Third Quarter Review of Monetary Policy 2011-12
-Announced on the 24th January 2012
I. The State of the Economy
21. As measured by the consumer price index (CPI) for industrial workers, inflation moderated from double digits in September to 9.3 per cent in November. Inflation in terms of consumer price indices for agricultural and rural labourers moderated significantly in December. The new combined (rural and urban) consumer price index (base: 2010=100) declined marginally from 114.4 in November to 113.9 in December, reflecting softening of food prices.
22. Money supply (M3) growth, which was 17.2 per cent at the beginning of the financial year, reflecting the strong growth in time deposits following increase in interest rates by banks, moderated to 15.6 per cent by end-December 2011 consistent with the projected trajectory of 15.5 per cent for the year.
23. However, non-food credit growth moderated from 21.3 per cent at end-March to 15.7 per cent by end-December 2011, a rate below the indicative projection of 18 per cent set out in the SQR. Credit deceleration was particularly sharp for public sector banks, with growth moderating from 21 per cent to about 15 per cent during the same period. Disaggregated data for November showed that there was a general deceleration in the credit flow across sectors, except for personal loans. The deceleration was particularly sharp in agriculture, real estate, infrastructure, engineering, cement and cement products.
24. Resource flows to the commercial sector from other sources partly offset the deceleration in bank credit. The estimated total flow of financial resources from banks, non-banks and external sources to the commercial sector during April-December of 2011 at around `9.2 trillion was, however, lower than that of `9.5 trillion during the same period of last year.
25. During Q3 of 2011-12, the modal deposit rate of banks increased by 44 basis points for maturity up to 1 year, and 9 basis points for maturity between 1 to 3 years. During Q3, 23 banks raised their base rates by 10-100 basis points even as the modal base rate of banks remained unchanged at 10.75 per cent. The slowdown in total resource flow to the commercial sector and the peaking of base rates of banks reflect slowing down of investment activity.
26. Liquidity conditions, which have generally remained in deficit during 2011-12, tightened further beginning the second week of November 2011, partly reflecting the Reserve Bank’s forex market operations and advance tax outflows around mid-December. Average borrowings under the Reserve Bank’s daily liquidity adjustment facility (LAF) increased from around `480 billion during April-September 2011 to around `920 billion during November and further to `1,170 billion in December 2011. Average daily borrowings under the LAF were about `1,200 billion during January (up to January 20, 2012). To ease the tightness in liquidity, and consistent with its monetary policy stance of managing liquidity to ensure that it remained in moderate deficit, the Reserve Bank conducted open market operations (OMOs) aggregating over `700 billion during November 2011-mid January 2012.
27. Under the marginal standing facility (MSF), banks can drawdown up to one per cent of their net demand and time liabilities (NDTL) from their prescribed statutory liquidity ratio (SLR) portfolio. On December 21, 2011, the Reserve Bank clarified that banks could access the MSF even if they had excess SLR holdings. In view of the tight liquidity conditions, some banks accessed funds from the MSF window during December 2011-January 2012.
28. With the introduction of the new operating procedure of monetary policy in May 2011, overnight money market rates have become more stable. The overnight interest rates generally remained close to the repo rate during 2011-12 (up to January 20, 2012), barring a few days when the call rate breached the interest rate ceiling determined by the MSF rate owing to tightness of liquidity on account of advance tax outflows.
29. The Central Government’s key deficit indicators widened during 2011-12 (April-November) relative to the levels in the corresponding period of last year, and were higher even when compared with the deficit levels adjusted for the one-off spectrum receipts last year. This was reflected in the increase in borrowings by the Government. Beyond the budgeted estimate of Rs4,170 billion, the Central Government announced an increase in borrowings through dated securities of about Rs530 billion in September and further Rs400 billion in December. Consequently, the revised gross (net) borrowings for the year now work out to about Rs5,100 billion (Rs4,360 billion). About 83 per cent of revised gross (Rs4,220 billion) and 80 per cent of net market borrowings (Rs3,480 billion) were raised up to January 16, 2012. The Central Government has also announced an increase in the borrowing through net issuances of Treasury Bills by Rs1,025 billion over the budgeted amount of Rs150 billion for 2011-12.
30. The 10-year benchmark government security yield, which remained range-bound during the first half of 2011-12, rose during October, after the commencement of second half borrowing programme of the government. The yield, however, eased subsequently from 8.89 per cent at end-October to 8.74 per cent at end-November and further to 8.22 per cent as on January 20, 2012. The moderation in yield reflected improved demand for government securities as credit demand slackened, OMO purchases by the Reserve Bank, increase in debt cap for foreign institutional investors (FIIs) for investment in government securities, and expectation of moderation in inflation.
31. The foreign exchange market remained under pressure in Q3 of 2011-12, reflecting adverse global sentiments and moderation in capital inflows. Between end-March 2011 and January 13, 2012, the 6, 30 and 36-currency trade weighted real effective exchange rates (REER) depreciated by about 9 per cent each, primarily reflecting the nominal depreciation of rupee against the US dollar by about 13.2 per cent. Much of the depreciation happened during August-December. The Reserve Bank took a number of steps to stimulate capital inflows and curb speculation, besides also intervening in the market consistent with its policy of containing volatility and preventing disruptive movements. The Reserve Bank continues to closely monitor developments in the external sector and their impact on the exchange rate and, as indicated in the Mid-Quarter Review (MQR) of December 2011, will take action, as appropriate.
32. During H1 (April-September) of 2011-12, the current account deficit (CAD), in absolute terms, widened relative to H1 of last year, reflecting widening of the trade deficit due to significant increase in international prices of imported commodities, especially crude oil and gold as well as moderation of growth in exports of services. However, as a proportion of GDP, the CAD at 3.6 per cent was a shade lower than 3.7 per cent in H1 of last year. During Q3 of 2011-12, merchandise exports growth decelerated, on an average, to 7.7 per cent y-o-y from an average of 36.9 per cent during the first half of 2011-12. With imports growth moderating more slowly than exports growth, the trade deficit for Q3 widened further.
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Macroeconomic and Monetary Developments: Third Quarter Review 2011-12 ...Click Here
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RBI CREDIT AND MONETARY POLICIES (1999-2012)