Macroeconomic and Monetary Developments in 2007-08
-Announced on the 28th April 2008
The Reserve Bank of India on 28th April 2008 released the document “Macroeconomic and Monetary Developments in 2007-08” to serve as a backdrop to the Annual Policy Statement for 2008-09 being announced on April 29, 2008.
The highlights of macroeconomic and monetary developments during 2007-08 are:
Headline inflation firmed up in major economies, mostly during the second half 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 responses during the year, however, were mixed in view of heightened concerns about the implications of credit crunch arising out of the US sub-prime crisis on financial stability and economic growth in the latter part of the year.
Global commodity prices firmed up during 2007-08 led by sharp increases in food and crude oil prices. Metal prices, which had witnessed some moderation during June-December 2007, rose again during January-March 2008. Agricultural raw materials prices, however, remained largely range bound during 2007-08. International crude oil prices, represented by the West Texas Intermediate (WTI) rose to a historical peak of US $ 119.2 a barrel level on April 22, 2008. Food prices firmed up especially during the second half of 2007-08, led by wheat, rice, 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.
In India, headline inflation based on the wholesale price index (WPI) softened from 6.4 per cent at the beginning of the fiscal year to a low of 3.1 per cent on October 13, 2007 before increasing again to 7.4 per cent by March 29, 2008, mainly reflecting hardening of prices of primary articles, fuel group and some manufactured products items.
Primary articles inflation, y-o-y, eased from 12.2 per cent at the beginning of April 2007 to an intra-year low of 3.7 per cent by end-December 2007 but increased to 8.9 per cent on March 29, 2008 mainly led by fruits and vegetables, oilseeds, raw cotton and iron ore. Fuel group inflation, after remaining negative during June-November 2007, turned positive from mid-November 2007 to reach 6.7 per cent on March 29, 2008 reflecting increases in the prices of some petroleum products such as naphtha, furnace oil, aviation turbine fuel (ATF) and bitumen as well the upward revision in the domestic prices of petrol and diesel in February 2008. Manufactured products inflation, y-o-y, eased from 6.4 per cent at the beginning of the year to 3.5 per cent by November 24, 2007 but increased to 7.1 per cent by March 29, 2008, mainly reflecting the continued rise in the prices of edible oils/oil cakes, basic heavy inorganic chemicals, and basic metals and alloys.
Inflation based on year-on-year variation in consumer price indices (CPIs) eased up to January 2008, mainly reflecting the deceleration in food price inflation. Subsequently, there has been some increase in CPI inflation measures mainly due to food and fuel prices. Various measures of consumer price inflation were placed in the range of 5.5-7.9 per cent during February/March 2008 as compared with 6.7-9.5 per cent in March 2007.
As per the latest available information on WPI, headline inflation eased marginally to 7.3 per cent during the week ended April 12, 2008 from 7.4 per cent at end-March 2008.
Global financial markets remained volatile during 2007-08 as the crises about the US sub-prime mortgage market and other credit markets exposures deepened and spilled over to markets for other assets.
The Indian financial markets remained largely orderly during 2007-08, barring the equity market which witnessed bouts of volatility, especially beginning the second week of January 2008 in tandem with trends in major international equity markets. Over the year, however, the equity market registered gains.
Brief spells of volatility were observed in the money market on account of changes in capital flows and cash balances of the Central Government with the Reserve Bank.
After the withdrawal of the ceiling of Rs. 3,000 crore on reverse repo acceptances under the LAF on August 6, 2007, interest rates in the overnight money markets moved in the reverse repo and repo corridor and remained within the corridor during the remaining part of the year. Interest rates in the collateralised segment of the overnight money market remained below the call rate during the year.
In the foreign exchange market, the Indian rupee generally exhibited two-way movements against major currencies.
The 10-year yield in the Government securities market softened during the most part of the year.
The External Economy
India’s balance of payments position remained comfortable during 2007-08 (April-December). The merchandise trade deficit, on balance of payments basis, widened to US $ 66.5 billion in April-December 2007 from US $ 50.3 billion in April-December 2006. Net surplus under invisibles (services, transfers and income taken together) was higher at US $ 50.5 billion in April-December 2007 as compared with US $ 36.3 billion in April-December 2006.
Despite sharp rise in merchandise trade deficit, the net invisible surplus, mainly emanating from the rise in remittances from the overseas Indians and software services exports, contained the current account deficit at US $ 16.0 billion during April-December 2007 (US $14.0 billion in April-December 2006). The current account deficit was more than financed by capital flows which remained large during 2007-08.
Net inflows by foreign institutional investors (FIIs) aggregated US $ 20.3 billion during 2007-08 (US $ 3.2 billion during 2006-07). Inflows under foreign direct investment (FDI) were US $ 25.5 billion during 2007-08 (April-February) as compared to US $ 19.6 billion during 2006-07 (April-February). During 2007-08 (April-December), inflows (net) under external commercial borrowings (ECBs) amounted to US $ 16.3 billion (US $ 9.8 billion during April-December 2006). Non-Resident Indian deposits registered a net inflow of US $ 106 million during 2007-08 (April-February) as compared with net inflows of US $ 3.9 billion during the corresponding period of the previous year.
According to the data released by the Directorate General of Commercial Intelligence and Statistics (DGCI&S), during 2007-08 (April-February), merchandise exports recorded a growth of 22.8 per cent as compared with 23.2 per cent growth posted during 2006-07 (April-February). Growth in imports at 30.1 per cent was higher than 25.2 per cent recorded a year ago. Non-oil imports recorded a substantial increase of 31.8 per cent (22.6 per cent a year ago), while oil imports showed a deceleration in growth (26.4 per cent as against 31.2 per cent in April-February 2007). Merchandise trade deficit during April-February 2008 widened to US $ 72.5 billion from US $ 49.4 billion, a year ago.
Foreign exchange reserves increased by US $ 110.5 billion during 2007-08 to US $ 309.7 billion as on March 31, 2008. As on April 18, 2008, India’s foreign exchange reserves were US $ 313.5 billion.
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