008-09 so far (up to July 25, 2008) constituted 41.0 per cent of the BE whereas net market borrowings at Rs.47,982 crore (Rs.45,232 crore a year ago) constituted 48.5 per cent of the BE. The weighted average yield and weighted average maturity of Central Government securities issued during 2008-09 so far were higher at 8.62 per cent and 15.18 years, respectively, as compared with 8.12 per cent and 14.90 years for those issued during 2007-08 (full year). As against the estimated gross market borrowing of Rs.59,000 crore (net: Rs.44,629 crore), State Governments mobilised Rs.8,712 crore (net: Rs.3,583 crore) by July 25, 2008.

29. The Central Government had issued special securities amounting to Rs.38,050 crore and Rs.40,321 crore, respectively, during 2007-08 and 2006-07 outside the market borrowing programme and the MSS.There have been no such issuances during 2008-09 so far. As mentioned in the Annual Policy Statement of April 2008 issuances of Government bonds to public sector oil marketing companies for partial compensation of their under-recoveries and to fertiliser companies to cover their under-recoveries/subsidy need to be continuously monitored in view of the implication for the evolving fiscal outlook.

30. Financial markets reflected the changes in liquidity conditions during the first quarter of 2008-09. The weighted average call money rates rose from 6.11 per cent in April 2008 to 7.75 per cent in June 2008 due to tighter liquidityconsequent upon increases in the CRR in April and May 2008 and in the LAF repo rate on June 12, 2008 and June 25, 2008.The call rates started moving upwards from June 12 and reached a level of 9.12 per cent on July 25, 2008.Interest rates in the collateralised borrowing and lending obligation (CBLO) and market repo segments moved in tandem with call rates and increased from 5.05 per cent and 5.48 per cent, respectively, in April 2008 to 7.21 per cent and 7.42 per cent in June 2008 and further to 8.51 per cent and 8.64 per cent on July 25, 2008. The daily average volume (one leg) in the call money market increased from Rs.9,758 crore in April 2008 to Rs.10,854 crore in June 2008. The corresponding volumes in the market repo (outside the LAF) were Rs.14,966 crore and Rs.11,262 crore, whereas in the CBLO segment, the volumes were Rs.38,828 crore and Rs.35,774 crore, respectively. During July 2008 (up to July 25), the average daily volume in the call, market repo and CBLO segments were Rs.13,367 crore, Rs.7,255 crore and Rs.20,501 crore, respectively.

31. There was a marked increase in CP issuances and the outstanding amount increased to Rs.48,342 crore by mid-July 2008 from Rs.32,592 crore at end-March 2008. The weighted average discount rate (WADR) on CP, which had declined from 10.38 per cent at end-March 2008 to 8.57 per cent as on May 15, 2008 increased to 10.75 per cent by mid-July 2008. In the market for certificates of deposit (CDs), the WADR declined from 10.0 per cent at end-March 2008 to 8.49 per cent as on April 25, 2008 but subsequently increased to 9.68 per cent as on July 4, 2008. The outstanding amount of CDs increased from Rs.1,47,792 crore at end-March, 2008 to Rs.1,64,557 crore as on July 4, 2008.

32. Yields in the Government securities market hardened substantially during the current financial year in both primary and secondary segments. Primary yields on 91-day, 182-day and 364-day Treasury Bills increased by 184 basis points, 196 basis points and 210 basis points, respectively, over the end-March 2008 level to 9.06 per cent, 9.32 per cent and 9.45 per cent by July 25, 2008. In the secondary market, yields on Government securities with one year residual maturity moved up by 176 basis points over their end-March 2008 level to 9.25 per cent by July 25, 2008. The yields on Government securities with 10-year and 20-year residual maturity also increased during this period by 117 basis points and 133 basis points, respectively, to 9.10 per cent and 9.64 per cent. Consequently, the yield spread between 10-year and one-year Government securities narrowed from 44 basis points in March 2008 to (-)15 basis points as on July 25, 2008 whereas the spread between 20-year and one-year Government securities narrowed from 82 basis points to 39 basis points over the same period.

33. Deposit rates of SCBs increased, particularly at the longer end of the maturity spectrum, during the first four months of 2008-09 (up to July 25). The interest rates of public sector banks (PSBs) on deposits of maturity from 91 days and up to one year increased to the range of 5.75-9.25 per cent in July 2008 as compared with 5.25-8.50 per cent in March 2008. The deposit rates of private sector banks on deposits of both maturity of one to three years and above three years firmed up to the range of 8.00-10.00 per cent in July 2008 as compared with the range of 7.25-9.25 per cent and 7.25-9.75 per cent, respectively, in March 2008. On the lending side, the benchmark prime lending rate (BPLR) of PSBs and private sector banks were placed in the range of 12.75-14.00 per cent and 13.50-17.25 per cent, respectively, in July 2008 as compared with 12.25-13.50 per cent and 13.00-16.50 per cent in March 2008.

34. Increased activity in the foreign exchange market was reflected in a rise in the average daily turnover to US $ 49.4 billion in July 2008 (up to July 18, 2008) from US $ 44.9 billion a year ago. While the inter-bank turnover increased from US $ 32.6 billion to US $ 37.2 billion, the merchant turnover at US $ 12.3 billion was close to US $ 12.2 billion a year ago. There has been a hardening of forward premia across all maturities. The six-month forward premia increased from 2.47 per cent at end-March 2008 to 4.70 per cent as on July 25, 2008.

35. The equity markets witnessed a major downturn in both the primary and secondary segments during the current financial year so far, continuing the moderation that had set in by early January 2008. In the primary market, resource mobilisation through public issues declined sharply as compared with the corresponding period last year. Resource mobilisation through private placement and euro issues, however, increased significantly during the current year so far when compared with the corresponding period last year. In the secondary market, the BSE Sensex (1978-79=100) recorded a low of 12576 on July 16, 2008 before increasing to 14275 by July 25, 2008 which was 8.8 per cent lower than the end-March 2008 level and 31.6 per cent lower than the peak level of 20873 recorded on January 8, 2008.

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Click Here For Highlights of First Quarter Review of its Annual Policy Statement for 2008-09

Click Here For Macroeconomic and Monetary Developments: First Quarter 2008-09

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