Third Quarter Review of the Annual Policy Statement for 2007-08, RBI Credit Policy: Banknet India

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Third Quarter Review of the Annual Policy Statement for 2007-08

I. Assessment of Macroeconomic and Monetary Developments

Domestic Developments

2. The growth of real gross domestic product (GDP) moderated to 8.9 per cent in the second quarter (July-September) of 2007-08 from 9.3 per cent in the first quarter and 10.2 per cent a year ago, as per the end-November 2007 release of the Central Statistical Organisation (CSO). Accordingly, real GDP growth was placed at 9.1 per cent in the first half of 2007-08, somewhat lower than 9.9 per cent a year ago. Real GDP originating in agriculture, industry and services sectors rose by 3.7 per cent, 9.5 per cent and 10.5 per cent, respectively, during the first half of 2007-08 as against 2.8 per cent, 11.0 per cent and 11.6 per cent a year ago.

3. Domestic economic activity continued to be steered by investment demand, with gross fixed capital formation (GFCF) increasing by 15.5 per cent in real terms in the first half of 2007-08 (14.5 per cent a year ago); on the other hand, private final consumption expenditure (PFCE) increased by 5.6 per cent (6.4 per cent). In nominal terms, the share of GFCF in GDP increased to 31.8 per cent from 29.6 per cent a year ago whereas the share of PFCE declined to 56.5 per cent from 57.6 per cent.

4. The first advance estimates of the Ministry of Agriculture place kharif foodgrains production at 112.2 million tonnes in 2007-08 - higher than 110.5 million tonnes in 2006-07, but below the target of 114.2 million tonnes. Available information suggests that by January 18, 2008 rabi sowing acreage was 3.7 per cent lower in the current season than its level a year ago. Declines have been recorded in area sown under wheat (-2.1 per cent), rice (-5.6 per cent), pulses (-5.0 per cent) and major oilseeds (-9.9 per cent) whereas some increase was reported in the area sown under coarse cereals (1.8 per cent). While the cumulative rainfall during the North-East monsoon season (October-December 2007) was 32 per cent below normal, it is relevant to note here that major rabi producing regions like Punjab, Haryana, Himachal Pradesh, western Uttar Pradesh and eastern Madhya Pradesh had received deficient rainfall in the 2007 South-West monsoon season. As on January 17, 2008 live storage in 81 major reservoirs was 55 per cent of the designated capacity which is 7.1 per cent lower than the level a year ago though 17.3 per cent higher than the last 10 years' average.

5. Against the backdrop of developments in the first half of 2007-08, industrial activity has experienced further deceleration in the third quarter of the year. The index of industrial production (IIP) rose by 9.2 per cent during April-November 2007 as compared with 10.9 per cent a year ago. The manufacturing sector, which contributed 89.9 per cent of the increase in industrial production up to November 2007, recorded a growth of 9.8 per cent (11.8 per cent a year ago), led by chemical and chemical products, basic metals and alloys, machinery and equipment other than transport, and products of wood, leather, rubber, plastic, petroleum and coal. On the other hand, deceleration was observed in textiles and transport equipment and parts. The production of metal products and parts declined. The continued buoyancy of investment demand was reflected in the growth in capital goods production at 20.8 per cent (17.4 per cent) supported by the growth in production of basic goods by 8.4 per cent (9.4 per cent), in intermediate goods by 10.1 per cent (11.1 per cent) while consumer non-durable goods output rose by 7.8 per cent (8.9 per cent), the production of consumer durables goods declined by 1.7 per cent (increased by 12.4 per cent). Mining and electricity generation recorded increases of 4.9 per cent (4.2 per cent) and 7.0 per cent (7.3 per cent), respectively. The six infrastructure industries, comprising 26.7 per cent of the IIP, posted a lower growth of 6.0 per cent during April-November 2007 as compared with 8.9 per cent a year ago. All the infrastructure sectors, viz., electricity generation, production of crude petroleum and petroleum refinery products, cement, coal and finished steel registered lower growth as compared with the corresponding period of the previous year.

6. Private corporate sector activity exhibited some moderation in the first half of 2007-08. Overall sales of sampled non-financial private companies increased by 17.4 per cent as compared with 27.4 per cent in the first half of 2006-07. Other income from non-core activities registered a high increase of 63.6 per cent as compared with 19.3 per cent a year ago and accounted for 29.5 per cent of post-tax profits. Operational costs increased on account of a substantial rise in staff costs and other expenses vis-à-vis sales growth; however, raw material costs grew at a slower rate in relation to sales, partly on account of cheaper imports. Reflecting the differential between growth in sales vis-à-vis expenditure, operating profits increased by 20.0 per cent in April-September 2007. Interest cost continued to be low as the interest to gross profit ratio came down from an average of around 50.0 per cent in 1990s to 39.0 per cent in 2000-05, 13.0 per cent in 2005-07 and to 11.7 per cent during the first half of 2007-08. Depreciation provisions increased by 15.1 per cent in April-September 2007 as compared with 16.1 per cent a year ago. Net profits rose by 31.1 per cent as compared with 41.6 per cent in April-September 2006, attributable to some moderation in consumer demand growth and high base effects. Non-manufacturing companies (IT, communication and other services) performed better than manufacturing companies, with a growth of 26.4 per cent and 48.4 per cent in sales and net profits, respectively, in contrast to 15.1 per cent and 25.1 per cent for manufacturing companies. Buoyant equity markets have enabled higher mobilisation of resources by the private corporate sector through public issues and private placements in 2007-08 so far than in the corresponding period of 2006-07. Early results for the third quarter of 2007-08 (October-December 2007) for a truncated sample of companies indicate that the moderation witnessed in sales growth during the first half has been somewhat arrested and profitability ratios have been shored up by income from both core and non-core activities. The growth in raw material cost and depreciation provisions was lower than in the corresponding quarter a year ago. Operating profits have been reinforced by other income representing non-sales activities of companies.

7. The Reserve Bank's Industrial Outlook Survey conducted during November 2007 indicates some moderation in the underlying business optimism with the share of respondents expecting a better overall business situation in January-March 2008 being a shade lower than in the previous quarter. The business expectations index for January-March 2008 at 118.6 declined by 4.7 per cent from the preceding quarter and by 6.2 per cent from the corresponding quarter a year ago. The moderation in growth expectations is reflected in anticipation of some deceleration in production and order books growth. Increase in raw material costs, however, has fuelled increased expectations of higher working capital finance requirements for January-March 2008 than in the previous quarter, and some tightening in the overall financial situation and availability of finance is perceived. Significant augmentation in capacities is seen in order to meet the increased production requirements and the overall capacity utilisation may be around the same level as in the last few quarters. Nearly half the firms expect prices of raw materials to go up but less than a fourth perceive any increase in their selling prices, indicating weakening of pricing power. Respondents expect the recent moderation in profit margins to continue in the next quarter.

8. Business confidence surveys conducted by other agencies convey a mixed, though overall positive, picture for the near future. Purchasing managers' indices (seasonally adjusted) reflect positive sentiments for end-2007 driven by rising levels in new business. Local demand is seen as supporting new orders, although the pace of growth of export orders is decelerating. A higher level of growth in the third quarter of 2007-08 is also expected by one agency, propelled by the overall positive economic conditions of the economy. According to another agency, the business sector has responded swiftly to improvements achieved in containing inflation and business confidence recorded a rebound with respect to the previous quarter. It has noted that a stronger rupee has tilted purchases of raw material by firms in favour of imports and there is a greater pessimism on the export front. A recent survey reflects status quo in business conditions and lower optimism in the consumer goods sector. Some other indices reflect improvement in business confidence when compared with the past six months, but lower business confidence when compared with the corresponding period of the previous year. A majority of respondents expect increases in new orders and in exports and more than half expect employment to increase, though successive hikes in interest rates and the rising rupee appear to have depressed sentiment and a weakening of industrial growth in the second half of 2007-08 is indicated.

9. Services sector activity was sustained at a robust pace as reflected in lead indicators. Railway revenue earnings from freight traffic increased by 8.0 per cent during April-November 2007. Total telephone connections in the telecommunications sector increased by 42.4 per cent, and 3.56 million new telephone lines were added to the switching capacity of telephone exchanges. Export and import cargo handled by the civil aviation sector increased by 0.2 per cent and 22.3 per cent, respectively, whereas cargo handled at major ports increased by 13.1 per cent. Passengers handled at international and domestic terminals also registered growth of 13.4 per cent and 25.9 per cent, respectively.

10. Non-food credit extended by scheduled commercial banks (SCBs) increased by Rs.2,22,842 crore (11.8 per cent) during the current financial year up to January 4, 2008 as compared with the increase of Rs.2,56,693 crore (17.5 per cent) in the corresponding period of 2006-07. There was a decline of Rs.5,237 crore in food credit as compared with an increase of Rs.2,392 crore in the previous year.

11. On a year-on-year basis, non-food credit of SCBs expanded by Rs.3,82,155 crore (22.2 per cent) as on January 4, 2008 on top of the increase of Rs.4,16,418 crore (31.9 per cent) a year ago. Provisional information available from select SCBs up to November 2007 indicates that credit to the industrial sector recorded the highest growth of 25.3 per cent followed by credit to the agriculture sector (21.4 per cent), the services sector (20.8 per cent) and personal loans (20.0 per cent). The share of the services sector in outstanding credit declined from 23.7 per cent in November 2006 to 23.4 per cent in November 2007. Within the services sector, real estate loans continued to record a high growth of 33.0 per cent, although their share in total non-food bank credit was only 2.6 per cent. Growth in credit off-take by some other sub-sectors like computer software, professional services and transport operators was also high, although from a relatively lower base. Within the personal loans sector which accounted for 25.4 per cent in total outstanding non-food gross bank credit, housing loans recorded a year-on-year growth of 15.1 per cent. Industry's share in total non-food bank credit increased from 38.3 per cent to 39.2 per cent. This followed from a pick-up in credit flow to industries like infrastructure (34.5 per cent), textiles (24.4 per cent), metals (27.1 per cent), engineering (28.4 per cent), food processing (30.0 per cent), petroleum (17.8 per cent), vehicles (38.5 per cent) and construction (37.0 per cent). The share of infrastructure in total outstanding credit to industry increased from 20.2 per cent in November 2006 to 21.7 per cent in November 2007. The share of priority sector advances declined nominally from 34.9 per cent to 34.3 per cent.

12. Commercial banks' investments in shares, bonds/debentures and commercial paper (CP) increased by Rs.4,679 crore (5.9 per cent) during the current financial year up to January 4, 2008 as against a marginal decline (Rs.32 crore) in the corresponding period of the previous year. Their investments in instruments of mutual funds was much higher at Rs.34,155 crore as against Rs.2,130 crore in the corresponding period of the previous year. The total flow of resources from SCBs to the commercial sector increased by Rs.2,27,522 crore (10.4 per cent) during the current financial year so far as compared with the increase of Rs.2,56,661 crore (16.6 per cent) in the corresponding period of the previous year. The year-on-year growth in total resource flow decelerated to 21.7 per cent from 30.1 per cent a year ago.

13. Aggregate deposits of SCBs increased by Rs.3,79,898 crore (14.6 per cent) in the current financial year up to January 4, 2008 as compared with an increase of Rs.2,78,398 crore (13.2 per cent) in the corresponding period of the previous year. On a year-on-year basis, the growth in aggregate deposits at Rs.6,00,761 crore (25.2 per cent) was higher than that of Rs.4,44,241 crore (22.9 per cent) a year ago. There has been a sizeable expansion in term deposits in the current financial year so far, indicative of migration from small savings schemes of the Government. The annual incremental non-food credit-deposit ratio declined to 63.6 per cent from 93.7 per cent a year ago.

14. Commercial banks invested Rs.1,64,458 crore in Government and other approved securities during the current financial year up to January 4, 2008, which was substantially higher than Rs.48,086 crore in the corresponding period of the previous year. Adjusted for banks' collateral securities under the liquidity adjustment facility (LAF), however, their investment in securities increased by Rs.1,02,999 crore during 2007-08 so far as against an increase of Rs.50,151 crore a year ago. Banks' holdings of Government and other approved securities at 29.1 per cent of their net demand and time liabilities (NDTL) as on January 4, 2008 was marginally higher than 28.6 per cent a year ago. SCBs' stock of such securities in excess of the prescribed statutory liquidity ratio (SLR) amounted to Rs.1,33,017 crore on January 4, 2008 and adjusted for LAF holdings, these holdings stood at Rs.99,128 crore or 3.0 per cent of NDTL. Adjusted for LAF collateral securities and the outstanding issuances under the market stabilisation scheme or MSS, investment in Government and other approved securities by SCBs are placed in the range of 23.0 per cent to 24.0 per cent of NDTL.

15. During the current financial year so far, money supply or M3 (up to January 4, 2008) increased by Rs.4,40,056 crore (13.3 per cent) which was higher than the increase of Rs.3,33,864 crore (12.2 per cent) in the corresponding period of the previous year and reflected the sizeable deposit mobilisation by banks, including shifts out of small savings schemes of the Government. M3 increased by 22.4 per cent on a year-on-year basis, on January 4, 2008 which was higher than 20.8 per cent a year ago and well above the projected trajectory of 17.0-17.5 per cent indicated in the Annual Policy Statement for 2007-08.

16. On a financial year basis, reserve money increased by Rs.1,29,034 crore (18.2 per cent) up to January 18, 2008 as compared with the increase of Rs.68,764 crore (12.0 per cent) in the corresponding period of the previous year. Currency in circulation increased by Rs.61,964 crore (12.3 per cent) as compared with Rs.57,726 crore (13.4 per cent). With the increase in the cash reserve ratio (CRR), bankers' deposits with the Reserve Bank registered a higher growth of Rs.69,760 crore (35.4 per cent) as compared with an increase of Rs.12,319 crore (9.1 per cent) in the corresponding period of the previous year. Among the sources of reserve money, Reserve Bank's net credit to the Central Government declined by Rs.1,57,815 crore as against an increase of Rs.6,963 crore in the corresponding period of the previous year. Adjusted for issuances under the MSS, Reserve Bank's net credit to the Central Government showed a decline of Rs.59,731 crore as compared with an increase of Rs.18,392 crore a year ago and mainly reflected the exchange of collateral securities under the LAF and the changes in the Centre's cash balances (non-MSS) with the Reserve Bank. Due to sustained net capital inflows, the Reserve Bank's net foreign exchange assets (NFEA) increased by Rs.2,51,026 crore as against an increase of Rs.1,14,337 crore during the corresponding period of the previous year. The Reserve Bank's foreign currency assets, adjusted for revaluation, increased by Rs.3,11,941 crore as compared with an increase of Rs.80,166 crore during the corresponding period of the previous year. Reserve money increased by 30.6 per cent on a year-on-year basis as on January 18, 2008 as compared with 20.0 per cent a year ago. Adjusted for the first round effect of the increases in the CRR, reserve money growth was 21.5 per cent as compared with 17.5 per cent a year ago. The ratio of NFEA to currency increased from 171.8 per cent on March 31, 2007 to 197.3 per cent by January 18, 2008.

17. Over the third quarter of 2007-08, movements in the key monetary and banking aggregates were reflected in generally easy conditions of liquidity till November 11, 2007. Up to that period, the banking system experienced conditions of surplus liquidity on account of substantial deposit mobilisation relative to credit demand. During November 1-11, 2007 average daily net absorption under the LAF was Rs.10,384 crore, despite an additional amount of Rs.3,000 crore absorbed under the MSS. Thereafter, the system switched to a tighter liquidity mode. With effect from the fortnight beginning November 10, 2007 the CRR was raised to 7.50 per cent which implied a liquidity reduction of about Rs. 16,000 crore in the banking system. Between November 12-22, 2007 there was net injection of liquidity at the LAF auctions, with repos averaging Rs. 17,911 crore as liquidity remained tight on account of the increased reserve requirements. From November 23, 2007 net issuances under the MSS were halted in view of the prevailing liquidity situation and redemptions of a cumulative amount of Rs.20,000 crore up to January 11, 2008 released funds to the system. The Centre's cash balances moved in a steady range between Rs.28,000 crore - Rs.44,000 crore during this period. However, infusions of liquidity through repo gradually declined in the subsequent period and there were intermittent absorptions under the LAF as well.

18. During the first half of December 2007 liquidity conditions improved, money market rates eased and the LAF returned to absorption mode; however, liquidity tightened in the second half of December amidst substantial outflows towards payment of advance tax. The Centre's cash balances moved up from levels of Rs.30,000 crore - Rs.40,000 crore in the first half of December to around Rs.85,000 crore during December 20-27, 2007 exacerbating the liquidity situation. The LAF shifted to injection mode, with daily repo volumes rising to a peak of Rs.47,665 crore on December 26, 2007. Liquidity conditions began to ease towards end-December 2007 through mid-January 2008 with the LAF returning to absorption mode and the Centre's cash balances stabilising in the range of Rs.35,000 crore-Rs.60,000 crore. The outstanding issuances under the MSS fell to Rs.1,58,155 crore by January 4, 2008 before rising to Rs.1,69,194 crore on January 25, 2008 within the overall ceiling of Rs.2,50,000 crore for 2007-08 as revised on November 7, 2007. The overhang of liquidity as reflected in the sum of LAF, MSS and the Central Governments' cash balances increased from Rs.85,770 crore at end-March 2007 to Rs.2,58,187 crore on January 17, 2008 before declining to Rs.2,32,809 crore on January 24, 2008.

19. Inflation, based on variations in the wholesale price index (WPI) on a year-on-year basis, eased to 3.8 per cent as on January 12, 2008 from its peak of 6.4 per cent at the beginning of the financial year and from 6.2 per cent a year ago. On an annual average basis, inflation at 4.7 per cent was lower than 4.9 per cent a year ago.

20. At a disaggregated level, prices of primary articles (weight: 22.0 per cent in the WPI basket) registered a year-on-year increase of 3.9 per cent as on January 12, 2008 as compared with 9.5 per cent a year ago. The relatively lower increase in prices of primary articles during 2007-08 was mainly due to food articles; however, prices of non-food primary articles like cotton and oilseeds went up sharply. Manoeuverability in supply conditions has been reduced considerably due to the existence of a relatively low level of stocks and high price increases in respect of foodgrains in the international markets. The stock of foodgrains with public agencies was lower than buffer stock norms during July-October 2007. The stock of foodgrains with public agencies stood at 19.7 million tonnes in November 2007 as against the norm of 20.0 million tonnes for January 1, 2008 (16.2 million tonnes for November 1, 2007).

21. Inflation in terms of prices of manufactured products (weight: 63.8 per cent) eased to 3.9 per cent from 5.8 per cent a year ago, largely on account of the decline in prices of textiles, sugar and non-ferrous metals and deceleration in prices of non-electrical machinery, wood and paper. On the other hand, prices of edible oils, oil cakes, rubber products, cement, iron and steel and their products and electrical machinery increased on a year-on-year basis.

22. Inflation in terms of the prices of the 'fuel, power, light and lubricants' group (weight: 14.2 per cent) was 3.7 per cent as on January 12, 2008 the same as a year ago. Excluding the fuel group, inflation was at 3.9 per cent (6.9 per cent a year ago). The price of the Indian basket of international crude has registered a sustained increase during 2007 from US $ 56.6 per barrel during January-March to US $ 66.4 in April-June, US $ 72.7 in July-September, US $ 85.7 in October-December 2007 and US $ 88.9 per barrel as on January 25, 2008. While the subsidy schemes for kerosene and domestic LPG have been extended till March 2010, domestic retail prices of petrol and diesel have remained unchanged since February 2007 thereby increasing the magnitude of incomplete pass-through. Since the last revision of domestic retail prices of petrol and diesel in February 2007, the price of the Indian crude basket has increased by about 56 per cent in US dollar terms and about 39 per cent in rupee terms (up to December 2007). Prices of the freely priced petroleum products, on the other hand, have increased substantially, as for instance, for aviation turbine fuel (36.5 per cent), naphtha (35.0 per cent), bitumen (28.4 per cent) and furnace oil (36.9 per cent) by January 12, 2008. While the issuance of oil bonds and burden sharing by upstream oil public sector units would mitigate a part of the under-recoveries, the fiscal costs of such operations have associated monetary implications.

23. In the light of the spurt in international crude oil prices, public authorities in many countries have taken initiatives to protect domestic consumers and to minimise the adverse effects of the pass-through of oil prices to domestic inflation. As against a four-fold rise in average international crude prices over the period 2003-2007, domestic prices of major petroleum products have risen by only 50 per cent in India (LPG and kerosene prices have remained unchanged), by 70 per cent in China and by 150 per cent in Indonesia. Cross-country analysis of end-user prices of the pass-through, however, needs to adjust for the wedge created by the tax components which ranges from high in European countries to low in the US where the retail prices are determined in a competitive market with an efficient refining industry and can be considered as an approximate benchmark for assessing the pass-through for countries with low taxes. An analysis of the tax component in composite barrel price across countries indicates that the tax component has been brought down substantially by both high-tax and low-tax countries in the recent years in the wake of hardening of crude prices. According to the Organisation of Petroleum Exporting Countries (OPEC), the share of taxes has come down during 1999-2006 from 70 per cent to 53 per cent in France, from 69 per cent to 56 per cent in Italy, from 63 per cent to 57 per cent in Germany, from 68 per cent to 62 per cent in the UK, from 38 per cent to 29 per cent in Canada and from 31 per cent to 25 per cent in the US.

24. Inflation based on the consumer price index (CPI) for industrial workers (IW) declined to 5.5 per cent on a year-on-year basis in November 2007 from 6.3 per cent a year ago. The CPI for urban non-manual employees (UNME), agricultural labourers (AL) and rural labourers (RL) also declined to 5.1 per cent, 5.9 per cent and 5.6 per cent, respectively, in December 2007 as compared with 6.9 per cent, 8.9 per cent and 8.3 per cent a year ago. Prices of food items, which have a higher weightage in the CPI basket relative to the WPI, are the major cause of CPI inflation consistently ruling above WPI inflation during the current year. Average inflation based on CPI for IW was 6.5 per cent in November 2007 as compared with 6.1 per cent a year ago. On an annual average basis, inflation based on CPI for UNME, AL and RL increased to 6.5 per cent, 8.2 per cent and 7.8 per cent, respectively, in December 2007 as compared with 6.0 per cent, 6.7 per cent and 6.4 per cent a year ago.

25. Revenue receipts of the Union Government improved to 56.5 per cent of the budget estimates (BE) in April-November 2007 from 54.8 per cent in April-November 2006. As a proportion to BE, revenue expenditure at 61.8 per cent was comparable with 62.6 per cent a year ago. Within capital expenditure, Plan and non-Plan expenditure were 67.0 per cent and 20.5 per cent (net of transactions relating to transfer of the Reserve Bank's stake in the State Bank of India to the Government) of BE, respectively, as compared with 53.9 per cent and 32.6 per cent in the corresponding period of the previous year. As a proportion to BE, the revenue deficit was 97.9 per cent as compared with 99.7 per cent in the corresponding period of the previous year whereas the gross fiscal deficit decelerated to 63.8 per cent from 72.8 per cent a year ago. In recent months, there has been deceleration in mobilisation under small savings. On December 7, 2007 it was announced that the five-year post office time deposit accounts and the senior citizen savings scheme would enjoy the same tax treatment as bank deposits. The element of bonus on post office monthly income accounts has also been restored.

26. The gross market borrowings of the Central Government through dated securities at Rs.1,47,000 crore (Rs.1,30,000 crore a year ago) during 2007-08 so far (up to January 25, 2008) constituted 94.6 per cent of the BE. Net market borrowings at Rs.1,03,092 crore (Rs.91,432 crore a year ago) constituted 94.1 per cent of the BE. The weighted average yield and weighted average maturity of Central Government securities issued during 2007-08 so far were at 8.15 per cent and 14.57 years, respectively, as compared with 7.89 per cent and 14.72 years for those issued during 2006-07 (full year). In addition, securities amounting to Rs.15,147 crore have been issued by the Central Government (excluding MSS) beyond the regular market borrowing programme for 2007-08 to fertiliser companies and to oil companies for partial compensation of under-recoveries, over and above issuances of such securities to the tune of Rs.40,321 crore during 2006-07. In addition to provisional net allocation of Rs.28,781 crore for 2007-08, additional allocations of Rs.2,834 crore were made to certain States and Rs.35,518 crore was allocated to meet the shortfall in receipt from the national small savings fund (NSSF). Accordingly, total net allocation for States stood at Rs.67,133 crore (gross Rs.78,687 crore) for 2007-08 against which they raised a net amount of Rs.35,895 crore (gross Rs.47,449 crore) during the current year up to January 25, 2008.

27. During the third quarter of 2007-08, money, debt and foreign exchange markets remained generally stable, despite large movements in liquidity conditions. Overnight interest rates, which averaged around 6.0 per cent in the first eleven days of November, rose to the upper end of the LAF corridor by mid-December and hardened further in the second half of December on account of reduction in liquidity with the banking system due to sizeable tax outflows and build-up of the Centre's cash balances. Thereafter, overnight rates have softened. The call money rate, which had declined from 14.07 per cent in March 2007 to 6.03 per cent in October, rose to 6.98 per cent in November and to a peak of 7.95 on December 26, averaging 7.50 per cent in December 2007. Thereafter, call rates remained within the informal LAF corridor and averaged 6.57 per cent in January 2008 (up to January 25, 2008). Overnight rates in other segments, viz., market repo and collateralised borrowing and lending obligations (CBLO) ruled around the call money rate during the period. Market repo (other than LAF) declined from 8.13 per cent in March 2007 to 5.87 per cent in October 2007 and increased to 7.36 per cent in December 2007, before declining to 6.33 per cent in January 2008 (up to January 25, 2008). CBLO rates moved from 7.73 per cent in March 2007 to 5.61 per cent in October 2007, before increasing to 7.18 per cent in December 2007. However, they declined to 6.17 per cent in January 2008 (up to January 25, 2008). The daily average volume (one leg) in the call money market decreased from Rs.11,608 crore in March 2007 to Rs.8,124 crore in December 2007. The corresponding volumes in the market repo and CBLO segments increased from Rs.8,687 crore and Rs.17,662 crore, respectively, in March 2007 to Rs.13,354 crore and Rs.30,087 crore in December 2007. As on January 25, 2008, call, market repo and CBLO rates were 7.37 per cent, 7.40 per cent and 4.41 per cent, respectively.

28. The primary yields on 91-day Treasury Bills decelerated to 7.10 per cent on January 25, 2008 from 7.98 per cent at end-March 2007 and 7.31 per cent in end-October 2007. Yields on 364-day Treasury Bills moved to 7.39 per cent on January 25, 2008 from 7.98 per cent at end-March 2007 and 7.36 per cent in end-October 2007. The weighted average discount rate (WADR) on CP declined to 9.20 per cent by end-December 2007 from 11.33 per cent at end-March and the outstanding amount of CP increased from Rs.17,688 crore to Rs.40,231 crore over this period. In the market for certificates of deposit (CDs) also, WADR declined from 10.75 per cent at end-March 2007 to 8.81 per cent by December 21, 2007 accompanied by an increase of 32.4 per cent in the outstanding amount (i.e., from Rs.93,272 crore to Rs.1,23,466 crore).

29. Rapid growth in turnover in the foreign exchange market was sustained by large surplus conditions in the spot market as average daily turnover increased to US $ 50.1 billion for the quarter ended December 2007 from US $ 27.6 billion in the corresponding quarter of the previous year. With increasing volumes of current and capital account transactions, the merchant turnover increased to US $ 15.5 billion from US $ 7.8 billion while the inter-bank turnover increased to US $ 34.6 billion from US $ 19.8 billion. There has been a general softening in forward premia across all maturities over end-March 2007 but some hardening was witnessed after October 2007. 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 1.67 per cent by end-October before it increased to 2.12 per cent on January 25, 2008.

30. The yield on Government securities with one-year residual maturity declined from 7.55 per cent at end-March 2007 to 7.30 per cent as on January 25, 2008. The yield on Government securities with 10-year and 20-year residual maturity also declined from 7.97 per cent and 8.23 per cent, respectively, to 7.46 per cent and 7.66 per cent. The yield spread between 10-year and one-year Government securities narrowed from 42 basis points to 16 basis points and the spread between 20-year and one-year Government securities reduced from 68 basis points to 36 basis points during this period.

31. During March 2007-January 2008, pubic sector banks (PSBs) that were earlier paying higher interest rates on longer term deposits, readjusted their interest rates downwards by 25-50 basis points, while those offering lower deposit rates for similar maturity earlier increased their deposit rates by 50-75 basis points. Similarly, PSBs paying higher interest rates earlier on shorter term deposits of up to one year maturity also revised their deposit rates downwards by 25 basis points. In particular, the interest rates offered by the PSBs on deposits of above one year maturity moved from the range of 7.25-9.50 per cent in March 2007 to 8.00-9.25 per cent in January 2008, while deposit rates for shorter term deposits of up to one year maturity decreased from the range of 2.75-8.75 per cent to 2.75-8.50 per cent during the same period. On the other hand, private sector banks increased their interest rates for long term deposits of above one year maturity from a range of 6.75-9.75 per cent to 7.25-10.00 per cent during the same period. On the lending side, the benchmark prime lending rates (BPLRs) of PSBs increased by 25-75 basis points from a range of 12.25-12.75 per cent to 12.50-13.50 per cent. The private sector banks increased their BPLR from a range of 12.00-16.50 per cent to a range of 13.00-16.50 per cent, in the same period. The range of BPLRs for foreign banks, however, remained unchanged at 10.00-15.50 per cent during the same period.

32. Buoyancy in the equity market continued in terms of large issuances in the domestic primary segment as well as in international stock exchanges. The secondary market witnessed high volatility despite positive sentiments. The BSE Sensex (1978-79=100) increased from 13,072 at end-March 2007 to cross the 15,000 level on July 9, 2007, the 20,000 level on December 11, 2007 and closed at 18,362 on January 25, 2008 registering an increase of 40.5 per cent over end-March 2007. According to data released by the Securities and Exchange Board of India (SEBI), net investments by foreign institutional investors (FIIs) in the equity market were significantly higher at Rs.50,201 crore (US $ 12.1 billion) during the current financial year up to January 25, 2008 as compared with Rs.19,161 crore (US $ 4.1 billion) in the corresponding period of the previous year. In October 2007, SEBI made changes in FII registration criteria by modifying the broad-based criteria considering the track record of the applicant, limiting the issuance of offshore derivative instruments/participatory notes (ODIs/PNs) to only "regulated" entities instead of "registered" entities and giving a road-map for gradual phasing out of existing ODIs/PNs. Also, FII and sub-account registration has been made perpetual, subject to fee payment. Despite these regulatory measures, there has been considerable volatility in portfolio flows which has been reflected in large movements in stock prices. During April-December 2007, mutual funds mobilised net funds of the order of Rs.1,23,993 crore as against Rs.79,708 crore a year ago.