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Venugopal Reddy,
Governor, Reserve Bank of India on the
Third Quarter Review of Annual Monetary Policy
for the Year 2007-08
This Review consists of three sections: I. Assessment of
Macroeconomic and Monetary Developments; II. Stance of
Monetary Policy; and III. Monetary Measures. An analytical profile
of macroeconomic and monetary developments was issued a day
in advance as a supplement to this Review, providing the
necessary information and analysis with the help of charts and
tables.
I. Assessment of Macroeconomic andMonetary Developments
Domestic Developments
6. Private corporate sector activity exhibited some moderation in the first half of
2007-08. Overall sales of sampled non-financial private companies increased by
17.4 per cent as compared with 27.4 per cent in the first half of 2006-07. Other
income from non-core activities registered a high increase of 63.6 per cent as
compared with 19.3 per cent a year ago and accounted for 29.5 per cent of post-
tax profits. Operational costs increased on account of a substantial rise in staff
costs and other expenses vis-à-vis sales growth; however, raw material costs
grew at a slower rate in relation to sales, partly on account of cheaper imports.
Reflecting the differential between growth in sales vis-à-vis expenditure,
operating profits increased by 20.0 per cent in April-September 2007. Interest
cost continued to be low as the interest to gross profit ratio came down from an
average of around 50.0 per cent in 1990s to 39.0 per cent in 2000-05, 13.0 per
cent in 2005-07 and to 11.7 per cent during the first half of 2007-08. Depreciation
provisions increased by 15.1 per cent in April-September 2007 as compared with
16.1 per cent a year ago. Net profits rose by 31.1 per cent as compared with 41.6
per cent in April-September 2006, attributable to some moderation in consumer
demand growth and high base effects. Non-manufacturing companies (IT,
communication and other services) performed better than manufacturing
companies, with a growth of 26.4 per cent and 48.4 per cent in sales and net
profits, respectively, in contrast to 15.1 per cent and 25.1 per cent for
manufacturing companies. Buoyant equity markets have enabled higher
mobilisation of resources by the private corporate sector through public issues
and private placements in 2007-08 so far than in the corresponding period of
2006-07. Early results for the third quarter of 2007-08 (October-December 2007)
for a truncated sample of companies indicate that the moderation witnessed in
sales growth during the first half has been somewhat arrested and profitability
ratios have been shored up by income from both core and non-core activities.
The growth in raw material cost and depreciation provisions was lower than in
the corresponding quarter a year ago. Operating profits have been reinforced by
other income representing non-sales activities of companies.