Macroeconomic and Monetary Developments: Third Quarter Review 2007-08
-Announced on the January 28, 2008
The Reserve Bank of India on 28th January 2008 released the document “Macroeconomic and Monetary Developments: Third Quarter Review 2007-08” to serve as a backdrop to the Third-Quarter Review of the Annual Policy Statement for 2007-08 being announced on January 28, 2008.
The highlights of macroeconomic and monetary developments during 2007-08 so far are:
The Real Economy
The Indian economy continued to exhibit robust growth during the second quarter (July-September) of 2007-08, albeit with some moderation. According to the estimates released by the Central Statistical Organisation (CSO) in August 2007, real GDP growth was 8.9 per cent during the second quarter of 2007-08 as compared with 10.2 per cent during the same period in 2006-07. While ‘agriculture and allied activities’ recorded higher growth during the first half of 2007-08 over the corresponding period of the previous year, the growth of industrial and services sectors was somewhat lower than that during the first half of the previous year.
The cumulative rainfall during the South-West monsoon season 2007 (June 1 to September 30) was 5 per cent above normal as compared with one per cent below normal during the corresponding period of the previous year. Cumulative rainfall during the North-East monsoon (October 1, 2007 to December 31, 2007) was 32 per cent below normal as compared with 21 per cent below normal during the corresponding period of the previous year. The reported sown area of kharif crops (up to October 26, 2007) increased by 2.7 per cent, while that of rabi crops (up to January 18, 2008) was about 3.7 per cent lower than a year ago.
During April-November 2007, the index of industrial production (IIP) rose by 9.2 per cent as compared with the increase of 10.9 per cent recorded during the corresponding period of the previous year. The manufacturing sector registered a growth of 9.8 per cent during April-November 2007 as compared with 11.8 per cent during April-August 2006.
During April-November 2007, the infrastructure sector recorded a growth of 6.0 per cent as compared with 8.9 per cent a year ago, with all the sectors exhibiting growth rates lower than a year ago.
The services sector continued to record double-digit growth (10.5 per cent) in April-September 2007. Leading indicators of service sector activity for April-October 2007 show that growth rates in revenue earning freight traffic of the railways, commercial vehicles production, new cell phone connections, passengers handled by civil aviation at domestic terminals, cement and steel moderated albeit over a high base.
According to the latest information on Central Government finances for 2007-08 (April-November), key deficit indicators, viz., revenue deficit and GFD, were placed lower than those in the corresponding period of the previous year, both in absolute terms and per cent of the budget estimates. Apart from the lower revenue deficit, contraction in defence capital outlay also moderated the fiscal deficit. There was a primary surplus of Rs. 7,374 crore during April-November 2007 as compared with a budgeted surplus of Rs. 8,047 crore.
Gross and net market borrowings (including 364-day Treasury Bills) of the Central Government during 2007-08 (up to January 25, 2008) were Rs.1,73,429 crore and Rs.1,03,092 crore, respectively, accounting for 91.8 per cent and 94.1 per cent of the estimated borrowings for the year.
During 2007-08 (up to January 25, 2008), the States raised market loans amounting to Rs.47,449 crore through auctions, as compared with Rs. 14,204 crore during the corresponding period of the previous year.
Headline inflation firmed up in major economies during the third quarter of 2007-08, reflecting the combined impact of higher food and fuel prices as well as strong demand conditions, especially in emerging markets. The monetary policy response during the quarter, however, was mixed in view of heightened concerns about the implications of credit crunch arising out of the US sub-prime crisis on financial stability.
Global commodity prices firmed up during the third quarter of 2007-08 led by food and crude oil prices, although there was some moderation in prices of metals. International crude oil prices, represented by the West Texas Intermediate (WTI), touched a historical peak of US $ 99.6 a barrel level on January 2, 2008. Although the prices eased somewhat subsequently, they continued to remain at an elevated level (US $ 89.9 a barrel on January 23, 2008). International food prices firmed up further during the third quarter of 2007-08 led by wheat and oilseeds/edible oils, reflecting surging demand (both consumption demand and demand for non-food uses such as bio-fuels production) and low stocks of major crops, partly on account of weather related disturbances.
In India, headline inflation, based on movement in the wholesale price index (WPI) was 3.8 per cent on January 12, 2008 (3.4 per cent at end-September 2007) as compared with 5.9 per cent at end-March 2007 (and 6.2 per cent a year ago). The easing in inflation from a year ago was mainly led by primary food articles and some manufactured products items.
Primary articles' inflation, y-o-y, eased to 3.9 per cent on January 12, 2008 from 6.2 per cent at end-September 2007 and 9.5 per cent a year ago; it was 10.7 per cent at end-March 2007. The deceleration was mainly due to easing of food articles' inflation. Manufactured products inflation, y-o-y, eased to 3.9 per cent on January 12, 2008 from 4.5 per cent at end-September 2007 and 6.1 per cent at end-March 2007; it was 5.8 per cent a year ago. The deceleration in manufactured products inflation, y-o-y, was mainly due to decline in the prices of non-ferrous metals, textiles and sugar. Fuel group inflation, which was negative during June-November 2007, turned positive from the beginning of December 2007 (3.7 per cent on January 12, 2008) partly reflecting the base effects of fuel (petrol and diesel) price cuts last year and increase in the prices of some petroleum products such as naphtha, furnace oil and aviation turbine fuel.
Inflation based on year-on-year variation in consumer price indices (CPIs) also eased during November/December 2007 (from a year ago) but continued to remain above the WPI inflation, mainly reflecting the impact of food prices and their higher weights in the CPI vis-à-vis WPI. CPI inflation measures were placed in the range of 5.1-5.9 per cent during November/December 2007 as compared with 5.7-7.9 per cent in September 2007 (and 6.7-9.5 per cent in March 2007).
Monetary and Liquidity Conditions
Growth in broad money (M3), year-on-year (y-o-y), was 22.4 per cent (Rs. 6,86,925 crore) on January 4, 2008 as compared with 20.8 per cent (Rs. 5,26,566 crore) a year ago.
Aggregate deposits of banks, y-o-y, increased by 23.8 per cent (Rs.6,17,035 crore) on January 4, 2008 as compared with 21.5 per cent (Rs. 4,59,021 crore) a year ago.
Growth in bank credit moderated after the strong pace in the preceding three years. Non-food credit by scheduled commercial banks (SCBs) moderated to 22.2 per cent (Rs.3,82,155 crore), y-o-y, as on January 4, 2008 from 31.9 per cent (Rs.4,16,418 crore) a year ago.
Reserve money expanded by 30.6 per cent, y-o-y, as on January 18, 2008 as compared with 20.0 per cent a year ago. Adjusted for the first round impact of the hike in the cash reserve ratio, reserve money growth was 21.5 per cent as compared with 17.5 per cent a year ago.
Liquidity conditions continued to be influenced by movements in capital flows and cash balances of the Governments. The Reserve Bank continued with the policy of active management of liquidity through increase in the cash reserve ratio (CRR), issuances of securities under the market stabilisation scheme (MSS) and operations under liquidity adjustment facility (LAF).
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