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Macroeconomic and Monetary Developments: Third Quarter Review 2007-08 -Announced on the January 28, 2008

The highlights of macroeconomic and monetary developments during 2007-08 so far are:

Financial Markets

During the third quarter of 2007-08, international financial markets remained volatile as uncertainties about the US sub-prime mortgage market and other credit markets exposures persisted.

Indian financial markets remained generally orderly for the most part of the third quarter of 2007-08 except for some volatility in the equity market. Swings in cash balances of the Government and capital flows were the main drivers of liquidity conditions in the financial markets.

Interest rates in the overnight money markets mostly remained within the informal corridor set by reverse repo and repo rates during the third quarter of 2007-08. Interest rates in the collateralised segment of the overnight money market hardened but remained below the call rate during the quarter.

In the foreign exchange market, the Indian rupee generally appreciated during the quarter vis-a-vis all major currencies (US dollar, Euro, Pound sterling and Japanese yen).

Yields in the Government securities market remained range-bound, partly reflecting global trends in yields. Yields softened beginning in the first week of January 2008. The 10-year yield moved in a range of 7.42-8.32 per cent during 2007-08 (up to January 23, 2008).

The External Economy

India’s balance of payments position continued to remain comfortable during the first half of 2007-08 (April-September). The merchandise trade deficit, on balance of payments basis, widened to US$ 42.4 billion in April-September 2007 from US$ 33.8 billion in April-September 2006. Net surplus under invisibles (services, transfers and income taken together) was higher at US $ 31.7 billion in April-September 2007 (US $ 23.4 billion in April-September 2006). The net invisible surplus offset a large part of the trade deficit (74.7 per cent during April-September 2007 as compared with 69.4 per cent during April-September 2006).

Despite large merchandise trade deficit, higher net invisible surplus, mainly emanating from private transfers, contained the current account deficit at US $ 10.7 billion in the first half of 2007-08 (US $10.3 billion in April-September 2006). The current account deficit was financed by capital flows which have remained large during 2007-08 so far.

During 2007-08 (up to January 11, 2008), net inflows by FIIs amounted to US $26.8 billion (US $ 2.5 billion in the corresponding period of 2006-07). Inflows under foreign direct investment (FDI) were US $ 13.8 billion during April-November 2007 as against US $ 10.1 billion during the corresponding period of the previous year. During the current financial year 2007-08 (April-September), inflows (net) under external commercial borrowings (ECBs) amounted to US $ 10.6 billion (US $ 5.7 billion during April-September 2006). The ECB approvals (including under the automatic route) amounted to US $ 23.3 billion during April-December 2007 as compared with US $ 15.3 billion during April-December 2006. Non-resident Indians’ deposits registered net outflows of US $ 433 million during April-September 2007 as against net inflows of US $ 3.0 billion during April-September 2006.

According to the data released by the Directorate General of Commercial Intelligence and Statistics (DGCI&S), during 2007-08 so far (April-November), merchandise exports posted a growth rate of around 22 per cent moderating from the growth rate of 26.2 per cent during April-November 2006, while growth in imports at 26.9 per cent was marginally lower than that of 27.4 per cent in April-November 2006. Non-oil imports recorded a substantial increase, while oil imports showed a sharp deceleration in growth. Overall, the merchandise trade deficit widened to US $ 52.8 billion in April-November 2007 from US $ 38.5 billion in April-November 2006.

India’s foreign exchange reserves were US $ 284.9 billion as on January 18, 2008, showing an increase of US $ 85.7 billion over end-March 2007.

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