Macroeconomic and Monetary Developments in 2008-09
-Released on April 20, 2009
The External Economy
In the face of deteriorating external environment, the adverse effects of the contagion transmitting through different components of India's balance of payments (BoP) could largely be contained through policy actions. A noteworthy feature during 2008-09 was that the effect of external shocks transmitting to India through the BoP could be contained with loss of reserves mainly in the third quarter of the year, when the global crisis deepened and spread significantly with more visible real effects.
India’s BoP position in 2008-09 (April-December) was characterised by a widened trade deficit leading to a higher current account and lower net capital inflows. In the face of deteriorating external environment, the adverse effects of the contagion transmitting through different components of India's balance of payments (BoP) remained largely contained.
The rapid contraction in the global trade was reflected in negative growth experienced during the third quarter, which was last observed in 2001-02. The growth in imports also decelerated to single digit level during the third quarter, led by lower crude oil prices and weakening domestic demand. The merchandise trade deficit further widened to US$ 113.8 billion during April-February 2008-09 (US $ 82.2 billion a year ago).
Net surpluses under invisibles increased in April-December 2008, primarily led by private transfers and software services, though a moderation in such inflows set in the third quarter. Thus, the current account deficit widened to a level of US$ 36.5 billion (US$ 15.5 billion in April-December 2007)
The adverse impact of the global financial market turmoil was also felt in terms of reduced inflow of the long and short-term debt and reversal of portfolio inflows. A positive development was, however, relative resilience of FDI inflows (US $ 31.7 billion in April-February 2008-09) in the face of reversal of capital flows, reflecting the attractiveness of India as a long term investment destination.
As on April 10, 2009, the foreign exchange reserves stood at US $ 253 billion, showing a decline of US$ 56.7 billion (including valuation) over the level at end-March 2008.
India’s external debt, debt sustainability indicators and the level of foreign exchange reserves continue to remain at comfortable levels and would ensure external stability.
The global crisis, which created intense uncertainties for funding liquidity in the face of tight market liquidity for financial instruments trading in almost all financial markets, brought to the fore the strong interactions between funding liquidity and market liquidity. As the global liquidity crisis started to affect the domestic money and foreign exchange markets in the last quarter of 2008, the Reserve Bank ensured adequate provision of both domestic and foreign exchange liquidity to the market through banks, with the aim of restoring normal functioning of the market, and thereby facilitating adequate flow of credit to the productive sectors of the economy.
The monetary policy stance of the Reserve Bank shifted from concerns related to inflation in the first half of 2008-09 to maintaining financial stability and arresting the moderation of growth in the second half. While money supply evolved consistent with indicative projections, credit to private sector reflected the conditions evolving in the real sector of the economy.
Growth in broad money (M3), year-on-year (y-o-y), was 18.4 per cent at end-March, 2009 as compared with 21.2 per cent a year ago, reflecting deceleration in the expansion of bank credit and capital inflows.
Aggregate deposits of banks, y-o-y, was 18.8 per cent at end-March 2009 as compared with 21.7 per cent a year ago.
Non-food credit growth (y-o-y) of SCBs to the commercial sector remained strong up to October 2008 on the backdrop of drying up of other sources of funds to industry but witnessed sustained deceleration thereafter. Non-food credit by SCBs was moderated to 17.5 per cent, y-o-y, at end-March 2009 as compared with 23.0 per cent a year ago.
The contractionary impact of decline in net foreign exchange assets on reserve money and domestic liquidity was offset by expansion through open market operations (OMOs), unwinding of MSS and other measures to augment rupee liquidity. Adjusted for the first round effect of the changes in CRR, reserve money growth (y-o-y) as on March 31, 2009 was lower at 19.0 per cent as compared with 25.3 per cent a year ago.
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