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click here for Main Page of First Quarter Review



Macroeconomic and Monetary Developments First Quarter Review 2005-06


Domestic Developments

2. The annual policy Statement projected real GDP growth for 2005-06 at around 7.0 per cent on the assumption of normal monsoon and that the industry and services sectors would maintain their growth momentum while absorbing the impact of oil prices. Though the onset of monsoon was delayed this year, it picked up by end-June and excess or normal rainfall was observed in 29 of the 36 meteorological subdivisions and total season rainfall was normal as on July 20, 2005.

3. The index of industrial production (IIP) increased by 9.6 per cent during April-May 2005 aided by 10.5 per cent growth in the manufacturing output. While basic goods, capital goods and consumer goods output growth remained buoyant, moderation in the growth of intermediate goods production was noticed. The production of capital goods, increasing by 18.9 per cent, recorded its highest growth in recent years.

4. The continued good performance of the Indian corporate sector, in general, and good growth in manufacturing output, in particular, has found a reflection in a positive assessment of the overall business situation and an improved level of business confidence. There has been an improvement in the outlook for major business indicators like the corporate expectations for production, order books, capacity utilisation, working capital finance requirements, exports and imports for July-September 2005.

5. During 2005-06, scheduled commercial banks' credit increased by 6.6 per cent (Rs.72,792 crore) upto July 8, 2005 as compared with 5.0 per cent (Rs.41,768 crore) in the corresponding period last year. Food credit increased by Rs.3,696 crore as against an increase of Rs.7,496 crore. Non-food credit increased by 6.5 per cent (Rs.69,096 crore) as compared with an increase of 4.3 per cent (Rs.34,272 crore). The incremental non-food credit-deposit ratio was higher at 66.8 per cent as against 54.7 per cent.

6. During 2004-05, credit to agriculture and industry increased by over 35 per cent and 17 per cent, respectively, while credit flow to non-agriculture non-industrial sectors remained buoyant at 36 per cent. For 2005-06, the disaggregated data available for the first two months show that credit to industry, housing and real estate continued to record strong growth. More recent information on industrial credit upto June 2005 indicate significant increase in credit to metals & metal products, engineering, power and roads & ports.

7. The scheduled commercial banksí investments in bonds/debentures/shares of public sector undertakings and private corporate sector, commercial paper (CP) etc., declined by 3.4 per cent (Rs.3,156 crore) up to July 8, 2005 as against a decline of 2.8 per cent (Rs.2,514 crore) in the corresponding period last year. Notwithstanding this decline, the total flow of resources from scheduled commercial banks to the commercial sector increased by 5.7 per cent (Rs.65,940 crore) as compared with the increase of 3.6 per cent (Rs.31,758 crore). The year-on-year growth in resource flow was also higher at 27.4 per cent, net of conversion, as against 20.1 per cent a year ago.

8. In the current financial year upto July 8, 2005, money supply (M3) increased by 5.4 per cent (Rs.1,21,399 crore) as compared with 3.9 per cent (Rs. 77,514 crore) in the corresponding period of the previous year. On an annual basis, growth in M3 at 13.9 per cent, net of conversion, was lower than the projection of 14.5 per cent for the year as given in the annual policy Statement. Aggregate deposits of scheduled commercial banks rose by 6.1 per cent (Rs.1,03,460 crore) as compared with an increase of 4.2 per cent (Rs.62,621 crore) in the corresponding period of the previous year. On an annual basis, the growth in aggregate deposits, net of conversion, was 14.9 per cent.

9. Reserve money increased by 3.7 per cent (Rs.17,932 crore) in the current financial year up to July 15, 2005 as against a decline of 1.6 per cent (Rs.7,059 crore) in the corresponding period of the previous year. Currency in circulation increased by 5.2 per cent (Rs.19,200 crore) as compared with 4.3 per cent (Rs.14,126 crore) in the corresponding period of the previous year. Bankersí deposits with RBI declined by 0.1 per cent (Rs.171 crore) as compared with a decline of 19.7 per cent (Rs.20,554 crore). As regards the sources of reserve money, net RBI credit to the Central Government increased by Rs.25,530 crore as against a decline of Rs. 33,227 crore in the corresponding period of the previous year. Adjusted for liquidity adjustment facility (LAF), net RBI credit to the Central Government showed a lower increase of Rs.13,565 crore. RBIís net foreign exchange assets (NFEA) declined by Rs.20,941 crore as against an increase of Rs.68,583 crore during the corresponding period of the previous year. NFEA adjusted for revaluation, however, increased by Rs.5,793 crore as compared with an increase of Rs.34,567 crore in the corresponding period last year. The balances under market stabilisation scheme (MSS), to sterilise the impact of forex inflows, stood at Rs.70,258 crore as on July 15, 2005. The ratio of NFEA to currency declined from 166.2 per cent in March to 152.6 per cent by July 15, 2005. The year-on-year increase in reserve money was higher at 18.1 per cent as on July 15, 2005 as compared with 14.4 per cent a year ago.

10. The annual policy Statement had placed the annual point-to-point inflation rate for 2005-06 in the range of 5.0-5.5 per cent, subject to the growing uncertainties on the oil front both in regard to global prices and their domestic absorption. Annual inflation, as measured by variations in the wholesale price index (WPI), on a point-to-point basis, rose from 5.1 per cent at end-March to 6.0 per cent by April 23, but declined steadily thereafter to 4.1 per cent by July 9, 2005. At a disaggregated level, WPI for primary articles, 'fuel, power, light and lubricants' sub-group and manufactured products registered annual increases of 0.9 per cent, 10.5 per cent and 3.0 per cent as compared with the increases of 4.5 per cent, 10.4 per cent and 7.6 per cent, respectively, a year ago. Excluding 'fuel, power, light and lubricantsí sub-group, the annual inflation was lower at 1.9 per cent as compared with 5.3 per cent a year ago.

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