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RESERVE BANK OF INDIA

Macroeconomic and
Monetary Developments
Third Quarter Review 2010-11

Issued with the Third Quarter Review of
Monetary Policy 2010-11

January 24, 2011

JAYANT PRINTERY

Macroeconomic and
Monetary Developments
Third Quarter Review 2010-11

Reserve Bank of India
Mumbai

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iv I.38 VI.29 V. Price Situation 39 . Output 1-6 II. Aggregate Demand 7 .47 VII. The External Sector 13 . Contents Overview i .21 IV.52 . Monetary and Liquidity Conditions 22 . Financial Markets 30 .12 III. Macroeconomic Outlook 48 .

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Satisfactory EMEs face the risk of inflation from kharif production and higher rabi sowing point potential overheating and hardening of to stronger contribution of the agriculture sector commodity prices to overall GDP growth in 2010-11. Global economic activity in the second half conditions between the advanced and the of 2010 turned out to be stronger than earlier emerging economies and the imbalance in their expectations. A number of EMEs arising from the growth momentum in major resorted to soft capital controls and exchange advanced economies was neutralised by the market intervention to limit the adverse impact persistence of high unemployment and of excess capital inflows on their economies. signals in the form of higher prices has been weak. i . Emerging Market Economies (EMEs). to its earlier high growth path. The positive sentiments rates have re-emerged. other advanced Robust broad-based growth puts the economies faced a difficult choice between economy back on its earlier high growth delaying fiscal exit to support growth on the trajectory but sectoral imbalances pose one hand and early exit to contain the sovereign risks to inflation debt concerns on the other. as well as growing demand economies has improved. prompted items. concerns persist pressures in EMEs. The asymmetry in monetary and liquidity 1. The robust GDP growth in the first half of debt crisis spreading from the Euro-zone 2010-11 suggests that the economy has returned periphery has resurfaced in recent months. exhibited robust growth momentum the services sector show sustained buoyancy. Lead indicators of economies. Industrial production has exhibited near double digit 2. largely reflecting easy liquidity conditions in advanced While the outlook for recovery in advanced economies. however. The risk of sovereign 4. particularly non-cereal food overheating risks have. growth but the significant volatility adds which had recovered ahead of the advanced uncertainty to the outlook. However. MACROECONOMIC AND MONETARY DEVELOPMENTS THIRD QUARTER REVIEW 2010-11 Overview Global Economic Conditions Commodity prices also firmed up. The familiar policy challenges of asset the durability of recovery in the advanced price inflation and upward pressure on exchange economies persist. downside risks from weak housing markets and unfinished deleveraging. Inflation and In certain sectors. the supply response to market monetary tightening at varied pace. over the durability of the momentum 3. driven by domestic demand. While in the US the second dose of Output quantitative easing (QE2) was followed up with extension of fiscal stimulus. The combination of Indian Economy: Developments and developments resulted in additional policy Outlook stimulus. however. the uneven pace of growth outlook have led to larger capital inflows growth across regions and uncertainty about to EMEs.

unlike in to higher growth. the cushion to a Core infrastructure sector has grown slower widening trade deficit from net invisibles than both the overall GDP and the industrial declined. even relative to deposit growth as well as higher though global uncertainty remains a downside demand for currency. the shift in the juxtaposed with high growth suggests that composition of capital flows. decline in net FDI inflows raises questions about the sustainability of the external sector Aggregate Demand in the medium-term. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 thereby exerting upward pressures on inflation. Private consumption expenditure and Monetary and Liquidity Conditions gross capital formation emerge as the key growth drivers Large primary liquidity injected by the Reserve Bank eased the liquidity pressures 5. suggesting that it remains a constraint not pose any immediate challenge. the trade deficit widened. Lead terminal months of 2010 to the point of posing indicators of private demand. current account perspective. including External Sector reduction in SLR by 1 per cent of NDTL Higher current account deficit remains accompanied by a roughly equivalent amount fully buffered by higher capital inflows. As expected. Growth in private consumption without diluting its anti-inflationary focus expenditure. has consolidated and remained BWA spectrum auctions. As per tighten by mid-2010 reflecting the normalisation trends in the growth of gross fixed capital of monetary policy and large increase in formation. The liquidity conditions had started to acceleration in the first half of 2010-11. reflecting ii . particularly the capacity addition is keeping pace with growth sharp jump in portfolio inflows and significant in demand. after remaining subdued over several quarters. Capacity utilisation levels many other EMEs. Fiscal trends during the year to date liquidity conditions were consistent with the suggest that the fiscal deficit could remain anti-inflationary monetary policy stance of the within the budgeted level. Weak demand conditions in advanced balances of the Government and structural economies have not affected the domestic factors as reflected in stronger credit growth growth momentum much in 2010-11 so far. introduced a number of measures with the aim of limiting the scale of the deficit. 6. which remained consistent with its sustainability concerns could stem from anti-inflationary policy stance. While sustained deficit strong. The growth in non-food credit has the year. The severe tightness in sales. such as corporate concerns for growth. While higher net capital inflows did sector. non-oil imports liquidity was caused by both frictional factors and credit demand point to sustained momentum associated with unusually large surplus in growth. capital expenditure plans. the magnitude capital expenditure would add to the overall of the deficit widened significantly in the growth momentum from private demand. The Reserve Bank risk to the growth process. Even as exports expanded faster than remained above the indicative trajectory of the imports. which deficit in the current account. exhibited significant 7. The magnitude the composition of capital flows of liquidity deficit has moderated in recent weeks. From the Reserve Bank since October 2010. because of the widening have generally remained steady. the current account deficit widened significantly in the second quarter of 8. but of OMOs. but high growth in Reserve Bank during the year. the recovery in investment demand Government’s surplus balances with the Reserve that had started in the last quarter of the Bank due to revenues generated through 3G/ previous year.

In India. The Reserve Bank and the pressure of imports. reflecting the tight monsoon did not materialise. particularly non-cereal food CD segments hardened significantly. the supply response has generally deposit rates to improve deposit mobilisation lagged behind. CP and certain sectors.1 to 5. eggs monetary policy stance. which on food inflation has been magnified by could be expected to moderate the aggregate rigidities in the supply chain management. was slightly below the projected level on account of sluggish deposit 10. which are monetary policy. inflation over a few months prior to December including India. driven by factors that Financial Markets were largely unanticipated. largely due to unseasonal deposit and lending rates rains and supply chain frictions. In December 2010. fruits. Non-food manufactured inflation. has remained stable in the expectations about monetary policy actions range of 5. items. renewed price pressures surfaced. however. pulses. particularly in CBLO. Asset prices generally 11. corporate earnings prospects largely insensitive to anti-inflationary monetary and the portfolio capital inflows that entailed policy measures. The pace of moderation in WPI of advanced economies. The pace of increase in housing non-food manufactured items to price signals prices varied across cities. notwithstanding some a broad indicator of generalised and demand correction in equity prices that partly reflected side price pressures. The Reserve Bank has already recognised the upside risks 9. interest rates in the money impact of growing structural imbalances in market. Overview growing credit demand associated with robust Inflation economic growth. Upside risks from structural demand supply banking sources lagged behind the incremental imbalance in certain sectors and firming flow of bank credit. associated with the abrupt reversal in the Besides the expected better supply response in inflation path. inflation in recent months as also the rising price iii . banks raised their and meat. The global financial markets continued to inflation from higher global commodity to reflect the uncertainty about sovereign debt prices. reflecting the liquidity conditions. which is remained firm. High month-over-month (annualised) asset price build-up. however. normalisation of levels of food and fuel inflation. normalisation of has recently used macroprudential measures the policy rate would have contributed to this to restrain the role of excessive leverage in trend. Flow of financing from non. Food inflation Deficit liquidity conditions strengthened exhibited a strong rebound. WPI inflation had witnessed modest growth as well as some moderation in money softening during August-November 2010 after multiplier resulting from higher growth in remaining in double digits for five consecutive currency. demand. were influenced more by the 2010 was also weak due to persistent elevated domestic growth outlook. but this hardening happened sooner than sustainability and the changing growth outlook anticipated.9 per cent so far in the year. While the high growth in per capita Recognising the structural imbalance between income and the shift in the composition of deposit growth and credit growth as well as demand have led to stronger growth in demand the underlying signals of the anti-inflationary for items such as vegetables. months. T-bill. Money supply (M 3 ) global commodity prices have increased growth. The expected significant a potential source of pressure on exchange rate softening of food inflation after a normal and asset prices. The impact of this imbalance while also raising the lending rates. led by onion and the transmission of policy rate actions to other vegetables. going forward. Markets in EMEs.

Aggregate demand side pressures on Growth and Inflation Outlook inflation. recognising though the limits of monetary 13. iv . particularly in the agriculture and global environment. even could be weakened considerably by structural with the usual transmission lags. sectoral input costs and demand pressures. particularly in an environment of nature of the items in which the imbalances are firming global commodity prices. moving permanently to a higher trading range however. and the need for forward looking guided by not only the anti-inflationary thrust response to demand side pressures. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 index of the non-food manufactured group. downside risks to India’s growth demand side risks are also visible in the growing momentum have receded considerably. Thus. Going forward. has the potential to raise the wage 12. besides raising rural outlook suggests some moderation in growth in demand at a faster pace relative to production both advanced and emerging economies in of cereals and non-cereal food items. Recent trends in Robust broad-based growth is expected to sales growth and earnings of corporates point coexist with elevated inflation in the near. Since a that is necessary in an environment of persistent lower inflation regime is essential for high inflation. Oil prices current environment. however. containing inflation effectiveness in a condition of entrenched becomes the dominant policy objective in the supply side pressures on inflation. Though the overall global construction sectors. has been 300 basis points. the effective increase in policy rate monetary policy would have to continue. the Reserve Bank has to acquire centre stage in the near-term. given the factors. As a result. the Reserve Bank’s policy in dealing with structural pressures on monetary policy measures would have to be inflation. The size of the current account deficit. suggest the combined impact of both looks more probable now. to their improving pricing power. eroding export competitiveness. which is being conditioned by inflation differential is a potential factor for both demand side and supply side factors. would have to be contained in a forward looking manner. with raised policy rates six times since the beginning structural measures in the medium-run of March 2010. Moreover. 14. growing. of anti-inflationary monetary policy measures and higher policy rates may not ensure the on inflation expectations and core inflation desirable degree of demand adjustment. The anti-inflationary focus of repo to repo. term in turn. The 2011. and high inflation outlook. suggests slow paced moderation in inflation. MGNREGS. given the fact that elevated inflation with the possibility of rigidity at above the and current account deficit are the two major comfort level in the near-term. The return to the high growth path in bargaining power even in the unorganised 2010-11 materialised despite an uncertain sector. Recognising the macroeconomic concerns at the current need to firmly anchor inflationary expectations juncture. The factors imbalances in several non-cereal food items that underlying the inflation process pose a major reflect weak supply side adjustments in response challenge for monetary policy since the impact to rising demand could persist in the near-term. demand management measures need and contain inflation. along with the addressing sectoral imbalances and export impact of the shift in the LAF mode from reverse competitiveness. but also their expected sustainable high growth.

social & personal services 13.0 7.1 11.6 14. higher than that in last year.6 7.3 13.1 8.5 12.1 11.6 3. namely – Table I. 2011) South-West monsoon.6 9. the area sown up in agricultural performance due to a normal during rabi season so far (January 14.1 9.9 0.2 2.8 3. 7.1 4.8 0.2 12. economy is back though moderated on account of the base effect. Industry 3. sustainability of growth requires continued buoyancy in the industrial sector.4 7.5 4.9 8.7 7.8 8.3 5.5 3.6 3.9 7.7 9.9 12. thereby exerting pressure on inflation. structural policy measures to limit the magnitude of imbalances would be critical.3 Electricity.0 3.2 7.6 0.2 1.3 2. hotels.1 3. 2009-10 2010-11 2009.2 Manufacturing 3. real estate & business services 10.5 8.1 With 8. While. The I.5 9.2 Trade.1 6.6 8.5 8.7 4.0 8.1 6. Notwithstanding the impact of a lower base.2 10.4 9.0 9. the area momentum in Q2 reflected the continued sown during kharif 2010-11 was 7 per cent buoyancy of services sector and further pick. India continues to be one of the growth momentum in agriculture sector fastest growing economies in the world. Agriculture & allied activities 1.9 6. transport & communication. with respect to major rabi crops.5 10.2 3.4 7.4 13.4 Community. The robust growth performance during 2010-11.4 8.1 Mining & quarrying 1.2 10.8 2.8 3.7 7.3 Financing. insurance.8 8.9 7. but volatile.7 11.6 10.4 8. Source: Central Statistics Office.8 1.5 8.9 7. I.1 9. albeit with greater volatility.2010- 09* 10# 10 11 Q1 Q2 Q3 Q4 Q1 Q2 H1 H1 1 2 3 4 5 6 7 8 9 10 11 1.7 9.7 10.6 8.7 11. # : Revised Estimates.4 9. particularly in some items where demand is growing faster than capacity. etc.3 8. As downside risks recede.9 8.1 9. 2009.0 6. Services sector growth and enhanced agricultural output supported the strengthening of the growth process.9 per cent growth in the first half Rabi outlook suggests continuation of the of 2010-11. gas & water supply 3.8 16.9 7.6 8. GDP at factor cost 6.6 4. Industrial growth.1 8.4 6.2 10. 2010) have the first half GDP growth suggests return to the brightened the prospects of agricultural high growth path (Table I.1 Construction 5.3 8.3 8.1). For high growth to coexist with a low inflation regime.3 7.4 1.6 7. 1 .7 6.8 6.0 9.5 6.3 8.5 8.9 5.6 8. Industrial growth was robust.4 4.9 -1. With both services sector and agriculture performing well.1: Sectoral GDP Growth (Base: 2004-05) (Per cent) Item 2008.6 14. I.9 6.3 11. average as on December 31.3 11. on the high growth trajectory remained on the higher side.1 10.9 11.3 8. OUTPUT GDP growth is reverting to its earlier high growth trajectory led by broad-based growth momentum.3 15.9 * : Quick Estimates.0 10.7 2. Robust growth has coincided with growing sectoral imbalances. Services 9.0 0.3 8. restaurants.2 Normal rainfall during South-West uncertainty about the durability of the robust monsoon and satisfactory progress of North- growth seen in Q1 of 2010-11 waned significantly with the momentum continuing in East monsoon (121 per cent of long period Q2.4 10.3 2.

prices of several I.10 8. Improved sectors exerting sustained pressures on sowing positions due to satisfactory monsoon food inflation along with improved reservoir positions indicate promising progress for rabi crop.73 8. 1 Report of the Working Group for the Eleventh Five Year Plan (2007-12) on Crop Husbandry. As estimates the demand-supply gap to be around regards rabi crop.62 49.9 per cent.36 5.02 1. Supply pertains to actual domestic production based on Fourth Advance Estimates. agricultural crops has not kept pace with Area 09 10 11 demand on account of lower rate of increase in 1 2 3 4 5 Wheat 27.69 14.3 As per the First Advance Estimates for agricultural commodities continue to remain kharif production.12 substantial increase in demand for various (0. the pace of in per capita availability of food grains. 2009.8) (6. rabi pulses 2009-101.3) Total Coarse Cereals 6.7 per cent in pulses higher sowing and improved reservoir and around 2.4) inputs have pushed dairy prices up. while demand estimates in case of oilseeds is based on normative approach. 13. reflecting structural production during 2010-11 is estimated to be imbalances.93 48. at 1.91 35.54 35.4 per cent in oilseeds. production of wheat. (which accounted for around 70 per cent of the overall pulses production in 2009-10) and I.73 57.53 (1.1) supply of onions and vegetables in markets Total Foodgrains 49.4) income levels has altered dietary habits causing All Crops 59.91 57. Source: Ministry of Agriculture. With robust growth. milk and fish.65 (1.98 9. however.6 per cent during 1990-2010. 2010. The Eleventh Plan Document 10. The year on year growth over a trailed behind the average population growth very low base. based on rainfall pattern.1) (2.4 Notwithstanding stronger growth outlook for the agriculture sector. inadequate irrigation coverage and (1.32 6.7) (-7.0) (0. Government of India.88 While low yield and increased cost of (-5.41 27. Supply of major Crop Sowing* Normal 2008. As a increase in per capita disposable income has result. previous year. eggs.25 1.had surpassed the levels and a normal monsoon have not eased the achieved during the corresponding period of pressure on food inflation.84 yield. 18.91 28. strong growth in the agriculture sector far exceeded the rate at which supply is growing.23 50. the estimates are based on behavioural approach.96 59.94 (-4. total kharif foodgrain downward sticky.4) (2.46 13.4 per cent higher than the previous year.02 13. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 wheat and pulses . Demand and Supply Projections and Agricultural Statistics.9) (3.2) (1. and as regard pulses and foodgrains.2).5 Average growth rate of foodgrains oilseeds is expected to be higher than the production.6 Growing population coupled with rising Total Oilseeds 9.0 per cent in food grains during positions. last year as well as the normal area sown for Widening demand-supply gaps in some the respective crops (Table I. I. products like meat.92 (23. The per capita net availability of Table I. 2 . particularly pulses and Note: Figures in parentheses are percentage change over vegetables as well as other protein-based previous year.9) I.3) untimely and erratic rainfall affected Total Pulses 12.3) excessive dependence on monsoon.0) * : As on January 14.18 (1.2: Rabi Area Sown foodgrains per day has declined from 510 grams (Million hectares) in 1991 to 436 grams in 2008.17 35.74 6.33 27.9) (-27. masks the stagnation of 1. Total Cereals 37. agricultural products. Agricultural Inputs.27 0. Rice 4.

Gujarat and Industrial growth has been robust. but do not ease pressure on food inflation.8 The industrial sector recorded a growth onions. labour and 5 20 fuel have contributed to further pressure on 10 0 0 prices. The onion crop was affected in Andhra Pradesh management in relation to demand. security reserve requirements. Note: 1. of 9.1: Food Stocks and its Determinants changes in demand pattern continues to fuel 20 70 demand-supply mismatch in these products. Acceleration in manufacturing sector agencies. The growth pattern has. Pest infestation has also been a major cause of shortfall in supply of I. Procurement and off-take data are monthly figures. Consumer non- respective buffer stock norms and food durables continued to remain subdued. 2. viz. For poultry products like eggs and Jan-11 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 chicken.. 2011) coupled 20 with higher monthly average off-take (up to 16 October 2010) resulted in a decline in food stocks in recent months. Excess rainfall in various parts Stocks (RHS) Quarterly Norm (RHS) of the country led to damage to crops like onion. Maharashtra.9 Growth in electricity generation remained I. Madhya Pradesh. The total stock of food 12 Per cent grains with the Food Corporation of India 8 (FCI) and other government agencies. as well as various fruit items.3). manufacturing and mining sectors (Table I.9 million tonnes on June 1. mainly driven by the performance of the Ample food stocks provide food security. been partly due to the nature of items driving volatile through the months of the current year food inflation which lie beyond the ambit (Chart I. The policy on food management has to focus on better supply 2009-10 2010-11 3 . growth was driven by the production of capital continued to remain much higher than their goods and consumer durables. 2011 (Chart I. Lower monthly Chart I. besides and Karnataka due to cyclonic rainfall in addressing the structural capacity constraints October 2010 and in other states such as in food items. supply side constraints have Million Tonnes Million Tonnes 40 put pressure on prices. a rise in poultry feed prices resulted Off-take Procurement in higher prices. 2010 came down to 47. but also Rajasthan due to untimely and erratic rainfall volatile in November 2010. however. though declining in recent months. Also. 2010.5 per cent during April-November 2010. of food security I.7 Food stocks with public procurement modest. Data for off-take is available only up to October.2). the rise in input 10 30 prices of items such as feedstock. which 4 stood at 60. potato and tomato.2: Growth in Index of average procurement of food grains.3 million tonnes on January 0 Jul Jun Jan Sep Feb Oct Dec Aug Apr May Nov Mar 1. rice Industrial Production (Y-o-Y) and wheat (up to January 14.1). In 60 15 50 the case of milk. Output Inadequate response of production to structural Chart I.

8 33.3 : Growth Concentration in Manufacturing Sector a.3: Index of Industrial Production: Sectoral and Use-Based Classification of Industries (Per cent) Industry Group Weight Growth Rate Weighted Contribution# in IIP Apr-Mar Apr-Nov Apr-Mar Apr-Nov 2009-10 2009-10 2010-11 P 2009-10 2009-10 2010-11 P 1 2 3 4 5 6 7 8 Sectoral Mining 10.9 3.6 per cent in IIP (Chart I.6 10 6. Relative Contribution to Growth 30 80 73.2 5.3 3.0 26.4 9.6 21. with a combined bran oil.0 6.0 30 26.0 10.9 a) Consumer Durables 5.6 6.6 11.5 9.5 20 5 10 0 0 Top 5 industries Bottom 12 industries Top 5 industries Bottom 12 industries 2009-10 2010-11 (Apr-Nov 2010) 2009-10 2010-11 (Apr-Nov 2010) 4 .7 25. higher growth than last year.6 70 68.7 6.8 19.4 86.6 17.8 20. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Table I.2 0.2 9.8 5.3 60 20 50 Per cent Per cent 15 40 32. capacity out of seventeen industries (contributing to about utilisation levels in the infrastructure sector did 36 per cent of the weight in the IIP) exhibiting not stretch much relative to last year (Table I. despite nine I.9 21.0 7. but robust growth entails become broad-based the risk of capacity pressures I. Chart I.0 5.7 General 100.7 Intermediate Goods 26.9 Consumer Goods (a+b) 28.9 Use-Based Basic Goods 35.5 Capital Goods 9.2 5.9 8. manufacturing The lower capacity utilisation in the cement sector growth is yet to become broad-based.0 25 21.4 39.10 During April-November 2010.6 20.2 5.0 100. fluorescent weight of 24. P : Provisional.8 18. Growth b.4 1.4 11.6 32. Capacity utilisation in core sector remains Manufacturing sector growth yet to broadly unchanged. hsl lamps.5 21.7 0.7 17. rice manufacturing industries.3 20.4 8.0 100.5 100. primarily on account of deceleration in growth the period was contributed by the top five of industries such as wheat flour/maida.6 22.11 During April-October 2010.5 90. Source: Central Statistics Office.0 89.5 22.2 6.5 10.2 6.4 24.4 Manufacturing 79.0 # : Figures may not add up to 100 due to rounding off.6 7. tubes and rubber foot wear.7 4. hair oil.5 7.8 Electricity 10.7 1.5 29.5 4.4 12.9 6.2 b) Consumer Non-durables 23.4).3).0 7. sector partly reflects larger capacity addition Nearly 73 per cent of the overall growth during relative to demand. coffee.5 13.1 6.4 24.3 0.

14 The six core industries (26. GoI and Central Electricity Authority. Leather 0 21 4 34 3. employment growth situation improved as which remained subdued during the current compared with the previous quarter as well financial year. transport. IT/BPO 129 129 108 936 8. Metals 4 45 27 99 4.4).2 Refinery Production-Petroleum 101. Ministry of Labour and Employment.1 94. Capacity Utilisation Survey (OBICUS) of the Electricity generation exhibited subdued Reserve Bank indicates that capacity growth. Transport -2 -21 13 -12 7.0 Fertilizer 94.6 per cent of I. Output Table I. primarily due to under performance of utilisation increased during Q2 of 2010-11 but thermal power generation constrained by remained below the previous peak (Chart 1.7 88. Coal production. Source: Capsule Report on Infrastructure Sector Performance (April 2010-October 2010). July–September.2 65 *: Data represent plant load factor and pertain to April- Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 December. per cent growth during April-November 2010 I. Gems and jewellery 24 4 4 39 6. which has the dominant both GDP and industrial sector growth share in GDP. 5 . Textiles including apparels -119 -63 245 79 2. Inventories and over that of the preceding year (Chart I. Ministry of Statistics and OBICUS.3 102. negative or very low growth in each type of I.5). Automobiles 29 51 29 115 5. especially coal. Labour Bureau.4: Capacity Utilisation in Chart I. restaurant.7 Thermal Power* 72.15 Led by “trade.9 70 Cement 80.0 75.4: Capacity Utilisation Infrastructure Sector 80 (Per cent) Sector Apr-Oct 2009-10 2010-11 75 1 2 3 Per cent Finished Steel (SAIL+VSP+ Tata Steel) 87.5: Changes in Estimated Employment (in ’000s) Industry/ Group Mar 2010 over Jun 2010 over Sep 2010 over Sep 2010 over Dec 2009 Mar 2010 Jun 2010 Sep 2009 1 2 3 4 5 1. environmental norms. exhibits sustained momentum I.13 During the second quarter of 2010-11 fossil fuel. hotel.12 The Order Books. the total weight in IIP) recorded a moderate 5 storage and communication” and “financing.5).9 76. Handloom/Powerloom -5 -3 6 7 Overall 61 162 435 1296 Source: Eighth Quarterly Quick Employment Survey. Table I. may continue to fall short of as the corresponding quarter of last year target on account of increasing sensitivity to (Table I. 2010. RBI Programme Implementation. GoI. Growth in core infrastructure lags behind Services sector.

7 Passengers handled at growth in the near term. Serious disruptions to supply of agricultural products due to temporary Table I.6).8 7.9 27.Apr-Oct Apr-Oct focus on removal of bottlenecks.9 -6.2 5.2 8. cell phone connections. as reflected Steel* 1.5 : Growth in Infrastructure Industries a. Industrial freight traffic $ 4.7 12.6 Cargo handled at major on account of the base effect. suggest continuation of the recent growth going forward.4 -1.5 26. air cargo account of the satisfactory progress of the North- and passengers handled at domestic and East monsoon and the resultant increase in area international terminals during the year so far. Downside risks to domestic terminals -12. lead indicators.9 2.5 Import cargo handled -5.8 Per cent Per cent 6 4. however.6 8. though a major * : Data pertains to April-November.6 4.5 5. Source: Ministry of Tourism.9 4 2 0. The strong growth of various I. sustain the growth momentum pattern (Table I. Refinery Electricity Cement Finished Steel 0 -4 Sep Feb Dec Jul Aug Nov May Jan Jun Oct Apr Mar 2009-10 2010-11 Apr-Nov 2009-10 Apr-Nov 2010-11 insurance. Ministry of Statistics and disruption to growth from these risks appears Programme Implementation and SIAM.2 Crude Oil Coal Overall Pet.8 growth from global uncertainty and increase in $ : Data pertains to April-December.7 2. unlikely. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Chart I.5 0.7 production.9 6 5. For growth momentum to become sustainable.9 47.0 8 9. Overall Growth b: Sector-wise Growth in Infrastructure Industries 10 14 12 11.2 10. minimisation Indicators 09 10 2009-10 2010-11 of post-harvest losses.9 6.1 4 2. Services sector Cement* 7.7 3.3 49. improvement in cold storage and Tourist arrivals $ -3.7 14.4 10.0 4. is expected to moderate Cell phone connections 80.7 in the growth of core infrastructure during Civil aviation November 2010 and slowdown in Export cargo handled 3.6 2 0 -2 -1.6: Indicators of Services Sector Activity as well as structural shocks call for immediate (Growth in Per cent) Services Sector 2008.1 41. oil and commodity prices remain.7 10 8 6. including commercial vehicles favourable prospects for rabi production on production.5 4. The deceleration ports 2.9 15.4 Manufacturing PMI during December 2010 Passengers handled at indicate uncertainty about the course of IIP international terminals 3.1 14.16 The improved kharif production thus far.3 coordinated supply chains.9 6.7 7.3 3. of the agriculture sector.1 growth momentum could continue.8 0. reduction in transaction 1 2 3 4 5 costs.2 20. real estate and business services”.4 5.8 5. coverage under rabi crop in 2010-11 would. 6 . service sector growth during Q2 of 2010-11 risks to inflation from structural imbalances showed gradual acceleration over the previous needs priority attention three quarters.6 1.9 Railway revenue earning by its various lead indicators.5 warehouse facilities and promotion of Commercial vehicles production $ -24 35.5 11 4.5 11.2009.5 8.

1 4.4 12.2 5.7 5.1).2 -9. data will not add up to 100.0 8.8 -6.2 11. Reflecting fiscal consolidation and slowdown in government expenditure in recent few months.537 12.6 61.3 1.0 11.3 1. Gross fixed of the year capital formation also showed higher growth II.2 2.3 5.3 71.8 11.0 34.25.3 11. contribution of government consumption expenditure to growth moderated.993 11.6 73.3 7.3 Net Exports -6.3 6.1 9.4 73.7 11.3 1.3 31.3 5.858 13.0 7.587 12. Note: As only major items are included in the table.23.1 -5.3 1.4 33.9 69.454 11.4 -5.6 -0.4 1.4 1.2 3.5 2.1 3.2010- 09@ 10# 10 11 Q1 Q2 Q3 Q4 Q1 Q2 H1 H1 1 2 3 4 5 6 7 8 9 10 11 Growth Rate Real GDP at market prices 5.6 61.7 5.3 11.4 per cent and gross fixed capital formation (Table II.5 11.1 -5.4 Total final consumption expenditure 8.8 -6.3 60.7 Changes in stocks 1.0 9.1 and during the first half of 2010-11. AGGREGATE DEMAND The domestic demand* led growth process continued and was characterised by stronger growth in private consumption expenditure and higher contribution of fixed capital formation to growth.3 4.94.2 -7.3 1. II.6 61.5 15.8 4.6 71.4 9.8 -6.6 35.9 0.8 8.6 (i) Private 59.1: Expenditure Side of GDP (2004-05 Prices) (Per cent) 2008.9 32.6 6.4 11.141 @ : Quick Estimates # : Revised Estimates. the supported by robust corporate sector growth impulse from the expenditure side of performance and strong growth in capital GDP emanated predominantly from the expenditure by the Government.9 34. suggesting buoyancy in demand. 2009. * Demand as measured by expenditure side GDP data 7 .7 13.4 Relative Share Total final consumption expenditure 70.4 11.7 -7.3 Memo: ` Crore Real GDP at Market Prices 44.222 10.7 (i) Private 6.5 57.3 5.3 13.4 30.7 -6. Source: Central Statistics Office. which was Table II.97.530 24.65.1 15. 2009-10 2010-11 2009.1 During the first half of 2010-11.39.3 60.08.1 72.8 3.8 17.2 10.7 19.4 34.6 (ii) Government 16.1 Gross fixed capital formation 4.3 2.1 10.4 (ii) Government 11.3 1.2 11. real acceleration in private consumption expenditure GDP at market prices increased by 10.3 -113.1 11.2 22.7 0.4 34.8 32.554 21.8 4.9 Changes in stocks -61.4 60.4 13.0 9.6 14.1 60.4 51.360 48.1 3.1 7.8 71.6 8.7 72.4 62. Overall. the contribution of net exports to growth could remain negligible.6 6.9 9.3 12.8 9.3 1. Corporate sales growth remained high while earnings improved. Private final consumption government capital expenditure have been expenditure gathered pace reflecting partly the the major growth drivers in the first half pick-up in agricultural growth.42. Private consumption expenditure and Chart II.85.3 10.8 2. As the external sector outlook broadly suggests widening of current account deficit.9 -0.6 7.6 7.7 10.5 8.5 8.8 Net Exports 40.2 Gross fixed capital formation 32.2 -2.3 1.07.

1).0 40.0 Percentage to GDP Growth the second successive quarter. The Contribution of government final government intends to boost its expenditure in consumption expenditure and net exports to priority sectors.0 2007-08 2008-09 2009-10 2010-11 PFCE GFCE GFCF higher than the growth of 8. which expenditure side data for the first quarter of needs to be continued to address the growing 2010-11.2). expenditure.2: Contribution to of the resumption of the fiscal consolidation Real GDP Growth process (Table II. 20.2 Government final consumption pressures. reflecting the impact Chart II. expenditure continued to grow at a robust pace II. was substantially lower than the now better aligned for the first half of the current growth recorded during the corresponding fiscal.3 The contribution of net exports fell for 60.0 20.4 The Centre had budgeted a sharp PFCE GFCE GFCF Net Exports 2009-10 (Q2) 2010-11 (Q2) reduction in expenditure growth for 2010-11 as 8 . given the fiscal space available overall growth reflects fiscal consolidation on account of higher than budgeted revenue and widening current account deficit receipts.5 The higher than budgeted revenue receipts but showed noticeable slackening relative to during 2010-11 (April-November) resulted from higher growth of last year.9 per cent in real a part of its gradual exit from the crisis-driven GDP at factor cost.0 0. 70. The capital component of Furthermore. the trends in gross fixed capital infrastructure gap. period of 2009-10. formation and capital goods segment in IIP are however.0 60.0 still remained positive.0 50. which potentially could exert demand II.1: Quarterly Y-o-Y Growth 70.0 II.0 Per cent 30. though it 50.0 (Chart II.0 the goods and services account persisted 30. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Chart II. The differential in growth expansionary fiscal policy stance. the rates reflected higher net indirect taxes accruing progress during 2010-11 (April-November) to the government from stronger overall and indicates a higher than budgeted growth in industrial sector growth in the year. Total expenditure growth.0 The composition of government expenditure 10.0 has shifted towards capital expenditure 0. even as the deficit in 40.0 10.0 II.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 -10. as the Government lowered its expenditure since August 2010. with substantial revision in expenditure exhibited strong growth. However.

rural development.2: Central Government Finances: April-November Items Amount Percentages to Growth Rate (` crore) Budget Estimates for (Per cent) 2009-10 2010-11 2009-10 2010-11 2009-10 2010-11 1 2 3 4 5 6 7 1.2).06.80.9 62. Capital Expenditure 56.6 21.677 2.326 27.978 106.955 86.9 121.2 27. the The progress in Central Government finances higher demand resulting from social during 2010-11 (April-November) shows a expenditure also suggests the need to step up lower growth in expenditure as compared to the rate of growth of essential items on the 2009-10. Revenue Receipts 3.6 ii) Defence 78. than those as against a decline (7.2 188.86. Revenue Expenditure 5.7 4.8 per cent) and corporate tax II.2 25. Gross Primary Deficit 1.47.995 4.717 51. Ministry of Finance.873 2.57.73.5 per cent of GDP in 2010.813 45. Since lower inflation is a from strong buoyancy in its revenue receipts.6 50.404 55.1 7. Non-Plan Expenditure 4. Consequently.1 8.645 73.40.7 58.5 -8. Revenue Deficit 2.125 4.771 64.9 30.8 215. Plan Expenditure 1.544 53. There have been significant year (Table II. Table II.027 6.9 per cent). 9 .90.1 55.672 6.4 ii) Non-tax Revenue 74.3 per cent) along with high growth in personal income tax for inclusive growth collections (11.082 52.9 73.3 25.4 48.687 60.5 55.6 The Government is on track in anchoring sustainable growth.5 2. Total Expenditure 6.1 7.5 -39. reflecting mainly the expenditure shows higher than budgeted buoyancy in domestic economic activity and growth in expenditure during 2010-11 (April- international trade as well as the partial rollback November) in agriculture. reflecting the exit.0 12. Gross Fiscal Deficit 3. benefiting demand for grants.2 Source: Controller General of Accounts. 2004.2 49.221 1.4 5.79.0 54. increases in revenues from customs duty (64.1 of which: i) Interest Payments 1.0 64.65. gross substantially lower in absolute terms and as tax revenue increased strongly (26.8 60.8 11.522 76.716 50.1 -0.32.7 82.6 20.8 49.4 -45. key factor to promote inclusive growth.4 65.8 9.9 142.2 9.19.96.2 Higher development expenditure necessary per cent) and union excise duty (37.504 1.0 -72.1 10.7 9.10.4 iii) Major Subsidies 90.902 1.7 3.137 85.8 per cent) proportions of budget estimates.766 90. The higher resource its fiscal deficit to 5.3 23.2 50.5 27. The mid-year targets for its key fiscal fiscal space for allocating higher outlays to indicators were met for the first time since the these priority sectors.158 91.0 69.916 53.34.7 Sector-wise profile of Government collections (19.4 229.6 -8. availability from excess revenues has created 11. along with strong growth observed supply side.634 49.874 63. Government’s commitment to inclusive and II.252 1.21.4 56.449 155.16.76.2 6. of indirect tax rate reductions as part of the fiscal education and health.07.86. Apart from substantial non-tax revenues in the revenue deficit (RD) and gross fiscal deficit form of receipts through the 3G and broadband (GFD) during 2010-11 (April-November) were wireless access (BWA) spectrum auctions.9 -2.3 7.2 i) Tax Revenue (Net) 2. Aggregate Demand better than expected tax and non-tax collections. in tax and non-tax revenues.6 82.4 39. Non-Debt Capital Receipts 8.8 per cent) in 2009-10 during the corresponding period of the previous (April-November). which was reflected in enactment of Fiscal Responsibility and Budget the Government’s additional supplementary Management (FRBM) Rules.

4 4. Furthermore.6 4. 10 . while also building adequate fiscal space to deal with future adverse shocks to II.2 2. Government Debt Status and Road Ahead.4 26. continues to be a key (BE) (Table II. Durable fiscal term objective is to use borrowings for consolidation. Note: Negative sign indicates surplus. previous two years. however. Ministry of Finance. The fiscal correction are in line with the Medium Term Fiscal Policy envisaged during 2010-11 seems to rely Statement (MTFPS) roadmap. Furthermore.7 58.4 2.0 disinvestment proceeds). steeper substantial proportion of the budgeted fiscal corrections would be necessary by 2013-14.3). would require measures financing capital expenditure as indicated by to augment revenue collection on a sustainable the Government in its Mid-Year Analysis. there II.10 After witnessing deterioration in the is a likelihood of further increase in subsidies.0 4.0 10.3 8. global uncertainty.9 25.0 59.5 6.0 0.6 0. Government of India. account in 2010-11 is expected to come Table II. # : Data pertain to 27 State governments.2 2009-10 RE 3.3 6. with a focus on curtailing non-plan classification. The correction in the revenue downside risk to fiscal consolidation.0 5.8 Although Central Government finances growth and inflation.3 74.6 -0.8 3. November 2010.8 6.2 2010-11 BE 1.2 2009-10 RE 1.3 2010-11 BE 3. per cent of GDP.3: Key Fiscal Indicators (Per cent to GDP) Year Primary Deficit Revenue Deficit Gross Fiscal Deficit Outstanding Liabilities* 1 2 3 4 5 Centre 2008-09 2. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Risks to fiscal consolidation over the medium II. Finally.0 per government finances show improvement cent of GDP) during 2010-11. an abiding medium- arrears and loan waiver scheme. basis and rationalisation of recurring 2010-11. Government administration and departmental commercial undertakings in gross capital Combined fiscal gap likely to moderate as state formation was budgeted to remain low (1.0 74. correction in 2010-11 is to be realised from the The Government recognises that the envisaged savings on account of lower than expected elimination of RD by 2013-14 would be expenditure in respect of pay and pension difficult.9 4.2 2010-11 BE 1. consolidated revenue in view of the rising international oil and deficit and gross fiscal deficit of State fertiliser prices. governments are estimated to fall in 2010-11 especially in Europe.2 5. respectively).5 57. Moreover. expenditure of Central revenue expenditure.5 74.4 26.5 2009-10 RE 4. As per the economic and functional expenditure. BE : Budget Estimates.8 States # 2008-09 0.8 Combined 2008-09 3. * : Includes external liabilities at current exchange rates based on the report.9 The emphasis in the current phase of term and quality of fiscal consolidation are consolidation should be on the quality of important concerns adjustment.3 RE : Revised Estimates. in order to meet significantly on one-off items (such as receipts the Thirteenth Finance Commission (TFC) from telecom spectrum auction and target for RD and GFD (zero per cent and 3.4 8.

3 31.0 4.5 Interest to Sales 2.5 Expenditure 33.9 0. Sectoral demand-supply to the recent peak observed during the first imbalances require structural policy quarter of the financial year (Chart II.0 20.3 5.3 14.4 -0.9 5. Sectoral imbalances require structural policies benefited from strong sales growth during the second quarter of 2010-11 (Table II.0 8. Aggregate Demand through increase in revenue receipts as well Compared to moderate growth in PAT of the as compression in revenue expenditure (as ratio private corporate sector. In the first half of 2010- elevated levels of 2009-10 (Table II.13 Strong investment intentions.8 5. 338 projects were sanctioned assistance by banks/FIs involving about `2.9 2.0 2.9 1.5 34. the build-up in inventory partly reflected the low base effect.0 99.3).7 29.0 Gross Profits to Sales 14.9 Profits after tax 6. *: Other income excludes extraordinary income/expenditure if reported explicitly Note: Growth rates are percentage changes in the level for the period under reference over the corresponding period of the previous year for common set of companies.0 36. II.9 2.Financial Performance (Growth rates/Ratios in per cent) Item 2008-09 2009-10 2010-11 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 1 2 3 4 5 6 7 8 9 10 11 No.8 21.3 Interest payments 58.6 30.5 3.4 10.9 8.7 21.000 crore as Corporate sales growth remained high against 251 projects worth `2.9 -0.8 19.7 2.5 20.9 60.31.1 2.5 11.2 -1.6 8.000 crore suggesting buoyancy in demand during the corresponding period of the previous II.7 8.9 4.9 Interest Coverage (Times) 6.6 -53.5 29.2 6.9 13.9 5. Government non- to GDP) and thus appears to be more balanced.1 24. intervention to improve the supply situation Table II.3 8.11 Combined finances of the Central and of companies which approached banks/FIs State governments budgeted for 2010-11 for financial assistance during April-September indicate that the key deficit indicators as per 2010. 11.3 62. indicate optimistic outlook for cent of GDP would moderate compared to the fixed capital formation.7 -8.9 5. to the robust economic activity. and in turn.8 1.5 12.4 8.0 13.8 0.12 The private corporate sector contributed year.0 19.9 16.5 12.8 3.3 0.6 Profits After Tax to Sales 9. and hence.6 5.4 50.5 19.6 21.7 -1. as ratio to GDP is likely to result in lower GFD- II.7 Interest to Gross Profits 16. in higher envisaged capital expenditure II.1 2.1 10.4: Private Corporate Sector.1 85.7 -26.4).7 15.1 19. as reflected GDP ratio.7 Other Income* -8.8 9.5 1.8 3.1 19.4 -19.14 The rebound in private consumption However.8 10.8 Gross profits (PBIT) 11.5 16.6 23.2 18.0 #: For companies reporting this item explicitly.9 Depreciation provision 15.0 4.1 22.3 18.8 39.4 2.2 6. 11 .9 26.5 20.2 10.8 9.6 2.7 14.4 -2.42.1 16. financial companies witnessed a noticeable rise Lower consolidated revenue deficit of State driven by the robust performance of oil governments along with lower capital outlay companies.6 2.3 16.6 21.9 3.0 -12.7 5.3).6 -4.4 10.9 14.6 4.3 44.7 -1.9 -2.8 Select Ratios Change in stock-in-trade to Sales# 2.4 2.5 13.2 2. of Companies 2500 2386 2486 2561 2530 2531 2562 2565 2546 2586 Sales 29. accumulation relative to sales moderated does not signal any broad based demand side during the second quarter of 2010-11 compared pressure as yet.0 7.3 -21.6 13.5 -4.3 -2.9 36.7 8.6 20.6 -0.2 58.5 37.2 9.

Macroeconomic and Monetary Developments Third Quarter Review 2010-11

Chart II.3 : Sales Growth and Change in Stock-in-Trade to Sales Ratio (%)
Change in stock- in-trade to Sales Ratio (%) 4.0 35.0
31.8
29.3 29.1 2.9
3.0 30.0
2.9 2.3
22.5 25.0
2.0 2.2 24.2

Sales growth (%)
18.7 20.0
1.0 0.6 1.1 1.0
0.8 15.0
0.0
9.5 10.0
-1.0
1.9 5.0
-1.7 -0.9 0.1
-2.0 0.0
-1.8
-3.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 -5.0

2008-09 2009-10 2010-11
Change in stock in trade to Sales Sales

more than any demand compressing measures the Government is expected to further lower the
at the aggregate level. The stronger growth in relative contribution of government final
private consumption expenditure partly reflects consumption expenditure to growth even though
the change in terms-of-trade in favour of the share of government fixed capital formation
agriculture in view of the supply side constraints may increase. Fiscal consolidation, if sustained,
and the Government’s commitment towards its can contribute to a low inflation regime to
flagship programmes, such as MGNREGA. coexist with high growth. In the near-term,
With the waning of the base effect, the recent India’s policy option could be to pursue further
momentum in sales growth of corporates, diversification of exports in the fast growing
however, would be contingent, inter alia, on the emerging market economies to increase the
sustained growth in final consumption contribution of the external sector to overall
expenditure. Fiscal consolidation ushered in by economic growth.

12

III. THE EXTERNAL SECTOR
India’s external sector situation was characterised by a higher level of current account deficit
and dominance of portfolio flows in Q2 of 2010-11. This may pose policy concerns going
forward. Higher trade deficit and lower support from net invisibles led to a higher current
account deficit. Even though export growth remained reasonably strong, robust import demand
resulting from high domestic growth led to a large expansion in the size of the trade deficit.
Higher net capital flows were better absorbed by the widening current account deficit, leading
to a moderate accretion to reserves. External liabilities, however, increased at a faster pace
than external assets. The composition of capital flows also changed considerably, with large
increase in portfolio flows and lower FDI inflows. India’s export growth remained strong in Q3
of 2010-11 notwithstanding persisting positive inflation differential. Ongoing developments
such as volatility in the exchange rate of key currencies and pressure on commodity prices
could have implications for India.

Uneven pace of growth across regions III.1b). Apart from the possibility of sovereign
continues, though the recent performance debt crisis spreading to other advanced
of advanced economies has been better economies, the downside risks to growth
than earlier expected projections for advanced economies could stem
from the vulnerabilities related to continued
III.1 The multi-speed recovery in the global
weakness in financial systems, ongoing
economy that was observed in the first half of
household balance sheet deleveraging and
2010 became more entrenched in the second
tensions that may arise from country specific
half, as the advanced economies faced greater
response to global imbalances. The ILO expects
uncertainty while the emerging market
the employment situation in advanced
economies (EMEs) experienced consolidation
economies to reach the pre-crisis level only by
of growth around trend. The advanced
2015. Persistent high unemployment and
economies which faced the prospect of double-
uncertain growth outlook have complicated
dip recession, have in fact outperformed GDP
decisions on policy exit.
growth forecasts made a year ago. The
sovereign debt crises of Greece in May 2010 World trade recovery continues, though
and Ireland in November 2010 and the evolving industrial output growth decelerates
fiscal situation in Portugal, Italy and Spain III.2 Growth in world industrial production
added to the uncertainty regarding global exhibited signs of deceleration after attaining a
recovery. EMEs, led by China and India, peak in May 2010, partly reflecting the base
continue to grow at a faster rate compared to effect (Chart III.1c). Trade activities, however,
the advanced economies. In December 2010, have sustained the momentum of a strong
OECD projected world real GDP growth at 4.6 recovery, prompting the WTO in December
per cent. In October 2010, IMF had projected 2010 to retain its September 2010 estimates for
world real GDP growth at 4.8 per cent (Chart growth in merchandise trade volume at 13.5 per
III.Ia). Among advanced economies, there was cent for 2010 (Chart III.1d). This high growth,
a divergent trend in growth during the third however, needs to be seen against the low base
quarter vis-a-vis the previous quarter (Chart that resulted from the sharp 12.2 per cent

13

Macroeconomic and Monetary Developments Third Quarter Review 2010-11

Chart III.1: Key Global Indicators

a: Output Growth b: Real GDP Growth (Quarter-on-Quarter)
10 6
8
4
6
2

Per cent
Per cent

4
0
2
-2
0 US UK Japan
-4 Euro Area EU27
-2

-4 -6

2009Q1

2010Q1
2007 2008 2009 2010 2011f

2009Q3

2010Q3
2009Q2

2010Q2
2009Q4
World Advanced Economies
Source: IMF
Emerging and Developing Economies
Source: Eurostat and BEA

Chart c: Industrial Production Growth (Year-on-Year) d: Growth in World Merchandise Exports (Value)
25.0 40 25
20.0 30 20
15.0 15
10.0 20
10
5.0
Per cent

10
Per cent

Per cent
5
0.0
0 0
-5.0
-10 -5
-10.0
-15.0 -10
-20
-20.0 -15
-30 -20
-25.0
Jan/09

Mar/09

May/09

Jul/09

Sep/09

Nov/09

Jan/10

Mar/10

May/10

Jul/10

Sep/10

-40 -25
2006Q1
2006Q2
2006Q3
2006Q4
2007Q1
2007Q2
2007Q3
2007Q4
2008Q1
2008Q2
2008Q3
2008Q4
2009Q1
2009Q2
2009Q3
2009Q4
2010Q1
2010Q2
2010Q3
Developing Asia High Income Countries World (WBG members)
Q-on-Q (right scale) Y-on-Y
Source: World Bank. Source : WTO

contraction experienced in 2009. In value terms, Asia to 8.5 per cent for 2010 from 8.2 per cent
even after expanding by 23 per cent during the made in September, to reflect the robust
first three quarters of 2010, world merchandise expansion of the third quarter, mainly in
trade remained below the peak level attained Eastern and Central Asian countries. Recent
before the financial crisis. At 30 per cent, Asian data, however, point to some deceleration in
exports increased at a significantly faster rate economic activity and accordingly, real GDP
during the third quarter of 2010 on a year-on- growth for the region is projected at 7.3 per
year basis than the 18 per cent growth for world cent for 2011. IMF projections made in January
merchandise trade. With deficient domestic
2011 also suggest real GDP growth of 7 per
demand and high unemployment rate in
cent for 2011 for Asia, down from 8 per cent
advanced economies, protectionism remains a
in 2010. Going forward, emerging inflationary
possible response, which could hinder overall
pressures reflecting the shrinking output gap
global recovery.
and firming global commodity prices could
Emerging Asia exhibits robust growth but prompt monetary tightening. Sensitivity of
rising inflation and larger capital flows capital inflows to such actions and policy
pose policy dilemma for central banks options to deal with larger inflows that, at
III.3 In December 2010, the ADB revised times, could be distortive, will complicate
upward its assessment of growth of developing policy decisions.

14

6 The moderation in net invisibles surplus effect (Chart III.0 April-December 2010. Within services. the trade balance 0. The decline in net registered strong growth.0 -40.0 -8. 2009. partly due to the continuing growth imbalance between India and the rest of the III. -20.3). The growth in imports has primarily per cent a year ago).3: India's POL Imports and International Crude Oil Prices 14 140 12 120 10 100 US$ billion US$ per barrel 8 80 6 60 4 40 2 20 0 0 Apr-05 Jul-05 Oct-05 Jan-08 Apr-08 Jul-08 Oct-08 Jan-07 Apr-07 Jul-07 Oct-07 Jan-09 Apr-09 Jul-09 Oct-09 Jan-06 Apr-06 Jul-06 Oct-06 Jan-10 Apr-10 Jul-10 Oct-10 POL Imports Average Price of Indian Basket (right scale) 15 . with export growth significantly Per cent Growth US$ billion 20. India’s export growth maintained the momentum despite the fading out of the base III. Rising crude oil prices along with growth in software exports continued to be robust quantity of oil imports has led to the higher oil reflecting geographical diversification as well Chart III.0 exports has outpaced imports growth during 60.5 The rise in trade deficit (on BoP basis) led to a further widening of the current account India’s export growth has remained strong deficit during the second quarter of 2010-11. India’s export growth has during the quarter relative to the corresponding also been better than the global recovery in quarter of the previous year was mainly on exports. Though the growth of 80.0 0. reflecting the diversification of the account of decline in net investment income and export basket as well as the export destinations.0 Current account deficit widened -60. During October and income was mainly on account of decline in November 2010.3).0 improved relative to the first two quarters. imports have also net services (Table III.0 -4. private transfers.4 After witnessing a turnaround in October world (Table III.0 significantly reflecting larger trade deficit and subdued net invisibles surplus Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Exports Imports Trade Balance (Right Scale) III.0 of 2010-11.2).0 exceeding the import growth. The External Sector Chart III.2: India's Merchandise Trade import bill (Chart III.0 -2. there was a investment income receipts by 62.0 per cent slowdown followed by a decline during during the quarter (as against an increase of 17. but trade deficit for the year so far has on the back of stagnation in net invisibles widened surplus. however. of lower interest rates abroad. reflecting the persistence been led by oil.2). In Q3 40.0 -6. which offset the increase in Since October 2009. pearls and semi precious stones.9 December.1). the trade deficit has widened in absolute terms (Table III.0 -10.0 -12.0 -14.

Net Invisibles 80. .4 -26.8 16.0 Oil 87.9 144.7 19.3 Non-Oil Trade Balance -49.. .2 39.2 -12.6 15.8* 21.2 . largely reflecting the interest rate III.1* 25. Trade Balance (1-2) -118.3 8. .1 .2 -9.8 247.3 14.6 107. 16 .8 96. * : Figures pertain to April-November..6 -82.7 The buoyancy in capital inflows differentials.4 3.1 -7..2: India’s Balance of Payments (US$ billion) Item 2009-10 2009-10 (PR) 2010-11 Q1 Q2 Q3 Q4 Q1 (PR) Q2 (P) 1 2 3 4 5 6 7 8 1. Not Available. as enhanced operational efficiencies.8 .7 3.5 -16. Net inflows under ECBs and short- Larger net capital inflows were absorbed term trade credits reflected improved access in financing the higher current account to global financial markets and the need for deficit. Exports 182.8 89.1: India’s Merchandise Trade (US$ billion) Item April-March April-December 2009-10 (P) 2009-10 (R) 2010-11 (P) Absolute Growth (%) Absolute Growth (%) Absolute Growth (%) 1 2 3 4 5 6 7 Exports 178.4 47.5 Oil 28.2 -8.0 78. FII commercial borrowings (ECBs) (Table III.8 164.1 84.1 19.7 29.8 -5. continued during the second quarter of 2010- 11 driven by large inflows under FII III. Current Account Balance (3+4) -38..3 54. business and financial services.4 73.8 92.6 -79.1 9. architectural & estate.8 7.5 -4. P : Provisional. Business FDI. mainly on account of robust recovery in of which the share of FII investment was 77 receipts. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Table III.3 157.1 19.2 -12.7 -3.6 206. inflows have exhibited large volatility during Table III.9 -31.5 9.2 76. per cent.6 -35.0 22.0 112.0 Trade Balance -108.. Imports 300.2 -13.6 65. . Non- poses sustainability risks resident Indian (NRI) deposits continued to be steady.6 -31.5 78.7 77.1 3.1 2.2 -5..8 2.6 90. Imports 286.0 -25. real & management consultancy.4 0.7 -13. business of lower FDI inflows under construction.8 6. Gross Capital Inflows 345.1 -15. Overall Balance (5+8)# 13.4 19.7 66.2 20.6 -16. Source: Directorate General of Commercial Intelligence & Statistics. Non-oil 150.9 -24. Gross Capital Outflows 292. R : Revised.4 4..3 -29.4 -4.6 3. However.8 19.4).5 56.1 87.1 20. Equity engineering services as well as maintenance of flows accounted for about 79 per cent of net offices abroad) recorded lower net outflows capital flows during the first half of 2010-11.0 61. but the composition of capital flows financing higher demand for imports.6 5. Net Capital Account (6-7) 53. moderated mainly on account services (mainly covering trade related.5).6 -24.7 -4.3 # : Overall balance also includes errors and omissions apart from items 5 and 8.6 -30.2 52. P: Preliminary.4 4.2 43.4 Non-oil 199.4 1.7 18.6 127.0 81.3 2.3 74.0 64. PR: Partially Revised.3 95.2 -18.8 -12.8 Latest available information on certain investments along with steady inflows under lead indicators of capital flows suggests short-term trade credits and external continued buoyancy (Table III.4 18.9 -36. however.9 74.

7 6.8 12.7 12.7 0.2 2. during April-November 2010 has been driven which needs to be reversed (Chart III.6 1.4 19.0 36.8 -2.7 26.5 affiliates. NRI Deposits 1.3 22.3 ADR/GDRs 2.0 6.2 17.5 19.2 21. flows to other EMEs. year-on- Financial Services -0. during April-September 2010.4).5 39.1 Compensation of 2011).7 PR: Partially Revised.5 Brazil. FDI flows to EMEs Of which: recovered modestly on the back of improved Travel 0.6 1. FDI flows to major EMEs like China. Notably.6 0. net FDI flows to Business Services -2. ECB by sectors such as construction.5 to the latest estimates of UNCTAD (January Investment Income -0.9 23.0 1. Mexico and Thailand recorded increases Total (1+2+3) 20.2 -0. However.7 19. 17 .3 5.1 in the range of 6-53 per cent in 2010. however.4 7.6 42. which appear to have India has to be seen in the context of overall affected the investors’ sentiments. mining and approvals. This pattern has contributed to inflows.1 -0.1 India declined by almost 36 per cent.8 13. Added to this global trends. Foreign Direct Investment (FDI) 7.7 0.4 24.3 -0.5 23.9 -3. integrated township projects and III.7 10.3 Inward FDI 10.9 The recent moderation in FDI flows to construction of ports.7 0.6 0.1 -0. particularly.10 The moderation in FDI inflows to India rate.9 6.5 12.0 -6. continue to increase on the business services.9 2. which partly reflected subdued cross- 2009-10 2010-11 2009-10 2010-11 border merger and acquisition (M&A) activities (PR) (P) (PR) (P) 1 2 3 4 5 and weaker return prospects for foreign 1 Services 7. environment sensitive policies pursued. the volatility in equity prices and the exchange III.7 Of which: 1.3 -0.3 20.7 1.4: Net Capital Flows (US $ billion) Item July-September April-September 2009-10 (PR) 2010-11 (P) 2009-10 (PR) 2010-11 (P) 1 2 3 4 5 Net Capital flows 19.4 -0. The External Sector Table III.0 18.2 0.1 -0. Short-term Trade Credits 1. External Assistance 0.3 in M&A activities.1 -3. Subsequently.6 3.4 0. the decline in net FDI flows acquisition issues and availability of quality Table III.7 19. P: Preliminary.3 Transportation 0.1 year.2 corporate profitability and some improvement Software Services 10.2 3.1 -1.1 -0.3: Net Invisibles to India was relatively moderate (12 per cent) (US $ billion) compared to EMEs (estimated to be 33 per cent Item July-September April-September in 2009). Employees -0. land During 2009-10. Portfolio Investment 9.0 26.8 FIIs 7.7 -3.0 -2.2 7. Moderation in FDI inflows has continued.0 5.2 6.3 -6. Indonesia recorded about a three-fold rise in FDI the year so far. as Moderation in FDI flows needs policy manifested in the recent episodes in the mining attention sector. PR: Partially Revised.8 15.5 2. ECBs 1. are the persistent procedural delays.6 Outward FDI 3.4 4. A major reason for the decline back of strong domestic demand and interest in inward FDI is reported to have been the rate differentials.5 2.0 2.0 4. P: Preliminary.2 2.9 -3.3 2 Transfers (Private) 13. According 3 Income -1.1 19.0 3.

Component Period 2009-10 2010-11 1 2 3 4 Indicators of Real Effective Exchange FDI to India April-November 25.13 External debt stock as at end-September account. if addressed implying that inflation in India has been expeditiously. currency REER indices during the year so far.5).12 There has been a distinct divergence NRI Deposits (Net) April-December 3.5 1.8 (excluding valuation effects) increased by US$ billion from US$ 262.2 1.0 III. despite higher net currency index) (Chart III.0 Jul Sep Jan Jun Dec Oct Apr Aug Nov May 2009-10 2010-11 2009-10 2010-11 18 . the 36 country REER largely Government’s policy focus. The future.4: Recent Trends in Foreign Investment Flows a.0 billion during the first half of 2010-11. could raise the share of India in comparable or below the level prevailing in its the projected FDI flows to EMEs in the near trading partners in the developing world.5 30. FII : Foreign Institutional Investors.5 2. which remain at the centre of the economies.3 between the movements of 6-currency and 36- FDI : Foreign Direct Investment.4 billion. the foreign contributing around 71 per cent of the total Chart III. This is reflected in the 30-currency REER (which is derived after Reserve accretion during the year so far the exclusion of 6-currency index from the 36- has been moderate as. the base level by 16 to 20 per cent. GDR : Global Depository Receipts. India’s foreign exchange reserves 2010 increased by 12.8 per cent to US$ 295.0 0.0 3.0 0. While the 6-currency REER remained above ADR : American Depository Receipts. These factors.8 2010-11 so far billion.0 US$ billion 2.1 16. ECB : External Commercial Borrowings. signifying NRI : Non Resident Indians.6 reflecting inflation differential ADRs/GDRs April-December 3. 2011 stood at US$ 297.3 19. the financing need in the current account increased Some external debt parameters have deteriorated III.7 31. According to the IIF. net FDI flows to magnitude of nominal exchange rate EMEs are forecast to increase by 11 per cent in appreciation/depreciation of the currencies of 2011.0 0. higher inflation differentials with these infrastructure.5: Capital Flows in exchange reserves increased by US$ 13.11 As the surplus in the capital account exceeded the financing gap in the current III.0 US$ billion 10.8 ECB Approvals April-December 13.0 3.5 20. with ECBs and short-term debt Inclusive of valuation effects.5 -10. capital inflows. 2010. Foreign Institutional Investments (Apr-Jan 7) b. remained below or around the base level. which are more structural in nature.0 Business Hotels Others Manufacture Finance Electricity & others Real Estate Wholesale Trade Education R & D Mining Trading Communication Construction Transportation Computer -20.0 Rate (REER) showed a divergence FIIs (net) April-January 14 24. these countries also differed. Foreign Direct Investment (Apr-Nov) 4.0 2. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Table III.0 40.3 billion at end-March 7.0 -30. Foreign exchange reserves as on January (US $ billion) 14.0 1.

Higher global crude oil increased by US$ 33.6 22.1 billion at end-September to depreciation of the US dollar against other 2010 (Chart III.2 3. Government of India and Reserve Bank of India.2 209.9 2.6 24.2 7.7 1.6). Bilateral 20.5 4.5 1.6).1 9.5 25. NRI Deposits 41.3 295.8 Total Debt (8+9) 224. major currencies accounted for nearly 19 per Significant widening of current account deficit cent of the rise in external debt during this would necessitate larger and stable long-term period. ECBs 62. given incremental assets in the IIP in the second the weak and uncertain demand conditions in quarter of 2010-11.8 3.5: Real Effective Exchange Rate 130 120 Base: 1993-94=100 110 100 90 80 70 Jul-01 Jul-93 Jul-03 Jul-95 Jul-05 Mar-98 Nov-98 Mar-08 Nov-08 Mar-02 Nov-02 Jul-97 Jul-99 Jul-07 Jul-09 Mar-96 Nov-96 Mar-06 Nov-06 Mar-94 Nov-94 Mar-04 Nov-04 Mar-00 Nov-00 Mar-10 Nov-10 REER 6 REER 30 REER 36 increase (Table III. Valuation effects due quarter to US$ 211. Short-Term Debt 43.6 0. though still very much within the comfort zone. IMF 1. Multilateral 39.3 5.5 1. however.8 33. there capital flows to limit risks to medium-term has been some worsening of debt parameters sustainability during the first half of 2010-11.0 -1. Rupee Debt 1.1 2.0 8 Long-Term Debt (1 to 7) 181.6 9. shows deterioration imperative to diversify the exports further in III.15 Recent trends in export growth suggest the possibility of exports surpassing the annual International Investment Position (IIP) target for the current year. It is. September 2010 over 2009 2010 PR September March 2010 2010 P Amount Per cent 1 2 3 4 5 6 1. III.5 16.0 4.5 12.6 262.7 2.8 20.3 14. The External Sector Chart III.9 49.3 6.6 47.0 6. Source: Ministry of Finance. P: Provisional. With higher private debt flows.1 2.5 71.14 Incremental liabilities outpaced terms of commodities and destinations.6: India’s External Debt (US$ billion) Item Outstanding Variation End-March End-March End.0 PR: Partially Revised. Net international liabilities advanced economies.2 10.0 9. 19 .8 229.9 82. Trade Credit (above 1 year) 14.2 billion during the second prices and non-oil commodity prices Table III.4 52.5 19.0 13.9 9.8 46.5 9.9 18.5 66.2 0.5 42.8 Memo Item Total Debt/GDP (in per cent) 20.0 6.

4 41. If the improvement in the trade deficit Although financing of such a deficit has not witnessed in Q3 of 2010-11 continues.7 15. lower order of reserve 0 accretion and faster increase in external -100 liabilities of the country relative to external -200 assets are some key areas of concerns surfacing Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 in the external sector. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Chart III.5 6. Table III.3 2. pose some sustainability risks. Import Cover of Reserves (in months) 12.5 9. there been a problem so far.3 7. III.9 106. The BoP data released Net Asset Liabilities by the Reserve Bank report a CAD of 3.6 4.4 11. Given the dominance of composition of capital flows in the near term. remained It is important to monitor the magnitude and at a comfortable level.2 42. The debt service ratio. accompanied by stronger domestic economic which is higher than the sustainable level of activity could raise India’s import growth around 3 per cent in the medium-term. the changing may be some moderation in CAD from the high composition of capital flows for financing the levels seen during the first two quarters. any given its potential implications for asset prices. Ratio of Short-term to Total Debt (Residual Maturity) 38. however. A 400 higher current account deficit. debt creating flows and volatile FII flows.7: External Sector Vulnerability Indicators (Per cent) Indicator End-September End-March End-September 2009 2010 2010 1 2 3 4 1. Ratio of Short-term to Total Debt (Original Maturity) 17.1 18. of the evolving situation.7 per cent of GDP during April-September 2010.5 4. compositional US$ billion 300 200 shifts in capital flows in favour of short-term 100 debt and portfolio flows.8 8.9 3.0 22.1 10.4 99. interest rate differentials could be expected to attract even larger net capital inflows. 44 per cent during the last one decade).0 20 . however. The deficit calls for an assessment of the external upbeat growth outlook of India and rising sector vulnerability indicators.0 5. trajectory. Ratio of Concessional Debt to Total Debt 18. Reserves Cover of Imports and Debt Service Payments (in months) 11. Debt Service Ratio (Debt Service Payments to Current Receipts) 5.8 22. unforeseen adverse global developments may exchange rate and the overall sustainability of pose risks and this warrants close monitoring the external sector.7).4 16.5 20.1 5.6: International Investment Changing dynamics of BoP suggests the need Position to guard against vulnerabilities 700 600 III.17 Reflecting the dominance of debt creating level of CAD along with the dominance of flows during April-September 2010 (almost 50 volatile and short-term debt creating flows per cent compared to the average share of about could.16 The dynamics of the balance of 500 payments altered significantly in 2010-11. debt A low inflation regime is also necessary so that sustainability indicators witnessed some any real appreciation of the exchange rate does deterioration at end-September 2010 (Table not erode the competiveness of Indian exports. Ratio of Short-term Debt to Reserves 15. Ratio of Reserves to Total Debt 115.7 10. A higher III.

the external sector needs to be though in recent months trade balance has monitored closely. the reform process needs to be of global recovery.19 The above assessment suggests that going steep rise in international crude oil prices. While the subdued growth of medium-term and readjust its financing in the services receipts is cyclical in nature and can short term. FDI flows to India rise in crude oil prices and reasons for strengthening on the promise of growth moderation in FDI are more structural in prospects and the reform process being nature. significant increase expedited to address the impediments. The economy is very well improved. The challenge in this regard is acquisition issues and availability of quality to reduce the current account deficit in the infrastructure.18 Widening of CAD and deterioration in inelastic. forward. The External Sector III. Second. Third. in imports relative to exports reflecting the III. 21 . Since supply of crude oil is relatively accelerated. lower growth in services receipts non-conventional sources of energy. As regards relative to payments reflecting the uneven pace FDI flows. The prospects for the medium-term be expected to resolve with the global recovery adjustment will improve with the global becoming more broad-based and robust. land persisting trend. moderation in FDI inflows poised to absorb a higher current account deficit that was reported to have occurred on account for a couple of years but this cannot remain a of environment sensitive policies. the recovery consolidating. the economy needs to adjust itself in vulnerability indicators are a result of several the medium-term by investing in the use of factors: First.

00 7.00 (+0. 2.50 (–2.75 (+0. leading to higher deposit and lending rates.75 banks responded to the liquidity deficit by April 20. 2009 4.25) 6.50 (+0.50) December 8. In the January 5.25) 4. warranting liquidity easing measures by the Reserve Bank.75 5.00 9.00 tightened beyond the comfort level.50 significant downward inflexibility. which was reflected in the high growth of base money. liquidity conditions January 17.50 (+0.25) 6.50) 5.00 8.50 (+0.00) 6.00 (-0. The Reserve Bank injected large primary liquidity through repo and open market operations.00 pressures to avoid the risk of liquidity stress September 16. 2010 5.00 6.25) raising deposit and lending rates.00 6. Reverse repo indicates absorption of liquidity and repo activities.00 5.00) 5.00 (–0.50 (+0. 2008 6.00) 5.75 April 24.75 (+0. The predominant objective behind Table IV.00 (-1. 2010 4. autonomous factors persistent high inflation has emerged as IV.25 4.00 (-1.25 (+0. but got exacerbated by achieved with the return of robust growth.50 (–1. inflation remains elevated with October 11.50 (–1.25) 5. basis points.50) rate and liquidity conditions altered November 3. 2009 4. 2009 3.00 November 2.00) 5.25 4. percentage points.1: Movements in Key Policy Rates adopting such an approach to normalisation in India was to gradually raise the anti-inflationary (Per cent) Effective Since Reverse Repo Cash Reserve accent of the policy without disrupting growth.00 (+0.25) 6. driven by April 21. The Reserve July 2.00 (+0. 2009 3.50) 6.50 (-0. even though the overall anti-inflationary stance was sustained throughout. respectively. 2010 5. as the tightness in liquidity prompted competition among banks.00 both frictional and structural factors. the repo and the reverse repo the key challenge for monetary policy rates were raised by 150 basis points and 200 IV. The anti-inflationary stance of indicates injection of liquidity. Conditions for enhancing the effectiveness of monetary policy.25) interest rate transmission also strengthened as March 19.00 7. 2010 3.25) 6.50 5. 2008 5. 2010 3. The normalisation of monetary policy during the year. as intended.50) October 20.25 6.25) 5. Figures in parentheses indicate change in policy rates in monetary policy.00 Bank undertook measures to ease the liquidity July 27.00 significantly during the course of the year on November 8.50 terminal months of 2010.75 (-0.00) 6. there November 2010 through calibrated tightening was an effective tightening of policy rate by 300 of the policy interest rates and liquidity conditions.2 In 2010. improved in the third quarter of the year.00 affecting the flow of credit to productive Note: 1. however.75 5.25) 5. 2010 3.50 5.25) 6. however. and February 13. The interest October 25. continued. 2008 6.50) 6.25) 5.50 the back of policy normalisation. 2008 6. MONETARY AND LIQUIDITY CONDITIONS Liquidity conditions remained tight during the third quarter of 2010-11. With repo disruptive normalisation between March and rate emerging as the operative policy rate.00 (–0. While the goal of non-disruptive Liquidity conditions started to tighten on normalisation of monetary stance has been the back of policy. 2008 6.50) March 4. 2008 6.1).1 The Reserve Bank achieved non. 2010 3.25 (+0.00 (+0. This was necessary to avoid the risk of liquidity stress adversely impacting the real economy.25) 5.25) 5. 2010 4.50 (–0. as part of the normalisation of policy (Table IV.75 5. Repo Rate Rate Ratio While growth has firmly consolidated around 1 2 3 4 the trend now.50) February 27. 2010 3.25 (-0.00 8.00 (–1.IV. has been non-disruptive.75 (+0. 22 .00 (+0.50) 5.50 (–0.50) 5.25 (+0.

Table IV. 2010.0 per cent of NDTL for availing additional liquidity support under the LAF till December 16. 2010 and balance account with the measure (ii) up to July 30.1). SCBs were: anticipated collection for 3G/ (i) Allowed to avail additional liquidity support under the LAF to the extent of up to 0. Note: The central government. 2010. As deficit operationalised several liquidity-easing liquidity conditions persisted for most part of measures at regular intervals in order to reduce the year and the severity of the pressure at times the liquidity deficit (Table IV. advance tax outflow resulted banks were allowed to seek waiver of penal interest).1: LAF Volumes 2010. -20000 -50000 May 2010.0 per cent of their NDTL till January 28. (iii) The Reserve Bank re-started purchase of government securities under its open market operations (OMO) from November 4. liquidity tightened on account of the -80000 -110000 monetary policy actions. Reserve Bank End-October 2010: Frictional (i) The Reserve Bank conducted special SLAF on October 29 and November 1. Mid-December 2010: In the mid-Quarter Review of December 2010. undertook a number of measures for cash management which also helped in management of liquidity.5 per cent of BWA spectrum in addition to their NDTL (for any shortfall in maintenance of SLR arising out of availment of this facility. measure (i) was extended up to July 16. 2011. which was exacerbated -140000 by autonomous factors such as large increase -170000 11-Jan-11 1-Apr-09 5-Jun-09 9-Aug-09 13-Oct-09 17-Dec-09 20-Feb-10 26-Apr-10 30-Jun-10 3-Sep-10 7-Nov-10 in government surplus with the Reserve Bank as well as the unusually high demand for Reverse Repo Amount Repo Amount currency on account of high inflation. in consultation with the Reserve Bank. CRR requirement (since the (ii) The Reserve Bank extended these liquidity easing measures further and conducted SLAF on all fortnight ended October 22. the Reserve Bank reintroduced daily SLAF and extended the period of waiver of penal interest on shortfall in maintenance of SLR to the extent of 1. 2010. 2010.000 crore and rescheduling of auction amount of g-secs from that mentioned in the indicative calendar on a few occassions. and allowed waiver of penal interest on autonomous factors shortfall in maintenance of SLR (on October 30-31.0 per cent of NDTL compounded by banks’ high for availing additional liquidity support under the LAF.0 per cent of NDTL) for availing additional liquidity in NDTL) support under the LAF till November 7. days during November 1-4. 2011. The increase in cash reserve ratio (CRR) 190000 in February and April 2010 contributed to the 160000 130000 gradual tightening of liquidity and the effective 100000 switch of the Liquidity Adjustment Facility 70000 40000 ` crore (LAF) from absorption through reverse repo to 10000 injection through repo (Chart IV. the Reserve Bank extended the daily SLAF and allowed additional liquidity support to the SCBs under the LAF to the extent of up to 2. From end. the Reserve Bank schemes such as MGNREGS. the Reserve Bank: Continued build up in (i) Reduced the SLR of SCBs from 25 per cent of NDTL to 24 per cent with effect from December government balances on 18. 2010. 23 . Given the permanent reduction in the SLR. 2010-July 2. 2010.0 per cent account of third quarterly of NDTL under the LAF would be available from December 18. 2010. 2010. (iv) On November 9.000 crore per week). (v) On November 29. 2010. central government’s cash With the persistence of deficit liquidity conditions. additional liquidity support of 1. 2010) to the extent of 1. a special two- liquidity pressure due to day repo auction under the LAF on October 30. 2010 and extended the period of waiver of penal interest on shortfall 2010 had seen a large increase in maintenance of SLR ( to the extent of 1.2). increased asset prices and payments under government became excessive. Monetary and Liquidity Conditions basis points between March and November Chart IV. in migration of liquidity to (ii) Given access to second LAF (SLAF) on a daily basis.2: Liquidity Management Measures taken by the Reserve Bank in 2010-11 Time Period/Event Measures 1 2 End-May 2010: Larger than For the period May 28.000 crore in the next one month (staggered as purchases of `12. advance tax collections (ii) Announced conduct of OMO auctions for purchase of government securities for an aggregate amount of `48. 2010. These included repurchase of dated securities in tranches. reduction in the amount of borrowing in the indicative calendar for the second half of 2010-11 by `10. 2010 till January 28.

by means of which large amount of cash flows on receipts and expenditure side.772 50.422 24.390 86.484 B. Liquidity impact of OMO* (net) 43.673 -37.784 17.249 10.729 15.000 -12.2: GoI Balance with the Reserve Bank (` crore) October 2010 were primarily on account of unusually large unspent cash balances of the 180000 160000 government. Chart IV. Bank Reserves # (A+B) -66. the surplus balance of the government helped in 24 .870 1.795 75. the same factor government’s surplus balance with the Reserve widened the deficit in liquidity to the extent of Bank and currency with the public.09.730 3. * : Includes oil bonds but excludes purchases of government securities on behalf of State Governments. Note: Data pertain to March 31 for Q4 and last Friday for all other quarters.785 -44.938 -22. The effective impact on 40000 liquidity.3 The tight liquidity conditions during the modulating the liquidity overhang in the system. increase in the the previous year.020 25. Management of Liquidity (5+6+7+8) -21. First round impact of CRR change 0 0 0 -36.020 -43. however.618 67.b. this primary liquidity was injected into the system factor is generally seen as a frictional (Table IV.275 6.991 2.4 The tight liquidity conditions since end.3).036 2.2).075 5.663 85.0 per cent 100000 80000 of net demand and time liabilities (NDTL) of 60000 banks (Chart IV.187 4.785 55.376 89. During the third quarter of 2010.a.869 3. The Reserve becoming a source of stress for the financial Bank managed the liquidity conditions system. 11/Jan/11 1/Apr/09 5/Jun/09 9/Aug/09 13/Oct/09 17/Dec/09 20/Feb/10 26/Apr/10 30/Jun/10 3/Sep/10 7/Nov/10 IV. The unusually tight liquidity in the system in recent Frictional tightness in liquidity reflected months has been a result of this frictional factor unusually large government surplus persisting longer than usual.420 317 0 8.674 62. the government surplus with the Reserve 120000 Bank hovered in the range of 1. WMA and OD 0 0 0 0 0 0 0 4.514 -66.500 0 0 C.215 1. (-) : Absorption of liquidity from the banking system.224 -31. Centre’s surplus balances with RBI 3. third quarter of the year were mainly the result With the change in the liquidity conditions from of autonomous factors.540 2.34.863 23. # : Includes vault cash with banks and adjusted for first round liquidity impact due to CRR change..787 1.874 2.914 27.165 6.30. RBI’s net Purchase from Authorised Dealers -15.860 (+) : Injection of liquidity into the banking system. Since government’s surplus balances primarily through operations under the LAF and only reflect the temporary mismatch in their OMO.255 -41. Others (residual) -13. IV.117 0 16.0 to 3.456 1. balances with the Reserve Bank IV.960 3. was equivalent to an 20000 0 increase in CRR by 100-300 basis points.550 2. Data are provisional.055 -1.690 -9.210 54 -42.523 436 910 816 751 5.659 -14.5 It may be noted that in 2009-10.110 -44.921 -1. Drivers of Liquidity (1+2+3+4) -45.034 -1. Liquidity impact of LAF -1.953 -78. determinant of autonomous liquidity.257 -58.928 29.330 18.3: Reserve Bank’s Liquidity Management Operations (` crore) Item 2009-10 2010-11 Q1 Q2 Q3 Q4 Q1 Q2 Q3 1 2 3 4 5 6 7 8 A.382 -67. 140000 11. i. therefore.e. Currency with the Public -18.085 56.545 83.04. Liquidity impact of MSS 65.910 7.159 32. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Table IV.650 -58.334 538 10.

The temporary reprieve in SLR maintenance.0 7.3). During the quarter..2009 May 7.0 23.0 25. up to mid-December.7 The subdued deposit growth partly helped ease the pressure reflected the higher growth in currency demand IV.0 widened during the third quarter of 2010-11 (the 17.0 -6.4). 2010 from percentage points higher than during the `2.0 gap peaked at 9 percentage points in mid- December). 2010 July 31.5). lowering of SLR requirement IV. 2009 10-Apr-09 5-Jun-09 31-Jul-09 25-Sep-09 20-Nov-09 15-Jan-10 12-Mar-10 7-May-10 2-Jul-10 27-Aug-10 22-Oct-10 17-Dec-10 Aggregate Bank Divergence between growth rate SLR maintained SLR mandated Deposits Credit of credit and depsoit (right scale) Exemption allowed for liquidity support 25 .0 -10.0 1 3 5 7 9 11 13 15 17 19 21 23 25 mobilised `88. the growth rate of currency with the public during excess SLR investments of SCBs moderated to the year so far has been.4: Currency Demand credit growth and above trend growth in Currency with the Public (Y-o-Y growth in per cent) currency added to the liquidity pressure 21.2009 July 2. 2010 September25.3: Aggregate Deposits Chart IV.e.0 10. 2009 December 17. in SLR.0 June 5. 3.566 crore a year ago. reflected partly with large divergence across banks (Chart IV.0 19.0 27. reduction and which drains liquidity from the system.638 crore of credit.0 21.0 -4. emerging thereby as a structural 15. Excess SLR holdings for the to the festive season.56.0 -8. i. 2010 January 15.0 13.0 4.0 9.8 On account of the tight liquidity in 2010-11 (Chart IV.0 29.0 11. banks 13. Increase in currency conditions and the consequent measures taken with the public is another autonomous factor by the Reserve Bank. 2010 October 22.0 23. This mismatch 2009-10 2010-11 partly reflected the delayed response of banks in raising deposit rates.14.514 crore of deposits and lent Fortnight out `2. The observed pattern in system as a whole are much lower than last year. banks could use the additional space the third quarter of the financial year typically for accessing liquidity through OMOs and the registers an increase in currency demand due repo window.0 8.4 `1.0 -2. With active deposits.0 6.0 17. 2010 April 10. After the reduction corresponding period of last year. deposit mobilisation in the last reporting With room for collateralised borrowing by fortnight of December 2010. currency demand and deposit. Moreover.0 0. on average.6 The divergence between the growth rates of credit and aggregate deposits of SCBs 19. Monetary and Liquidity Conditions Structural imbalance between deposit and Chart IV.694 crore as on December 31.0 2. Chart IV.77.0 source of pressure on liquidity (Chart IV.0 25.0 IV.2009 March 12. even though the the normal response to high inflation and monetary policy stance had provided the signals persistent low or even negative real return on for timely response by the banks.0 15. 2010 November 20.5: SLR Maintenance by Banks and Bank Credit (per cent of NDTL) (Y-o-Y growth rate in per cent) 31. 2010 August 27. smaller. the mismatch banks from the Reserve Bank getting narrowed considerably.

Besides. There May 1.795 317 76.03.461 June 1.890 12.459 -31.17.660 0 86. During the current year.6).775 0 16.430 7.290 31.437 31.50.953 increase. 2.070 18. during which deposit growth.773 45.250 0 65. (Table IV.090 0 93.663 almost 66 per cent of the total incremental October 84.054 31. contributed partly to the higher incremental deposits.773 58. Broad money (M3) growth trend is largely influenced by the pattern of growth Table IV. in case of surplus.505 22.4: Liquidity Position in aggregate deposits of the banking system.815 0 20. registered notable June -74.216 -40. day of the month and the quarter.022 IV.201 and November 2010.589 of 2010-11. 2009 partly reflecting the response to lower deposit April 1.415 0 1. respectively.909 April 35.720 2.430 70.773 80.412 1. (` crore) which account for over 85 per cent of the stock Outstanding LAF MSS Centre’s Total as on Surplus@ of M3 (Chart IV. salutary effect of higher government spending but reached closer to the indicative since end-December 2010 is mirrored in the trajectory of the Reserve Bank lower surplus balances and the corresponding decline in LAF volumes.450 18.391 1.665 December -1.08.111 1.182 21.227 capital issues in the second fortnights of October October -1.431 1.41.232 was. Negative sign in column 4 indicates WMA /OD Hence. November -1.996 month-end accruals of interest payments and 2010 January 88.477 35.837 1. 2010.31..05.440 1.834 89.67.737 54.303 active mobilisation as well as quarter-end/ December 19.685 39.5). The surplus peaked in December Money supply growth deceleration 2010 reflecting advance tax collections.10.290 7.115 18.39. February 47.13.127 2. which is the last quarter of the surplus with the Reserve Bank that drained financial year.531 -999 hence.17. a sharp turnaround in the last July 1.773 1.e.06.71.869 subscription to Coal India and Power Grid September -30. There has been a sharp Last Friday moderation in both time (which are nearly 87 1 2 3 4 5=(2+3+4) per cent of total deposits) and demand deposits.720 money is also on account of the change in the @ : Excludes minimum cash balances with the Reserve Bank key determinants of the money multiplier.773 69. money growth. December 31.03.785 18.890 -6.737 33. This reflected November 94. The gradual easing of IV.114 1.614 deposits for the entire quarter. Note: 1. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Liquidity tightness could ease further with government would spend in order to meet its increase in government spending committed expenditure for the year during the IV.425 -9. the liquidity under the LAF scaled up significantly liquidity position would improve.688 18.10 At the end of the third quarter of 2010- liquidity conditions is also reflective of the 11.795 18.215 317 -7.438 1. It is expected that the (Table IV.44.460 1.138 salaries/pensions credited to accounts1.234 rates in an environment of high inflation.14.44.737 18.570 0 1.11 The moderation in the growth rate of 2011 January 14 -82.463 August 11.9 Alongside the build up of government ongoing quarter.72.38. Negative sign in column 2 indicates injection of 1 Reporting fortnight for data compilation coincided with the last liquidity through LAF.001 there were two fortnights during the third quarter March* 990 2.737 -28.87.53. The continued reflecting the deposit pattern. With government cash surplus liquidity from the system.193 fortnight of the quarter when banks mobilised August 1.063 26.4). This was on account of inflows for July 1. 26 . currency growth has * : Data pertain to March 31. the injection of beginning to flow back into the system. and May 6.868 9. i.775 2.695 September 1. money growth remained below the Reserve staggered OMOs carried out by the Reserve Bank’s indicative trajectory as set out in the Bank since the mid-quarter Review of Second Quarter Review of Monetary Policy December 2010. interest payments and accruals to salary/pension accounts availed by the central government. however.690 21.

6 Aggregate Deposits 16.5: Monetary Indicators (Growth in per cent) Item Year-on-Year Financial year to date 2010-11 2009-10 2010-11 2009-10 1 2 3 4 5 Broad Money (M3) 16.5 17. 2009 July 31. increment in base money during the current the banking system’s credit to the commercial financial year.5 17.8 11. while the growth led to a higher currency to deposit ratio.7 9. 2009 January 15.2 17.9 Main Sources of M3 Net Bank Credit to the Government 17. 2010 Money Reserve to Currency to Deposit Money Aggregate Deposits Multiplier Deposit Ratio Ratio (right scale) 27 .1 17.0 13.6 19.0 17.0 34.5 15.5 21. been much higher than deposit growth. Data pertain to December 31.2 3. 2009 November 20.7 23.0 4.4 15. The reflecting injection of primary liquidity by increase in both these ratios has had some the Reserve Bank moderating influence on the money multiplier. 2009 September 25.2 Reserve Money 22. 2010 May 7.5 14.13 Reserve money continued to grow at an thereby lowering M 3 growth (Chart IV. 2.7 Scheduled Commercial Banks Non-food Credit 24.7 10.0 8.1 7.1 9.3 16.8 17. reflecting the injection of primary of 2010.3 Note: 1.1 14.0 per cent per cent 19.4 11. 2009 June 5.4 16.0 7.1 Aggregate Deposits 16.0 April 10.4 Net Foreign Assets of the Banking Sector 2.8 Reserve Money adjusted for CRR changes 17. 2010 August 27.5 Main Components of M3 Currency with the Public 19.3 8.0 6. 2010 March 12. 2010 July 2. 2010 August 27. which is for January 14. 2010 July 2.9 10.7). Monetary and Liquidity Conditions Table IV.1 10. moderation in the currency to deposit ratio. 2011.5 19. 2009 November 20.5 -1. The injection of primary liquidity sector has steadily gone up since November during the third quarter in the form of repo 2009.7 8. 2010 May 7. 2010 March 12.9 6.2 13. The third quarter registered the highest quarterly IV.3 of which: Demand Deposits 11. 2009 September 25.8 5. led to a significant liquidity in the face of tight liquidity conditions.6 16.0 Narrow Money (M1) 15.6: Money and Aggregate Deposit Chart IV. 2010 December 17.6 11.5 5.9 Bank Credit to the Commercial Sector 23.0 17. however. IV. Data are provisional.7: Money Multiplier and (Y-o-Y growth in per cent) Behavioural Ratios 23.0 4.5 15.7 3. accelerated pace during the third quarter of Higher incremental deposits in the last fortnight 2010-11. 2010 except reserve money.1 18.3 12. 2010 April 10.6 Time Deposits 16. 2009 July 31. account of the increase in the CRR that was Base money expansion remains strong effected in February and April 2010.7 3. 2009 January 15. 2009 June 5. which associated demand for credit. 2010 October 22.2 13.0 15.12 Among the major sources of M3 growth.9 7.3 7. 2010 October 22. The in banking system’s credit to the government reserve to deposit ratio has also gone up on has decelerated.7 11. reflecting the growth momentum and the operations under the LAF and open market Chart IV.8 8.6 -2.8 15. 2010 December 17.

2010 are provisional. 2010 As on Dec 31.618 28. banks remained the dominant lenders in Credit growth.17 Due to the buoyancy in credit flow 8 percentage points by end-December 2010 from the banking system.737 24.641 24.38. non-food credit IV.424 8. basic metal and metal products credit to deposit ratio peaked at 110. As on Jan 1.6). however.14 With economic growth consolidating around the pre-crisis trend.914 13.93.15 The increased credit off-take was seen to the commercial sector during April- across all bank groups (Table IV. though still dominated by the banking system. Private Banks 6. roughly 60 per private sector banks and foreign banks cent of which was offset by the incremental registered high growth in credit flow as build-up in government surplus with the compared to the previous year. accounting for nearly infrastructure.705 3.213 3. Note: Data for December 31. three-fourths of the incremental year-on-year based credit off-take at the end of the third quarter of 2010-11. Public Sector Banks 27.4 1.028 -8.25. For the period Table IV.9).4 * : Including Regional Rural Banks.5 per cent and engineering industries accounted for two- in mid-December 2010.766 -14. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Chart IV.1 2.6: Credit Flow from Scheduled Commercial Banks (Amount in ` crore) Item Outstanding Variation (Y-on-Y) as on Dec 31. nearly three-fifth of total incremental financing IV.8 7.7).63. increase in credit.89.232 41. with deposit pattern (Chart IV.608 16. dipped by over IV.66.474 19.2 4. The ratio.32. Also. 28 . the incremental non-food Infrastructure. an indication of the role third of the annual incremental credit off-take of the structural squeeze on liquidity during the as on December 17. Disaggregated data suggest mobilisation lagging behind the fast pace of that credit flow to industry has been robust.16 Data on sectoral deployment of gross non- continued to grow at an accelerated pace during food credit show the increasing broad-based the third quarter of the year. 2010. quarter. All Scheduled Commercial Banks* 37. 8: Credit Indicators (a) Non-food Credit (b) Incremental Credit Deposit Ratio 27 115 105 24 Y-o-Y growth in per cent 95 Per cent (Y-o-Y) 21 85 18 75 65 15 55 12 45 9 35 1 3 5 7 9 11 13 15 17 19 21 23 25 1 3 5 7 9 11 13 15 17 19 21 23 25 Fortnight Fortnight 2009-10 2010-11 2009-10 2010-11 purchases was `1. banks accounted for (Chart IV.902 crore. 2010 2010 Amount Per cent Amount Per cent 1 2 3 4 5 6 1.8 3.1 31. Foreign Banks 1.9 5.8).51. public sector Reserve Bank. is gradually getting broad. IV.90.41. Even as December 2010 (Table IV.

164 8.328 19.0 20.983 1.00.7: Flow of Financial Resources to the Commercial Sector (` crore) Item April-March April-December 2008-09 2009-10 2009-10 2010-11 1 2 3 4 5 A.267 13.0 Non-food credit growth 25. The (Y-o-Y growth in per cent) funding from foreign sources decreased on 30.27.215 28.0 27.824 4.205 31. Net issuance of CPs subscribed to by non-banks 4.091 4.961 * : April-November ^ : April-September # : April-Dec 15.956 19.819 1.0 11.603 34.9: Sector-wise Credit Flow domestic and foreign non-bank sources.491 -181 -23.0 policy 0. External commercial borrowings/FCCBs 30.852 22.66.238 B1.4 account of lower amount of net FDI inflow into 25.310 B.298 2. on account of a decline in both effective.485 9.085 -29.788 15. Systemically important non-deposit taking NBFCs (net of bank credit) 42. but the magnitude of the deficit under consideration. funding from non-bank may have to continue at around 1.399 5.578 1. LIC’s gross investment in corporate debt.48.361 6.9 and the details in paragraph IV.534 * 7.0 in Dec 2010= 23.661 3.37.490 3.663 40.017 10.552 27. FDI to India 1.960 2.964 70.856 1. 15.88.514 Memo Item: Net resource mobilisation by Mutual Funds through Debt (non-Gilt) Schemes -32. Total Flow of Resources (A+B) 8.989 2. ADR/GDR issues excluding banks and financial institutions 4.991 43.70.16 are based on become visible since the third quarter of the data collected from select SCBs that account for 95 per cent of the total non-food credit extended by all SCBs.267 2.495 71.390 # 4.57.288 34.224 2.255 1.0 per cent of sources registered a decline compared to the NDTL for monetary transmission to remain previous year. Adjusted Non-food Bank Credit (NFC) 4.4 IV. The tight liquidity conditions These data are being disseminated every month from would improve as the government steps up its November 2010.791 23. Gross private placements by non-financial entities 77.530 * C.50.3 21. Flow from Non-banks (B1+B2) 4.46. expenditure.876 28. Foreign Sources 1.947 2.84.5 per cent GDRs.874 5.93. Net credit by housing finance companies 25.016 ^ 4.574 42.0 Non-food credit growth in Dec 2009= 11.11.NABARD.277 60.674 13. Total gross accommodation by the four RBI regulated AIFIs . 29 .34.878 -283 31. Short-term credit from abroad -13.1 per India as well as lower subscription to ADRs/ 20.258 2.276 i) Non-Food Credit 4.928 1.136 * ii) Non-SLR Investment by SCBs 9.733 2.435 9.58.835 69.72.570 1.51.556 B2.280 ^ 3.0 -0.21.38.23.36.51.894 1. Monetary and Liquidity Conditions Chart IV. Public issues by non-financial entities 14.159 8. 2010.774 5.936 25.41.66.559 3. Table IV. financial year.948 15.132 3. SIDBI and EXIM Bank 31. NHB.900 33. infrastructure and social sector 61.408 33.168 96.18.817 6.443 32.64.4 Stronger monetary policy transmission is 10.0 Agriculture & Industry Services Personal Loans measures taken during the course of the year Allied Activities could become more effective with the stronger December 2009 December 2010 transmission in the financial system that has Note: Chart IV.80.911 * 5.871 -1.5 13.18 The anti-inflationary monetary policy -5.966 of which petroleum and fertiliser credit 31. Domestic Sources 2.0 expected to enhance the effectiveness of 5.00.124 15.68.7 15.611 51.

in turn. reflecting expectation of policy rate inflows influenced the domestic markets changes in an inflationary environment.2 The Indian financial markets remained prices (Table V. Widening with policy rates and tight liquidity conditions. Global asset price trends and capital shifted.1 Renewed concerns regarding sovereign the US dollar and stock prices rose on the back debt crisis in the Euro area and the multi-paced of strong foreign portfolio inflows. In January 2011. CDs. macroprudential measures and soft capital Increased capital inflows into the EMEs exerted controls. government dated securities and bank deposits increased.3 Sovereign risks in the Euro-area These flows. FINANCIAL MARKETS The global financial market conditions largely reflected concerns relating to sovereign debt in the Euro-zone. orderly. equity prices moderated.1 a and b). The the strong growth prospects of the Indian yield curve for Government Securities (G-Sec) economy encouraged inflows from foreign 30 . The interest rates/yields on overnight. partly driven by higher portfolio flows. The emerging market economies (EMEs) attracted greater portfolio flows in Frequent re-pricing of risks in the search of better returns. upward pressures on their currencies and equity V.1). Call rate firmed up in step impacted by the global developments. which underpinned frequent re-pricing trend during the second quarter of 2010-11. Both commercial paper (CP) and greater recourse to external commercial certificate of deposit (CD) markets remained borrowings (ECBs). V. interest rate differential due to divergent It mostly remained above the upper bound of monetary policies followed by advanced the LAF corridor during the third quarter of economies and India led corporates to take 2010-11. CBLO. V. Easy global liquidity and active as alternative sources of finance. notwithstanding the impact of global V. Treasury Bills. The forex market also remained orderly and witnessed two way movements. Prices in the global recovery dominated global financial housing market in general continued the rising markets. of risks. exerted upward pressures resurfaced during the fourth quarter of 2010 on currencies and asset prices in EMEs. given the easy international financial markets reflected availability of liquidity in developed countries persisting uncertainties especially after the announcement of QE2. ample global liquidity resulting from quantitative easing (QE2) in the US and uncertain growth outlook in other advanced economies.4 Indian financial markets. partly reflecting market expectations of tighter monetary policy in response to higher inflation. Severe tightness in liquidity that developed in the last few months of 2010 impacted rates in different segments of the money market. The Indian Rupee appreciated moderately against V. particularly the developments and tight liquidity conditions in equity and foreign exchange markets were domestic markets. Indian markets functioned in an orderly manner although there was a rise in equity prices in the third quarter of 2010-11. in line with the trend in other EMEs. CPs. leading which resulted in higher G-Sec yields and some of these economies to resort to widening of CDS spreads (Charts V. Housing prices in major cities rose in general in the second quarter of 2010-11 and to contain excessive leveraging in the housing sector. the Reserve Bank tightened prudential measures for housing credit.

Euro Area 4.0 13.4 7.2 40. reflecting Table V.0 Indonesian Rupiah -21.7 Thailand (SET Composite) -47.6 1.0 12.9 10.9 80.6 0. IFS. (Table V. Sovereign CDS Spreads . quarter of 2010-11.3 (Jakarta Composite) Russian Ruble -30.5 600 1 0. The rupee appreciated against major call rate mostly remained above the upper bound currencies during the beginning of the third of the LAF corridor during the third quarter.4 Basis Points 800 1.1: Currency and Stock Price Movement in EMEs (Per cent) Appreciation (+)/Depreciation (-) of the US Dollar Stock Price Variations Items End-March End-March End-Dec. The V. with the call rate albeit below it.5 9.9 15. Government Bond Yield in Advanced Economies b. Financial Markets Chart V.2a).5 69. the Reserve Bank liquidity conditions as money market rates implemented liquidity management measures hardened (see Table IV.1 51. in line with V.8 6.0 Mexican Peso -24.6 31. but corrected subsequently.6 Taiwan (Taiwan Index) -39.5 During the third quarter of 2010-11.2 82. segments showed marginal moderation vis-a- above-trend currency expansion and mismatch vis the uncollateralised market.7 33.3 15. In order to stabilise overnight inter-bank rates closer to the Policy measures were taken to manage operative policy rate.8 1200 1.2 0 1-Apr-09 20-May-09 8-Jul-09 26-Aug-09 14-Oct-09 2-Dec-09 20-Jan-10 10-Mar-10 28-Apr-10 16-Jun-10 4-Aug-10 22-Sep-10 10-Nov-10 29-Dec-10 2 0 1-Apr-09 20-May-09 8-Jul-09 26-Aug-09 14-Oct-09 2-Dec-09 20-Jan-10 10-Mar-10 28-Apr-10 16-Jun-10 4-Aug-10 22-Sep-10 10-Nov-10 29-Dec-10 Greece Ireland Portugal Spain US Euro UK Japan (RHS) Italy Belgium Germany Source : Bloomberg institutional investors (FIIs) seeking higher between growth in bank credit and deposits.3 Argentine Peso -14.4 9. Source: Bloomberg.6 0.1 28.8 -4. there activity in the collateralised borrowing and was a tightening of liquidity on account of lending obligation (CBLO) and market repo persistence of large government cash balances.2 Indonesia -41.5 Turkish Lira -20.3 Chinese Renminbi 2.2 of Chapter IV for details).8 7. 31 .9 0. * : Variation over End-March.0 -9. The returns.4 200 2.2 Singapore (Straits Times) -43. Items End-March End-March End-Dec.6 30.8 15. IMF.5 (Shanghai Composite) Thai Baht -11.5 Russia (RTS) -66.3 0.2 South Korea (KOSPI) -29.7 South Korea Won -28. The rates in the collateralised segments the movement of the US dollar vis-a-vis other (which accounted for more than 80 per cent of major currencies and moderation of FII inflows the total volume) generally moved in tandem.6 Brazilian Real -24.5 0.2).1 3.2 Malaysian Ringgit -12.1 Indian Rupee -20.5 @ : Year-on-year variation. 2009@ 2010@ 2010* 2009@ 2010@ 2010* 1 2 3 4 5 6 7 8 Japanese Yen 0.6 1000 4 1.8 400 3 0.6 0. mainly due to strong FII reflecting the tight liquidity conditions (Chart inflows.5 India (BSE Sensex) -37.3 21.7 31.4 22.9 -1.4 93.9 12.1: Indicators of Global Fnancial Market Developments a.7 Brazil (Bovespa) -32.9 14.2 52.2 Malaysia (KLSI) -30.4 128.2 Per cent Per cent 3.5 China -31.9 71.5 1.7 -1.7 5.4 11.1 -2.4 -3.5 17.

01 @: As on December 15.891 98.07 34.606 15.33 1.: Not available.599 46.59 2.015 13.691 5.027 12. NSE: National Stock Exchange of India Limited.150 14.196 8.24.835 5.56 May-10 8.473 8.388 79. given the tight liquidity as well as the Treasury Bills of comparable conditions.444 58.840 6.005 5188 17300 Jul-10 18.885 10.50 155 13.92 -34.888 23.813 5156 17260 Feb-10 13.029 7.148 4994 16826 Nov-09 13.69 Aug-10 7.730 6.40.347 21.41.96 2.436 7.20.849 8.658 14.82 3.812 19.574 46.958 15.34 Oct-10 8.564 4.63 -25 13.57 -36 16.99 3.21 36.33 1.311 10.3: Activity in Money Market Segments (` Crore) Year/Month Average Daily Volume (One leg) Commercial Paper Certificates of Deposit Call Market CBLO Outstanding WADR Outstanding WAEIR Money Repo (%) (%) 1 2 3 4 5 6 7 8 Sep-09 8.343 5.589 6.821 44.85 3.165 6069 20250 Nov-10 17.82 3.24 68.258 5. demand for funds in excess of available V. 2010 #: As on December 17.AAA inter rate @ net NSE Nifty Sensex daily (Per LAF over^ yield over 5-Yr bank (`/US$) purchase turnover ** ** turnover cent) (`crore) (`Crore) (Per (` Bonds turnover (+)/sale(-) (`crore) (`crore) cent) Crore) (US$ mn) (US$ mn) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 2008-09 22.439 46.959 4658 15585 Oct-09 15.27 34.812 45. manufacturing companies continued to be the Table V.843 8.691 7.723 8.54 -46.624 3.52 37.651 20.875 1.645 97.21.989 43.01.978 62.528 46.16 .922† 11.17 78.52 3.32 32.68 2.17 Sep-10 8.776 3.2c).006 75.661 12.50 28.982 8.107 47.565 50.535 7.899 8.894P 45.880P 44.661 5360 17848 Aug-10 15.313 98.49 57. † : Cumulative for the financial year.640 8.704 6.281 7.40 2.807 5.227 4.82.58 49.113 99.33 0 12.80 2.02 870 17. and maturity (Table V.51 37.653 13.305 5.67 -1.2b).821 63.616 7.155 16.809 19.15 40.06 260 15.769 8.522 14.32 3.274 1.474 8.618 3.48.57 110 13. P: Provisional .17 2.333 6055 20126 Dec-10 18.year Turn.06 2.01 3.390 6.319 50.793 12.93 3.571 91.150 60.6 The average fortnightly issuance of CDs securities for collateral backing (Chart V.19 1.048 16.440 5971 19228 * : Average of daily weighted call money rates. Leasing and finance.23 81.57 0 14.477 12. Chart V.81 -99.719 17.09.828 5295 19679 May-10 16.299 8.927 53.786 3.81 0 12.45.242 8.79 1.65 Feb-10 6.755 45. ^: Average of daily outright turnover in Central Government dated securities @ : Average of closing rates.17.953 46.059 27.566 # 9.39 -61.758 22.401 43.181 1.402 46.52 36.50 -24.17 Jun-10 7.243 45.64 44.436 12.28.15 Mar-10 8.920 14.5 0 13.954 5.12.228 5.101 4.302 3.872 6.549 7.833 45.054 6.86 Dec-09 6.15 3.54 610 10.284 5.06 2.03.291 8.37.505† 16.70 Nov-09 6.988 8.936 7.182 5457 18177 Sep-10 17.212 5.110 7. **: Average of daily closing indices.224 4954 16684 Dec-09 13.27. during the third quarter was higher than that Secondary market yields on CDs and CPs in the previous quarter.94 3. Daily Yield .93 2.481 31.72 75 18.41 450 17.53 34.37 Jul-10 9.07 Apr-10 8.09.2: Domestic Financial Markets at a Glance Money Market Bond Market Forex Market Stock Markets G-Sec Corporate Bonds Year/ Call Call Avg Daily 10.56 3. 32 .84 0 12.32.553 45.567 7.338 90.631 5178 17303 Apr-10 16.43.831 1.24 1.305 8.215 7.12.23 27.620 12.440 4.822 3.000 4.89 34.865 9. 2010 CBLO: Collateralised Borrowing and Lending Obligation WADR: Weighted Average Discount Rate WAEIR : Weighted Average Effective Interest Rate.300 7. 13.23 30.924 3.102 1.104P 45.23 1.948 5100 17090 Jan-10 12.17 -1.967 32.508 8.37 36.16 -47. Daily Exchange RBI’s Daily CNX BSE Month Money rates* daily Turn.784 1.14 27.495 9.614 7.02.516 3.644 8.342 8.36.225 7.156@ 12.257 4840 16184 Mar-10 17.003 7. Note : In col 4 (-)ve indicates injection of liquidity while (+)ve indicates absorption of liquidity. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Table V.129 9.675 12.00.500 55.16 Dec-10 9.3.26.61 32.506 6.374 3.708 5811 19353 Oct-10 17.193 8.457 8.41.915 5.62 2.529 54.040 46.039 6.83 32.29 3.04 2.571 8. issuances of CPs also witnessed higher increases by the end of the increased as companies accessed alternative third quarter as compared to the overnight rates avenues for funds.187 20.69 2.879 7.325 3713 12303 2009-10 15.011 29.961 1.42 -2.353 7.810 6.798 24.322 7.223 1.57 1.01.610 42.919 7.393 17.544 7.252 46.792 6.49.937 5053 16845 Jun-10 14.96 0 17.16.17 1.92 Jan-10 6.03 1.916 5.769 5.67 Nov-10 8.30 Oct-09 7.22 3.03 1.37 3.411 14.

457 39 13. projected the third quarter reflecting demand for mobilisation of `17. over and above funds.830 16 68.7 The yield on Treasury Bills in the primary Weighted Average Effective Interest market firmed up during the third quarter of Rate (WAEIR) on CDs and Weighted 2010-11 (Table V.183 62 12.330 43 13.098 52 40.305 Mar-10 39.171 Jun-09 34.454 34 10.156 @ @ As on Dec 15.027 40 42.685 18 75.49.738 29 4. 2010 33 .890 14 99. Table V.228 Dec-09 36.12.835 13 90.17.305 54 54. The calendar for issuance Average Discount Rate (WADR) of CPs in of Treasury Bills for the fourth quarter of 2010- the primary markets increased during 11. Financial Markets Chart V.894 37 14.071 20 79.02.620 Nov-10 58. 2010.437 50 23.000 crore.060 13 1.26.549 Sep-10 58.485 36 13.250 10 44.421 9 1. released on December 31.161 45 55. The V.4: Major Issuers of Commercial Paper (` Crore) End of Period Leasing and Finance Manufacturing Financial Institutions Total Amount Share (%) Amount Share(%) Amount Share(%) Outstanding 1 2 3 4 5 6 7 8 Mar-09 27.465 11 1.793 Dec-10 53.721 Sep-09 31.792 Aug-10 57.767 35 13.443 47 11. the rollover during the quarter.455 11 1.329 52 35.572 43 43.344 30 13.420 12 1. Thousand Crore 5 80 Per Cent 4 60 3 2 40 1 20 0 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 0 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Apr-09 Mar-10 Apr-10 Market Repo (Non-RBI) Call Money CBLO Reverse Repo Rate Repo Rate CBLO volume Market Repo volume Call Money volume c: Daily Movement of Money Market Instruments 10 9 8 7 Per cent 6 5 4 3 2 13-May-09 26-May-09 8-Jun-09 19-Jun-09 2-Jul-09 16-Jul-09 29-Jul-09 11-Aug-09 25-Aug-09 7-Sep-09 18-Sep-09 7-Oct-09 22-Oct-09 5-Nov-09 18-Nov-09 1-Dec-09 14-Dec-09 29-Dec-09 11-Jan-10 22-Jan-10 5-Feb-10 19-Feb-10 3-May-10 14-May-10 31-May-10 14-Jun-10 25-Jun-10 8-Jul-10 21-Jul-10 3-Aug-10 16-Aug-10 30-Aug-10 13-Sep-10 24-Sep-10 8-Oct-10 21-Oct-10 3-Nov-10 18-Nov-10 1-Dec-10 14-Dec-10 28-Dec-10 15-Apr-09 28-Apr-09 5-Mar-10 19-Mar-10 6-Apr-10 20-Apr-10 CP (3-month) CD (3-month) 91 day T-Bill Call major issuers of CPs (Table V.477 52 22.506 Jun-10 42.5).003 Oct-10 80.648 40 31.933 44 13.4).871 50 45.509 40 16.2: Movement in Money Market Rates and Turnover a: Policy Rates and Money Market Rates b. Daily Average Volumes in the Money Market 8 120 7 100 6 Rs.

82 7.6).97 consolidation and the strong buoyancy in tax Nov-10 24. 2011). reflecting improvement in liquidity auctions that stood in the range of 1.000 5. as secondary yields for short and medium-term G.86 5.000 7.9 during conditions due to reduction in Government cash 2010-11 so far and 1.000 5. the short-term end.8 The prevalence of tight liquidity 11 was completed during the year (up to January conditions and expectations of further hike in 19.80.48 V.31 5.49 V.14 and non-tax revenue (particularly receipts under Dec-10 19.15 2009-10 3.76 4. 12. compared with the corresponding period of the Secs during the third quarter.1 during the third balances and OMO purchases of G-Sec by the quarter. As the yield curve flattened at the longer Reserve Bank.000 5.46 6. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Table V. 2011).94 6.9 The spreads on five-year corporate bonds (` crore) 91-day 182-day 364-day over the corresponding government bond yield 1 2 3 4 5 hovered in a narrow range of 73-85 basis points 2008-09 2. Both the average maturity of debt the Reserve Bank’s policy rates were reflected issuances and weighted average yield increased in an upward movement in primary as well as during 2010-11 (up to January 19.00 7 140 Basis Points 6 120 Per cent 7.000 4.90 6.64 5. AAA-rated Corporate Bond Spread over Govt.00 10 200 9 180 8.50 3 60 2 40 6.18 6.4-3.92 Jun-10 12.99.37 during October-November 2010.37 3G spectrum auctions). partly (up to Jan.30 Apr-10 36.7-3.65 6.5: Treasury Bills in the daily turnover of G-Sec in the secondary market Primary Market declined during the third quarter of 2010-11.3a).39 4.00 31-Mar-10 30-Jun-10 29-Sep-10 1 20 5. but increased 2010-11 during the second half of December 2010.000 3.50 Per cent 5 100 7. 2011) 2. Though long-term previous year (Table V.50 8 160 8.000 crore. taking advantage on inflation concerns (Chart V.15 6.14 6.99 Aug-10 33.00 1 11 21 3 13 23 5 15 25 8 18 28 7 2 9 17 12 19 27 22 29 6 16 26 4 10 14 20 24 30 Maturity in years Spread(RHS) AAA 5-Yr Corp Bond 5-Yr Govt Bond Source : FIMMDA Source : Bloomberg 34 .3b).41 6. Jul-10 16.000 6. Chart V.3: Turnover and Yield in the Bond Market a. In January 2011.10 Taking into account the need for fiscal Sep-10 13. more long dated securities were issued as well as long-term yields have again hardened during the second half so far.000 6.57 3.000 4.00 4 80 6. Bonds 9. Government Securities Yield Curve b.27.99 4.20 7.000 7. and medium-term yields eased temporarily in as evident from the bid-cover ratio of the November.500 6. the indicative calendar for the issuance of dated securities during the G-Sec yield curve shift reflects expectation second half of 2010-11 was scaled down by ` of policy rate changes in an inflationary 10.29 5.32 7.50 31-Dec-10 20-Jan-11 0 0 01-Apr-09 01-Jun-09 01-Aug-09 01-Oct-09 01-Dec-09 01-Feb-10 01-Apr-10 01-Jun-10 01-Aug-10 01-Oct-10 01-Dec-10 5.000 6. the short-term yields. Nearly 89 per cent of the GOI’s environment gross market borrowing programme for 2010- V.22 7.07 reflecting the deficit liquidity conditions (Chart May-10 36.14 7. Despite hardening of yields remained range-bound. The average of the yield curve movements.59 Oct-10 27.14 4. Year/ Notified Average Implicit Yield at Month Amount Minimum Cut-off Price (Per cent) V.56 5. investors’ sentiment remained positive.10 7.

50 5. Foreign Banks 3.00 10.00 5.75 7.04-8.00 4.31.60-23.25-9.75 12. 2011.00 2.94 State Governments Gross amount raised (`crore) 1.50 7.75 6. BPLR/Base Rate# 1.04-8.085 82.25 7.00 3.98 - * : Interest rate on non-export demand and term loans above ` 2 lakh excluding lending rates at the extreme five per cent on both sides.773 Bid-cover ratio (Range) 1.12 The scheduled commercial banks (SCBs) cover.11 As regards State Government market (Table V.00-28. Actual Lending Rate* 1. # : With effect from July 1.68 7.06. about 50 per cent of the gross rates upwards in the range of 25-100 basis points allocations for the States for 2010-11 were raised during July-January 17.39 7.50-8. of 2010-11(Chart V.6 Weighted average yield (per cent) 8.50 11.75 2.9 Weighted average maturity (years) 11.000 Devolvement on Primary Dealers (`crore) 7.4a).25-7. The turnover in both inter-bank and Table V.11 8.00-8. Several banks revised their base borrowings.25-7.7: Deposit and Lending Rates of Banks (Per cent) Dec-09 Mar-10 Jun-10 Sep-10 Jan-11@ 1 2 3 4 5 6 1.00.25-8. Public Sector Banks 11. Weighted average currencies with minimal intervention or capital yields on market borrowings went up by 34 account management during the third quarter basis points so far during 2010-11.3 1.75-9.20 11.122 1. 2011.50 6. Foreign Banks 10. Private Sector Banks 3.219 7.75-9.56 Weighted average yield (per cent) 7.00-8.000 4.6: Issuances of Central and State Government Dated Securities (` Crore) Item 2009-10 2009-10* 2010-11* 1 2 3 4 Central Government Gross amount raised (` crore) 4.50 11.23 7.25-35.00 3.4-4. With the sharp appreciation of the rupee during October 2010.75 7.75-7. 2011.03.4-4.00-13.37 * : Up to January 19. Taking into account the comfortable cash larger capital inflows balances of the State Governments coupled with buoyant National Savings Scheme Fund (NSSF) V.50-16.25-7. 2011. raised during the comparable period of 2009- The forex market remains orderly.80-26. 2011 as compared increased their BPLR in the range of 50-150 with nearly 90 per cent of the gross borrowings bps during July-January 17.25 Private Sector Banks 5. Private Sector Banks 12.50-16. @ : As on January 17.18.25 6.25-18.49 8.00 - 3. the BPLR system was replaced with the Base Rate system.00-13.00-13.219 5.00 10. 35 .00 3.50-22.50 3.00 Foreign Banks 2.50-25.00 - 2.60-25.50-16.25 8.00 6. of monetary policy transmission reflecting the increased demand for forward V.464 Cut-off yield (Per cent) 7. The credit market exhibits strengthening forward premia firmed up across maturities.50-16.75 12.50-9.15 11.00-7.00 3.25-18.84 3. 2010.3 1.00-9. Forty SCBs also by 22 States up to January 19. but raised the deposit rates to step up their deposit remained higher than in the first two quarters mobilisation to support the high credit growth of 2010-11.50-16. Forward premia eased subsequently.03 8.25 6.00-7.7).00-7.25-18.50-16.00 3. V.4-3.75 2.00-9.25-7.00 2.50-8.50-25.50-8. despite 10. Financial Markets Table V.00-8. Public Sector Banks 3. Domestic Deposit Rate (1-3 years tenor) Public Sector Banks 6.00 3.000 4.75 7.1-8.00 3.25 6.00-27.00 3.00 3.00 2.13 The Indian rupee exhibited a two-way flows there may be a moderation in their movement against major international borrowings for 2010-11.

as concerns relating to central bank survey results published by the Ireland’s debt rating resurfaced in November Bank for International Settlements (BIS) in 2010.36 23. Market Capitalisation to GDP 98. 36 .0 Ratio (per cent)@ * : Based on 30 scrips included in the BSE Sensex and 50 scrips included in the S&P CNX Nifty.90 4.04 3. BSE Sensex/S&PCNX Nifty (i) End-period 17528 17465 20509 5249 5201 6135 (ii) Average 15585 15151 18610 4658 4527 5587 2. Coefficient of Variation 11.5 35 50 0 0.32 22. (NSE).65 3.6 6.5 60 20 1.Dec) (Apr.4b). The volumes recovered in per cent during the third quarter. @ : As at end-period.9 96. Daily Average Turnover 60 90 80 4. the volume of FII support to the equity April 2010 shows that more than half of the markets declined considerably since the last average daily turnover in forex derivatives on week of the month.6 101.0 70 3. so far. and reality indices declined by 4.0 02-Jan-11 02-Apr-09 02-May-09 02-Jun-09 02-Jul-09 02-Aug-09 02-Sep-09 02-Oct-09 02-Nov-09 02-Dec-09 02-Jan-10 02-Feb-10 02-Mar-10 02-Apr-10 02-May-10 02-Jun-10 02-Jul-10 02-Aug-10 02-Sep-10 02-Oct-10 02-Nov-10 02-Dec-10 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Merchant Inter-bank Inter-bank to merchant (RHS) Rs/US Dollar Rs/100 Yen Rs/Pound Sterling (RHS) Rs/Euro (RHS) merchant segments of the forex market Volatile equity markets reflect largely the increased in October 2010 but declined impact of volatile portfolio flows thereafter (Chart V. Nominal Exchange Rate of the Rupee b.96 11.87 5. However. even though mutual funds turned net in their portfolio.Dec) (Apr-Dec) (Apr-Dec) 1 2 3 4 5 6 7 1.5 103. As compared to India (USEI). declined thereafter up to the rise in the benchmark BSE Sensex by 2.0 45 30 1.17 24.8: Key Stock Market Indicators Indicator BSE NSE 2009-10 2009-10 2010-11 2009-10 2009-10 2010-11 (Apr. The preliminary triennial sellers. The market regained some Indian Rupees took place offshore.0 US $ Billion 50 50 2.20 3.70 3.33 23.5 Ratio 70 40 2. in line with the global trend during the grew in size in the past five years reflecting the third quarter of 2010-11. Trading strength by the end of the third quarter.9 7. Source: Bombay Stock Exchange Ltd. Price-Earning Ratio (end-period)* 21. V.5 55 80 60 3. which had spiked of strong growth prospects of the Indian in September 2010.8).56 22.48 4. in view volumes in currency futures. the banking January 2011.4 91.2 December 2010. with the commencement of economy and expectations of encouraging operations by the United Stock Exchange of corporate results (Table V.9 97.33 11. Price-Book Value Ratio 3.0 40 10 0. Strong domestic increasing globalisation of the economy.88 12. and the fundamentals helped in attracting FII flows in need for non-residents to hedge the rupee risk equities.14 The offshore market for Indian Rupee volatile.4: Trends in Forex Market a.15 The Indian equity markets remained V. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Chart V.84 3. (BSE) and National Stock Exchange of India Ltd.6 per cent and Table V.

7 per cent during April-September 2010 particularly from the beginning January 2011. 37 . in anticipation of policy response to high inflation. Resources raised through public issues of the third quarter.000 -5000 -2000 500 -3000 -10000 0 1-Jan-11 1-Apr-09 1-May-09 1-Jun-09 1-Jul-09 1-Aug-09 1-Sep-09 1-Oct-09 1-Nov-09 1-Dec-09 1-Jan-10 1-Feb-10 1-Mar-10 1-Apr-10 1-May-10 1-Jun-10 1-Jul-10 1-Aug-10 1-Sep-10 1-Oct-10 1-Nov-10 1-Dec-10 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 FII MFs Bankex(RHS) Cash Segment Derivative Segment Realty (RHS) BSE Sensex (RHS) 23.153 12.5 : Movement in Stock Prices and Turnover a: Stock Price Indices and Institutional Investment b.949 2. FIIs turned net sellers in 2011 (up to V.469 -23.104 27.164 8. # : Including UTI Mutual fund.170 -8. Private Sector 54. of resources mobilised by mutual funds during mainly on account of year-end redemption April-December 2010 as compared to an inflow pressures which resulted in a moderation of during the corresponding period of the previous turnover in both cash and derivative segments year due to tight liquidity conditions exerting (Chart V.639 -32.967 15.5a).41. Prospectus and Rights Issues* 32. Activity in the Indian Stock Markets 8000 25000 4. @ : Net of redemptions.697 1. Table V.803 9.5a). FII investments.928 1. however.214 * : Excluding offer for sale. Public Sector # 28. There was a net outflow witnessed some slowdown in December 2010. Mutual Fund Mobilisation(net)@ 83. Crore 2000 5000 2.500 6000 Rs. Thousand Crore 5000 15000 3.080 1.16 The activity in the primary segment of the January 2011 (up to January 11) (Chart V. domestic capital market continued to display Net FII investment in Indian equities signs of buoyancy during October-November increased strongly during the first two months 2010.152 33.08. funds turned net sellers during April- December 2010 and this trend reversed in V.988 15. in view of the pressure on redemptions. Mobilisation of concerns relating to the banks’ financing of the resources through private placement increased reality sector (Chart V.5b). Euro Issues 15.799 a) Financial 326 313 3. Public Sector 7.079 B.128 6. respectively. largely on account of debt issuances by the equity markets have witnessed some correction financial companies.000 4000 10000 2.9: Resource Mobilisation from Capital Market (` crore) Category 2009-10 (Apr-Mar) 2009-10 (Apr-Dec) 2010-11 (Apr. Financial Markets Chart V. Source: Mutual Fund data are sourced from SEBI and exclude funds mobilised under Fund of Funds Schemes.164 1. Private Sector (a+b) 25.479 13.301 18. In the recent period.500 0 0 -1000 1. while investment in debt increased considerably during April-December 2010 as compared to the corresponding period remained subdued.17 The FIIs were net buyers and mutual January 19).Dec) 1 2 3 4 A.491 C. last year (Table V.9). by 2.607 20.000 7000 20000 3.4 per cent.500 Index 3000 Rs.379 2.000 1000 1.420 b) Non-financial 25.

Going forward. 90 80 However. which have to be met by banks and inflationary stance markets in a more competitive environment. the Reserve Bank Mumbai Lucknow Delhi Kolkata Bengaluru Chennai* Ahemedabad had tightened the prudential norms for housing * Chennai index is Property Price Index containing both residential and credit. The expected continuation While orderly financial markets would of the robust growth momentum suggests that support the growth momentum. liquidity demand for financing economic activities would conditions would reflect the anti- increase. account of policy actions initiated by the while maintaining orderly conditions in various Reserve Bank and reduction in the unusually segments of the financial markets would high Government balances may reduce the continue to be a policy priority. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Rise in property prices continues Chart V. mainly reflecting the deficit through appropriate rate adjustments. as 140 reflected in the quarterly House Price Index 130 Index 120 (HPI) based on data collected from the 110 100 Department of Registration and Stamps (DRS).6). the recent of volatile portfolio flows impacting asset prices substantial easing of liquidity conditions on and exchange rate could be expected to persist. property prices in Delhi and Chennai Q1: 2010-11 Q2: 2010-11 Q4: 2008-09 Q1: 2009-10 Q2: 2009-10 Q3: 2009-10 Q4: 2009-10 recorded some moderation (Chart V. The risk liquidity conditions. commercial properties pressure on the rates. with a view to preventing excessive leveraging. the Banks would have to respond to the structural interest rates in most segments of financial mismatch between deposit and credit growth markets shot up.18 Property prices continued to rise in most 160 150 cities during the second quarter of 2010-11.6: Trends in House Price Index V. 38 .19 During the third quarter of 2010-11. V. In November 2010.

especially crude oil and metals. However. average that was experienced during the pre- crisis high growth phase. Furthermore. especially vegetables. which could dampen the expected impact of monetary policy to some extent.1a). there have basis. Food inflation in particular has remained stubbornly in double digits for over two years now. could be largely non-responsive to monetary policy actions. Second. inflationary pressures emerged in condiments and spices as pressures have increased both from higher well. headline inflation exhibited moderation during August- November 2010 relative to double digit levels experienced during March-July 2010.3 Since the second quarter review of have helped lower inflation on a year-on-year monetary policy in October 2010. The sources of price pressure in this segment. Price expectations also Changing dynamics underlying the remain elevated and price-level changes have inflation rebound not yet dampened (Chart VI. significant price pressures in VI. the price index has shown some uptick like onion. Some price VI.1b). These together accounted for nearly sector.1d). Policy response ahead has to recognise these risks. rains and supply chain rigidities. but price pressures persist (Chart VI. VI. however. been significant changes in the factors Food inflation moderated for a significant part conditioning the inflation path. but rose again on the inflation remained range-bound during 2010- back of significant rise in prices of vegetables 11 so far.2 Apart from food inflation. okra. Currently inflation remains above the seasonally adjusted annualised inflation in Reserve Bank’s comfort level and the long-term recent months (Chart VI. the global crude oil prices were global commodity prices and domestic demand. While inflation is likely to soften in coming months it is likely to stay elevated above the earlier anticipated path. Inflation rebound in December 2010 was the risk that rising international commodity largely driven by unanticipated factors prices will spill over into domestic inflation. New drivers are seen from fuel and non-fuel international commodity prices and demand-supply imbalances in some food items. renewed inflationary pressures became evident in December 2010 as headline WPI inflation increased to 8. entail and even futures prices indicating only gradual 39 . cabbage and brinjal in recent months and the risks to more owing to loss of output caused by unseasonal generalised inflation appear to have re-emerged.4 percent from 7.5 per cent in November 2010. digit after almost two years in November 2010 Though non-food manufactured products along the expected lines. Base effects VI. which has welfare costs. tomato. particularly from the impact of supply rigidities and hardening commodity prices have increased. The upside risks to inflation. First. raw rubber and minerals may lead to of primary food articles. increase in input costs for the manufacturing and fuels.1 Inflation resurgence during December domestic non-food primary articles such as raw 2010 was mainly led by a sudden spurt in prices cotton. averaging at about US$ 75 per barrel in the Increasing trends in international commodity second quarter of 2010-11 with most forecasts prices. The persistent price pressures are also 60 per cent of the WPI increase during the evident from the high month-over-month month. PRICE SITUATION Reflecting favourable base effects and modest softening of manufactured products price pressures aided by past monetary tightening. the of the year but still remains elevated and has primary food articles inflation declined to single witnessed renewed pressures in recent weeks.

Contrary to the some persistence and moderate only gradually.4 As a result of newer factors and increased the peak it reached during the global food price risks.0 130 2. In the mid-Quarter priced products under the fuel group and review of December 16. (b) put pressure on input costs for the manufactured supply-disruptions in a number of primary products.0 125 0. both commodities and (c) spillover effects of further anticipated and unanticipated.1: Trends in Wholesale Price Inflation a: Wholesale Price Index b: WPI Inflation (y-o-y) 150 12. The FAO upside surprise on expected inflation trajectory.0 4.0 Wholesale Price Index (2004-05=100) 145 10.0 June Septembe Novembe April May July January February March August October December June April May July January February March August September October November December -15.0 20.0 10.0 140 8. the global commodity prices.0 35.0 0. especially the US.0 Per cent Per cent 15.0 Per cent 135 6.0 5. the sharp the upswing. food price index in December 2010 surpassed VI. the inflation trajectory is likely to show shock of 2008. primary commodities and metals have materialised. This occurred due to: (a) better- increase in prices of non-food primary articles than-anticipated growth outlook for certain key and minerals.0 0. a host of factors. especially Some of these upside risks have since food.0 2008-09 2009-10 2010-11 2008-09 2009-10 2010-11 c: Inflation Build-up Over March d: M-o-M Seasonally Adjusted Annualised Rate 12. the seasonal decline in food increased substantially and the pass-through of prices has still not occurred as a result of global increases to domestic prices have so far persistent inflation in primary food items.0 -5. expectations. that the risks to this projection are on the upside. suggesting risks from imported Second. been limited. global commodity prices are again on inflation going forward. Finally.0 2. indicating significant price 40 . Therefore. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Chart VI. Third.0 2008-09 2009-10 2010-11 2008-09 2009-10 2010-11 recovery going forward.0 10.0 4.0 30.0 -10. contributed to the quantitative easing (QE-2) in the US. crude oil prices have firmed up In the Second Quarter Review of Monetary significantly and crossed US$90 per barrel now.0 25. like raw cotton and iron ore could advanced economies.0 8. the inflation projection for March 2011 This exerted upward pressure on prices of freely was placed at 5. Policy. 2010.5 per cent.0 6. it was indicated increased risks ahead for further pass-through. First.0 120 Septembe June Novembe April January February March May July August October December Septembe June Novembe April May July January February March August October December -2.

putting pressure on the prices of the stimulate economic activity. Among from high primary commodity prices are emerging economies. 8. 19.5 * 8. 2010) (-)25 200 13.00 (Sep. 1. 5. 2010) (-) 25 75 1.2 Japan Uncollateralised Overnight Call Rate 0. advanced economies face enhanced VI.0 * 2.6 Benchmark 1-year Lending Rate 5. 2010) (-)225 (-)300 8.9 India Reverse Repo Rate 5. 9.50 (Mar. 3. 5. and emerging economies is perceptible (Table However. 2011) Changes in Policy CPI Inflation Region Rate Rate Rates (basis points) (y-o-y) Apr-09 to Since Dec.4 3. Some of the advanced economies like the risks of higher long-term inflation expectations. data on inflation pertain to CPI for Industrial Workers.16. Others like the euro freely priced petroleum products.0 to 0.26.25 (Jan.7 Korea Base Rate 2.25 (Jan.8 7.00 (Jul. 5.9 * 0.9 2. Source: Websites of respective central banks/statistical agencies. 2011) (-) 25 100 3.00 (May 13.0 to 0.6 Subdued growth in advanced economies VI.75 (Nov.00 (Jul.25 (Dec.2009) (-) 50 0 0. 21.5 3. 2010) (-)250 (-) 150 6. Figures in parentheses in column (5) indicate the variation in the cash reserve ratio during the period.3 5. 1.8 3.2009) 0 0 2.7 US Federal Funds Rate 0.5 The global inflation environment along with slack labour market conditions and continues to remain moderate but a rising well anchored inflation expectations provide divergence in inflation trends between advanced room to sustain policy accommodation.9 3. Dec- Aug-09 Sep-09 09 10 1 2 3 4 5 6 7 Developed Economies Australia Cash Rate 4. 41 . 2011) (-) 250 250 4. Asian economies are facing inflationary Global inflation outlook suggests growing pressures. 20. 2.8 ^ Canada Overnight Rate 1.00 (Oct. 2010) 0 50 (350) Indonesia BI Rate 6. 3.9 2. With products prices.3 ^ 2. US and Japan face the macroeconomic in the context of further fiscal stimulus being Table VI. 2010) (-)25 150 3.10 (Oct. 2009) (-)75 0 4.0 Repo Rate 6.3 3.5 Thailand 1-day Repurchase Rate 2. 2011) 0 75 2.75 (Dec.0 * Euro area Interest Rate on Main Refinancing Operations 1.9 4. For India.2008) 0 0 2.26.81 (Dec.75 (Jun. Third. 2010) 0 0 -1.8 8. 2010) 0 50 1.50 (Aug. 2.12. even while area and UK are witnessing acceptable level of pass-through remains incomplete for the core inflation but with rising headline inflation administered items.0 Israel Key Rate 2. Figures in parentheses in column (3) indicate the dates when the policy rates were last revised.1: Global Inflation Indicators (Per cent) Country/ Key Policy Policy (as on Jan. Price Situation pressures.8 South Africa Repo Rate 5.5 Developing Economies Brazil Selic Rate 11.25 (Nov. 2009) (-)75 0 Russia Refinancing Rate 7. input cost pressures and high rates of unemployment.1). just as is the case with most Latin divergence and the associated asymmetry American and East European economies.3 * Repo Rate 6.50 (Nov. 2010) (-) 25 150(100) China Benchmark 1-year Deposit Rate 2. 2. 2009) (-) 125 0 2.0 ^ : Q2 of 2010-11 * : November Note: 1. in the stance of monetary policy VI. all major South East and strong demand. China recorded a two year exerting further pressure on manufactured high in CPI inflation in November 2010.25 (Nov.75 (Jan 13.5 Philippines Reverse Repo Rate 4. 9.7 1. combined with robust growth the exception of Malaysia.1 * UK Official Bank Rate 0. Crude oil prices have firmed up challenge of generating some inflation to further. 2010) (-)25 175 1.

started normalisation of their monetary policy and (d) the degree of pass-through that may be stance. markets to India’s inflation path would depend further quantitative easing by advanced upon four factors: (a) the extent of increase in economies and its potential impact on world prices of imported items. to rise since mid-2010. Policy rates in advanced economies imported inflation. though the pass-through was have been firming up since July 2010. especially food and metals. (c) share of to their domestic inflation. These could be attributed to VI. (b) movements commodity prices could raise the upside risks in the exchange rate of rupee. Global non-fuel domestic wholesale prices also rose commodity prices. gold and silver. continue to remain near zero/very low as the VI. maize. With significant increase in commodity prices. global crude oil prices crossed US$90 per barrel. prices to domestic prices has been particularly Risks of imported inflation from rising low in case of wheat.1). domestic disruptions in many commodities and prices are now significantly impacted by the indications of further quantitative easing by global commodity price movements. On the back of easy global liquidity and chain rigidities severe winters in Europe and US. sugar and edible global commodity prices have amplified oils (Table VI. iron ore. significantly. Simultaneous increase in prices of a inflation. international of upward risk to domestic inflation. Since October 2010. in spite of VI. going domestic market.7 Upside risks to domestic inflation local supply conditions and administrative price emanate from further hardening of global measures in place. For EMEs.9 Persistence of food inflation has become ample spare capacities with some OPEC a primary impediment to faster moderation of members. some advanced economies initiated these trends rising international prices is an important source (Chart VI. The pass-through from global forward. which have already started world prices of cotton. The expected degree of correction in Chart VI. commodity price pressures have been Persistence of high food inflation reflects exacerbated by hardening of global crude oil both structural imbalances and supply prices.8 The magnitude of the spillover impact of concerns relating to sustainability of recovery rising prices of commodities in the world still persist (Table VI. Several EMEs have imported items in India’s consumption basket. and hence. however. and the anti-inflationary monetary policy suppressed by policy intervention in the could become a more common response.2). Overall. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 used in conjunction with enhanced monetary number of commodities poses the risk of higher stimulus.2). Supply incomplete in many cases.2: International Commodity Prices 290 240 Index (Jan 2007=100) 190 140 90 40 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 IMF Commodity Price Index Food Metals Crude Oil 42 .

0 25.0 -8. 2011 Mar 26.9 supply response to growing demand in some Cotton 95. The Soyabean oil 44. 2010 Aug 7. 2010 Dec 11.6 per and Domestic Commodity Prices cent to the increase in overall WPI during Q3 (Per cent change in December over March 2010) Item International Domestic of 2010-11 (Table VI.7 Silver 71.9 augmenting measures would be critical to Fertilizers 29.3 23. 2011 Milk Eggs.3). 2010 Jun 5.8 31.10 Extended spells of South-West monsoon materialise.9 Wheat -6. Fish and Meat 12.3: Primary Food Articles Inflation a: Primary Food Articles Inflation (y-o-y) b: Divergent Trends in Food Inflation: 25.5 1.3 160 Fruits 15.3).7 Maize 57. Import option to deal with this Gold 24.0 from vegetables.0 Protein and Non-Protein 35.0 5. given the size of demand and high * Mineral Oils. Primary food articles with a weight and unseasonal rains in certain parts of the Chart VI.0 10.0 0.0 Crude Petroleum 13.0 10.0 Per cent 20.4 -0.2 140 Condiments & Spices 38.4 120 Vegetables Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 65.0 30. 2010 Nov 20.9 1. 2010 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Food Exclding Protein Rich Items Protein Rich Food Items* 2009-10 2010-11 *Includes Pulses.7 challenge on a permanent basis remains Source: World Bank and Ministry of Commerce and Industry.6 2.9 5. 2010 Aug 28.0 15. food prices after a normal monsoon did not VI.4 Sugar 50. 2011 Jan 22.0 5.9 0.4 -20 -10 0 10 20 30 40 50 60 70 Inflation (y-o-y) Cereals Pulses Fruits and Vegetables * As on January 08. 2: Movement in International of 14. contributed 38.1 220 WPI (2004-05=100) Rice 2.0 y-o-y. global food prices.0 Jan 1.9 Aluminium 6.0 40. limited. apart Wheat 60. 2010 Jun 26.9 31. 2010 Oct 30. Eggs. 2011 Feb 12. leading to Coal 21. 2011 Mar 5. Price Situation Table VI.5 7. 2010 Apr 24.0 0. Per cent 15.9 are non-cereals (Chart VI.5*) growing imbalances. 2011 Apr 3. the protein rich items.7 this source.0 (9. These were. 2010 Oct 9. 2010 Jul 17.2 39. Milk. The decomposition Prices Prices (WPI ) of food inflation indicates that during the 1 2 3 recent period the key drivers of food inflation Rice 5. GOI.9 200 Eggs.4 contain the persistent pressure of inflation from Copper 22.6 -0.9 180 Milk 13. 2010 May 15. Medium-term supply Iron ore 80.3 per cent in WPI. 2010 Sep 18.0 20. Fish and Meat 43 . Fish and Meat c: Key Drivers of Annual Primary Food Inflation* d: Price Trends in Primary Food Articles: Major Groups 240 Pulses -14.4 12.6 of these items has been weak.

9 2.5 10.4 1.6 1.1 -0.9 -3.3 4.4 18.1 18.5 4.6 4.3 i. Vegetables 1.1 1. Fruits 2.7 20.0 0.0 9.6 8.0 0.9 -0.0 13.1 100.1 -0.8 100.7 2.0 9.0 0.0 0.8 13.3 2.5 14.2 8.0 1.2 0.9 2.3 7.4 0.5 15.9 85.3 7.6 16.9 9.3 0.7 23.6 3.3 0.3 20.6 19.4 28.5 0. Pulses 0.7 1. 44 . ‘eggs.1 3.5 1.9 6.6 i.4 2. Coal Mining 2.9 7.7 1.2 0.5 8.7 ii.1 18.9 -8.6 3. Primary Articles 20.6 2.6 2.4 1.7 20.0 6.6 0.6 WPI Excluding Fuel 85.1 -0.2 6.3: Wholesale Price Inflation in India (2004-05=100) Per cent Commodity Weight 2009-10 2009-10 Year on Year Financial Year Quarterly Quarterly Variation (March-10) (March-10) Variation Variation (Sep-10 Variationto December-10 (Mar-10 to Dec-10) (Sep-10 Dec-10) to Dec-10) Inflation C* Change C* Change C* Change C* (y-o-y) in WPI in WPI in WPI 1 2 3 4 5 6 7 8 9 10 All Commodities 100.2 of which : Fertilisers 2.9 13.4 71.2 2.5 31.2 v.4 100.0 0.8 3.0 iii.2 24.3 9.3 iv.6 v.2 40.6 28.4 53.0 3.5 4.# : Primary# :Food Primary Articles Food Articles + +: Manufactured ManufacturedFood FoodProducts.0 5.8 4.6 31.2 1.0 4.0 Minerals 1.7 0.6 1. Machinery and Machine Tools 8. Rice 1.7 49.3 1.4 0.0 1.2 0.5 0.9 7.7 5. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Table VI.7 1.6 0.4 4.2 10.8 6.7 -0.7 14.9 14.0 8.7 Food Articles 14.9 0.9 -1.4 3. Man Made Fibres 2.0 -0.3 1.8 20.4 5.8 of which: Sugar Sugar 1.5 -0.7 0.2 0.3 2.8 -2.4 0.0 vi.4 6. Food Products 10.5 62.1 18.0 i.3 0.2 1.1 9.4 1.3 -10.6 25.6 4.1 16.7 27.2 48.0 0. Products $ : Includes milk.5 15.4 18.8 2.3 13.4 4.6 3.5 -5.5 48.1 14.2 2.6 53.1 viii.7 5.2 WPI Excluding Food 75.5 Manufactured Non-food Products 55.2 0.4).0 i.6 22.4 35.3 of which: Iron and Semis 1.7 5.1 5.6 1.0 2.1 4.0 5.3 ii.0 -5.0 0.6 29.1 47.2 0.7 Essential Commodities 14.0 4.0 1.2 32.6 -0.1 -0.4 0.3 -0.3 2.7 0.3 20.6 79.5 0.0 6.4 3. Wheat 1.3 17.6 7.7 1.7 1.2 41.9 55.7 7. Chemicals and Chemical Products Products 12. Oilseeds 1.1 3.7 25.6 17.9 13.7 0.4 11.0 3.9 58. Fish and Meat 2.5 46.8 -9.8 8. Electricity 3.3 1.3 1.3 9.3 31. country have led to loss of vegetables output.7 -0.6 8.7 10.2 0.3 -1.0 1.2 24.7 9.8 * : Contribution Weighted contribution to increasetoinincrease WPI in WPI.0 8.5 1.3 11. Raw Cotton 0.1 vii.0 0.2 100.8 2.9 5.3 1.7 2.5 37.4 8. Eggs.1 0.2 12.0 1. Transport Equipment and Parts 5.5 9.0 0.2 5.0 10. Fuel Group 14.0 0.1 iv.1 22.8 4.5 0. Cotton Textiles 2.8 6.8 iii.0 vi.5 1.0 of which: Cement & &Lime Lime 1.1 -0. This is in market.5 3.9 3.7 -0.0 15.2 3.0 1.1 -0. fish fishandandmeat meat’ andand pulses pulses. Alloys and Metal Products 10.4 2.9 82.8 25.9 1.9 -0.9 -3.7 13.2 20.3 4.3 18.4 Food Items (Protein Based)$ 6.4 8.2 -0.0 0.0 Edible EdibleOils Oils 3.5 28. egg.6 18.1 7.9 -2.6 2.0 2.7 7.5 1.5 -0. Manufactured Products 65.7 1. Mineral MineralsOils Oil 9.0 ii.2 6.0 2.5 14.1 7.7 7.8 18. contrast to the trend witnessed in previous Given its perishable nature and also the lack years as the prices of vegetables usually show of adequate warehousing and storage facilities.9 38.7 4.1 11.8 0. some seasonal decline during December the prices of vegetables increased significantly following the arrival of winter crop in the in December 2010 (Table VI.7 vii.9 2.6 12.0 0. Non-Metallic Mineral Products 2.1 ii.2 5. Sugarcane 0.5 3.6 3.9 0.1 14.0 0.4 3.7 44.8 18.9 2.4 31.4 1.4 18.4 iii.4 5.9 1.0 iii.2 0.7 2.7 14.4 0.0 of which: Electrical Machinery 2.0 0.6 4.2 1.1 15.0 70.0 2.9 1. Basic Metals.2 Non-Food Articles 4.9 79.5 14.0 31.1 1.3 52.1 -0.6 1.9 0.4 1.8 1.9 10.0 24.7 19.9 8. Milk 3.7 4.7 1.5 7.0 2.0 3.5 1.9 7.9 0.8 5.0 0.3 7.4 19.8 Memo: (Composite##) Food Items (Composite) 24.2 3.

6 Cabbage -14.0 -3.5 127.11 On a year-on-year basis.4).1 Cauliflower -12.a).8 31.6 42.5 64.7 -0.9 33. more on primary articles also continue to contribute account of the high base recorded a year ago. Fuel group and non-food commodities declined significantly.4: Increase in Vegetables Wholesale Price Index Per cent Commodity 2009-10 2010-11 November December November December Variation C* Variation C* Variation C* Variation C* 1 2 3 4 5 6 7 8 9 All Vegetables 1.1 100.9 -27.0 41.5.0 11.1 22. The contribution of manufactured since December 2009.9 -93.8 -56.3 -31.8 -92.13 Manufactured non-food products. Contribution of non-food manufactured inflation moderated largely on account of products inflation to headline inflation decline in sugar prices.6 -137.6 * Weighted contribution to overall increase in vegetable price index (in per cent). Manufactured products and seen as a broad indicator of generalised Chart VI.0 Brinjal -14. non-food and minerals are showing double-digit inflation.9 19.4: Contribution to Overall Inflation .1 -137.0 -5.9 -3.0 2.0 7.7 0. of price pressures visible inflation remains higher in primary articles and VI.1 17.0 -14.3 100. Iron ore prices have doubled (Chart VI. Currently.9 Tomato 46.4 19.3 -4.4 10. Price Situation Table VI.6 -42.12 Among the major sub-groups of WPI.2 -5.0 26. but some indication VI.0 -1. all segments remains steady of primary articles .1 0.1 7.0 1.2 23.0 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Total Food (Primary and Manufactured) Fuel Group Manufactured Non-food Products Primary Non-Food Articles+Minerals All Commodities (Per cent) 45 . Inflation in essential December 2010.food.1 -132.6 -3.6 65.7 11. remains range-bound.Major Groups 13.0 100 Potato -12.2 -18. significantly to overall inflation pointing towards persisting and generalised inflationary Non-food manufactured products inflation pressures.8 7.1 -14.1 -81.2 35. the moderation primary articles inflation has been exacerbated in inflation witnessed up to November 2010 was by revision in sugarcane index by about 50 per largely on account of the decline in the cent in March 2010 and increase in iron ore and contribution of food inflation to overall inflation raw cotton prices.0 22.7 -13.5 46. Non-food VI.0 3.1 9. which ‘fuel and power’ group relative to manufactured account for 55 percent weight in the WPI basket products (Chart VI.1 236.5 Okra (Lady Finger) 7.7 359.7 116.1 12.6 2.0 Contribution in percentage points 9.8 -13.0 5.9 Onion 8.5 -2.0 85.4 5.7 100. while raw cotton prices non-food products increased marginally in increased by more than 42 per cent since November 2010 and remained unchanged in September 2010.

0-8. generally moderated stage. As a result. While the extent of 126.15 The underlying inflation trends suggest Inflation (y-o-y) (Right Scale) that the return of inflation to a more WPI.14 Inflation.0 5. during 2010-11.0 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Manufactured Non-food Products Primary Non-food Articles Primary Articles Fuel Group Essential Commodity Group Manufactured Products Total Food inflationary pressures exhibited near stable acceptable level could at best be gradual.0 125. particularly in respect of some of the petroleum VI.0 0.0 Per cent 125.5 : Annual WPI Inflation a: Major Sub-groups b: Major Components 25. even as inflation softens.0 M-o-M Seasonally Adjusted Annualised Rate (Right Scale) VI.0 0. The Some of the domestic supply-side pressures flattening of inflation in non-food manufactured could be transient in nature. as measured by various products.0 30. both remained elevated 6. some price prices in the wake of buoyant demand. the expected moderation can corroborated by both upward trend in the price get offset by rising risk of transmission index and high month-over-month seasonally from increasing global commodity prices.1 suggesting the need for sustained anti. 124. with some reversal witnessed in December 2010 (for CPI-Agricultural and Chart VI. pressures could persist. Various measures of inflation Non-food Products Inflation 126.3 Upside risks to inflation have increased.0 10. going ahead.0 remained in the range of 8. This is However.0 20.0 15.0 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 -15. but upside risks to this segment persist.7 -2.9 narrowed significantly.0 -10.0 November/December 2010. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Chart VI. 125. This could largely Hardening international commodity prices.6).7). minerals and metal pressures emanating from high primary prices have already begun to seep through to commodity prices translating to higher output domestic prices. be on account of the significant input cost particularly petroleum.5 4.4 per cent in 126.0 125.Manufactured Non-Food Products 46 . but elevated levels point administrative price interventions to insulate to persistence of welfare costs domestic prices from global price surges. adjusted annualised inflation. and administrative items in past few months could be partly in steps to curb the price spiral and seasonal response to the monetary tightening of the past.9 0.0 -5.0 Per cent Per cent 10.0 25. correction could soften prices.6: Trends in Manufactured Rural Labourers).1 divergence between WPI and CPI inflation 8. inflation path during 2010-11 (Chart VI.0 15.7 leading to significant welfare costs (Chart VI.0 -5. could also become more open at a later consumer price indices.0 5.5 12.0 20.3 10. 2.0 Index: 2004-05=100 125.0 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 inflationary policy focus 124. Divergence between CPI and WPI Suppressed inflation in the near-term due to inflation narrows.

inter alia. VI. supply-side shocks. closer monitoring of production. 47 . monetary policy addressing structural issues at a micro level.17 While inflation upsurge has largely come sustaining a low inflation regime would require from supply-side elements. inflation from high input cost pressures consumption and price patterns in specific transmitting to output prices. Price Situation Chart VI. be helpful.16 Even if inflation softens in the near-term. necessary to mute the second-round impact of through timely imports. The risks to commodities with a focus on supply-chain generalised inflation cannot be overlooked as management to contain market pressures would inflation expectations are currently ruling high. In would need to factor in near-term risks to the near-term. There is also a need to focus on Anchoring inflationary expectations would be supply augmentation in the short-run.7: WPI and CPI Inflation (y-o-y) 20 15 10 Per cent 5 0 -5 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 WPI (All Commodities) CPI-IW Difference VI. wherever feasible.

1* percentage change (y-on-y) 3. The Reserve adversely include: (i) deterioration in investment Bank’s Industrial Outlook Survey also mirrors climate and financial position of the firm relative the optimism. Table VII. This is broadly corroborated by the Reserve Bank’s Industrial Outlook Survey and the Professional Forecasters’ Survey. 2011 FICCI Q2:2010-11 Dun & Bradstreet CII Oct. and in demand and overall financial conditions. * * : Change over October-March 2009-10 survey.1 percentage change (q-on-q) -2. The survey.Jan. larger capital inflows have met the financing need of the current account.5 67. Persistence of inflation at a high level and widening current account deficit are the two major policy concerns at the present juncture.1: Business Expectations Surveys Period Index NCAER.1 5.5 76.9 163.2 Various business expectations surveys suggests that tight capacity constraints are getting show an optimistic picture about the near-term reflected in higher outstanding business orders. Various forward looking surveys also indicate receding downside risks to growth in the near term. The (ii) concerns regarding the mounting inflationary Professional Forecasters’ Survey shows an pressures (the Dun and Bradstreet Survey and improvement in (median) GDP growth rate to NCAER Survey).7 -2.2 66. waning risks to the robust growth outlook and visible upside risks to the inflation outlook would shape the stance of monetary policy in the near term.2 Index as per previous survey 162.6 Index levels one year back 153. conducted by various agencies.1 The robust growth momentum seen so include possibility of improvement in exports (the far and the lead indications that this performance CII Survey) and buoyant future demand would be sustained in the near future are conditions. Going forward.7 0.7 per cent from 8. alongwith rise in volume of sales and reflected in the forward looking surveys new orders (Dun and Bradstreet Survey).3 The seasonally adjusted HSBC Markit previous survey. 48 . MACROECONOMIC OUTLOOK Indian economy has moved to a higher growth trajectory with the outlook remaining optimistic.1).0 4.2** * : Change over the previous survey.1 71.2 171.2 24. 2010-11 Business Confidence Overall Business Q1: 2011 Business Business Confidence Index Confidence Index Optimism Index Index 1 2 3 4 5 Current level of the Index 158. VII.2 6.8 72. The growth projections of Manufacturing Purchasing Managers’ Index various domestic and international agencies also (PMI) witnessed a slowdown in December 2010 reflect the buoyant optimism. which generally Factors that affected the business sentiment show significant y-o-y gains.4 137. especially regarding improvement to the previous round (the NCAER Survey). Factors which provided inflation could dent the process a boost to the overall business expectations VII. Growth optimism continues but high outlook (Table VII.3 66. 8. however. While sensitivity of inflation to past monetary policy measures has remained subdued due to the very nature of the inflation process. even though the survey indicated strong Business expectations surveys exhibit momentum in manufacturing sector and rapid optimism growth in order books.5 per cent reported in the VII.-Dec. VII.

working optimistic. the input costs as capital finance requirement as well as availability well as the output prices of the services sector of finance showed improvement for both rose substantially. albeit at companies passed on higher costs to customers. of sustained buoyancy in economic activities. showed an improvement for VII. suggesting that Indian assessment and expectation quarters. manufacturing sector has an optimistic view about improvement in demand conditions viz. Overall financial situation.1a and b).4 to 9. On the downside.7 The results of the 14th round of ‘Survey the assessment quarter (October–December of Professional Forecasters’ conducted by the 2010) and a marginal moderation for the Reserve Bank in December 2010 shows overall expectation quarter (January-March 2011) (median) GDP growth rate for 2010-11 at 8. capacity utilisation and Services PMI showed a moderation in exports for the assessment quarter.e. Macroeconomic Outlook lengthening of delivery times and increase in VII.2). GDP growth in 2010-11 generally suggest Chart VII. The forecasts reflect the views of professional forecasters and not of the Reserve Bank. The modest moderation per cent. which is the threshold that separates VII. The survey results suggest that The Industrial Outlook Survey of the manufacturers expect selling prices and profit Reserve Bank shows improvement in margins to increase despite expectations of rising demand and overall financial conditions input costs.8 All available projections for contraction from expansion). even though the outlook about slight moderation is indicated for the expectation future business prospects remained generally quarter.5 The 52nd round of the Industrial Outlook the employment outlook. above growth in the range of 8.1 per cent 100. October-December 2010. order books. Indian manufacturers Survey of the Reserve Bank conducted during were perceived to be net hirers (Table VII. Dun and Bradstreet and RBI 130 Expecation Index 250 85 HSBC-Markit and FICCI 120 200 75 (Per cent) (per cent) 150 65 110 100 55 100 50 45 90 0 35 80 Mar-08 Jun-08 Sep-08 Dec-08 Mar-07 Jun-07 Sep-07 Dec-07 Mar-09 Jun-09 Sep-09 Dec-09 Jun-06 Sep-06 Dec-06 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jan-Mar 2011 Jan-Mar 2008 Apr-Jun 2008 Jul-Sep 2008 Oct-Dec 2008 Jan-Mar 2007 Apr-Jun 2007 Jul-Sep 2007 Oct-Dec 2007 Jan-Mar 2009 Apr-Jun 2009 Jul-Sep 2009 Oct-Dec 2009 Jan-Mar 2006 Apr-Jun 2006 Jul-Sep 2006 Oct-Dec 2006 Jan-Mar 2010 Apr-Jun 2010 July-Sep2010 Oct-Dec 2010 NCAER Dun & Bradstreet RBI -BEI (Expectation) HSBC-Markit PMI Manufacturing Assessment Expectations FICCI 1 Introduced by the Reserve Bank from the quarter ended September 2007.6 The survey shows that the Indian both input and output prices. 49 . higher costs.7 (Chart VII. On VII. The indices for both assessment and expectation Projections of different agencies peg quarter remained in the growth terrain (i. a December 2010.4 The pace of growth in the HSBC Markit production. However. as against 8. based on a sample of Survey of Professional Forecasters1 1.5 per cent reported in the at a high level of the index suggests expectations previous survey (Table VII.561 companies. which reflect their pricing power. VII.1: Industrial Outlook Surveys a: Reserve Bank's Industrial Outlook Survey-Business b: Business Conditions Surveys: A Comparison NCAER.3).

- 9.7 -37.0 7.1 43.3 27.3 17.8 5.0 3.3 -28. Securities Yield (per cent-end period) 7.7 8. Higher ‘net response’ indicates higher level of confidence and vice versa.1 -36.0 37.1 26.9 -53.4 9.8 9.3 8. .9 .2 9.6 37.2 9.5 9.0 23. 10-year Govt.3R 9.5 26.3 -28.9 18.7 36.9 8.7 21.1 .3.7 16. .43.4R 9.6 8. R: Revised Estimate P: Preliminary Value .5 38.3 15.5 8. .6 -62.3 36.0 17.9 6.0 7 Cost of raw material Decrease -48. Exports (growth rate in per cent)! -3.6 9.8 20.1 5.36.2 . . .5 7.3 a. .3 Note: 1.4 5.9.0 19.6 8 Capacity utilisation Increase 19.9 48.0 6.3 30.0 .8 26.0 15.6 9.3 44.6 14.0 36.8 6.3 36.1 44.0 3.3 -49.9 . Third Quarter 2010-11.0 8. . Trade Balance (US$ billion) -108.5 8.5 35.9 33.5 36.34.6 2. . . !: US$ on BoP basis.2 3. *: BSE listed companies. .5 8.7 . Industry 10.6 6 Order books Increase 33. Table VII. . . .0 15.6 5.1 43.4 44.4 b.5 5.2 -4. .5 6.3 36. .16.4 28.5 20.0 12.8 3.2 E: Previous Round Projection.5 44. the IMF and World Bank upwards. Corporate profit after tax (growth rate in per cent)* 28. . L: Latest Round Projection.0 9.4 6.5 .9 -35.3 32.2 15.1 7. - 10.) 3. .3 6.3 -33.8 17.0 3.1 41. .3 32.9 .5 9.6 1 0 Selling prices Increase 13. . . T-Bill 91 days Yield (per cent-end period) 4. Imports (growth rate in per cent)! -5.2 -0. .7.1 8.7 8. Agriculture & Allied Activities 0. E: Expectations and A: Assessment.0 6.4 31. .6 5. Gross Domestic Capital Formation (per cent of GDP at current market price) .5 -37.5 44.0 21. while previous round refers to the thirteenth round for the quarter ended September 2010. .-38.9 7.5 .3 5 Production Increase 35. .6 9.9 -23. - 8.0 49.5 43.0 34.6 15.5 3.6 1 1 Profit margin Increase 3. . Gross Domestic Saving (per cent of GDP at current market price) .4 7.8 37.9 35.8. . Inflation WPI (Avg.8 .7 18.1 8. an optimistic picture (Table VII. 2. - 11.36.0 35.3 8.6 8.0 17.8 4.8 6.5 9. 50 .9 -40. - 3.6 6.7 -49. Exchange Rate (INR/US$ end period) 45.3 32.4 20. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 Table VII.0 35. .: Not Available. Services 8. .5 8. .9 44.1 8.5 43.3: Professional Forecasters’ Survey Actual Annual Forecasts Quarterly Forecast 2009-10 2010-11 2011-12 2010-11 2011-12 Q3 Q4 Q1 Q2 Q3 E L E L E L E L E L E L E L 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 1.0 5.2: Reserve Bank’s Industrial Outlook Survey Net Response Parameter Optimistic Apr-Jun July-Sep Oct-Dec Jan-Mar Response 2010 2010 2010 2011 E A E A E A E 1 2 3 4 5 6 7 8 9 1 Overall business situation Better 41. .4 8.0 35.1 44. . .7 8. Note: The latest round refers to fourteenth round for the quarter ended December 2010.9 8.6 19.1 -2.-41. .0 14.6 7. .5 9.3 -63.8 7.9 44.0 20.0 6.5 -31.5 35. .6 -21. . .5 43.7 8. .0 20. Source: Survey of Professional Forecasters. .4 40.1 37.1 9 Employment in the company Increase 13.3 -58. .9 50.2 40.9 7.0 15.1 .3 -38.7 20. ‘Net response’ is measured as the percentage share differential between the companies reporting ‘optimistic’ (positive) and ‘pessimistic’ (negative) responses.3 35. revised their growth projections for India Recently.7 47. Real GDP growth rate at factor cost (in per cent) 7.7 21.8 5.8 18.3 4 Cost of external finance Decrease -20.1 30.0 37.2 34.5 23.8.8 20.9 -31.5 .6 39.6 31.5 45. responses indicating status quo (no change) are not reckoned.2 13.8 20.5 9. .0 9.5 8. .2R 4.2 18.1 2 Overall financial situation Better 36.0 .2 3.4 6.8 c.1 3 Availability of finance Improve 26.0 44.7 41.9 .5 45.4 8.2 40.1 .9 8.4).4R 8. .

(c) return of pricing especially to the infrastructure sector. (f) continuous upward VII.35) Dec-10 8.8(+/-0. particularly farm products. remains a major behind GDP growth as well as industrial growth concern. lend further support to the growth momentum VII. increased which could also weaken price competitiveness VII. especially oil. prices and the regional outlook suggesting (d) stronger growth in corporate sales and continuation of the trend. which in in several sectors. (d) improving bargaining buoyancy in various business expectation power of both organised and unorganised labour. Going forward.1 Nov-10 8. (c) sharp rise in prices. buoyant.5(+/-0. Going forward.7 Jan-11 8.8 Jan-11 8.4: Agencies’ Projections for 2010-11 Agency Latest Projection Earlier Projection Real GDP Growth Month Real GDP Growth Month (Per cent) (Per cent) 1 2 3 4 5 World Bank 8.10 However. (f) pick-up in private consumption restrict exports to ease potential pressures on demand. becoming open. (e) inflationary pressures.11 The persistence of inflation at an include: (a) improved kharif production (that will elevated level and the significant pick-up in be reflected in Q3 GDP data) and favourable December 2010 suggest the amplification of prospects of rabi production on account of upside risks to inflation. (e) capacity constraints spends more from its surplus balances.3 May-10 NCAER 8. turn may ease the concerns of liquidity stress where supply response to high prices may impacting flow of credit. (b) increase in global food tax revenues indicating strong economic activity.5 Jun-10 IMF 8. their domestic inflation.1 July-10 ADB 8.4 Oct-10 8. (d) growth in core infrastructure lagging close to two years.2 Feb-10 @: At market prices.5 July-10 8. The inflation persistence led by which adds to uncertainty to the industrial growth stubbornly high food inflation in double digits for outlook. as the government manufacturing sectors. which include: (a) sovereign debt rising input costs. with MGNREGS contributing to the wage which would reduce crowding out risks and (j) pressures in the farming and unorganised easing of liquidity conditions. upside risks to inflation have capacity putting pressure on the exchange rate. the factors that may and. Table VII. (g) continuing strong credit growth. (b) robust growth in lead inflation are: (a) higher international commodity indicators of services sector. surveys.2 July-10 Economic Advisory Council to the PM 8. however. (h) power to corporates. which could further earnings. Macroeconomic Outlook While downside risks to growth have (b) strong capital inflows beyond the absorptive receded.0 Feb-10 Ministry of Finance 8. factors satisfactory north-east monsoon and higher which may exert further upward pressure on reservoir levels. (i) possibility of fiscal consolidation. certain downside risks to revision in minimum support prices reflecting growth remain. (c) volatile industrial growth. continue to be slow.5 Sep-10 8. and other administered petroleum product prices.25) Feb-10 OECD@ 9. 51 .9 The outlook for growth remains of Indian exports. while others are at factor cost. resulting from revision of diesel which may adversely affect external demand. (g) risk of suppressed inflation risks spreading from the Euro zone periphery. (e) improvement in employment limit the import option as countries may ban/ indicators.

As long excess capacity and high unemployment. containing pressures are emanating from sources that are inflation will have to remain as the not very sensitive to monetary policy measures. 52 . Since persistent high inflation could conduct of monetary policy. predominant objective of monetary policy in the Growing demand-supply imbalances in several near-term. while growth prospects Bank reflecting the need for sensitivity of remain robust.12 Notwithstanding these risks. even as the structural factors underpinning the though in the Euro-area and the UK headline relative price pressures persist. The challenge is endanger the growth objective and also exacerbated by the fact that inflationary amplify risks to inclusive growth. which in turn have pushed up inflationary expectations. The 300 basis points effective by the Reserve Bank. remains. the headline inflation. While non-food manufactured inflation has been stable in a VII. the month-over- may help in restraining the inflationary pressures month increase in price index in recent months include: (a) government measures to improve reflects emerging demand side pressures as bottlenecks in the supply chain from farm gate well as rising input costs.9 per cent. In an environment of to retail. far. factors that range of 5. (c) subdued risk to the core inflation through higher input costs to inflation in advanced economies due to large and inflationary expectations.1-5. Macroeconomic and Monetary Developments Third Quarter Review 2010-11 when the implicit subsidy burden increases non-cereal food items have led to sharp relative significantly and (h) prevalence of high price changes. was carefully calibrated by the Reserve VII.13 To sum up. (b) expected moderation in food high food and fuel inflation. particularly after the increase in the policy rate from March 2010 so strengthening of transmission in recent months. the risk of spillover inflation with a good rabi crop. persistence of high inflationary monetary policy to both growth and inflation expectations poses a complex challenge for the objectives. the impact of inflation has edged up in the recent period and anti-inflationary monetary policy could remain (d) the impact of monetary policy actions taken dampened.