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Swift response with all appropriate measures to all situations impinging on inflation expectations and the growth momentum
Renewed focus on credit quality and orderly financial markets conditions in securing macroeconomic, in particular, financial stability.
Bank Rate, Reverse Repo Rate and Repo Rate kept unchanged.
Scheduled banks required to maintain CRR of 6.5 per cent with effect from the fortnight beginning April 28, 2007.
GDP growth projection for 2007-08 at around 8.5 per cent.
Inflation to be contained close to 5.0 per cent during 2007-08. Going forward, the resolve is to condition policy and perceptions for inflation in the range of 4.0-4.5 per cent over the medium term.
M3 expansion to be contained at around 17.0-17.5 per cent during 2007-08.
Deposits projected to increase by around Rs.4,90,000 crore during 2007-08.
Adjusted non-food credit projected to increase by around 24.0-25.0 per cent during 2007-08, implying a graduated deceleration from the average of 29.8 per cent over 2004-07.
Appropriate liquidity to be maintained to meet legitimate credit demand.
lCeiling interest rate on FCNR (B) deposits reduced by 50 basis points to Libor minus 75 basis points.
Ceiling interest rate on NR(E)RA deposits reduced by 50 basis points to LIBOR/SWAP rates.
Average cut-off yield on 182-day Treasury Bills to be used as a benchmark rate for floating rate bonds.
Working Group to be set up to go into all the relevant issues and suggest measures to facilitate the development of interest rate futures market.
Overseas investment limit (total financial commitments) for Indian companies enhanced to 300 per cent of their net worth.
Listed Indian companies limit for portfolio investment abroad in listed overseas companies enhanced to 35 per cent of net worth.
Aggregate ceiling on overseas investment by mutual funds enhanced to US $ 4 billion.
Prepayment of external commercial borrowings (ECBs) without prior Reserve Bank approval increased to $400 million.
Present limit for individuals for any permitted current or capital account transaction increased from US $ 50,000 to US $ 100,000 per financial year in the liberalised remittance scheme.
A Working Group on Currency Futures to be set up to suggest a suitable framework to operationalise the proposal in line with the current legal and regulatory framework.
The interest rate ceiling on FCNR (B) deposits reduced by 50 basis points to Libor minus 75 basis points with immediate effect.
Risk weight on loans up to Rs.1 lakh against gold and silver ornaments for all categories of banks reduced to 50 per cent.
Introduction of a credit guarantee scheme for distressed farmers.
Indian banks permitted to extend credit and non-credit facilities to step-down subsidiaries within the existing prudential limits and some additional safeguards.
Banks and primary dealers permitted to begin transactions in single-entity credit default swaps.
Risk weight on residential housing loans to individuals for loans up to Rs.20 lakh reduced to 50 per cent as a temporary measure.
Existing relaxed prudential norms applicable to Tier I and Tier II urban cooperative banks extended by one year.
Ceiling rate of interest payable by NBFCs (other than RNBCs) on deposits raised by 150 basis points.
The advance estimates of the Central Statistical Organisation (CSO) placed real GDP growth at 9.2 per cent for 2006-07, over and above 9.0 per cent in 2005-06.
The year-on-year wholesale price index (WPI) inflation was 5.7 per cent in end-March and 6.1 per cent on April 7, 2007, after moderating from an intra-year peak of 6.7 per cent in end-January 2007, but higher than 4.1 per cent at end-March, 2006.
The average price of the Indian basket of international crude oil increased to a peak of US $ 71.1 per barrel in July 2006.
Money Supply (M3) growth, on a year-on-year basis, increased by 20.8 per cent (Rs.5,67,372 crore) in 2006-07 as compared with 17.0 per cent (Rs.3,96,881 crore) in 2005-06.
Reserve money increased by 23.7 per cent (Rs.1,35,892 crore) during 2006-07, higher than the increase of 17.2 per cent (Rs.83,922 crore) in the previous year.
Aggregate deposits of scheduled commercial banks (SCBs) increased by 23.0 per cent (Rs.4,85,210 crore) during 2006-07 as against 18.1 per cent (Rs.3,23,913 crore) in 2005-06.
Non-food credit extended by SCBs increased by 28.0 per cent (Rs.4,10,285 crore) on top of 31.8 per cent (Rs.3,54,193 crore) in the previous year, exhibiting some moderation from the sustained growth during 2003-06.
Incremental non-food credit-deposit ratio edged down to 84.6 per cent during 2006-07 from 109.3 per cent in the previous year.
During 2006-07, financial markets shifted from conditions of easy liquidity to occasional spells of tightness necessitating injection of liquidity through the LAF. The build-up of cash balances of the Government and shortage of collateral as a consequence of steady draw-down of excess SLR holdings exacerbated the tightening of liquidity.
The total overhang of liquidity under the LAF, the Market Stabilisation Scheme (MSS) and surplus cash balances of the Central Government taken together increased from an average of Rs.74,334 crore in March 2006 to Rs.97,449 crore in March 2007.
Financial markets experienced generally stable conditions during the greater part of 2006-07, albeit with some volatility in the second half amidst heightened activity as volumes increased steadily and interest rates firmed up in all segments, particularly in the uncollateralised call/notice money market during the last quarter of the year.
Scheduled commercial banks' appetite for Government paper revived during 2006-07 as their investment in Government and other approved securities increased by Rs.74,706 crore in contrast to a decline of Rs.22,809 crore in 2005-06.
Commercial banks' holdings of Government and other approved securities declined from 31.4 per cent of the banking system's net demand and time liabilities (NDTL) in March 2006 to 28.0 per cent in March 2007.
Interest rates on deposits of over one year maturity of public sector banks (PSBs) moved up from 5.75-7.25 per cent in April 2006 to 7.25-9.50 per cent in March 2007.
The benchmark prime lending rates (BPLRs) of PSBs and private sector banks increased from 10.25-11.25 per cent and 11.00-14.00 per cent to a range of 12.25-12.75 per cent and 12.00-16.50 per cent, respectively, during the same period.
The BSE Sensex declined from 11,280 at end-March 2006 to a intra-year trough of 8,929 on June 14, 2006 but thereafter rallied to the peak of 14,652 on February 8, 2007 but subsequently moderated to 13,072 by end-March 2007.
During 2006-07, the Central Government's net market borrowing at Rs 1,11,275 crore was 97.7 per cent of the budgeted amount .
The weighted average yield on primary issuance of the Central Government's dated securities rose by 55 basis points to 7.89 per cent in 2006-07 from 7.34 per cent in the previous year.
The Reserve Bank of India (Amendment) Act, 2006 gives discretion to the Reserve Bank to decide the percentage of scheduled banks' demand and time liabilities to be maintained as CRR without any ceiling or floor. Consequent to the amendment, no interest will be paid on CRR balances so as to enhance the efficacy of the CRR, as payment of interest attenuates its effectiveness as an instrument of monetary policy.
The revised definition of "repo" and "reverse repo" provided under the amendment would facilitate transactions of market participants/banks in these instruments. The amendment also provides the Reserve Bank with the statutory backing for regulating the money market and also for regulating trading ofover-the-counter derivatives.
In US dollar terms, merchandise exports increased by 19.3 per cent during 2006-07 (April-February) as compared with 26.3 per cent in the corresponding period of the previous year. Imports showed an increase of 27.8 per cent
While there is evidence of structural changes underlying the recent Indian growth experience, there are also indications that the upsurge of demand pressures may contain a cyclical component. The structural changes include a step up in the investment rate supported by a sizeable increase in the rate of gross domestic saving, the growing linkages of the Indian economy with the global economy and the indications of improvements in productivity in industry and services.
Among the cyclical factors, first, robust global GDP growth has been supportive of high growth in India. Second, the persistence of high growth in bank credit and money supply, the pick-up in non-oil import growth and the widening of the trade deficit together indicate pressures on aggregate demand. Third, cyclical forces are also evident in the steady increase in prices of manufactures, resurgence of pricing power among corporates, indications of wage pressures in some sectors, strained capacity utilisation and elevated asset prices.
A significant worrisome feature of domestic developments in 2006-07 is the firming up of inflation, which represents the key downside risk to the evolving macroeconomic outlook.
Real GDP growth in 2007-08 may be placed at around 8.5 per cent, assuming
No further escalation in international crude prices and barring domestic or external shocks.
In view of the lagged and cumulative effects of monetary policy on aggregate demand and assuming the absence of domestic and external shocks, the policy endeavour would be to contain inflation close to 5.0 per cent in 2007-08.
Given the monetary overhang of 2005-07, it is important to contain M3 in 2007-08 at around 17.0-17.5 per cent in consonance with the outlook on growth and inflation.
Consistent with the projections of money supply growth, the growth in aggregate deposits in 2007-08 is placed at around Rs.4,90,000 crore.
Based on an overall assessment of the sources of funding, adjusted non-food credit is projected to increase in the range of 24.0-25.0 per cent in 2007-08, a graduated deceleration from the average of 29.8 per cent over 2004-07.
The stance of monetary policy in 2007-08 would be conditioned by the global and, more particularly, domestic developments. Monetary policy, while contributing to growth, is strongly in favour of reinforcing the emphasis on price stability and anchoring inflation expectations for the period ahead. |
