The
Reserve Bank of India today released the document ';';
to serve as a backdrop to the Mid-Term Review of the Annual
Policy Statement.
The
highlights of macroeconomic and monetary developments
during 2005-06 so far are:
I.
The Real Economy
- The
Indian economy recorded an impressive performance during
the first quarter of 2005-06. According to the Central
Statistical Organisation (CSO), real GDP growth in the
first quarter (April-June) of 2005-06 accelerated to
8.1 per cent from 7.6 per cent in the corresponding
period of the preceding year.
- The
cumulative rainfall during the South-West monsoon (June
1 to September 30, 2005) was one per cent below normal
as compared with 13 cent below normal a year ago.
- Industrial
activity gathered further strength during the first
five months of 2005-06, although there was some loss
of momentum during July-August 2005. During April-August
2005 industrial production accelerated to 8.8 per cent
led by the manufacturing sector.
- Lead
information on the major indicators of services sector
indicates continued buoyancy in the second quarter of
2005-06
- The
revival of the South-West monsoon, the acceleration
of the industry, buoyancy in services and positive business
confidence and expectations have improved growth prospects
for 2005-06.
II.
Fiscal Situation
- Available
information for the first five months of 2005-06 (April-August)
indicates improvement in Central Government finances,
benefiting from higher tax collections and expenditure
management through control over non plan expenditure.
- Gross
and net market borrowings raised by the Centre during
2005-06 so far have amounted to 60.1 per cent and 50.0
per cent, respectively, of the budget estimates.
- States
have raised an amount of Rs.14,265 crore during 2005-06
so far, which is 63.6 per of their gross allocation
for 2005-06.
- The
weekly average utilisation of WMA and overdraft by the
States was significantly lower than a year ago.
III.
Monetary and Liquidity Conditions
- Monetary
conditions have remained comfortable during 2005-06
so far despite a sustained pick-up in credit demand
from the commercial sector. Banks were able to finance
the higher demand for commercial credit by curtailing
their incremental investments in Government securities.
- Up
to September 30, 2005 money supply expanded by 16.6
per cent as compared with the indicative trajectory
(14.5 per cent growth) set in the Annual Policy Statement.
- Scheduled
commercial banks non-food credit, on a year-on-year
basis, registered a growth of 31.5 per cent as on September
30, 2005 on top of 24.9 per cent a year ago.
- Reserve
money growth as on October 14, 2005 at 17.9 per cent
was almost the same as that a year ago (18.0 per cent).
IV.
Price Situation
- Inflation
pressures firmed up in a number of economies during
first half of 2005-06, reflecting the impact of further
increases in international crude oil prices which reached
a new high of US $ 70.8 per barrel on August 30, 2005.
The issue of changes in inflation expectations has been
revived globally in the recent weeks.
- In
India, year-on-year inflation fell to 3.0 per cent on
August 27, 2005 from 5.1 per cent at end March 2005.
It has since increased to 4.6 per cent as on October
8, 2005.
- Fiscal
and monetary measures undertaken since mid-2004 to reduce
the impact of imported price pressures on domestic inflation
and to stabilise inflationary expectations, coupled
with base effects and the revival of monsoon, enabled
the moderation in headline inflation from its high of
8.7 per cent last year.
- However,
when a significant part of what may be considered as
permanent component of oil price increase is yet to
be passed on, there is a need to consider two factors:
First, the advisability of treating the oil price increase
as a shock rather than a permanent shift in relative
prices may need to be questioned; and, second, the inevitability
of second order effects on inflation needs to be taken
on board.
V.
Financial Markets
- Comfortable
liquidity conditions have kept interest rates in different
money market segments generally around the reverse repo
rate during the year so far.
- The
foreign exchange market remained more or less orderly.
Forward premia continued to decline in tandem with the
narrowing interest differential following hikes in the
US interest rates.
- Yields
in the Government securities market since May 2005 have
largely been range-bound with intra-year movements influenced
by domestic liquidity conditions.
- In
the credit market, key interest rates edged up as commercial
credit offtake continued to remain strong and broad-based.
VI.
The External Economy
- During
April-September 2005, merchandise export growth at 20.5
per cent was higher than the annual target of 16 per
cent set for the fiscal year by the Government of India
- Imports
maintained the tempo of high growth, driven by both
oil and non-oil imports, in an environment of buoyant
economy. The rise in petroleum, oil and lubricants (POL)
imports (42.9 per cent) in April-September 2005 was
due to a sharp increase in international crude oil prices.
Non-oil imports maintained high growth (28.8 per cent)
in tune with the acceleration in industrial activity.
- Trade
deficit, based on DGCI&S data, increased by 71 per
cent to US $ 20.3 billion during April-September 2005
- Balance
of payments (BoP) developments during the first quarter
of 2005-06 point to a sharp turnaround in the current
account balance, due to a widening of the merchandise
trade deficit.
- Nonetheless,
with capital flows remaining strong - led by foreign
investment flows, direct as well as portfolio - and
in excess of the current account deficit, the balance
of payments position remained comfortable and the overall
balance recorded a modest surplus.
- External
debt recorded a modest decline during the quarter ended
June 2005.
- Foreign
exchange reserves have increased by US $ 1.9 billion
in the current fiscal year so far to US $ 143.4 billion
as on October 14, 2005.
also see : Macroeconomic
and Monetary Developments: Mid-Term Review 2005-06
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