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Macroeconomic and Monetary Developments First Quarter Review 2005-06
Domestic Developments
11. In order to isolate the impact of supply shock, a contextual analysis of WPI reveals that excluding four commodities, viz., iron ore, iron & steel, mineral oils and coal mining, which have a combined weight of 12.6 per cent in WPI, the WPI inflation rate works out to 2.2 per cent as on July 9, 2005, on a point-to-point basis, as against 3.5 per cent a year ago.
12. Annual inflation, as measured by variations in the consumer price index (CPI) for industrial workers, on a point-to-point basis, was 3.7 per cent in May 2005 as against 2.8 per cent a year ago.
13. During 2005-06 so far, oil prices in the international markets continue to remain high and volatile. The average price for a basket of major international crude varieties (Brent, WTI and Dubai Fateh) at around US $ 52.1 per barrel during April-July 2005 was 12.9 per cent higher over January-March 2005 and 45.1 per cent over the corresponding period last year. With the latest hike in prices effective June 20, 2005, the average domestic price of petrol and diesel (in four metros) have increased by 6.2 per cent over the end-March 2005 level and 22.4 per cent over the level a year ago. The pass-through of crude prices continues to remain the most critical factor influencing domestic inflation.
14. The Union Budget for 2005-06 placed the net and gross market borrowings of the Central Government at Rs.1,10,291 crore and Rs.1,78,467 crore, respectively. Up to July 23, 2005, the Central Government had completed the net market borrowings of Rs.44,029 crore (39.9 per cent of the budgeted amount) and gross market borrowings of Rs.66,312 crore (37.2 per cent of the budgeted amount). The weighted average yield on government borrowings through dated securities increased from 6.11 per cent in 2004-05 to 7.24 per cent during the current year so far. During 2005-06, the borrowings of state governments were Rs. 3,970 crore (net) and Rs.10,245 crore (gross) upto July 23, 2005.
15. In addition to normal market borrowings, the Central Government raised Rs. 6,355 crore (face value) under MSS for sterilisation purposes during 2005-06 so far (upto July 23). Overall, the net resources raised through government securities (Centre, States and MSS) amounted to Rs.54,354 crore (face value) during 2005-06 so far as compared with Rs.70,307 crore in the corresponding period of the previous year.
16. During 2005-06, scheduled commercial banks’ investment in government and other approved securities declined by Rs.972 crore up to July 8, 2005 as against an increase of Rs.52,224 crore in the corresponding period of the previous year. The effective statutory liquidity ratio (SLR) investment of the banking system declined to 36.3 per cent of net demand and time liabilities (NDTL) as on July 8, 2005 from 42.3 per cent a year ago but continues to remain above the statutory minimum SLR of 25 per cent.
17. During April-May 2005, revenue deficit and fiscal deficit of the Central Government at Rs.44,154 crore and Rs.47,603 crore, respectively, accounted for 46.3 per cent and 31.5 per cent of the budget estimates for 2005-06, as compared with 57.5 per cent and 28.4 per cent in the corresponding period of the previous year.
18. The reverse repo volumes tendered under LAF declined from an average of Rs.29,809 crore in March 2005 to an average of Rs.9,363 crore in July 2005 (upto July 22). Further, there was lower absorption through MSS. Consequently, there has been gradual unwinding of liquidity by about Rs.14,000 crore during the current year upto July 22, 2005. Notwithstanding some decline in surplus liquidity during the year, the overhang of liquidity (MSS, LAF and government cash balances) continues to remain substantial at about Rs.1,00,000 crore.
19. During 2005-06 so far, financial markets have remained stable, though interest rates have displayed some upward movement. The call money rate increased from an average of 4.72 per cent in March to 5.00 per cent as on July 22, 2005. The market repo rate increased from an average of 4.36 per cent to 4.90 per cent and the CBLO rate increased from 4.09 per cent to 4.93 per cent, over the same period.
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