Macroeconomic and Monetary Developments Mid-Term Review 2008-09, RBI Credit Policy, Reserve Bank of India: Banknet India

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Macroeconomic and Monetary Developments: Mid-Term Review 2008-09 -Announced on the 23rd October 2008

The Reserve Bank released the document "Macroeconomic and Monetary Developments Mid-Term Review 2008-09" to serve as a backdrop to the Mid-Term Review of Annual Policy Statement for 2008-09 being announced on October 24, 2008.

The highlights of macroeconomic and monetary developments during 2008-09 so far are:

Monetary and Liquidity Conditions

Growth in broad money (M3), year-on-year (y-o-y), moderated to 20.3 per cent (Rs. 7,29,338 crore) on October 10, 2008 as compared with 21.9 per cent (Rs. 6,43,963 crore) a year ago.

Aggregate deposits of banks, y-o-y, increased by 20.4 per cent (Rs.6,28,140 crore) on October 10, 2008 as compared with 23.5 per cent (Rs. 5,85,253 crore) a year ago.

Growth in bank credit continued to expand at a strong pace. Non-food credit by scheduled commercial banks (SCBs) increased by 29.3 per cent (Rs.5,80,060 crore), y-o-y, as on October 10, 2008 as compared with 23.3 per cent (Rs.3,74,054 crore) a year ago. The higher credit growth relative to the deposit growth resulted in an increase in the incremental credit deposit ratio (y-o-y) of SCBs to 96.2 per cent as on October 10, 2008 from 66.8 per cent a year ago. During the financial year 2008-09 ( up to October 10, 2008), non-food credit expanded by 10.4 per cent (Rs. 2,40,995 crore) as compared with 5.0 per cent (Rs. 93,781 crore) during the corresponding period of the previous year.

Disaggregated sectoral data available up to August 29, 2008 showed that about 45 per cent (Rs. 2,18,246 crore) of incremental non-food credit (y-o-y) was absorbed by industry as compared with 40 per cent (Rs. 1,43,614 crore) in the corresponding period of the previous year. The agricultural sector absorbed around 8 per cent (Rs. 40,913 crore) of the incremental non-food bank credit expansion as compared with 13 per cent (Rs. 44,360 crore) in the corresponding period of the previous year. Personal loans accounted for nearly 17 per cent (Rs. 81,729 crore) of incremental non-food credit; within personal loans, the share of incremental housing loans was at 40 per cent (Rs. 32,792 crore).

Reserve money growth at 17.6 per cent, y-o-y, as on October 17, 2008 was lower than that of 24.4 per cent a year ago.

The Reserve Bank continued with its policy of active management of liquidity during the current financial year through appropriate use of the CRR, and OMO, including MSS and LAF, and other policy instruments at its disposal flexibly. Developments on both international and domestic fronts, particularly from mid-September 2008, have impacted domestic liquidity conditions. Nonetheless, liquidity modulation through a flexible use of a combination of instruments has, to a significant extent, cushioned the impact of international financial turbulences on domestic financial market by absorbing excessive market pressure and ensuring orderly conditions.

Price Situation

Headline inflation has remained firm in major economies during 2008-09 so far. However, there are signs of moderation in inflationary pressures reflecting marked decline in prices of food, fuel and other commodities, as well as augmentation of downward risks to growth from the intensification of global financial market crisis.

The monetary policy responses of different countries, which were initially somewhat independent in view of inflation concerns, became more coordinated in terms of simultaneous easing of monetary conditions during the period July-October 2008 in view of the increasing downside risks to growth and the consequent diminishing upside risks to price stability.

Global commodity prices have eased somewhat during the second quarter of 2008-09 led by a decline in the prices of crude oil, metals and food. After touching a historical high of US $ 145.3 a barrel level on July 3, 2008, international crude oil prices, represented by the West Texas Intermediate (WTI), have eased reflecting decline in demand in OECD countries and improved near-term supply prospects in non-OPEC countries. WTI crude oil price was at around US $ 66 a barrel on October 22, 2008. Metal prices eased further during the second quarter of 2008-09, reflecting weak construction demand in OECD countries and some improvement in supply, especially in China. Food prices, which had increased sharply up to the first quarter of 2008-09, reflecting higher demand and low stocks, eased somewhat during the second quarter of the year on the back of improved supply prospects, particularly for oilseeds and grains in major producing countries.

Mirroring global trends, inflation in India increased during 2008-09 so far, albeit with some recent easing. Inflation, measured as year-on-year (y-o-y) variation in the wholesale price index (WPI), increased to 11.1 per cent on October 11, 2008 from 3.1 per cent a year ago and 7.7 per cent at end-March 2008, reflecting the impact of some pass-through of international crude oil prices to domestic prices as well as elevated levels of prices of iron and steel, basic heavy inorganic chemicals, machinery and machinery tools, oilseeds, sugar, raw cotton and textiles on account of strong demand as well as international commodity price pressures. However, there has been some moderation in the prices of freely priced petroleum products and edible oils/oil cakes over end-June 2008.

Primary articles inflation, y-o-y, increased to 11.5 per cent on October 11, 2008 from 4.6 per cent a year ago and 11.0 per cent at end-June 2008 (9.7 per cent at end-March 2008) mainly reflecting the increase in the prices of food articles, especially of wheat, rice, fruits and vegetables, milk, and eggs, fish and meat as well as non-food articles such as oilseeds and raw cotton.

Fuel group inflation increased to 14.5 per cent on October 11, 2008 from a decline of 1.5 per cent a year ago and an increase of 6.8 per cent at end-March 2008 (it was 16.3 per cent at end-June 2008) mainly due to increase in the prices of minerals oil by 14.1 per cent over end-March 2008. However, in response to easing in international crude oil prices from the peak of early-July 2008, domestic prices of freely priced minerals oil items such as naphtha, furnace oil and aviation turbine fuel have declined in the range of 12-22 per cent beginning August 2008.

Manufactured products inflation, year-on-year, was 9.5 per cent as on October 11, 2008 as compared with 4.3 per cent a year ago and 10.9 per cent at end-June 2008 (it was 7.3 per cent at end-March 2008). The year-on-year increase in manufactured products prices was driven mainly by sugar, edible oils/oil cakes, textiles, chemicals, iron and steel, and machinery and machine tools. Prices of edible oils and grain mill products, however, eased somewhat over end-March 2008.

Consumer price inflation increased further during August/September 2008 mainly due to increase in the prices of food, fuel and services (represented by the ‘miscellaneous’ group).

Consumer price inflation for industrial workers increased to 9.0 per cent in August 2008 from 7.7 per cent in June 2008 and 7.3 per cent a year ago.

Consumer price inflation for urban non-manual employees firmed up to 8.5 per cent in August 2008 from 7.3 per cent in June 2008 and 6.4 per cent a year ago.

Consumer price inflation for agricultural labourers increased to 11.0 per cent in September 2008 from 8.8 per cent in June 2008 and 7.9 per cent a year ago.

Consumer price inflation for rural labourers was 11.0 per cent in September 2008 as compared with 8.7 per cent in June 2008 and 7.6 per cent a year ago.

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