Macroeconomic and Monetary Developments: Mid-Term Review 2007-08
-Announced on the 29th October 2007
Monetary and Liquidity Conditions
Growth in broad money (M3), year-on-year (y-o-y), was 21.8 per cent (Rs. 6,41,464 crore) on October 12, 2007 as compared with 18.9 per cent (Rs. 4,66,603 crore) a year ago.
Aggregate deposits of banks, y-o-y, increased by 23.4 per cent (Rs.5,83,198 crore) on October 12, 2007 as compared with 19.2 per cent (Rs. 4,01,717 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 23.5 per cent (Rs.3,77,759 crore), y-o-y, as on October 12, 2007 from 30.0 per cent (Rs.3,70,226 crore) a year ago.
Reserve money expanded by 24.4 per cent (14.9 per cent adjusted for the first round impact of the increase in the cash reserve ratio), y-o-y, as on October 19, 2007 as compared with 20.2 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 modulated market liquidity with the help of issuances of securities under the Market Stabilisation Scheme (MSS), operations under Liquidity Adjustment Facility (LAF) and increase in the cash reserve ratio (CRR).
During the second quarter of 2007-08, international financial markets turned volatile as uncertainties about the size and distribution of losses from the US sub-prime mortgage market made investors to adjust their positions. Emerging market economies have generally been less affected by developments in the advanced economies.
Indian financial markets remained orderly for the most part of the second quarter of 2007-08.
The call money rate, which had remained below the reverse repo rate during June-July 2007 on the back of the easing of liquidity conditions and ceiling on absorption through reverse repo operations under the liquidity adjustment facility (LAF) till August 3, 2007, reverted to the corridor set by the reverse repo and repo rates in August-September 2007. Interest rates in the collateralised segment of the overnight money market also hardened but remained below the call rate during the quarter.
In the foreign exchange market, the Indian rupee generally appreciated vis-a-vis all major currencies (US dollar, Euro, Pound sterling and Japanese yen) during the quarter.
Yields in the Government securities market softened.
Banks’ deposit and lending rates softened during the second quarter particularly at the upper end of the range of various maturities.
The External Economy
India’s balance of payments position has remained comfortable during 2007-08 so far. The merchandise trade deficit, on balance of payments basis, increased from US$ 16.9 billion in April-June 2006 to US$ 21.6 billion in April-June 2007. Net surplus on the invisibles account exhibited buoyancy during the first quarter of 2007-08, led by exports of software, business services and private remittances, and continued to finance a large part (78.2 per cent) of the merchandise trade deficit.
Despite large merchandise trade deficit, higher net invisible surplus contained the current account deficit (US$ 4.7 billion) during the first quarter of 2007-08 at broadly the same level (US$ 4.6 billion) as in the first quarter of 2006-07. The current account deficit was financed by capital flows which have remained large during 2007-08 so far.
During 2007-08 (up to October 19, 2007), net inflows by FIIs amounted to US $21.2 billion as compared with outflows of US $ 933 million in the corresponding period of 2006-07. FDI inflows were US $ 6.6 billion during April-July 2007 (US $ 3.7 billion a year ago). On the other hand, non-resident Indian deposits registered net outflows amounting to US $ 148 million during April-July 2007 as against net inflows of US $ 1.6 billion during April-July 2006.
During 2007-08 so far (April-August), growth of merchandise exports moderated, while imports posted a high growth rate. Non-oil imports registered high growth due to robust growth in capital goods. Oil imports registered a sharp deceleration from the strong growth recorded during the corresponding period of the previous year.
India’s foreign exchange reserves were US $ 261.1 billion as on October 19, 2007, showing an increase of US $ 62.0 billion over end-March 2007 level.
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