Macroeconomic and Monetary Developments in 2008-09
-Released on April 20, 2009
The process of deleveraging and dysfunctional financial markets in the advanced economies, which accentuated into a global financial crisis, has highlighted the importance of orderly functioning of markets for achieving macroeconomic objectives.
In the third quarter of 2008-09, when liquidity dried down in the global economy markets and credit markets almost froze, there were knock-on effects on domestic money and foreign exchange markets, which prompted the Reserve Bank to initiate measures to ensure adequate provision of rupee and foreign exchange liquidity.
An important distinction between the actions taken by the Reserve Bank and the other central banks is that the interaction is still largely through the banking channel. Another noticeable distinction is that there has not been any dilution of the collateral taken by the Reserve Bank. The array of instruments available allow for flexibility in Reserve Bank's operations.
While orderly conditions could be restored in the money market by November 2008, the pressure on the exchange rate continued, alongside pressure on the country's balance of payments and draw down of foreign exchange reserves. The equity markets followed the general global sentiments and market trends and after a phase of sharp downward movement, the market has shown some recovery since March 2009.
In the government securities market, reflecting the economy's need for large fiscal stimulus, the gross market borrowings of the Government in 2008-09 were substantially higher than those for 2007-08, and the entire market borrowing programme was managed smoothly by the Reserve Bank.
In the credit market following significant reduction in policy rates by the Reserve Bank, the lending rates of banks have begun to exhibit some moderation.
In the context of the high volatility that was witnessed in global financial markets in 2008-09, one notable aspect of the Indian markets was that all markets functioned normally, with occasional volatility for short periods.
The large order of volatility in the inflation outcome witnessed in India during 2008-09 is unprecedented. The sharp volatility in international commodity prices largely contributed to the spiralling inflation in the first half, and then to the subsequent decline from a higher base at fast pace in the second half of 2008-09.
In India, inflation, as measured by year-on-year variations in the Wholesale Price Index (WPI), reached an intra-year peak of 12.91 per cent on August 02, 2008. Subsequently, it fell sharply to 0.26 per cent as at end-March 2009 and further to 0.18 per cent as on April 4, 2009.
As external and supply side factors along with demand pressures conditioned the inflation trend during 2008-09, demand management policy measures had to be employed in a calibrated manner. While the first half of 2008-09 warranted for adjustment of aggregate demand on an economy wide basis, the sharp fall in inflation in the second half facilitated aggressive monetary easing, which aim at arresting the economic slowdown.
Unlike the WPI based inflation, CPI based inflation in India, however, remains high, with recent evidence of very modest moderation, and the transmission process of lower inflation at the wholesale level to inflation at the retail level has emerged as an important issue in the conduct of Reserve Bank's monetary policy.
Various measures of consumer price inflation, though started declining, still remained high in the range of 9.6-10.8 per cent during January/February 2009 as compared with 5.2-6.4 per cent in February 2008.
An assessment of the economic conditions at the current juncture indicates that the global economic conditions have deteriorated sharply during 2008 and the forecasts of the various international agencies point to deepening of recessionary conditions during 2009 as well.
Reflecting global developments and their impact on the Indian economy, as well as domestic cyclical factors, the various surveys of economic activity point towards prevalence of less than optimistic sentiment for the outlook of the Indian economy in the coming months. The Professional Forecasters’ Survey conducted by the Reserve Bank in December 2008 suggested moderation in economic activity in 2008-09 and 2009-10.
The Reserve Bank’s Industrial Outlook Survey of Manufacturing Companies in the Private Sector indicates that the business expectations indices based on the assessment for January-March 2009 and expectations for April-June 2009 declined sharply by 20.7 per cent and 13.9 per cent, respectively, over the previous quarters.
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