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:
Global financial market conditions deteriorated substantially during July-October 2008. Bankruptcy/sell-out/restructuring became more widespread emanating from mortgage lending institutions to systemically important financial institutions and further to commercial banks. The failure of banks and financial institutions also broadened geographically from the US to many European countries. As a result, funding pressures in the inter-bank money market persisted, equity markets weakened further and counterpart credit risk increased. Central banks continued to take action independently and also in a coordinated manner to enhance the effectiveness of their liquidity facilities.
Emerging market economies (EMEs), which had been relatively resilient in the initial phase of the financial turbulence, witnessed a changed environment in recent months, reflecting tightened liquidity conditions and rising risk.
Financial markets in India, which remained largely orderly from April 2008 to mid-September 2008, witnessed heightened volatility between mid-September and mid-October 2008.
Interest rates in the money market moved in accordance with evolving liquidity conditions. The daily average call rate, which had remained mostly within the informal corridor set by the reverse repo and repo rates of liquidity adjustment facility (LAF) during the first quarter of 2008-09, hovered generally close to the repo rate during the second quarter, but witnessed some spikes in late September due to tightened market liquidity. Interest rates in the collateralised segments of the money market moved in tandem with the call rate and continued to remain below the call rate during the second quarter.
In the foreign exchange market, the Indian rupee generally depreciated against major currencies.
In the credit market, lending rates of scheduled commercial banks increased.
Yields in the government securities market generally softened during the second quarter 2008-09.
Indian equity markets declined in tandem with trends in major international equity markets as well as edging up of domestic inflation.
The Reserve Bank took necessary actions to inject liquidity and reassured the market that the Indian banking system remained sound, well capitalised and well regulated.
The External Economy
India’s balance of payments position during the first quarter of 2008-09 (April-June) reflected a widening of the current account deficit and moderation in capital flows. The merchandise trade deficit, on balance of payments basis, increased from US $ 20.7 billion in April-June 2007 to US $ 31.6 billion in April-June 2008. Net surplus under invisibles remained buoyant, led by increase in software exports and private transfers and financed 66.0 per cent of the merchandise trade deficit during April-June 2008.
The large increase in merchandise trade deficit during April-June 2008 led to a significant increase in the current account deficit over its level during April-June 2007. The current account deficit was financed by capital flows which have, however, remained volatile during 2008-09 so far.
Net capital flows during 2008-09 so far have been lower than those in the corresponding period of 2007-08, mainly on account of outflows by foreign institutional investors (US $ 7.3 billion) during 2008-09 (up to October 10, 2008) in contrast to net FII inflows (US $ 18.9 billion) during the corresponding period of 2007-08. On the other hand, net FDI flows into India were higher at US $ 16.7 billion during April-August 2008 as compared with US $ 8.5 billion during April-August 2007. NRI deposits recorded a net inflow (US $ 273 million) during April-August 2008 as against a net outflow (US $ 168) during April-August 2007.
According to the data released by the Directorate General of Commercial Intelligence and Statistics (DGCI&S), during 2008-09 (April-August), merchandise exports recorded a growth of 35.3 per cent, which was higher than that of 19.3 per cent during April-August 2007. Imports during April-August 2008 grew by 38.0 per cent, as compared with the growth of 34.2 per cent recorded a year ago. Petroleum, oil and lubricants (POL) imports grew significantly by 60.0 per cent during April-August 2008 as against 17.9 per cent during April-August 2007, largely due to the escalation in international crude oil prices. Non-oil imports showed a moderation in growth to 28.3 per cent from 42.7 per cent a year ago. Merchandise trade deficit during April-August 2008 increased to US $ 49.3 billion from US $ 34.6 billion during April-August 2007.
India’s foreign exchange reserves at US $ 273.9 billion as on October 17, 2008 were lower by US $ 35.8 billion over end-March 2008.
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