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Macroeconomic and Monetary Developments: First Quarter Review 2009-10 -Released on July 27, 2009

The highlights of macroeconomic and monetary developments are the following:

Aggregate Demand

Weakening aggregate demand emerged as a major constraint to growth in 2008-09. The significant deceleration in private consumption expenditure as well as the moderation in investment demand required expansionary fiscal policy to arrest the slowdown in growth. Government consumption expenditure, therefore, increased sharply in the third and fourth quarters and contributed 32.5 per cent of real GDP growth (at market prices) in 2008-09, as against an average contribution of 5.9 per cent in the previous five years.

Reflecting the fiscal response to the growth slowdown, key deficit indicators of the Central Government, viz., the revenue deficit and the gross fiscal deficit in the revised estimates for 2008-09 were significantly higher than the budgeted levels as well as those of the preceding years.

Corporate performance remained subdued, and the impact of moderation in demand was visible in the substantial deceleration in sales growth in the second half of 2008-09. Corporate profitability also exhibited negative growth in the last three successive quarters of the year.

The Union Budget for 2009-10, presented against the backdrop of persistent global economic slowdown and the associated dampened domestic demand, has placed the fiscal deficit at 6.8 per cent of GDP in 2009-10 with a view to providing the necessary boost to demand and thereby support a faster recovery. Notwithstanding the necessity of an expansionary fiscal response to the growth slowdown, there is a need to address the challenges for fiscal consolidation with a view to returning to the high growth path at the earliest. '

External Economy

Reflecting the contraction in global demand due to the synchronised global recession, exports have declined since October 2008 for eight successive months. Imports growth also witnessed a deceleration during October-November 2008, before turning negative thereafter. The merchandise trade deficit declined during 2009-10 (April-May) over the corresponding period of the previous year, reflecting the sharper decline in the imports in relation to exports.

The lower trade deficit emanating from moderation in oil prices resulted in a turnaround in the current account to a modest surplus during the fourth quarter of 2008-09, after recording deficits for seven consecutive quarters.

For the year as a whole, net capital flows fell from US$ 108.0 billion in 2007-08 to US$ 9.1 billion in 2008-09, while the current account deficit widened from 1.5 per cent of GDP to 2.6 per cent of GDP during the same period. The impact of a severe external shock on India’s BoP was managed with a loss of reserves of only US$ 20.1 billion (net of valuation) without resorting to any extraordinary measures.

The lead information on certain indicators of the capital account suggests revival in capital flows to India during first quarter of 2009-10, after the net outflows in successive two quarters in the second half of 2008-09. The contraction in exports and imports, however, continues. India’s foreign exchange reserves increased from US$ 252 billion at end-March 2009 to US$ 266 billion by July 17, 2009. The debt sustainability indicators remained at comfortable levels at end-March 2009.

Monetary Conditions

The conduct of monetary policy had to contend with the scale and pace of external shocks and their spillover effects through the real, financial and confidence channels. The thrust of the various policy initiatives has been on providing ample rupee liquidity, ensuring comfortable US dollar liquidity and maintaining a market environment conducive for continued flow of credit to the productive sectors.

Since mid-September 2008, the policy repo rate has been reduced by 425 basis points, the reverse repo rate has been brought down by 275 basis points and the actual/potential liquidity injection/availability is over Rs.5,61,700 crore (excluding Rs.40, 000 crore under SLR reduction). These measures taken by the Reserve Bank have ensured availability of ample liquidity in the banking system, which was evident in the large and regular absorption of the surplus from the system through LAF by the Reserve Bank.

Broad money growth (year-on-year) remained high at 20.0 per cent (up to July 3, 2009), driven by robust growth in deposits (21.0 per cent) on the components side and significant increase in banking system's credit to the Government (48.0 per cent) on the sources side. Market absorption of the government borrowing programme was facilitated by dampened demand for credit from the private sector in the face of a high deposit growth.


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Click Here For First Quarter Review of Monetary Policy 2009-10

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