Report of the Central Board of Directors on the working of the Reserve Bank of India for the year ended

June 30, 2011 submitted to the Central Government in terms of Section 53(2) of the Reserve Bank of India Act, 1934

RESERVE BANK OF INDIA ANNUAL REPORT 2010-2011

2011 Ceased to be in Office w. M. Malegam Suresh D. May 13. 2011 8 Lakshmi Chand C.CENTRAL BOARD / LOCAL BOARDS GOVERNOR D. Venkatesan Dattaraj V. 2010 Appointed on September 24. K. Tendulkar5 A. 2010 Position for the year 2010-11 (updated till August 11. Rao Ram Nath Pritam Singh Kamal Kishore Gupta11 Mihir Kumar Moitra12 DIRECTOR NOMINATED UNDER SECTION 8 (1) (d) OF THE RBI ACT. 1934 Y. Saikia Sovan Kanungo Md.R. Sohrab9 NORTHERN AREA Mitha Lal Mehta10 U. 2011) . P. Vaidyanathan M. 2010 Appointed on August 26. Sharma Sanjay Labroo SOUTHERN AREA EASTERNAREA Suresh D. Chakrabarty Subir Gokarn Anand Sinha3 H.H. 2011 Appointed on February 15.e.C. 2010 Assumed office on January 19. Nair M. Malegam K. Subbarao DEPUTY GOVERNORS Shyamala Gopinath1 Usha Thorat2 K. Tendulkar5 U. Rao Lakshmi Chand DIRECTORS NOMINATED UNDER SECTION 8 (1) (c) OF THE RBI ACT. 2011 Assumed office on July 4.f. Salgaocar Jayantilal B.R. 1934 H. Govinda Rao Devaki Jain 7 8 9 10 11 12 Retired on January 31.H. Ranina Azim Premji Kumar Mangalam Birla Shashi Rajagopalan6 Suresh Neotia A. Khan4 MEMBERS OF LOCAL BOARDS WESTERN AREA Y. 2011 Term ended on September 23. R. 2011 Expired on June 21. P. 2011 Expired on August 5. 1934 Ashok Chawla7 R Gopalan 1 2 3 4 5 6 Term expired on June 20. 2011 Term expired on November 9. Patel DIRECTORS NOMINATED UNDER SECTION 8 (1) (b) OF THE RBI ACT.

........................................................ Raipur ....................................................................................................... Chief General Manager M.................................. Chief General Manager-in-Charge A. Agartala .................. Bhoria Chandan Sinha Sudarshan Sen Uma Shankar P............ Saraf Bazil Shaikh Amarendra Sahoo Phulan Kumar M............................................................... Kanungo K... Rural Planning and Credit Department ......... Officer-in-Charge Deepa Srivastava........................................B...... Press Relations Officer (Gr........... Department of Economic and Policy Research ....... Dehradun .. Sharma... Chief General Manager-in-Charge A..... Kochi .......................... Karthak.......................................................... Panaji ............. Gandhi P.......................................................... Chief General Manager Deepak Singhal. Financial Stability Unit ....... ................................... Department of Expenditure and Budgetary Control ..............P...................... Department of External Investments and Operations.................................................................................. Department of Payment and Settlement Systems ......................... Department of Banking Operations and Development .............E.................... Jaipur ......... Chief General Manager-in-Charge Vijay Chugh................................................................................ Department of Banking Supervision ................. George...........S....S............ Chief General Manager & Secretary A............................................. Kanpur ................... Chief General Manager-in-Charge Sandip Ghose.......................................K....V.............. Chief General Manager Ramakant K.................... Financial Markets Department ........... Gupta........................................................................................................................................................... Premises Department........................................... Department of Currency Management... General Manager D........................................................................ General Manager H. CENTRAL OFFICE Customer Service Department..... Foreign Exchange Department ............................... Chief General Manager Meena Hemchandra......................K...S... Vishwanathan Salim Gangadharan J.................................. Koshie.................................... Mumbai .. Patna .......................M........... General Manager V............................................................... Monetary Policy Department ....................................................... General Manager C.................. Gurumurthy.....................K............................................. Chief General Manager A.................. Secretary‘s Department.......... Thiruvananthapuram ..................................................P................................................... Chief General Manager G..... Chief General Manager B........................................................................... BRANCHES Ahmedabad .................................................................. Department of Communication ..................................................... Rao B...................................................... Jaganmohan Rao.... Department of Non-Banking Supervision....................... ............................... Panda B...................................................................................................S............................................................ Mahalingam.................K........ Singh Suma Varma OFFICERS-IN-CHARGE A........................ Chandigarh .. Das G..................................................K.............. Ramasastri......................... Reserve Bank Staff College........... General Manager S. Deputy General Manager Deepali Pant Joshi......................... Chennai................. Human Resource Management Department .................................. Principal Legal Adviser Janak Raj........................................................... Bajwa................... Bangalore ............................................................................. Mahapatra G........................................................ Ranchi....................................K.............. Prabhu...................... Department of Government and Bank Accounts .................... COLLEGES College of Agricultural Banking...................... Bhoi Jasbir Singh Surekha Marandi A...................................... Urban Banks Department...............I................ Nagpur ..................... Chief General Manager-in-Charge Kaza Sudhakar PRINCIPALS Kamala Rajan J.. Rajbhasha Department ..................................S...........A........................ Udgata............................................................................. Karuppasamy R........... ............ 2011) ............................. Gopalakrishna Deepak Mohanty S. Mishra....... ....................................................... Misra................ Legal Department ...............PRINCIPAL EXECUTIVE DIRECTORS ......................... Department of Statistics and Information Management .............. Sadakkadulla REGIONAL DIRECTORS N......... Vijaya Bhaskar B............................................... Chief General Manager Rabi N.................................................................... Internal Debt Management Department.......... ... Chakraborty.......... OFFICERS V................................ Chief General Manager-in-Charge Karuna Sagar...................................... Chief General Manager K............................................ General Manager Nirmal Chand............................... Sharma V.... Chief General Manager Uma Subramaniam.....................K....... General Manager E............. Hegde.... Kolkata ....................... Chief General Manager-in-Charge G......... Officer-in-Charge G............ General Manager R............................................. ................ Ananda........... New Delhi ...................... CHIEF VIGILANCE OFFICER . Bhatnagar.............................................. Chief General Manager-in-Charge Grace E....................................... Deputy General Manager (As on August 11....................................................................... Shimla .......... Bhubaneswar ............. Pune..............................R..............................B..................................................................................K........................... General Manager M................................................................................................. Gangtok ........................ Pandey...... Vohra ... Hyderabad ..N........................................................................................................................ Bhopal.................................... Krishna Mohan........................................................................................... .......... S........................................................... Bera...... ........................................... OFFICES Chennai ............. Padmanabhan Rajesh Verma............. ..................................... Lucknow.... Guwahati.. Department of Information Technology ......... Killawala............... Belapur .......................................................S.............. Adviser-in-Charge K..... Jammu ...........................R...................... Panda. Chief General Manager A................ F) N........... Srinagar ................................... Deb..................... Inspection Department ....................................

......................................... Commercial Banks .......................................................................................................................................................... Assessment of the Banking Sector................................................................................................................................................................................... Prospects for 2011-12 ............................................. External Sector.......................................................................................................................................................................................... Rural Co-operatives...... Foreign Exchange Market .................................................................................................................................. ASSESSMENTANDPROSPECTS .... V............................................................................................................................................... Government Securities Market ... 72 74 81 81 84 87 89 89 90 90 92 96 96 98 98 101 102 108 1 2 5 9 15 15 26 35 42 52 60 IV....... Urban Co-operatives Banks ............................................................................... REGULATION.................... DEVELOPMENTAND REGULATION OF FINANCIALMARKETS ........................................................................................ Government Finance ...................... The Real Economy .................................................................................... Reserve Bank‘s Perspective on the Medium-term Challenges for the Indian Economy II......................... i 110 110 111 111 ........................................................................CONTENTS Page No.......................... Derivatives Market ............................ PART ONE : THE ECONOMY – REVIEW AND PROSPECTS I.............................................................................................................. Price Situation............................. Money Market ............................................................................. PART TWO: THE WORKINGAND OPERATIONS OF THE RESERVE BANK OF INDIA III.........................SUPERVISIONANDFINANCIALSTABILITY ................................. Priority Sector Lending ....... Monitoring of Financial Stability ........................................................................................... Financial Stability Assessment...................................... Outreach Activities .................................................... Major Decisions Taken by Board for Financial Supervision ..................................................................................................................................................... ECONOMIC REVIEW ........................................................................................................................... Financial Inclusion ........................................................................................................................................................................... Non-Banking Financial Companies ...... Banking Codes and Standards Board of India ........................................................................................................................................................................................ Deposit Insurance and Credit Guarantee Corporation.. Monetary Policy Operations: Context and Rationale .................................... MONETARY POLICY OPERATIONS............................... Assessment of 2010-11 .................................................................... CREDITDELIVERYANDFINANCIALINCLUSION.............................. Money and Credit .......................................................................... VI................................................................................................................. Financial Markets......

............. Customer Service ................................................................... Debt Management of Central Government ....................................................................................................................................................... PUBLIC DEBT MANAGEMENT ...............................................................................................CONTENTS Page No.............................................................................................................................................................................................. VII................................................................................... HUMAN RESOURCES DEVELOPMENTAND ORGANISATIONALMANAGEMENT..................................... CPSS Initiatives............................................................................................ Expenditure on Security Printing and Distribution ..................................................................... Balance Sheet............................................................................................... Indigenisation of Paper.......... Initiatives for Improved Communication............................................................... Significant Accounting Policies and Notes to the Accounts for the Year 2010-11................................................................................................................................................... Coins in Circulation........... Clean Note Policy........................ IX.............. Income............................ Currency Operations ........................ Expenditure ................................................. Banknotes in Circulation...................................... Information Technology Infrastructure............................ Human Resource Development Initiatives............................................................ THE RESERVE BANK’S ACCOUNTS FOR 2010-11 ................................................. Ink and other Raw Materials for Production of Banknotes .......................................................... PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY ..................................... Policy Initiatives..................................................... 114 114 117 122 122 122 123 123 Counterfeit Banknotes ........................................................................................................... CURRENCY MANAGEMENT..................................................................................................................... Policy Initiatives.................................... ii 143 150 150 151 153 160 ......... Information Technology Applications ............................................................................................................................................................... Oversight of Payment Systems in India................................................. X.. 124 126 126 126 127 127 129 131 133 133 134 136 137 137 140 142 Initiatives in Organisation Management ................................................................ GOVERNANCE.............................. Initiatives for Improved Governance.......................... Information Technology..................... XI....................................................................................................................................... VIII....... Debt Management of State Governments .................................................................................................................

................................................ 2............................... 4.......... INDEXOFAPPENDIXTABLES 1........................................................................................1 II................... India's External Debt (As at end-March).......................................................................................... India's Foreign Exchange Reserves......... 164 166 Annex II : Visits of Foreign Delegations to the Reserve Bank of India during July 01.......... 15...................................... Key Fiscal Indicators..... Procurement................................. 17......... 3................. Annex I : List of Speeches by Governor and Deputy Governors: April 2010 to August 2011 ...... Transmission of Global Commodity Price Shocks to Domestic Inflation .................................................................................................. Gross Domestic Saving and Investment........................................ iii 34 .............................................................................. Capital Market ... 20...... 14........5 Towards Better Price Statistics............ 11........................................ 168 171 172 173 174 175 176 177 178 179 180 181 182 183 184 185 186 187 188 189 190 17 21 30 32 II...................................................................... Turnover in Indian Derivatives Market................................................ 10. Budgetary Operations of the State Governments...................................................... Off-Take and Stocks of Foodgrains................Primary and Secondary .....3 II.................................................... Sectoral Deployment of Gross Bank Credit ............................... Macroeconomic and Financial Indicators ......... 12................................... India's Exports and Imports..... 9................................. 21................ BOXES II........... India's Overall Balance of Payments ............................................ Financial Saving of the Household Sector (Gross)...................4 Would Firming Oil Prices Cringe Growth?............................................................. 7......... 8............................................................. 19.............2 II....................................................... Growth Rates and Sectoral Composition of Real Gross Domestic Product ...CONTENTS Page No.... 18.............. 2010 to June 30......................................................... 5........................................ 13. 6................................................................ Indices of Real Effective Exchange Rate (REER) and Nominal Effective Exchange Rate (NEER) of the Indian Rupee ................... Variations in Money Stock.............................................................................................. Foreign Direct Investment Flows to India: Country-wise and Industry-wise.................... Variations in Reserve Money .......................................................... Growth Inflation Trade-off and Threshold Inflation................................ Agricultural Production ............ Trends in Index of Industrial Production .......... 2011 . Variations in Index Numbers of Wholesale Prices ....................... 16................................... Food Management – What Needs to Improve? .

.............................CONTENTS Page No........................ Changes in Operating Procedure of Monetary Policy ........2 Short-run Shocks to Money Velocity and the Behaviour of Money Growth............................2 IV..... Procedure for Dealing with Counterfeit Currency ..........................................10 II...1 IX. II......................................... Initiatives taken by the Reserve Bank to migrate towards the Basel III norms ................................... Developments in RBI‘s role as Banker to Government.2 NDF Market and its Implication for the Domestic Financial Markets......................... X...........................7 II........... Credit Cycle and Economic Growth .................................................................................................... 39 48 50 51 51 55 57 59 60 63 67 69 70 73 77 84 88 94 95 97 98 99 104 109 112 118 125 132 134 135 138 V...Is the Financial System still Bank Dominant? ........ Interest Rate Sensitivity of Capital Flows to India ..................2 Knowledge Initiative ..............................1 VIII....................9 II..... iv 144 ......................... Impact of Financial Market Developments on Financial Soundness Indicators of the Banking System ......... IT Vision Document: 2011-2017 ...................... Financial Derivatives in India ....... Committee on the MFI Sector (Malegam Committee) .....................1 Governance Framework in the Reserve Bank . VI..... Recommendations of Committee on the Comprehensive Review of the NSSF ..................1 III............... Developments related to FSDC and its Sub-Committee........................... Has Increasing Globalisation Limited the Effectiveness of National Policies in India? India‘s Threshold level of Sustainable Current Account Deficit .......................................2 VI....................................................... 38 II.................................... X....3 VI.....................................................17 II.......... Fiscal Indicators in a Rule-based Framework: Cross-country Survey....... Interdependencies in Payment Systems ...........................................8 II.................................... Equilibrium Exchange Rate..............3 Regulatory Framework for Core Investment Companies (CICs)......... VI.......................... V......... Revenue and Expenditure Reforms – Improving the Fiscal Environment for Robust and Inclusive Growth ........... Monetary Policy Transmission after the Switchover to Base Rate ...14 II.13 II........11 II.16 II................. VI....................................Current Status ..............................4 Financial Stability Board (FSB)................................ Fiscal Multiplier: A Cross-Country Experience...................................... Information Technology as a Vehicle for Data Dissemination .................... Financial Inclusion and Inclusive Growth: What the Empirical Evidence Suggests?............6 Determinants of Currency Demand – What Caused the Shift in Trend? ........15 II...............5 Expert Committee on Licensing of New Urban Cooperative Banks ..12 II...........1 Guidelines on Credit Default Swaps (CDS) for Corporate Bonds ..............................19 III........................... Trends in Non-Bank Financing..................................1 IV............................................... Corporate and Household Leverage.......................................................6 VII........................................ Infrastructure Financing.................1 VI..18 II..................1 IX..2 IX................................................

............... Flow of Financial Resources to the Commercial Sector . 35 36 36 37 37 37 40 41 41 42 43 44 Variations in M3 in ` crore and per cent share of Major Components of M3 in the Variation ...............17 II.............................................................................................CONTENTS Page No..........................9 II........ Trends in GDP Growth and Inflation.......................................................................................... Household Financial Savings ..........................................................................................22 II.................6 II...... 2010-11 Yield Differential – State-wise ..................................31 II.....................................30 II.......... Important Sources of Variation in Reserve Money.......................................7 II......... Trends in Wholesale Price Inflation ................................ II...........................................3 II..........4 II................................................ Growth in Infrastructure Industries .....................................24 II.................................. Comparative Yield: India and the World ...........15 II.......... CPI and WPI Inflation (Y-o-Y).....................................................20 II...................................... per cent) ..........28 Growth in Reserve Money ..................................................... Global and Domestic Fuel Inflation (Y-o-Y) ..............................16 II............................. Movement in Government Securities Yield Curve..................................................................................................................... Manufactured Products Inflation...................................................................................27 II..................................25 II.....................................................18 II.......................................................... Expenditure Side of GDP....................... 26 27 27 28 28 29 29 31 31 II.................... 16 16 18 19 19 20 22 22 23 23 24 24 24 25 II.... Trends in Food Inflation ............................................... II.................................................................5 II....................... Growth in IIP (Y-o-Y) .....11 II.................................................................. Monsoon and Agriculture........... Growth Trend in Cargo Movements.............. Indicators of Global Financial Market Developments................................................................................................................................. Growth in services (excluding community..........................32 II.............................................................................. social and personal services) ..............................................35 Share of Various Sub-sectors in Incremental Industrial Credit Flow.33 II.................................................................. Transmission of Policy Rates to Financial Markets................................. Components of Aggregate Demand and Related Industry Growth Trends .......1 II....................................................19 II. v ....................13 II.......................10 II.................. Industrial Growth ................34 II........................14 Real GDP Growth ........ Growth in Services Sector GDP................. Contribution to Inflation: Major Groups .............................................21 II...........................................................26 II...... International Commodity Prices ...................23 Changing Weighted Contributions to Increase in WPI................... CHARTS II............................. Money and Deposit Growth ................... Liquidity Management Operations......................................................8 II......... Aggregate Deposits and Bank Credit of SCBs ......... Saving and Investment (Per cent of GDP at current market prices) ...................................2 II..........................29 Non-food Credit Growth (Y-o-Y..................12 II...................................

.........46 II.................................................. 64 65 66 66 68 68 68 68 70 II....3 IV...........................................................................................................................................36 II. Priority Sector Advances.................................37 II..................................................................................................................... Cash Balance of the Central Government ................ Industry-wise FDI Flows ..39 II............................... vi ................................ Activity in Financial Derivatives Market .................. Cost of Security Printing .............49 II....... 2008................................................................................................3 IV................................................................51 II............................... India‘s External Trade ..............................................38 II............ Country-wise FDI Inflows........... Trends in Major Components of Capital Flows (Net) ......................................................................52 II.............................1 VII..........2 III........................ Disbursements under SACP by Public Sector Banks ................................. Key Global Indicators..............................................................2 IV..................5 Credit to MSE Sector by SCBs ............................. Volatility in the Indian Financial Markets...................... Recovery of Direct Agricultural Advances ..... Movement in Housing Prices and Transactions ....................48 II.................................................................................1 VIII.... Key Deficit Indicators .. 75 75 79 81 82 82 82 83 Compensation of lending institutions under Agricultural Debt Waiver and Debt Relief Scheme............................... Performance of India's Invisibles ........................... Soundness Indicators on SCBs ...55 III.............. IV.............................................................. Movement in Equity Markets......................................1 IV.....................54 Year-on-Year Export Growth of India vis-a-vis AEs and EMEs ............................................44 II...................................................... 71 78 78 100 117 126 130 146 X......4 Monetary Policy Reviews ....................................................................40 II...................................................................... Exports and Imports of Major Commodities ............................................45 Activities in Domestic Financial Markets....... III..............42 II..........CONTENTS Page No....1 III...................... Liquidity Management Measures taken by the Reserve Bank in 2010-11 .............................................43 II....................53 II........................................................41 II...................... Exchange Rate and Forward Premia .................................................................... 46 47 47 49 49 50 53 54 61 64 II... Trends in the Major Components of Balance of Payments...1 IX..... II................................. Subsidies of Central Government ...........................................................................................47 II.......... Share of Paper Based Vs Electronic Transaction...50 II...... Exchange Rate flexibility in India ..................................................................................................1 External Debt Indicators...................................................... Outstandings under LAF and GoI Balance ..................................................1 Total Staff Strength of the Reserve Bank ............2 VI........................................ Repo (+)/Reverse Repo (-) under LAF ........................... TEXTTABLES III................................................................................................1 Movements in Key Policy Rates and Reserve Requirements in India ............................................................................. Movements of Indian Rupee against US Dollar and Euro.....................

..... Trends in Gross Income........... X...........................................................................................................................................2 XI......................... Coins in Circulation ........................................................7 Balances in Currency and Gold Revaluation Account (CGRA)...............................3 XI............. VII........... of Days States Availed of Special/Normal WMA and OD.......................................................................................Maturity Pattern .. Earnings from Foreign Sources.....................1 Investments of the State Governments/UT........... Currency Chests and Small Coin Depots... Disposal of Soiled Notes and Supply of Fresh Banknotes ......2 Number of Officers Trained in External Training Institutions in India and Abroad .....6 Reserve Bank‘s Office-wise Strength of Staff.......1 XI...................................................... VII..................... XI.................Programmes Conducted.............6 Yield on State Government Securities .............................................. Earnings from Domestic Sources .... XI....5 Central Government‘s Market Loans ..........................1 Reserve Bank Training Establishments ....Annual Turnover ................................... Foreign Exchange Reserves .......................................................................8 WMA/OD of State Governments (Average monthly outstanding).............................................4 VIII...6 Gross Income ......... Expenditure and Net Disposable Income..........................................................................1 VIII........... XI.....................................4 XI...........................5 XI.3 VIII...7 VII.........................11 Balances in Contingency Reserve and Asset Development Reserve ......................................................................3 VII............................ X...................................A Profile ........................................................... Indent and Supply of Banknotes (April –March) ......................................................7 IX........................................................ Indent and Supply of Coins ................................................ Outstanding Foreign Currency and Domestic Assets........ Contingency and Asset Development Reserves and Surplus Transfer to the Government .... Exchange Equalisation Account (EEA) and Investment Revaluation Account (IRA) ............ No...... 120 122 123 123 123 124 124 125 128 142 143 146 147 147 148 151 151 152 152 153 153 155 156 156 157 157 X....................................................................................................3 Recruitment by the Reserve Bank – 2010 . Payment System Indicators ............... X........... Counterfeit Notes Detected ......... States‘ Market Borrowings..1 Select Financial Indicators......6 VIII............................................................ Banknotes in Circulation ............ Expenditure .................5 VIII..............................4 VII.........CONTENTS Page No..........................................2 VII..................................................................1 Gross and Net Market Borrowings of the Central Government .......................................................................................................................9 XI... Investments in Shares of Subsidiaries/Associate Institutions ................4 Staff Strength of the Reserve Bank ................................... VII.9 VIII.................. VII.................................................................................................................... vii ............................................ Issuance of GoI Dated Securities .......5 Category-wise Staff Strength .. 101 114 115 115 117 117 119 119 120 Residual Maturity Profile of Outstanding State Development Loans and Power Bonds (as at end-March 2011)....................................................... VII............10 XI................. X..................... VI.........2 VIII........................... X..........................................8 XI...............................

AEs ALM AMA AML ASEAN Advanced Access Content System Authorised Dealer Asian Development Bank Advance Estimates Advanced Economies Assets Liability Management Advance Measurement Approach Anti Money Laundering Association of Southeast Asian Nations Associated Chambers of Commerce and Industry of India Auction Treasury Bills Automated Teller Machine CDR BC BCBS BCP BCSBI Business Correspondent Basel Committee on Banking Supervision Business Continuity Planning Banking Codes and Standards Board of India Budget Estimates Board for Financial Supervision Business Intelligence Board for Industrial and Financial Reconstruction Bank for International Settlements Banking Ombudsman Below Poverty Line Benchmark Prime Lending Rate Basis Points Board of Payment and Settlement System Bharatiya Reserve Bank Note Mudran Private Limited Bombay Stock Exchange Broadband Wireless Access Current Account Balance Commission for Agricultural Costs and Prices Current Account Deficit Centre for Advanced Financial Learning CPSUs CRA CRAR CRCS CRM CPIO CPIOs CPSS CPI CPI-IW CP CPADS Commercial Paper Centralised Public Account Department Systems Consumer Price Index Consumer Price Index for Industrial Workers Chief Public Information Officer Central Public Information Officers Committee on Payment and Settlement Systems Central Public Sector Undertakings Credit Rating Agencies Capital to Risk-weighted Assets Ratio Central Registrar of Co-operative Societies Customer Relationship Management CDs CDS CGA CIC CII CIP CMBs CODs CoR Certificates of Deposit Credit Default Swap Controller General of Accounts Core Investment Company Confederation of Indian Industry Central Issue Price Cash Management Bills Central Office Department Certificate of Registration Corporate Debt Restructuring CBRC CBS CCBs CCIL CCP CCs CDBS CAS CBLO CAFRAL Centre for Advanced Financial Research and Learning Central Account Section Collateralized Borrowing and Lending Obligation China Banking Regulatory Commission Core Banking Solutions Central Cooperative Banks Clearing Corporation of India Ltd. Central Counter Parties Currency Chests Currency Disintegration and Briquetting System ASSOCHAM ATBs ATM - BE BFS BI BIFR - BIS BO BPL BPLR bps BPSS BRBNMPL - BSE BWA CAB CACP - CAD CAFL - viii .E.LIST OF ABBREVIATIONS AACS AD ADB A.

LIST OF ABBREVIATIONS CRR CSF CSO CTS CVPS Cash Reserve Ratio Consolidated Sinking Fund Central Statistics Office Cheque Truncation System Currency Verification and Processing System District Central Co-operative Banks Department of Economic and Policy Research Duration Gap Analysis Directorate General of Commercial Intelligence and Statistics Deposit Insurance and Credit Guarantee Corporation Deposit Insurance Fund Department of Information Technology Disaster Recovery Dispute Resolution Mechanism Department of Statistics and Information Management Decision Support Systems Direct Tax Code Demand and Time Liabilities Dynamic Working Model Electronic Benefit Transfer External Commercial Borrowings Express Cheque Clearing System Electronic Clearing Services Enterprise knowledge Portal Emerging Market and Developing Economies EMEs EMS ERER ETL FAO FC FCI Emerging Market Economies Estate Management System Equilibrium Real Exchange Rate Extract Transform and Load Food and Agriculture Organization Finance Commission Food Corporation of India GFCF GFD GoI FRBs FRLs FSB FSDC FSF FST GCC GCF GDP GDS GFCE FMC FMD FMI FPS FRAs FRBM FLCCs FITF FII FIIs FIMMDA Financial Inclusion Technology Fund Financial Inclusion Index Foreign Institutional Investors Fixed Income Money Market and Derivatives Association of India Financial Literacy and Credit Counseling Centres Forwards Markets Commission Financial Market Department Financial Market Infrastructures Fair Price Shops Forward Rate Agreements Fiscal Responsibility and Budget Management Floating Rate Bonds Fiscal Responsibility Legislations Financial Stability Board Fiscal Stability and Development Council Financial Stability Forum Financial Sector Technology General Purpose Credit Cards FDI FEMA FI FICCI FCNR(B) FCMD Financial Conglomerates Monitoring Division Foreign Currency Non-Resident Accounts (Banks) Foreign Direct Investment Foreign Exchange Management Act Financial Institutions Federation of Indian Chambers of Commerce & Industry Financial Inclusion Fund DCCBs DEPR - FIF DGA DGCI&S - - DICGC DIF DIT DR DRM DSIM - DSS DTC DTL DWM EBT ECB ECCS ECS EKP EMDEs - Gross Capital Formation Gross Domestic Product Gross Domestic Savings Government Final Consumption Expenditure Gross Fixed Capital Formation Gross Fiscal Deficit Government of India ix .

LIST OF ABBREVIATIONS GPS GRF G-sec GST HLCCFM Global Positioning System Guarantee Redemption Fund Government Securities Goods and Services Tax High Level Coordination Committee on Financial Markets Held to Maturity International Association of Deposit Insurance Integrated Accounting System Indian Banks Association Indian Clearing Corporation Limited Incremental Capital Output Ratio Information and Communication Technology Institute for Development and Research in Banking Technology Integrated Establishment System Infrastructure Finance Companies International Financial Reporting Standards Inter-bank Funds Transfer Processor Indira Gandhi Institute of Development Research Indian Institute of Bank Management IIBM IIFCL IIM IIP IIT IMD IMF INFINET IOSCO India Infrastructure Finance Company Ltd. Indian Institute of Management Index of Industrial Production Indian Institute of Technology India Meteorological Department International Monetary Fund Indian Financial Network International Organisation of Securities Commissions Irrevocable Payment Commitments IPCs IRDA Insurance Regulatory and Development Authority Interest Rate Futures IRF IRS Interest Rate Swaps IT ITBs ITeS JLG JV/WOS KCCs KVP KYC LABs LAF LAN LC LCR LTV M3 MCX MCX-SX MENA MFIs MFs MIBOR MICR MIS MMS MoF MoU MPLS MQRs MSE MSF MSME MSP MSS MURI ISMS ISO Information Security Management System International Organisation for Standardisation Information Technology Intermediate Treasury Bills Information Technology enable Services Joint Liability Group Joint Ventures/ Wholly Owned Subsidiaries Kisan Credit Cards Kisan Vikas Patra Know Your Customer Local Area Banks Liquidity Adjustment Facility Local Area Network Letter of Credit Liquidity Coverage Ratio Loan to Value Ratio Broad Money Multi Commodity Exchange MCX Stock Exchange Middle East and North Africa Micro-Finance Institutions Mutual Funds Mumbai Inter-bank Offered Rate Magnetic Ink Character Recognition Management Information System Mail Messaging Solution Ministry of Finance Memorandum of Understanding Multi Protocol Label Switching Mid Quarter Reviews Micro and Small Enterprises Marginal Standing Facility Micro. Small and Medium Enterprises Minimum Support Prices Market Stabilisation Scheme Minimum Unemployment Rate of Inflation HTM IADI - IAS IBA ICCL ICOR ICT - IDRBT IES IFCs IFRS - IFTP IGIDR - x .

E.LIST OF ABBREVIATIONS NAB NABARD New Agreements to Borrow National Bank for Agriculture and Rural Development Non-Accelerating Inflation Rate of Unemployment National Association of Software and Services Company Non-Banking Financial Companies Nutrient Based Subsidy Net Capital Adequacy Framework Non-Convertible Debenture Non-Deliverable Forwards Net Demand and Time Liabilities National Electronic Clearing Services PDS NEFT NEL NFA NFSB NHB NIBM NIM NOC NOF NPAs NPS NR(E)RA NREGA National Electronic Fund Transfer Net External Liabilities Net Foreign Currency Assets National Food Security Bill National Housing Bank National Institute of Bank Management Net Interest Margin No Objection Certificate Net Owned Fund Non-Performing Assets New Pension Scheme Non-Resident (External) Rupee Account National Rural Employment Guarantee Act PI PIOs PNs POS PPP PSS Q.Negotiated Dealing System NECS - NAIRU NASSCOM NBFCs NBS NCAF NCD NDF NDTL - NSE NSFR NSM NSSF NSSO OBCs - xi . QIS RBI RBSC RCCP NRIs NSC NSCCL Non Resident Indians National Savings Certificate National Security Clearing Co-operation Limited National Stock Exchange Net Stable Funding Ratio Note Sorting Machines National Small Savings Fund National Sample Survey Office Other Backward Classes RCS RD RE RECS REER RIA RIDF RNBCs ROs PFCE PGPBF Public Distribution System Private Final Consumption Expenditure Post Graduate Programme in Banking and Finance Participant Interface Persons of Indian Origin Participatory Notes Points of Sale Public-Private Partnership Payment and Settlement System Quick Estimates Quantitative Impact Study Reserve Bank of India Reserve Bank Staff College Recommendations for Central Counterparties Registrar of Co-operative Societies Revenue Deficit Revised Estimates Regional Electronic Clearing Service Real Effective Exchange Rate Right to Information Act Rural Infrastructure Development Fund Residuary Non-Banking Companies Regional Offices OD OIS OLS OMO ORFS OTC OTS PACS PAD PAR PCR PDO-NDS Over Draft Overnight Index Swap Ordinary Least Square Open Market Operation Online Return Filing System Over-the-Counter One Time Settlement Primary Agricultural Credit Societies Public Account Department Performance Appraisal Reports Provisional Coverage Ratio Public Debt Office.

LIST OF ABBREVIATIONS RoA RoE RR RRBs RSSS Return on Assets Return on Equity Revenue Rules Regional Rural Banks Recommendations for Securities Settlement Systems RTGS RTI SACP SCBs SCEPR Real Time Gross Settlement Right to Information Special Agricultural Credit Plan Scheduled Commercial Banks Steering Committee on Economic and Policy Research SCs SCSS SDL SEBI SEZ SGL SHG SIDBI SIFI Scheduled Castes Senior Citizens' Saving Scheme State Development Loan Securities and Exchange Board of India Special Economic Zone Subsidiary General Loan Self-Help Group Small Industries Development Bank of India Systemically Important Financial Institutions SLAF SLBC SLR SMEs SPMCIL Second Liquidity Adjustment Facility State Level Bankers Committees Statutory Liquidity Ratio Small and Medium Enterprises Security Printing and Minting Corporation of India SPVs Special Purpose Vehicles STC StCBs STCRC STOs STs TAC TAFCUBs TAG T-Bills TGA UCBs USE UTs VAR VAT VECM VGF VVVF WMA WPI XBRL XML Y-o-Y ZCBs ZCYC ZTCS ST CCS Short-term Rural Cooperative Credit Societies Short-term Trade Credit State Co-operative Banks Short-term Co-operative Rural Credit Sub Treasury Officers Scheduled Tribes Technical Advisory Committee Task Force for Cooperative Urban Banks Technical Advisory Group Treasury Bills Traditional Gap Analysis Urban Cooperative Banks United Stock Exchange Union Territories Vector Auto Regression Value Added Tax Vector Error Correction Mechanism Viability Gap Funding Variable Voltage Variable Frequency Ways and Means Advances Wholesale Price Index Extensible Business Reporting Language Extensive Mark Up Year on Year Zero Coupons Bonds Zero Coupon Yield Curve Zonal Training Centres This Report can also be accessed on Internet URL : www.in xii .rbi.org.

April-March. During the preceding year and a half. political factors and execution issues. As input costs rose and were passed on substantially amidst strong consumption demand.THE ANNUAL REPORT ON THE WORKING OF THE RESERVE BANK OF INDIA For the Year July 1. it is important to rebalance demand from private and government consumption to private and public investment.REVIEW AND PROSPECTS I ASSESSMENT AND PROSPECTS TheIndianeconomyreturnedtoahighgrowthpathin2010-11. leaving its sustainability in question. Second. reference to past years as also prospective periods.6percent. investment activity slowed in the second half of the year as business confidence was impacted by high commodity prices. with headlineinflationaveraging9. 1 .hardeninginterestratesandhighbase. However. while headline fiscal numbers improved during the year. has been made in this Report.inflationremainedstickyonthebackofnewpressures. wherever necessary. For the purpose of analysis and for providing proper perspective on policies.. First. inflation became generalised since December 2010. the Reserve Bank had to carefully calibrate its monetary policy as the global financial crisis and the consequent slowdown in the global growth adversely impacted India‘s real and financial economic conditions.1 The Indian economy rebounded strongly in 2010-11 from the moderation induced by global financial crisis.TheReserve Bank responded to the inflation challenge by raising repo rate seven times during the year by 25 basis points (bps) each. I.3 In response to the generalisation.couldmoderate growth in 2011-12. 2010 to June 30. First. This prompted the Reserve Bank to take aggressive policy actions during May-July 2011.challengesemergedastheyearprogressed.However. 2011* PART ONE: THE ECONOMY . I. The whole of 2010-11 was marked by inflation persistence. For medium-term growth sustainability. tight monetary policy.especiallyforagriculture. It also turned broad-based in the later part of the year with cost-push and demand-pull factors feeding into producer prices.2 Even as growth reverted to its trend. data on a number of variables are available on a financial year basis. while inflation is lowered on an enduring basis through better supply responses.stickyinflation. On the other hand. several macroeconomic factors posed new challenges in 2010-11. Where available. though global commodity prices appear to have plateaued. new challenges emerged. the data are analysed on the basis of the financial year. Despite these actions. Third. globaluncertainty. the Reserve Bank raised its policy rate – the repo rate – more aggressively in 2011-12. It hiked the rate by 50 bps in * While the Reserve Bank of India‘s accounting year is July-June. Both. the data have been updated beyond March 2011 based on information available till mid-August. Going ahead.e. and hence. fiscal and monetary policies worked in tandem to pull the Indian economy quickly and firmly out of the slowdown.thoughmonetarypolicywastightenedthroughtheyear. the headline inflation accelerated from the negative levels in mid-2009 to double digits during March-July of 2010. inflation is likely to be elevated in near term and fall only towards the later part of the year as monetary transmission works through further. I. inflation remained elevated due to both newer supply-side shocks and demand factors. the improvement was led by cyclical and one-off factors. Continued focus on development of infrastructure and agriculture technology through public policy would facilitate improved supply response. i.

With revenue deficit. with a sharp dip in the second half. where new unforeseen price pressures emerged. Finally. 2 . enabling a smoother adjustmentofthefinancialmarketstomonetarypolicy actions. also turned flat in 2010-11. internal and external to a firm. producers were able to pass on a large share of the input cost pressures reflecting strong demand.5 Inassessingthemacroeconomicperformance of 2010-11.investment cycle can be elongated by focusing on better execution of pipeline investment and improved governance at all levels. reflecting strong demand. Considering that investment intentions in the new projects declined significantly in the second half of 2010-11 on a sequential basis. even as overall GDP growth increased supported by strong private consumption demand. which accounted for 61 per cent of the price rise in this period. investment slowed down during the second half of 2010-11 and has shown no signs of improvement yet. as captured by phasing details of the projects sanctioned financial assistance. in an uncertain interest rate environment. The declining trend in inflation during first half of 2010-11 was disrupted by sharper-than-expected rise in global commodity prices and structural factors constraining the decline in food prices in spite of normal monsoon. maintaining corporate investment levels in 2011-12 could turn out to be difficult. accounting for about two-fifths of increase in WPI. Whydidinflationpersistandwasthispredictable? I. operational policy rate has been raised by 475 bps in less than 17 months since March 2010. With this. Drivers of inflation changed during 2010-11. I. Food products were the main drivers of price rise during April-July 2010. Was monetary tightening adequate and did it help fight inflation? I.intheshortrun. The hikes were in smaller but frequent doses as the frequency of scheduled policy decisions was increased to eight from four. when non-food primary products turned out to be the main drivers.ANNUAL REPORT May. fiscal space to support investment in the economy remains limited. Monetary transmission improved considerably in the latter half of 2010-11 after sustained tight liquidity prompted banks to raise deposit and lending rates. these price pressures spilled over to manufactured non-food products during December 2010-March 2011. Public investment in relation to the size of the economy declined during 2008-09 and 200910. Corporate fixed investment. This underscores the importance of focusing on quality of fiscal consolidation. An unforeseen spike in vegetable prices due to unseasonal rains followed the good monsoon. hikes of 325 bps occurred during 2010-11. some questions are central to the overall assessment as set out below. However. it remains to be seen how far the momentum in investment can be sustainedahead. It continued into 2011-12.7 Inflation became difficult to predict in face of this changing pattern.Assuch. Of this. 25 bps in June and again by 50 bps in July.4 Second. spike in vegetable prices with unseasonal rains post-monsoon and rising global commoditypricesthatresultedinsignificantcost-push and demand-pull pressures since December 2010. I. helping avert inflation gathering further momentum amidst high inflation expectations and persistence of pricing power of the producers. when the rate hikes began. which showed a seven fold jump during 2003-04 to 200910.8 Cumulative monetary tightening by raising operational policy rates by 475 bps since mid-March 2010 has been one of the sharpest around the world. Their share declined during AugustNovember. The magnitude of these rate hikes was small ASSESSMENT OF 2010-11 I. as inflation spilled over to the manufactured non-food products.6 The year 2010-11 was marked by strong inflationexhibitingpersistenceonthebackofelevated inflation expectations. despite some improvement during 2010-11 remaining above the levels that prevailed during 2004-05 to 2007-08. Meanwhile.

trend in tax collections did not corroborate the slowdown. I. I. this was a huge swing. Furthermore. raises concerns. The deceleration was much less if these volatile components were excluded from the growth. corporate profitability. Not only did the correction in revenue account reflect morethan-anticipated non-tax revenues from spectrum auctions.3 per cent in the previous year. Although the share of capital 3 .5 per cent and is likely to turn higher after factoring in the new base IIP in the GDP data revisions. before rate hikes could begin to gain traction. helping restrain inflationary pressures from spiraling up further. Compared with a GFD of 6. half of the year. Also. the supply-side price pressures spilled over to generalised inflation. monetary policy was constrained by the extraordinarily large stimulus given in the wake of global financial crisis.15 A qualitative assessment of fiscal correction during 2010-11.9 Policy choices toughened during the second Did the growth rebound of 2010-11 lose steam in the second half? I. exports and imports.As a result. The above trend growth in 2010-11 was supported by strong aggregate demand conditions primarily emerging from high private consumption.10 In face of a series of supply-side shocks. kept the overall growth momentum.4 per cent of GDP in 2009-10. liquidity conditions were already unusually tight following the unexpectedly large 3G/BWA spectrum auction revenues that resulted in large government cash balances with the Reserve Bank for a major part of 2010-11. I.Also. there has been a spillover of subsidy expenditure from the last quarter of 2010-11 to the current fiscal year.2 per cent in 2010-11 from 5.ASSESSMENT AND PROSPECTS as the nature of inflation was largely supply-driven for the larger part of the year.13 Overall growth in 2010-11 is currently estimated at 8. uncertain inferences on growth due to data quality prompted a cautious view. social and personal services‘ where policy-induced deceleration was visible as fiscal consolidation resumed.Centre‘s gross fiscal deficit (GFD) was 4. Large surplus liquidity needed to be siphoned out first. Services remained buoyant. Was the fiscal consolidation in 2010-11 temporary or permanent? I. I. related indicators such as credit expansion. I. even as the headline IIP growth numbers available then on the basis of old index (base: 1993-94) suggested a distinct deceleration.11 It is now clear that the growth did not lose momentum in the second half of 2010-11.The new IIPnumbers (base: 2004-05) released subsequently reinforced the RBI view that growth had not decelerated during the second half of 2010-11. monetary tightening helped to keep some check on the spillover effects and high inflation expectations. the rate and quantum channels of monetary transmission were weak in the first half. Banks started responding to monetary signals in the second half of the year by raising deposit and lending rates. Both.7 per cent of GDP against 5. IIP growth accelerated to 8. the hikes remained small in quantum as headline and core inflation were expected to trend down.14 Fiscal deficit ratios in 2010-11 turned out to bebetterthanenvisagedintheUnionbudget. Monetary policy was tightened further in face of persistence of high inflation. The consequent rise in farm incomes supported demand conditions and with linkages with industry and services. However. It grew at about the same pace in the second half as in the first half.5 per cent budgeted. except ‗community. Inflation had become generalised towards the later part of the year. However. The Reserve Bank assessed that this deceleration was exacerbated by few volatile components.12 Agricultural growth rebounded in the second half due to record Kharif crop on back of normal monsoon. however.

With adequate foreign exchange reserves. Also.6 per cent in 2010-11 from 2. I.17 Clearly. a more enduring fiscal consolidation strategy that focuses on expenditure compression by restrainingsubsidiesaswellasrevenueenhancement byimplementingDirectTaxesCode(DTC)andGoods and Services Tax (GST) needs to be put into place without any further delay.8 per cent a year ago. while the permanent component of fiscal consolidation was rather weak.3 per cent of GDP during 2010-11.9 per cent than 13. In particular. WhydidtheCADimproveandisthisimprovement sustainable? I. revenue buoyancy was supported by a cyclical upswing that led to above trend growth.Against this backdrop.18 The improvement in the current account gap is more sustainable than the fiscal gap.5percentcontributedlargelytolower deficits.ANNUAL REPORT expenditure in total expenditure increased in 201011 from 2009-10. I.8 per cent in 2009-10. banks proved to be largely resilient. Effective market discipline is not getting reestablished. Augmenting FDI further could bring about a better balancebetweendifferentcomponentsofcapitalflows and reduce the possibility of volatile currency movements and any pressure on reserves in the face of contagion risks.16 Improvedfiscalpositionhadalargetemporary componentarisingfromabusinesscycleupswingand one-off revenue gains. Going forward. Trade policy supporting exports through schemes such as Focus MarketScheme(FMS). should another round of contagion occur. Assurances that multilateral backstops have the capacity to facilitate an orderly deleveraging without triggering further fiscal or bank funding lack credibility. it is important to improve resilience of external account by pursuing policies that shift the composition of capital flows so as to reduce dependence on its volatile components. The Current Account Deficit (CAD) improved markedly in the second half of 2010-11 on back of a strong pick-up in exports from November 2010. in outstanding terms. it was marginally lower than the budget estimates. balance sheet risks still remain. However. Consequently. Not counting for the revenue proceeds of two main one-off items – spectrum auction and the disinvestment – the GFD/GDP ratio works out to be 6. the Central government‘s capital outlay (as ratio to GDP) as at end-March 2011 was lower at 12. I.21 A strong payment and settlement system architecture with central counterparties and Delivery versus Payment (DvP) is in place in India. So the one-off gains and higher growth in nominal GDP of 20 per cent against thebudgeted12. Diversification of trade in terms of composition as well as direction helped in achieving strong export performance.FocusProductScheme(FPS) and Duty Entitlement Passbook Scheme (DEPB) also helped. Since then regulators have taken several measures to strengthen regulation and supervision. increase transparency and reduce settlement risks for derivatives and other financial instruments. I. there couldbesomepressureonCADiftheglobaleconomy weakens significantly and affects exports. it is important to look at whether financial risks have been sufficiently mitigated in India. from a medium to long term perspective. capital outlay-GDP ratio fell short of the budgeted ratio in 2010-11 and is still significantly lower than that achieved during precrisis period. India remains capable of handling any pressures emanating from the external sector in the near term. However. This resulted in the improvement in headline deficit numbers. NBFCs and Mutual Funds came under some stress. Have financial markets mitigated risks postcrisis? I. 4 . The improvementcameaboutbycyclicalupswinginglobal trade and turnaround in invisibles.20 Financial markets across the world have witnessed significant deleveraging in the post-crisis period. While in the post-Lehman crisis.19 The CAD improved to 2.

25 Recent trends in asset quality. I. Such deterioration needs to be averted by quickly resolving the pricing and input supply issues. This 5 . However.demandrebalancingfromprivate and government consumption to private and public investment holds the key to meeting the macroeconomic challenges in 2011-12. Risks of asset quality deterioration in infrastructure sector exists. inflation remains an important macroeconomic challenge. under extreme shocks.24 A corollary to the above question is whether the financial system can withstand another wave of stress in the global markets. overall trends in non performing assets (NPAs) do not indicate any systemic vulnerability. Furthermore. fiscal and monetary space is limited for any counter-cyclical stimulus if global conditions deteriorate. However. it is important to shore up investment from the point of view of sustaining high growth over the medium term. the Capital to Risk (Weighted) Asset Ratio (CRAR) based on Basel II was 13. With weak supply response. efforts have been made to develop a vibrant interest rate futures (IRF) market to support long-term debt financing in India. The growth of derivatives as off-balance sheet items of Indian banks is also a source of risk. PROSPECTS FOR 2011-12 I. I.theReserveBankhasdecidedtoextend the period of short sale in central government securities from the existing five days to a maximum period of three months in order to provide a fillip to the IRF market and the term repo market. Though this was lower than 14. though private consumption may decelerate ahead responding to monetary transmission from higher interest rates. with deterioration observed in case of some major banks. with domination by a few banks.23 India continues to promote orderly development of the financial markets.86 per cent as at end-June 2011. I. At a system level. Both. Consumption demand has been strong so far.22 The OTC interest rate derivative market in India display a significant degree of concentration. Guidelines for 5-year and 2-year IRFs are being finalised in consultation with the Securities and Exchange Board of India (SEBI). Since the Indian financial system remains bank dominated. However. is a matter of concern. recent emergence of a deep and liquid Certificates of Deposit (CDs) market with significant secondary market trading could alleviate this issue. Based on unaudited results of these banks.19 per cent as at end-March 2011.27 There are risks that the twin deficits – fiscal and current account – could increase if the global economic problems deepen. In March 2011. it was well above the minimum requirement. Can Indian banks withstand financial market stress? I. Global uncertainties have increased markedly since the Standard & Poor‘s (S&P‘s)downgradedlong-termsovereigncreditrating of the US to AA+ from AAA on August 5.ASSESSMENT AND PROSPECTS Despite these measures there still remain areas of concern.26 The Indian economy needs to brace up for a difficult year from a macroeconomic perspective. the Reserve Bank permitted IRF trading in 91-day Treasury bills with cash settlement in rupees.35 per cent at end-March 2011 but still remains low. Asset quality of banks needs to be closely watched in the changing interest rate environment as the sticky loan portfolio of small and medium enterprises might rise.This is hindering trading in Forward Rate Agreements (FRAs) as also in swaps. A series of stress tests conducted by the Reserve Bank in respect of credit. liquidity and interest rate risks showed that banks remained reasonably resilient. In particular. However. I.52 per cent by endJune 2011 from 2. banks‘ ability to withstand stress is critical to overall financial stability. theGrossNPA(GNPA)ratioofscheduledcommercial banks increased marginally to 2.Assuch. some banks could face moderate liquidity problems and their profitability could be affected. The absence of a liquid 3month or 6-month funds market has led to the absence of a term benchmark curve. 2011.

it has helped register a 6. will depend upon the effect it will have on trade.4 per cent in the last quarter of 2010-11. Sowing up to August 12. (ii) firm commodity prices amidst inflationary pressures. the June IIP growth of 8. Fixed investment growth has slumped to 0. If global financial problems amplify and slows down global growth markedly. including those for the sovereigns. but is largely expected to keep its momentum. though the growth is likely to turn out to be less than last year on a high base. The growth of the services sector will be driven by the unfolding of the global and domestic economic situation. overall consumption demand has remained strong in spite of rising prices and interest rates. just 1 per cent below the Long Period Average. I. I. growth is expected to decelerate but remain close to the trend of about 8. capital flows and global commodity prices.28 The S&P action came at a time when there were increasing signs of growth slowing down in the major advanced economies. compared with 88 in the corresponding period last year. may moderate if the coal sector continues to underperform.ANNUAL REPORT followed a US deficit reduction plan of US$ 2.remain high and could adversely impact growth.CreditDefault Swap (CDS) spreads. The monsoon up to August 17. Currently. 2011 was 6 . have widened since the event resulting in amplification of the debt difficulties in the Euro zone region. Maharashtra and Andhra Pradesh may have small adverse impact. except in the case of some cereals. crop prospects remain good.32 On the positive side. The downside risks to the industrial growth in 2011-12 may arise from (i) falling business confidence in face of global uncertainties and political factors. Persistent inflationary pressures. global oil and commoditypriceseven. (iii) tightening of monetary conditions and (iv) weak supply response. A rainfall deficiency in Haryana. real demand has not suffered as wage I. resulting in infrastructure bottlenecks. with thermal power accounting for about 70 per cent of total power generation in India. Orissa and parts of North-East. On the whole.4 trillion over next 10 years as against earlier proposals for a sharperreductionofaboutUS$4trillion. However. Industrial growth ahead may derive support from domestic demand due to rising income of people from higher salaries and wages. it would impart a downward bias to the growthprojectionindicatedintheFirstQuarterReview of Monetary Policy 2011-12. Growth Outlook for 2011-12 I.31 The outlook for the industrial sector in 201112 remains uncertain with the downside risks outweighing the upside risks.8 per cent IIP growth in Q1 of 2011-12. rise in cost of capital due to monetary tightening and slow project execution are some of the factors that are weighing ongrowth. Though the acceleration is drivenbycapitalgoodsthatexhibitvolatileoutputfrom month to month. Growth prospects for the year 2011-12 seem to be relatively subdued compared to the previous year due to a number of unfavourable developments. The likely impact of these developments on the Indian economy. In spite of high inflation. going forward. The power sector growth in 2011-12.0 per cent in 2011-12. 2011 was marginally higher than in corresponding period of the previous year.8 per cent has bucked the trend of industrial growth entering a soft patch.Whiletheprospectforthefarmsectorlooks encouraging with the normal South-West monsoon so far.29 After above trend growth during 2010-11. Global uncertainties have increased. the prospects for agriculture at this juncture appear promising. industrial sector growth is likely to decelerate due to above mentioned factors. Private consumption may moderate if inflationary pressures persist. especially the US. RBI‘s overall foodgrainsproductionweightedrainfallindexwas101 till August 17. Though demand for some interest ratesensitive sectors has been impacted. in particular.aftersomecorrection.30 At the sectoral level. I. The core sector performance is lagging behind the overall economic activity. pulses and groundnut. 2011. rising input costs.

I. Inflation Outlook for 2011-12 I. there are major downside risks to growth during 2011-12 that may arise if (i) global financial conditions worsen. I. it is expected that the robustness of the services sector. real GDP growth is expected to moderate to around 8. This policy stance may keep the commodity prices elevated. favourable demographics and strong demand from rural/semiurban areas shielding services such as transport. the benefit of a moderate fall in global commodity prices on domestic price level would be limited. Global commodity prices currently remain far above their level in the previous year. the twin deficits require close monitoring. Outlook on the twin deficits for 2011-12 I. which may impose large costs of disinflation. I. the Fed has already indicated that it will pursue its near zero rate policy at least till mid-2013.37 On a year-on-year basis. especially with factors such as low product penetration. have weakened since the fourth week of July.35 Inflation is likely to remain high and moderate only towards the latter part of the year to about 7 per cent by March 2012. however. With global growth environment deteriorating. communication.34 On current reckoning. finance and insurance from a cyclical slowdown in the industrial sector. At the same time.ASSESSMENT AND PROSPECTS inflation. continues to remain uncertain. The outlook for external demand driven services.38 The high and persistent inflation over the last two years has brought to the fore the limitation in arresting inflation in absence of adequate supply response.36 Given the fiscal limitations and growing signs of weakness in the US. while private consumption may decelerate. there are dangers of accepting elevated inflation level as the new normal. which should have a salutary impact on domestic inflation. As such. It has also hinted at another dose of quantitative easing. I. Even so. Should the global recovery weaken ahead.Thepass-throughoftheriseinglobalcommodity prices till April 2011 has been incomplete. Fertiliser and electricity prices will also require an upward revision in view of sharp rise in input costs.33 There is a very strong structural dimension to service sector growth in India. given that global growth is weakening again. the decline has not been very significant. further increase in prices of administered oil products will become necessary to contain subsidies. (ii) global recovery weakens further. would continue to support the growth process. Doing so can un-anchor long term inflation expectations. monetary policy still has an important role to play in curbing the second round effects of supply-led inflation. especially in rural areas has outstripped commodity price inflation. or (iii) food and non-food commodity price inflation remain high. In face of moderating demand. In face of nominal rigidities and price stickiness.Ifglobaloilpricesstayatcurrent level. However.39 In the context of weakening global economy and the likelihood of some spillovers to the domestic economy during 2011-12. including crude oil.0 per cent in 201112 from 8. Incomplete passthrough of high global commodity prices and persistence of high inflation expectations amidst continuing food price pressures may keep inflation elevatedinnearterm. expenditure-switching from government consumption expenditures to public investments would help. moderation is expected as investment may remain soft in the near term. especially in the minerals and oil space. inflation may remain stubborn in the near term and start falling sometimes in the third quarter of 2011-12.5 per cent in 2010-11. The hotel and restaurant segment is expected to register robust growth during 2011-12 driven by domestic demand. which can then lift inflation further from the present level. From the demand side. commodity prices may decline further. global commodity prices. If the global crisis deepens and domestic economy slows down beyond what is 7 . This can eventually lead to a hard landing. I. which accounts for more than 65 per cent of GDP. However.

44 On the other hand.fiscal and current account deficits could attract fresh investments. At the same time. slowing pace of global recovery and the sovereign debt problems in the Euro area. nevertheless.7-3.asalsoothermacro-economic parameters. if global crisis turns deep. I. Prospects for external sector for 2011-12 remain somewhat uncertain due toglobaluncertaintiesarisingfromthefinancialturmoil following the sovereign rating downgrade of the US. its attractiveness as an investment destination may increase. I.Therefore. capital flows to India could increase in spells as relative returns in EMEs could now be still higher. However. had projected software exports in dollar terms to grow by 16-18 per cent in 2011-12. the fiscal space to support any counter-cyclical policies is more limitedthanwhatexistedatthetimeoftheglobalcrisis of 2008. the impact of growthslowdownintheadvancedeconomiesonIndia could partly be mitigated by continued diversification of exports. With India‘s growth prospects still broadly intact. the impact is more difficult to gauge. the resultant revenue erosion could magnify the slippage.thepossibilityoflumpycapital inflows cannot be ruled out. the resultantbenefititmayhaveinloweringinflation. in the baseline scenario.40 On the other hand. On current assessment. including India to cover up losses elsewhere. with the US and Europe constituting the bulk of Indian software exports. (ii) reasonably good guidance for Q2. India‘s exports have diversified notably in composition and destination in recent years.ANNUAL REPORT currently anticipated. 8 . I. Europe and MENA countries. As such. For the current year.Itcouldpotentiallyerode the fiscal consolidation achieved in the previous year. the CAD would remain at a sustainable level in 201112. which serve as the chambers of commerce for the Indian IT and BPO companies. These could impinge on commodity prices and exchange rate movements. it can become perceptible with a lag if crisis assumes severe proportions impacting global growth prospects beyond current year. any downside impact would be marginal in the near term. As the Indian IT industry is inter-twined with the global economy. (iii) locked-in contracts this year and (iv) good corporate earnings and cash on balance sheet of the US firms in spite of sluggish growth. Interest differentials are likely to remain large and alluring to debt flows. capital flows are more likely to moderate as (i) foreign portfolio investors may sell equities in the EMEs. and (iii) domestic bonds could still remain less attractive if a slowdown impacts fiscal position adversely. If the economy slows down beyond what is currently anticipated. I. the fiscal deficit in 2011-12 is likely to overshoot the budgeted projections.43 As regards capital flows. Going forward.42 Services exports are also likely to expand due toIndia‘scomparativeadvantageinsoftwareservices. Capital flows could surge or diminish. These include (i) better-thanexpected dollar revenues by software firms in Q1 of 2011-12. National Association of Software and Services Companies (NASSCOM). Over the course.0 per cent of GDP. respond endogenously to exchange rate movements. capital flows could remain volatile and may depend on how tradeandcapitalflows. If these problems continue to simmer and do not turn into a full-blown crisis. turn material in case the slowdown in global growth is sharp and widespread. the fiscal slippage could turn outtobeanissueofconcern. some impact from a slowdown in advanced economies can be expected. I. depending upon the degree of risk aversion among several other factors. The impact could.41 The continuance of robust performance of exports recorded in 2010-11 and 2011-12 so far faces downside risks. In the short run. Several pointers suggest that a growth of broadly similar order could still be attained. if commodity prices soften and global crisis remains contained. Several investors view the valuation in the Indian stock market as attractive on an expected future earnings basis. the prospects are that services exports as well as private transfers are likely to remain stable despite problems in the US. (ii) risk aversion may raise the cost ofborrowingsfortheIndiancorporateandalsoimpact direct investments.EstimatesofsustainableCADsuggestathreshold of 2.

There are several challenges faced by the Indian economy that are constraining growth. These include those relating to education. better seeds. Finally. RESERVE BANK’s PERSPECTIVE ON THE MEDIUM-TERM CHALLENGES FOR THE INDIAN ECONOMY I. while imports have expanded 40 per cent. cold storage chains to manage supply-side shocks in perishable produce and market-based incentives to augment supply of non-cereal food items. growth sustainability over medium-term depends on addressing the structural bottlenecks facing the economy. International commodity prices remain a potential threat as global liquidity is still far too large due to monetary policy accommodation by advanced countries. as a large population cannot be subsidised in an import dependent item.The debt component of the capital inflows could rise with rising interest rate differential. A competition policy has been put in place andindustrialorganisationstructurescouldbestudied along with price information to stamp out anticompetitive practices and collusive behavior. The inclusion agenda can then be pursued on a sustainable basis without drag on inflation and the fiscal position. These include. complementary policies are put in place.47 What policy interventions can help to lower inflation and inflation expectations to acceptable levels? Monetary policy has an important role to play. the year 2011-12 appears to have begun well from the balance of payments front. Some of these are discussed below.48 Tackling food inflation also needs a strategy to break the inertial element arising from rising real wages leading to increases in the Minimum Support Price (MSP). where public policy interventions are needed as markets by themselves may not be able to do enough to remove the constraints. Some public policy interventions may be desirable in this regard. which in turn lead to higher food inflation that feeds back to higher wages with an element of indexation.As a result the size of the trade deficit in absolute terms during the first four months has remained largely unchanged from that in the corresponding period of the previous year. The prospects for FDI also appear bright as further policy initiatives are on the anvil. health. Free pricing of petroleum products can help. requires constant monitoring due to global uncertainties. If productivity improves. addressingthemiscentraltoraisingthepotentiallevel of growth in the Indian economy.49 Transmission of inflation from abroad has also been an important element in keeping inflation high in the recent years. Exports in dollar terms have risen 54 per cent yearon-year during April-July 2011. supply response would also depend on better management of water as also technical and institutional improvements in the farm sector and allied activities.realwagescanrisewithoutputtingpressure on prices. Land consolidation. but may find it difficult to deliver the objective unless I. technologies and supply chain to retail points all can contribute to lowering inflation and the inflation expectations that are formed adaptively. Rural wage programmes need to be linked with productivity. although likely to be manageable. However. improving land quality. 9 . However. I. pricing power in the manufacturing sector has macro as well as micro angles.ASSESSMENT AND PROSPECTS I. improved supply response for food. infrastructure and agriculture sectors.46 While the immediate challenge to sustaining high growth lies in bringing down inflation. harvesting. The Reserve Bank does not have a direct role in addressing most of these. higher storage capacity for grains. Fuel and food security would need to be given particular attention. the balance of payments during 2011-12.45 Overall. irrigation. energy. FDI to India in Q1 of 2011-12 has risen more than twice that in the corresponding period of the previous year. Lowering inflation and inflation expectations to acceptable levels I. Such behavior also adds to inflationary pressures and needs to be curbed. On the capital flows side. There is a need for environmentally sustainable solutions to manage energy security. Finally.

as per the Third Minor IrrigationCensus. seawater farming for crops that thrive in salt water in coastal areas and investment in research to promote water-efficient crops could facilitate in achieving long-term sustainability in agricultural production. especially in dryland regions. integrated pest management (IPM). It should focus on providing favourable soil conditions by managing soil organic matter and enhancing soil biological activity. Rainfed areas contribute more than 70 per cent of the pulses and oilseeds production as well as a substantial part of horticulture and animal husbandry produce.ANNUAL REPORT Harnessing technology productivity enhancements for agriculture I. especially drought-resistant varieties can also help in improving farm output.bulkofwhicharewells .51 Importantly. better cultivars and optimal water management can go a long way to improve farm productivity on a sustainable basis. Large scale introduction of Precision Farming Techniques involving GIS and Remote Sensing. substantial productivity enhancements are possible on the farm sector through better adoption of technology aided by incentives and institutional improvement. shallow and deep tube-wells . using water-saving methods of cultivation like System of Rice Intensification (SRI) methodology for paddy and sugarcane. This has been the case in India also as seen in the shift from canal irrigation in the 1970s to ground water in the 1990s. Better adoption of modern technologies in the area of biotechnology. I. Emphasis on steps like water harvesting. combined with local-specific fertigation practices.50 India is a knowledge economy with a strong technology base.54 In order to step up agriculture growth from a trend of around 3 per cent per annum to 4 per cent 10 . Natural and incidental recharge based on factors like rainfall. Resource conservation technologies that improve input use efficiency. and the consumptive nature of water use in agriculture. seed-supply chains and systems. there is scope for significantly increasing agricultural production. I. policy for agricultural reforms has to take into account the need to evolve programmes for recharge and management of the groundwater reserves of the country. and institutional reforms such as creation of infrastructure and laws for digitising land records in the country through appropriate legal framework would help. ground water is preferred to surface due to easier accessibility in terms of place. I. I.52 Rainfed agriculture continues to play an importantroleinIndia. so that extraction is limited only to what we can annually recharge.75-80percentoftheirrigation potentialisundergroundwater. and exploiting complementarities in the use of genetic resources by combining these in farming systems with a high degree of genetic diversity. cost-effective and ecofriendly integrated pest management technologies. For instance. Since irrigation potential in India is not fully used. Notwithstanding scarcity.aneedforacomprehensiveirrigation/water management strategy as water is probably going to bethemostscarceresourceinthetwenty-firstcentury. cultivationofhighvalueandlowwaterrequiringcrops. reducing excessive reliance on hydrocarbon inputs.2005. Currently. it has not fully reaped the dividends from technology. such as pulses and oilseeds in water scarce areas. Yet. soil characteristics and geomorphology cannot sustain groundwater given the rate at which it is being consumed. Focus on better water harvesting. time and quantity. Worldwide. and conserve and protect natural resources need to be aggressively promoted. regionally adapted varieties and hybrids.and mainly in private hands. There is. The decline in availability of land for foodgrain production due to increasing urbanisation and diversion of bio-fuels makes it important that technology is harnessed for improving yields. therefore.53 Water management is particularly important.dugwells. the approach to technology advancement has to be eco-friendly. minimum or zero tillage.contributingaround55percent of the cropped area and 45 per cent of the total agricultural output. improving soil and water conservation measures. competing uses of water. rotation groups to manage soil fertility and pests. genomic tools.

Yields need to be improved further by biochemical elementsoftechnologythatembodyirrigation. fertiliser subsidies in the past. partly because price-factors have been emphasised more in relation to non-price factors. Maintaining right balance between consumption and investment I. rebalancing took place away from government consumption to private consumption. taking into account land and climatic conditions. In the highgrowth phase. have not only distorted the optimal use of fertilisers. In 2010-11. government consumption rose on the back of large fiscal stimulus. on the other hand. There is now a need to maintain long-term balance between consumption and investment by rebalancing demand from consumption to investment. Price incentives in the form of higher MSPs. the investment rate of 40. The public sector turned from being a net dis-saver to a savings generating sector largely due to fiscal consolidation under the Fiscal Responsibility and Budget Management (FRBM) Act regime. where advanced economies may go through a prolongedscenarioofslowgrowth. This strategy is essential for improving crop output. I. Optimal input use. The CAD that finances the saving-investment gap has averaged less than 1 per cent of GDP over past two decades. rose faster. The Planning Commission at the start of the process for formulating the Twelfth Five Year Plan (2012-17) envisaged a growth of 9. After the global financial crisis.haveitslimitation in generating aggregate supply response for agriculture. but investment declined sharply in the second half of the year. while necessarytostabilizefarmincomes. Overall investment requirements and the need for continued sustainability on current account. This underscores.Forthis.57 From the year 2000-01 onwards. there is a rationale for extending the Nutrient Based Subsidy (NBS) scheme in scope. Investment. thus 11 .thismaybedifficult target to pursue. In the changed scenario. as the possibilities of further expansion in area under cultivation is limited.7 per cent in 2009-10.ASSESSMENT AND PROSPECTS would require a judicious use of technology.butfromarather low base. Increased yield potential of new varieties can yield better results on optimal use of biochemicals and consumptive use ofwaterthattakeintoaccountsoilmoistureconditions of the land. non-price factors benefit both small and large farmers and output response is greater than through price incentives. gross domestic savings increased mainly on account of rise in private corporate savings and improved performance of public sector savings even as household sector savings remained almost stable as per cent of GDP. leveragedconsumptiondidincrease.thereisaneedtostepupsavings in the economy. Even assuming a higher a CAD/GDP ratio of 2 per cent.genetic seeds.55 The agriculture performance appears to have fallen below its potential. prior to the global financial crisis. I. but have also led to suboptimal investments in fertiliser production as the subsidy was not pegged to nutrients earlier and benefitted inefficient old plants more than the efficient new plants. Private corporate savings improved in line with efficiency and profitability. institutional reforms including those relating to land. chemical fertilisers and pesticides. the importance of augmenting saving as well as bringing about technologicalandinstitutionalimprovementstorealize higher growth through higher investments and lower ICOR. While price incentives may still work for large farmers who have large marketed surplus.56 India is amongst the fast-growing emerging markets that has the right balance between consumption and investment in aggregate demand.0 per cent growth. incentives for supply response and better input use.The policies focused at price factors alone have led to distortions. gross domestic saving (GDS) rate need to be raised by about 5 percentage points from 33. It does not face the problems of over-investment or from excessive leveraged consumption. In order to achieve even a 9.5 per cent would be required if ICOR remains unchanged from 4. can improve yields significantly.As such.5 realised during the Eleventh Plan.5 per cent.0-9. For instance.

As the Ninth Round of auctioning exploration blocks under the New Exploration Licensing Policy (NELP IX) has not received adequate response. As a large amount of bank finance is locked in the infrastructure sector. public and private sectors. I.Indiafacesalargeenergy deficit that can eventually constrain the growth. The banking system. coal block auctions could be front-loaded. I. both in relation to other major countries and its own growing demand has been a key factor affecting the overall productivity of investments.58 Amidsthighgrowth. public policy support for augmentation of domestic hydrocarbons. India‘s energy deficit coulddoublebytheendoftheTwelfthPlanfromabout 170 million tonnes of oil equivalent during 2010-11.61 As per the assessment of the Planning Commission. I. The requirement of high initial capital outlay.63 In the recent past. Price increases would be necessary to incentivise energy conservation. petroleum products as well as natural gas in India is likely to rise. the strategy will need to be re-worked to create enabling financial and regulatory environment where public and private sectors effectively participate in the exploration.At the same time. but newer plants are also able to secure input supplies so that they start off in time with a reasonable load factor. the viability of new infrastructure projects need to be ensured in order to avoid any restructuring needs. Also. efficient energy usage and alternative sources of energy will have to form the three pillars for achieving energy security. Factoring the current and expected trends in supply and demand of energy in India. India may need to import 40 per cent of its energy requirements. This is a priority that I. necessitates measures to address the financing constraint to capacity expansion in infrastructure. during the Twelfth Plan (2012-17) India may need infrastructure investments of over US$ 1 trillion. This poses a mammoth financing task. coal and power output through public and private investments is necessary.62 Infrastructure investment during the Twelfth Plan will need to be funded by both. Fiscal consolidation and reorientation of expenditure towards capital expenditure is required to meet the target. The infrastructure gap of India. but also to ensure commercially viable funding that remains so over business cycles. public investment still has to play a significant role.ANNUAL REPORT underscore the need for attaining the highs of private corporate and public sector savings reached in the recent past and exploring the possibility of invoking an upward shift in household savings which have remained stable for many years. Despite increasing participation of the private sector in bridging the infrastructure gap.60 India has large coal reserves. but once the projects go on-stream. has seen high growth in credit to this sector in recent years. It is important to ensure that not only do existing power plants get adequate coal supply. The demand-supply gap for crude oil. curb demand and support supply response through capacity addition. their optimal utilisation requires that coal supply issues be resolved. The FII limit on investments in corporate bonds has been raised to 12 . several measures have been taken to support development of corporate bond market to facilitate long-term finance so that infrastructure investment can pick up. despite the risk of assetliability mismatch while lending long-term for infrastructure projects. The financing issue relates not only to possible resource gap. Pipeline investment in power projects is large. By the end of the Twelfth Plan. Facilitating infrastructure finance I. would entail better planning and coordination amongst concerned agencies and stakeholders. Facilitating energy security I. moderation of demand. Demand-supply gaps could be particularly large in coal and crude oil. that too over longer terms. This will put pressure on energy prices and balance of payments.59 Indiawillneedtoaugmentitsdomesticenergy production.

but its pattern with a view to cover all in the growth process.aboutonecrorepeople will seek to enter the workforce each year over the next decade. The demographic dividend will turn out to be a threat if skill formation does not gather pace.Itisbothanationalcommitmentandapolicy priority especially when a large section of population lacks access to even the most basic formal financial services. I. but has its own problems. However. small loans for entrepreneurial activity and offering micro insurance facility. Primary Dealers and investment banks have all been allowed as market makers. developing suitable recurring deposits. repos in corporate bonds have been allowed and new 91-day IRF product has been launched. These include. To support inclusive growth through financial inclusion. In turn. It allows people to contribute to as well as benefit from economic growth. rationalisation of stamp duties across States and re-look at tax treatment of Pass Through Certificates (PTC).67 Financial inclusion is an important priority of the Reserve Bank as only 30 per cent of the commercial bank branches are in rural areas and only 61 per cent of the country‘s population has bank accounts. In the secondary market. Reporting platform on OTC interest rate derivatives is now in place and DvP has been facilitated through transitory pooling of accounts.66 Availability of finance is the most important factor in promoting a sustainable model for inclusive growth. FIIs can now invest in corporate bonds of residual maturity of over five years issued by companies in infrastructure sector up to US$25 billion within the overall limit. Promoting financial inclusion and inclusive growth I. Finance is important for supply of all these activities. remittance facilities suited forpatternofcashflowsforpoorandruralhouseholds. Financial inclusion refers to delivery of financial services at affordable costs to the low income or disadvantaged groups in a fair and transparent manner by mainstream institutional players. I.Forinstance. infrastructure. so that these can be paid for. health and skill formation are critical to inclusivegrowth. introducing innovative products and encouraging use of technology for reaching the unbanked.Alternative means of risk mitigation through CDS or bond insurance are being explored.68 The list of medium-term challenges discussed above is not exhaustive.65 Long-term growth sustainability critically depends on achieving inclusive growth. the Reserve Bank of India has been encouraging banks to open no-frill accounts with inbuilt overdraft facility. a National Policy on Skill Development is now being implemented. however. Banks. CDS are also expected to be take off in near term. posing challenges for employment and skilling. Partial credit enhancement by banks is an option.anincreaseinthetrendgrowthwouldrequire 13 . Inclusion strategy aims at not just the pace of growth. human capital formation through education. I. needed to improve the flow of resources to infrastructure sector on a commercial basis. illustrate that while demand management through counter-cyclical monetary and fiscal policies has a role to play in containing inflation and in stabilising growth around itstrend. More players are also needed to help corporate bond market acquire depth and vibrancy. Recognising this. permitting large number of entities including corporates to function as Business Correspondents (BCs) and Business Facilitators (BFs). I.64 Further measures are. The Reserve Bank has taken the task of financial inclusion in mission mode and has fostered an enabling regulatory and policy environment by liberalising branch licensing. however. They. Disclosure norms have been simplified and withholding tax on investment in India Infrastructure Development Fund (IDF) bonds has been reduced. financial inclusion is a necessary condition for achieving this. mandating banks to open 25 per cent of new branches in unbanked rural centres. Investments in agriculture. Inclusive finance is necessary for supporting the demand for these activities.ASSESSMENT AND PROSPECTS US$40 billion. there are several barriers to inclusive growth.

pursuit of inclusive growth and lowering inflation on an enduring basis. However. reducing energy deficits. However. development of infrastructure. the potential can only be reaped through technology improvements. to maintain macro-economic stability with faster.ANNUAL REPORT policies that remove structural constraints over the mediumterm.Indiaremainsacountrywithsubstantial growth potential. productivity enhancements. human capital endowment. given the natural resources. the Plan would need to address the medium-term issues upfront. stepping up saving and investment. demographic dividends. 14 . more inclusive and sustainable growth. It should be possible to target a higher growth under the Twelfth Plan than the current trend. its knowledge base and increasing openness.

With added risks to growth from inflation above the thresholdlevelwheregrowth-inflationtrade-offcanwork.1).At this pace. The Planning Commission in its paper on Issues for theApproach to the Twelfth Plan (2012-17) proposed a growth target of 9. as also execution and governance. II. the real GDP growth rate increased for the second successive year 15 . Sustainability of high growth – enabling conditions II. THE REAL ECONOMY Growth rebounds strongly in 2010-11 II.1. Reflecting this. If global conditions worsen. headline inflation remained elevated throughout 2010-11. after the global crisis-induced sharp slowdown in 2008-09. II. This raises concern about sustainability of the high growth over the medium to long-term. quality of corporate governance and low productivity I. Slack in the advanced economies. growth will have to contend with risks from low agricultural productivity. inflation expectations started to feed on themselves and costpush factors from the manufacturing side exerted pressures on inflation. after the dip in 2008-09 in the wake of the global financial crisis and the recovery in 2009-10. However.0 per cent in 2009-10 (Appendix Tables 1 and 2). some moderation in growth and significant moderation in inflation from the later part of the year is anticipated going forward.Thestanceofmonetarypolicy continued to be anti-inflationary during the course of 2010-11 and in the year so far to contain inflation and anchor inflation expectations. high global commodity prices.theReserveBankrespondedwithelevenratehikesbetween March 2010 and July 2011. growth in India was back to the earlier high growth path. downside bias to this projection may arise. poor infrastructure. the contribution of the agriculture sector to overall GDP growth increased sharply in 2010-11 (Chart II.0-9.1 2010-11markedthecompletionoftheprocess of recovery from the adverse impact of the global financial crisis and the consequent slowdown of the global economy. withtheiroutputgapestimatedat3.1.1. As a result of monetary tightening and deteriorating global economic conditions.5 Growth is expected to moderate to the trend level of about 8 per cent in 2011-12.5 per cent in 2010-11 from 8. II.1. In the short run.5 per cent. However. However. though its growth was slightly lower than the average in the pre-crisis high growth phase of 2003-08. A pre-requisite for high growth is upfront removal of structural constraints with close attention on legal and institutional framework. inflation rose and remained stubbornly high throughout 2010-11 as supply-side shocks got generalised amidst strong aggregate demand. With vegetable prices spiking following unseasonal rains after a good monsoon and global commodity prices firming up in the second half of 2010-11.1. Services sector continued to be the predominant driver of growth. risk to demand compression remains from likely slippage on envisaged fiscal consolidation. This lifted effective policy rates by 475 basis points in the current interest rate cycle.2 Starting in double digits.II ECONOMIC REVIEW Growth rebounded strongly in 2010-11. employment and debt still impinge upon the activity levels in India.4percentin2010.3 Real GDP growth at factor cost increased to 8. Inflation turned persistent and generalisedasaresult.4 The main impetus to growth during 2010-11 emanated from agriculture which rebounded to above-trend growth rate on the back of a normal monsoon. as also the uncertainty about their future growth.

1 1.0 8.9 40 35 8.7 per cent of GDP at current market prices in 2010-11 from 12.3 andAppendix Table 4).7 13.0 2.0 9.0 percentage points.5 6.3 1. the substantial increase in oil prices in 2010-11 and 2011-12 so far.5 7.0 10.9 9.1 30 25 20 15 10 0.1.0 0.9 9.5 1. has raised concerns about the near-term growth (Box II.5 8.2: Saving and Investment (Per cent of GDP at current market prices) a.4 7.2 2005-06 2006-07 2007-08 2008-09 2009-10 Public Sector Private Corporate Sector Household Sector Gross Domestic Saving Public Sector Valuables Household Sector Private Corporate Sector Gross Capital Formation 16 .0 40.0 6.4 2005-06 3. mainly driven by redemption of mutual fund units. Gross Capital Formation 1.5 per cent.2 14. Furthermore.0 2006-07 -2. II.0 60.0 20.9 8.5 9.1: Real GDP Growth a: Contribution to GDP Growth 120.6 Calculations suggest that aggregate saving andinvestmentratesneedtobesteppedupfrom33.1 2009-10 5 0 7. there was a shift in favour of small savings and currency Chart II.5 7. there is a need for stepping up of household savings.9 10. Furthermore.2 11.7 Preliminary estimates based on latest available information show that net financial savings of the household sector moderated to 9.6 2006-07 5 2007-08 23.8 13.5-3.0 4.0 7.1 11.0 0.5 per cent of GDP in 2009-10. An investmentrateofaround38-39percentwithanICOR of around 4.8 23. in order to achieve GDP growth of 9.2 and Appendix Table 3). II.6 1.3 11.3 8.0 Per cent 80.5 9.7 11. The decline in the net financial savings rate of the household sector reflected the slower growth in households‘ savings in bank deposits and life insurance fund as well as an absolute decline in investment in shares and debentures.5 7.0 2007-08 2008-09 2009-10 2010-11 b: Growth Rate Agriculture & allied activities GDP growth (RHS) Industry Services Agriculture & allied activities Industry Services enhancement in the manufacturing sector. envisaged for the Twelfth Five Year Plan.ANNUAL REPORT Chart II. largely reflecting the reallocation of savings between financial and physical assets as well as the near synchronous movement of changes in financial assets and financial liabilities (Chart II. the investment rate needs to be stepped up by 2. Even so.1(as was envisaged for the Eleventh Five Year Plan) would be required.0 12. Thus.0 Per cent 8.5 b. The gross domestic saving rate needs to be augmented to 37 per cent or more.0 Per cent 14.7 per cent and 36.1).1 per cent in the previous year (Chart II.5 2008-09 2.0 100.7 13. Gross Domestic Saving 40 35 30 25 20 15 10 5 0 2.1.5 23. which have stagnated in recent years. This underscores the importance of at least attaining the high levels of private corporate and public sector savings reached in the past.1 17.2 22.0 6.5 23.0 2006-07 2007-08 2008-09 2009-10 2010-11 10.

and Luca Guerrieri (2007).1 Would Firming Oil Prices Cringe Growth? The oil price shocks of 1970s were associated with sharp output losses and large inflationary pressures. Following the US sovereign rating downgrade by S&P. With existence of non-linearities. during the year. Petroleum Planning and Analysis Cell.April2011. would lead to a reduction in real GDP growth by about 0. a small macro model developed to evaluate the impact of oil price shock on India‘s economic growth suggests that the impact could be somewhat significant. In contrast. ―The Macroeconomic Effects of Oil Shocks: Why Are the 2000s so Different from the 1970s?‖. 13368. increased reflecting higher borrowings from commercial banks.netexportsandprices of non-oil commodities and two major identities relating to national income and aggregate wholesale price index (WPI) comprising prices of oil and non-oil commodities. thus.3 per cent of total merchandise trade deficit in 2010-11.Itestimated that if global oil prices average US$ 150/barrel in 2011. Also. Though it is difficult to precisely quantify the impact of oil price on growth.5 per cent in Latin America.0percentagepointthroughdirect impact. Board of Governors of the Federal Reserve Board. even larger increases in the price of oil were associated with much softer impact on these macroeconomic variables.6/barrel in May 2011 on expectations of weaker global growth (Chart 1). the 125 per cent rise in oil prices during 2002-06 was driven primarily by excess global liquidity and rising demand for oil. NBER Working Paper No. relatively slower adjustment of bank deposit rates and the volatility in the Indian equity market Oct-10 Jul-08 Jul-09 Jul-10 Jul-11 .0 percentage points. Martin. Notwithstanding the pick-up in the 17 realGDPgrowthrateduring2010-11. Christopher J. Oil prices moderatedtemporarilyinJune2011onaccountofthedecision of the International Energy Agency (IEA) members to release 60millionbarrelsofcrudefromtheirstrategicreservestooffset supply disruptions. the Japanese quake shutting oil refineries and the sovereign default risks in the Euro zone have time and again reversed the otherwise firming oil prices on the back of global recovery broadly staying on track. Blanchard and Gali (2007) found that the oil prices are no longer correlated with business cycle as structural changes have weakened and modified the transmission mechanism of oil shocks. Erceg. governmentconsumptionexpenditure. Event risks such as the political turmoil in the Middle East and North Africa (MENA) region. before declining to US$ 110. It would alsoraiseWPIinflationby1. The 1973 oil embargo in the wake of the Arab-Israeli War and the 1979 oil price surge following the Iranian Revolution saw the supply of oil falling.3 percentage point. averaging US$ 112. GoI.897. Bodenstein.ECONOMIC REVIEW Box II. That raises the question whether we need to worry about the rising oil prices in 2011. imports accounted for 87. The model comprises seven structural equations pertaining to consumption.8/barrel in 2009-10 to US$ 85. Even with this. corroborated bytheIMF‘sWorldEconomicOutlook.3 per cent of total domestic oil requirement in 2010-11. Further work suggests that this change is attributable to wage rigidities and anchored inflation expectations in recent period. The price of the Indian basket of crude rose from an average of US$ 69. In the 2000s. the structure of financial market and risk-sharing. with total impact after subsequent rounds of feed through estimated at about 2. investment. The impact of oil prices on growth is.4/ barrel during July 2011. critically hinging on structural parameters. There is. In the case of India.75 per cent. Net oil imports (oil import less oil export) accounted for 65. etal. Olivier J. the adverse impact is greater if oil prices change above the 10 per cent threshold. the AugustpriceoftheIndianbasketofcrudeis25percenthigher than its average during 2010-11. oil prices fell again averaging US$ 106. Results showed that a 10 percentage point increase in oil price inflation. but edged up again. International Finance Discussion Paper No.6/ barrel in the first fortnight of August 2011. if passed through fully. Chart 1: Crude Oil Price Trends 140 US$ per barrel 120 100 80 60 40 20 133 120 185 172 159 146 Index Jan-11 Jan-08 Jan-09 Jan-10 Apr-11 0 Apr-08 Apr-09 Apr-10 Oct-08 Oct-09 Global Crude Oil Price (Indian Basket) Domestic Mineral Oil Index [WPI] (RHS) References: Bodenstein. good reason for not being complacent about the macroeconomic adjustment that may become necessary if global oil prices firm up significantly.75 per cent in Asia and subSaharan Africa to 0. Trading environment in the oil markets in 2011 remains uncertainwithhedgefundsliquidatingandre-buildingpositions causing volatility in prices. ―Oil Shocks and External Adjustments‖. and Jordi Gali (2007).5/barrel in April 2011. September. economic agents have viewed the recent episodes of firming oil prices as temporary and volatile movements.(2007) demonstrated that the impact differs from country to country and ultimately depends on the oil dependence. Blanchard. however.1/barrel in 2010-11 and further to US$ 118. Households‘ financial liabilities.persistentlyhigh inflation. These reflect broad approximations and actual impact may depend on several factors. however. it would lower real GDP growth in advanced economies by 0. while output loss in emerging and developing economies could vary from 0.

11 There are several factors constraining agriculture supply response thereby impacting inflation.4). the agricultural prospects remain encouraging. with a model error of ±4 per cent. II. agriculture turned into a significant driver of growth in 2010-11. II. Consequently. Orissa and some parts of North East. Overall. Maharashtra and Andhra Pradesh.1. there exists a wide variation in productivity of these crops across States/regions (Chart II. which has been neglected and use of optimal and locale-specific agricultural practices and introduction of precision agriculture. pulses and oilseeds. Increase in foodgrain productivity can be realised by ensuring soil conservation.1. The foremost relates to low productivity and monsoon dependence.9 The progress of monsoon so far during 2011 has been on the whole satisfactory.ANNUAL REPORT Per cent to GDP at current market prices Chart II. 2011 was marginally higher than last year.1. As on August 17. 2011 had covered the entire country. II. enabled both Kharif and Rabi sowings to be above normal.1. foodgrains. II.1. The monsoon arrived on time and by July 9. will require considerable technological and institutional improvements. The target growth rate of 4 per cent for the agriculture sector (Twelfth Five Year Plan).1. supply management would be needed to keep price pressures at bay. productivity levels remainlowandproductivitydifferentialsacrossStates and crops continue to persist. groundnut and sunflower. the first occasion in the last one decade. pulses. 2011. there was record foodgrain production in 2010-11 (Appendix Table 5). Technology breakthroughs key to maintaining demand-supply balances II. However.13 India‘s self-sufficiency in food and other agroproducts can be endangered if technology Change in Financial Assets (gross) Change in Financial Liabilities (gross) Net Fianancial Savings impacted by global macroeconomic uncertainties. namely. Spatially. sowing deficiency is observed in case of coarse cereals.5). Further.12 Productivity in Indian agriculture is low compared with productivity at the world level and major producers such as China and the US (Chart II. Presently.8 After two consecutive years of subdued performance.3: Household Financial Savings 16 14 12 10 8 6 4 2 0 though it has been so far deficient in Haryana. in relation to the trend growth rate of around 3 per cent. 18 . Kharif sowing is progressing well and till August 12. even though growth is likely to 2008-09 (revised) 2009-10 (revised) 2010-11 (provisional) decelerate on a high base.10 Though it is still early to predict the impact of monsoon on agricultural output. the monsoon has been reasonably well-distributed. If this stays. Even the most productive States in the country fall short of the world standards in terms of yields of major crops. This is significant given the import dependence for edible oils and pulses. affected the level and composition of net financial savings of the household sector. a week earlier than scheduled. The simultaneous occurrence of a normal and well-distributed southwest monsoon and excess north-east monsoon. cumulative rainfall since the start of the monsoon season was normal at 1 per cent below the Long Period Average (LPA). Strong rebound in agriculture growth in 2010-11 II. The India MeteorologicalDepartment(IMD)hadreviseditsinitial forecast of normal monsoon in 2011-12 to slightly below normal monsoon at 95 per cent of the LPA.

04 3.0 1.8 1.8 2. This can be attributed to rising income levels of a fast growing economy leading to a change in the dietary habits of the people.0 2. the demand for other agricultural products.ECONOMIC REVIEW Chart II.0 9. protein-based products such as meat.3 3.5: 2010-11 Yield Differential – State-wise Foodgrains 4500 4000 3500 3000 2500 2000 1500 1000 500 Uttarakhand Gujarat Chhattisgarh Maharashtra Rajasthan Tamilnadu Himachal P Assam Others Jharkhand Madhya P Karnataka J&K Bihar Orissa Haryana Kerala West B Andhra P Uttar P Punjab 0 1600 1400 1200 1000 800 600 400 200 Chhattisgarh Orissa Uttarakhand Maharashtra Haryana Andhra P Jharkhand Madhya P Assam West Bengal Gujarat Karnataka Himachal P Tamil Nadu Rajasthan J&K 0 Kerala Bihar Punjab Others Uttar P (Kg per hectare) Oilseeds Pulses 2400 2200 2000 1800 1600 1400 1200 1000 800 600 400 200 0 Chhattisgarh Orissa Maharashtra Gujarat Uttarakhand Kerala Bihar Others Andhra P Uttar P J&K Tamil Nadu Haryana Yield of Foodgrains All India average yield Yield of Pulses All India average yield Yield of Oilseeds All India average yield 19 Himachal P Assam Jharkhand Karnataka Rajasthan Madhya P West B Punjab .4: Comparative Yield: India and the World April 2011 Tonnes per hectare Tonnes per hectare 10.7 (Tonnes per hectare) April 2001 April 2006 Tonnes per hectare 4.06 5 4 3 4.82 2.0 4.03 4.7 0.1.1. milk and fish.84 3.Withjustaround44. efficient seed supply systems.1 1.5 1.9 3.7 2. eggs.7 7. the dependence of Indian agriculture on rainfall remains preponderant (Chart II.0 4. assumes importance.9 4.03 2.0 6.20 2.03 4.1 2.5 2.0 9.0 2 0. Higherdemandforprotein-baseditemscallsforurgent actions II.0 5. The National Mission for Protein Supplements through Chart II.5 6.20 3. particularly.0 4.9 3.8 3.84 0.3 1.6percentofthegross croppedareairrigated(asperthelatestdataavailable for 2007-08).8 2.The demand-supply mismatches in the case of these items resulting from inadequate supply response to structural changes in demand pattern have led to rising prices.64 2.9 2.72 2.25 8 7 6 7.0 7. 52 per cent of the work force continues to be engaged in agriculture.0 0. II. while helping to keep food inflation low.0 3.20 2. eco-friendly and cost-effective pest management practices.0 1.This.14 Notwithstandingthesharpdeclineintheshare of agriculture in GDP from an average of 53 per cent in the fifties to 19 per cent in the 2000s.0 0.1 2.0 1 0 Wheat Rice Wheat Rice Coarse Grains Oilseeds Wheat Rice Coarse Grains Oilseeds Coarse Grains Oilseeds India US China World India US China World India US China World advancements do not keep pace with growing demand stemming from rising population and income levels.6). Steps have been initiated to address the growing imbalance.0 2.2 4.0 0.3 8.7 2.wouldimprovefarmincomesandfoodsecurity.15 In recent years.90 4. and fruit and vegetables. have increased substantially.0 6. and commercialisation of the diversified and alternative uses of crop produce.7 3.82. Policy interventions are required to support sustainable growth in crop production and environmental protection through development of improved and diversified cultivars. inturn.1 0. It is in this backdrop that public policy interventions to step up investment and productivity enhancements for augmenting food supplies.

there is a need to address the structural constraints ailing the sector. goat rearing and fisheries is expected to help bridge the gap between increasingly divergent demand and supply of animal-based proteins. II.0 -6 -8 -40. food inflation in recent period has come from food items that are outside the ambit of public distribution system (PDS) and reflect a demand shift with rising income levels. released in June 2011 is better representative of the current industrial structure.0 -30.1. Accelerated Fodder Development Programme intended to benefit farmers in 25.0 -10.3 per cent in the preceding year (Chart II. Need to focus on food management in times of high food inflation.0 Per cent 4 2 0 0. The recovery was sustained in 2010-11. it also suggests that industrial performance recovered much less in 2009-10 than was thought earlier. However. This may sound 20 .1. There is need for research focused on ecological adaptability of cattle and developing the disease resistance of cross-bred species.000 villages has been launched. Food stocks with public procurement agencies have remained above the buffer stock norms and food security reserve requirements and have contributed to mitigating price pressures (Appendix Table 6). 2011. increase productivity and strengthen market linkages. augmentation of storage capacity is an important aspect of food management in India. Therefore.1. with supportive policy framework and required infrastructure. dairy farming. The productivity of Indian bovine compares unfavourably with the world average mainly due to gradual genetic deterioration. The demand-supply gap leading to price pressures in case of important food items such as fruit and vegetables and protein-based products.0 -2 -4 -20. This would keep a check on price pressure and also ensure more equitable distribution and food security.0 20.16 Even though the per capita availability of milk has increased from 194 grams per day in 1994-95 to 258 grams per day in 2008-09.2). Importantly. To achieve selfsufficiency in pulses production. continue to persist due to near stagnant supply owing to lower yield and increase in demand. better management of food stocks is imperative (Box II.19 The old base IIP data suggested that the industrial growth decelerated in the second half of 2010-11. it is also equally important to gradually move away from the cereal-centric policy towards these items.17 In recent years.6: Monsoon and Agriculture 12 10 8 6 Per cent 30. To sustain production of milk. with IIP growth accelerating to 8. For effective food security. Hence.2 per cent from 5.0 paradoxical.000 villages in rain-fed areas. which reached the vicinity of 66 million tonnes as on June 1. However.1. poor fertility. NewbaseIIPshowsthatindustrialgrowthaccelerated in 2010-11 II. it is imperativetoincreasetheoff-takethroughtheexisting PDS. piggery.ANNUAL REPORT Chart II. as well as poor nutritive value of feed and fodder. II. IIP growth remained 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Growth in Kharif sowing Growth in foodgrain production SW Monsoon deviation (RHS) Growth in Agricultural GDP Growth in Rabi sowing NE Monsoon deviation (RHS) livestock development. the current storage capacity is inadequate for the stocks. It suggests a sharper dip in industrial growth in 2008-09 amidst global financial crisis than was captured by the old base (199394=100). the Government launched a scheme for integrated development of 60. At the same time.0 10. large food stocks have coexisted with high food inflation.18 The Index of Industrial Production (IIP) data with the revised base (2004-05=100).7 and Appendix Table 7). production and wastage II. Under the new base.

agriculturalprice policy has provided a margin of around 20 per cent over total costs to both rice and wheat farmers (Dev and Rao.itcould pose a fiscal challenge through significant increase in food subsidy bill. Kaushik (2010). Procurement and Pricing Procurement of foodgrains. bulk of the public procurement remains confined to a few States for want of access to take-in windows. inadequate for ensuring better food management and greater focus on non-price interventions is necessary. The Planning Commission. being constant since 2002. in particular. ―The Economics of Foodgrain Management in India‖. particularly the vulnerable sections of society at affordable prices and maintenance of buffers for food security and price stability.2 Food Management – What Needs to Improve? The draft National Food Security Bill (NFSB) seeks to give legal right to every below poverty line (BPL) family in India to get 35 kgs. MSPof rice and wheat were hiked at an average annual rate of 14. Greater use of Information and Communication Technology (ICT) in PDS. ―Agricultural Price Policy. Rangarajan). Price interventions alone are. the price at which foodgrains are lifted by States for distribution under various welfare schemes. though has had limited success regarding certain other objectives such as price stability. lower than the decadalrateofpopulationgrowthof1. 2010). He underscored the need to look at the entire system of food production and procurement. 2007). Distribution and Delivery Mechanism Distribution and delivery have been the most intricate and challenging aspects of food management in the country.Onaverage. This has implication for capital expenditure in agriculture. the total requirement of foodgrains will increase. This has ensured sufficient and steady procurement of foodgrains which can cater to the demand for the PDS and various welfare schemes of the Government. S. and its release and distribution. GOI (2010).6percent. Department of Economic Affairs Working Paper. under which foodgrains are procured and distributed by the State governments themselves.174-182. Given the limitation to expanding the area under crops. 21 . Basu (2010) is of the view that lack of adequate storage is not the central problem for food management. increased supply of foodgrains would thus have to come from increase in productivity. The Food Corporation of India (FCI) procures foodgrains at the MSP. Other reform measures for food management which could be considered include allowing food coupons to be redeemed at approved private food retailers. pulses or other household basics up to the value of the coupon. wheat and rice. is an open-ended operation. thus providing freedom to choose quality of grains and thereby reducing incentive for adulteration of foodgrains. Aadhaar smart cards could help reduce identification errors and leakages significantly. a number of states have opted for Decentralised Procurement Scheme introduced in 1997.1 per cent and14. in early 2000s. found that the total leakage of grains meant for BPL population was 58 per cent.Resultantly. quantity. estimated at about `92. price and time intervals at which he/she could be supplied rations.6 per cent annually between 1990 and 2010. such as GPS tracking of movement of vehicles transporting PDS commodities. Prime Minister‘s Economic Advisory Council. It has been reasonably successful in warding off the threat of famine. Pending unanimity in approach for identification of beneficiaries. Surveys conducted in the past revealed significant inclusion and exclusion errors in PDS coverage. including eligibility for rations.8percent. Skewed incentives have affected land use and cropping pattern. Production and Food Security Foodgrain production in India grew at an average rate of 1.introducedonapilotbasisinselectdistrictsinAndhra Pradesh. June.ECONOMIC REVIEW Box II. In addition. equitable access and food security. as it stands now. Arunachal Pradesh and Bihar.Further. These features of the proposed smart card are expected to immensely help the existing food coupon or food-stamp system.5millionFairPriceShops (FPS) is plagued with deficiencies such as low margins that create perverse incentives for diversion of foodgrains.includingthatonstoragefacilities. 2/2010-DEA. distribution of foodgrains to consumers. of wheat or rice per month at the rate of `3 per kg for rice and `2 per kg for wheat by way of central allocation to the States to be distributed through the targeted PDS.respectively. which are based on the recommendations of the Commission for Agricultural Costs and Prices (CACP).‖ Economic and Political Weekly. Smart cards have the ability to store and record a large amount of programmed and authorised biometric information that can be matched to the actual fingerprint or signature of an individual involved in a transaction. however. entails procurement of foodgrains from farmers at minimum support prices (MSP). Between 2006-07 and 2010-11. References: Basu. C. The NFSB has been approved by the Empowered Group of Ministers (EGoM) on food security.000 crore by the Expert Committee (GOI. Spatially. The existingPDSinIndiawithroughly0. Farm Profitability and Food Security. in recent years. This may have implications for food security in future. per capita net availability of foodgrains per day declined from 510 grams in 1991 to 444 grams in 2009. If the Bill is implemented. This has resulted in stocks of foodgrains building up to a level much higher than the quarterly buffer norms and food security reserve requirements. 45:(26 & 27):. CCTV monitoring of FPS and computerisation of various operations of PDS could also improve its efficiency. An even bolder measure would be direct cash transfer that offershouseholdsthechoiceofpurchaseofanymixofgrains. In this backdrop a holistic review of food management would be helpful. No. Food management in India. Mahendra and Chandrasekhara Rao. This is despite the fact that food stocks have been at their peak in the 2000s. Theoff-takeoffoodgrainshasnotkeptpacewithprocurement despite the Central Issue Price (CIP). Report of the Expert Committee to Examine the Implications of National Food Security Bill (Chairman: Dr. Dev.

3 per cent in the second half.0 2.0 2007-08 2008-09 2009-10 2010-11 Apr-Jun 2011 Manufacturing Electricity Basic Goods Capital Goods Intermediate Goods Consumer Durables Consumer Non-durables 22 .ANNUAL REPORT Chart II. was only 15.9).Use-based Classification Per cent 40.0 a: IIP .however. its share in real GDP.existswidedifferentialsinproductivity betweendifferentStatesanddifferentindustrygroups. 15. 2009-10 2010-11 2011-12 broadly unchanged across the two halves of 201011.20 Further analysis of the IIP growth suggests some deceleration in mining and electricity in 201011 emanating from poor performance of coal and consequentlowerthermalpowergeneration. The new base has better coverage and is reflective of the more recent production structure based on 399 item groups as against 303 in the old base.thereisalargedifferenceinproductivitybetween the organised and unorganised sub-sectors of manufacturing.0 18. recording 8.1.7: Growth in IIP (Y-o-Y) 20.0 Per cent 10.1.8 per cent.0 10.0 5.0 0.0 30.0 as appeared from the headline numbers.0 50. The analysis adopting the trimmed mean approach tocomputeIIPgrowthexcludingvolatileitemsshowed that the industrial growth had not dropped as much Chart II. A number of recent studies have highlighted the growth of total factor productivity in the organised manufacturing sector in the past three decades.0 Jul II. The IIP growth during April-June 2011 shows some deceleration.Sectoral Classification 60. The Reserve Bank in its report on ‗Macroeconomic and Monetary Developments‘ accompanying the Monetary Policy Statement of May 2011 had indicated that the recent IIPslowdownwasexacerbatedbyafewvolatileitems. there is an urgent need to bridge the gap.0 12.8: Industrial Growth 20. not only to increase output but also to gainfully employ a larger number of people.0 10.0 6.0 May Mar Jun Aug Jan Dec Nov Sep Feb Apr Oct -5.0 14.0 0. Also.0 2007-08 Mining 2008-09 2009-10 2010-11 Apr-Jun 2011 -10. Considering that the latter accounts for almost four-fifths of total employment in the manufacturing sector. There is a need to boost this sector.0 20.0 8.0 16.Theusebased classification exhibits strong performance of capital goods and acceleration in growth across all sectors except consumer durables (Chart II. but this was substantially on a high base.0 0. The new base data confirms the view and shows that the IIP growth was in fact higher. There.0 4.8 and Chart II.2 per cent growth in the first half and 8.21 Despitetheemphasisonmanufacturingsector in India‘s planning process.0 Per cent b: IIP . II. as of 2010-11.

22 During 2010-11. natural gas.0 -20. 56. Capacity constraints in coal. which is an indicator of demand pressure in the economy.0 Per cent 28. Currently atomic Chart II.0 8.0 Coal Cement 2008-09 2009-10 2010-11 Apr-June 2011 Overall Steel 2010-11:Q4 2011-12:Q1 0. 23 Industries -2. capacity utilisation in petroleum refining remained stretched at 109. particularly of the power and fertiliser industries.9: Components of Aggregate Demand and Related Industry Growth Trends 30 Per cent 20 10 0 2007-08:Q1 2008-09:Q1 2009-10:Q1 2010-11:Q1 2007-08:Q2 2007-08:Q3 2007-08:Q4 2008-09:Q2 2008-09:Q3 2008-09:Q4 2009-10:Q2 2009-10:Q3 2009-10:Q4 2010-11:Q2 2010-11:Q3 2010-11:Q4 2011-12:Q1 a: Consumer Goods Production and Private Final Consumption Expenditure (Growth in per cent) 22 20 18 16 14 12 60.25 Capacity utilisation. Capacity addition in power sector during 2010-11 was 12.1. II.23 The high deficit in power generation is a constraining factor for growth.1. There is also a need to speed up exploration in the KG basin. Towards this end.0 Consumer Goods PFCE Current Prices (RHS) Capital Goods Capital Formation Construction (Estimated from Cement and Steel) Infrastructure sector registers moderation in growth amidst capacity concerns II.0 50.0 20.ECONOMIC REVIEW Chart II. the eight core infrastructure industries posted a moderate performance compared to the previous year (Chart II. given the large growth in demand raise concerns about sustaining growth. differed across the various infrastructure industries.1. Infrastructure industries such as crude oil.0 b: Growth Trends in Industries supporting Capital Formation Per cent Per cent 2007-08:Q1 2008-09:Q1 2009-10:Q1 2010-11:Q1 2007-08:Q2 2007-08:Q3 2007-08:Q4 2008-09:Q2 2008-09:Q3 2008-09:Q4 2009-10:Q2 2009-10:Q3 2009-10:Q4 2010-11:Q2 2010-11:Q3 -10 -20 -10. while that in cement and thermal power generation eased in line with the production trend for these two industries.0 40.0 23.1. acquiring oil and gas assets overseas is one of the important components of enhancing energy security.10).0 30. The current level of natural gas production in the country is inadequate to meet the industrial demand. for the time being.0 .0 13. During 2010-11.0 Fertilisers Electricity Crude Oil Refinery Products Natural Gas energy and solar power are expensive options compared to coal.161 MW.24 The recent slowdown in the production of crucial infrastructure industries such as coal and natural gas.3 per cent. II. the Government is also encouraging national oil companies to aggressively pursue equity oil and gas opportunities overseas.10: Growth in Infrastructure 48. Production of fertilisers was stagnant and coal output declined. In view of unfavourable demand-supply balance of hydrocarbons in India. The core infrastructure sector recorded lower growth of 5.0 10.0 38.0 43.0 18.0 3. Hence.0 33. II.7 per cent of the target for the year.0 per cent during April-June 2011 due to decline in natural gas and cement production. petroleum refinery and steel recorded strong growth while cement production and electricity generation witnessed moderation in growth. rapid increase in power generation would have to be through the conventional systems. ports and railways raise major concerns about sustaining growth.

aswas witnessed during the global financial crisis (Chart II.0 8.2 per cent in 2010-11 was marginally lower than that in the previous year largely due to deceleration in ‗community.0 4. Services dependent on external demand such as tourist arrivals.11). albeit with marginal deceleration II.0 2.27 Being the largest sector of the Indian economy. In view of the above.0 6.13).26 Services sector growth of 9. indicating improvement in global economic conditions. real estate & business Community. transport. the sustainability of the services sector growth is important. Another area where other countries have gained Chart II.12: Growth Trend in Cargo Movements Aug-09 Jun-09 Jun-10 Aug-10 Feb-10 Dec-09 Dec-10 Feb-11 2010-11:Q2 Apr-09 Apr-10 during 2010-11 on account of capacity constraints (Chart II.0 11.1.0 Per cent 10. the services sector has significant implications for growth.0 12. passengershandledatinternationalterminals.export and import cargo showed acceleration in growth during 2010-11.0 2006-07 2007-08 2008-09 2009-10 2010-11 Services Construction Trade.11: Growth in Services Sector GDP 16. The sector has responded well so far.Indiaisfacingincreasedcompetitiveness in IT/ITeS and telecommunications of late. Cargo movements in sea ports and railway freight traffic showed signs of moderation 40 35 30 25 Per cent 20 15 10 5 0 -5 Chart II.0 14. Cell phone connections also registered double digit growth.0 2007-08:Q1 2007-08:Q2 2007-08:Q3 2007-08:Q4 2008-09:Q1 2008-09:Q2 2008-09:Q3 2008-09:Q4 2009-10:Q1 2009-10:Q2 2009-10:Q3 2009-10:Q4 2010-11:Q1 2010-11:Q3 Apr-11 2010-11:Q4 Oct-09 Services excluding community.12). This increases its vulnerabilitytoglobaleconomicdevelopments. It is export-intensive. social and personal services‘ reflecting fiscal consolidation (Chart II.0 Aviation Cargo Port Cargo challenge for its sustainable growth arises from its dependence on external demand. insurance. employment-oriented and attractive for foreign direct investors.0 5.0 0. One major Chart II.1.13: Growth in services (excluding community. social & personal services 7. hotels. but in future the wage price pressuresmayposeathreattogrowthandprofitability. social and personal services 24 Oct-10 -10 . though lower than the previous year. social and personal services) 13. storage and communication Financing.ANNUAL REPORT Services sector sustains momentum.0 Per cent 9. Vulnerabilities that could impede sustained high growth of services sector remain II.

would depend on pick-up in execution of large infrastructure projects. streamlining of immigration process along with developing health support infrastructure. and as a result. II. accreditation of Indian hospitals is paramount as it will help in ensuring quality standards across a spectrum of speciality and super-speciality hospitals. There was a perceptible slowdown in investment in the second half of 2010-11. declined from 8. there is a need to provide supportive infrastructure such as improved air connectivity. viz. II. in real terms. Available data provides evidence of creation of additional employment opportunities. employment situation improved in both rural and urban areas in 2009-10 compared to the previous round (2004-05). expenditure side GDP data are being used as proxies for components of aggregate demand. accountancy and other business services.14: Expenditure Side of GDP a: Contribution to GDP Growth from Expenditure Side 100 80 60 Per cent b: Growth in Consumption and Investment 20 15 Per cent 40 20 Consumption Consumption Net Exports 0 Private 10 -20 -40 -60 GFCF Govt.. Recovery from the soft patch. India has potential but infrastructure such as road connectivity to tourist areas is a major challenge. consolidation. the contribution of net exports turned positive in 2010-11 (Chart II. On the other hand.1. health care.31 High growth rate along with subdued or marginal increase in employment generation has been a pressing concern in the post-reform period. the growth of government final consumption expenditure (GFCE) moderated sharply in 2010-11 reflecting the re-emphasis on fiscal consolidationfollowingthegradualwithdrawaloffiscal stimulus measures that had to be undertaken in the previous two years to support the economic recovery. though at a slower pace when compared with the high economic growth experienced in recent years. followed by gross fixed capital formation (GFCF). 25 . According to the results of latest quinquennial survey by the National Sample Survey Office (NSSO. measured by current daily status. The rebalancing in government expenditure could be maintained in 2011-12 by staying on the path of fiscal II. 5 0 PFCE GFCE GFCF 2008-09 1 2009-10 2010-11 2008-09 2009-10 2010-11 Despite well known limitations. financial services. In addition.28 The Indian Health Care Federation has prepared a roadmap for making India a world-class destination for medical tourism. The overall unemployment rate.2 per cent in 2004-05 to 6. 66th round).1. Globally traded services.ECONOMIC REVIEW tremendously is tourism. some moderation in expenditure is expected going forward in response to high inflation and demand-side policy measures. For this.29 The drivers of growth from the demand side1 revealed the continued predominance of private final consumption expenditure (PFCE) in driving growth.30 Even though aggregate expenditure. accelerated in 2010-11 with private consumption as well as investment expenditure growing at a brisk pace. Employment situation improved in the recent years Privateconsumptionandinvestmentcontinuetodrive growth II.6 per cent in 2009-10 and the decline in unemployment rate was more Chart II. to encourage medical tourism.14). External demand improved in line with the global recovery process.1.1. education. also have vast potential for growth which is yet to be tapped.

0 per cent Phase III: December 2010-July 2011 Increase in WPI 7.0 38. the magnitude of price rise was moderate (2.1. reflecting normalisation of crisis time stimulus. with a rate of growth in real value added in organised manufacturing of about 10 per cent per annum during 2003-09.2. employment increased by 9.1 per cent 32.2.4 per cent Phase II: August-November 2010 Increase in WPI 2.5 per cent per annum between 1995-96 and 2003-04. This marks a clear difference from the previous phases of high growth in manufacturing output when there was no major contribution to employment generation.1.0 per cent in 200405. largely driven by decline in women work participation rate. PRICE SITUATION High inflation persisted through the year II. Price pressures were both external and domestic. As per the latest data available.4percent) and was largely driven by high food prices.2 6. to begin with. for the Reserve Bank during 2010-11.4 24.Theoverallwork participation rate (usual status). also was associated with increase in employment in this sector.32 High industrial growth.7 Total Food Fuel and Power Primary Non-food Articles & Minerals Manufactured Non-food Products Note: Pie Chart Represents the Contribution of Different Sub-groups to Increase in WPI (adjusted for rounding up). inflation emerged as the dominant policy challenge Chart II.ANNUAL REPORT pronouncedformenthanforwomen. Monetary policy was.5 per cent per annum.8 lakh during 2010-11 with the major share accounted by the IT/BPO sector.whiletheunderlyingdrivers changed during three distinct phases during the year (Chart II. II. perhaps reflecting continuing demand shifts with rising income levels.DuringthefirstperiodApril-July2010.4 37.6 24. however.15).15: Changing Weighted Contributions to Increase in WPI Phase I: April-July 2010 Increase in WPI 3. 26 . Drivers of inflation shifted over three different phases II.8 28. The monetary policy response of the Reserve Bank was accordingly calibrated based on assessment of the changing drivers of inflation and assessment about the role monetary policy could play in dealing with different sources of inflation.2 per cent in 2009-10 from 42.33 Labour Bureau has been conducting a series of quarterly quick employment surveys since January 2009 to study the impact of the global economic slowdown on employment in eight major industries of the Indian economy. In the absence of anti-inflationary monetary policy response.0 per cent) but primary non-food articles II.8 43.1 With growth consolidating around the trend. II. In spite of good Rabi arrivals. continuously tightened during the course of the year. Inflation remainedhighthroughout. theincreaseinWPIwasquitesignificant(3.2 4. employment in the organised manufacturing sector increased by 7. food inflation remained high as prices of protein-rich items firmed up. the inflation condition and inflation expectations would have deteriorated further. declined to 39. as against decline of 1.3 23. but subsequently conditioned by the rising inflationary pressures. The latest Annual Survey of Industries (ASI) data reveal that between 2003-04 and 2008-09.9 8. with changing relative roles of supply and demand side factors.2 The changing inflation dynamics during 2010-11 could be evident from changes in weighted contributions to increase in WPI over three distinctphases.0 27. During the second phase betweenAugust and November 2010. however.

inflationary pressures rebounded strongly.1 per cent. The recent NSSO survey results on consumer expenditure of households in India suggest thatwithrisingper-capitaincome.0 3.17). This trend is also reflected in pressures on prices being largely in non-cereal food-items that have deviated sharply from the trends in recent years without trend reversion to mean.0 8. the share of protein-rich items has increased in both urban and rural areas from 2004-05 to 2009-10.16: Trends in Wholesale Price Inflation Wholesale Price Index (2004-05=100) 160 155 150 145 140 135 130 125 September December November February January October August March June April a: Wholesale Price Index 12.17: Contribution to Inflation13. however.16). as higher input costs transmitted to output price increases.0 5.0 2009-10 2010-11 2011-12 2009-10 2010-11 2011-12 witnessed strong price pressures and became the major driver of inflation during this phase. The new IIP series (base 2004-05) confirmed that industrial growth did not decelerate in spite of waning base effects. largely reflecting faster transmission of input cost pressures to manufactured product prices and revision in administered fuel prices. in a robust growth environment. driven largely by broad price pressures in the manufactured products group.ECONOMIC REVIEW Chart II. Price pressures have remained strong during 2011-12 so far.0 2.theshareofincome spent on food has declined. II. indicating generalisation of price pressures.0 b: WPI Inflation December November February January October August -2. Within food.0 6.0 7. During the third phase between December 2010 and July 2011.0 -3.3 The WPI increased persistently during 2010-11 (Chart II. This is likely to have contributed to build-up of non-food manufactured products inflation.2. whose output is less responsive to monsoon in the short-run (Chart II.0 4.2. Cotton prices firmed up reflecting global supply shortages and spiked in September. The moderate softening of inflation (y-o-y) witnessed up to November 2010 was of the year.18).0 -1.4 The significant role that supply side factors Major Groups played in keeping inflation elevated was visible from the trends in food and fuel inflation during the course 27 Total Food (Primary and Manufactured) Manufactured Non-food Products All Commodities (Per cent) Fuel Group Primary Non-Food Articles and Minerals March June April 120 0.0 September July July May May .0 Jan-11 Apr-09 Jul-09 Jan-10 Apr-10 Oct-10 Jul-10 Jul-11 -5. During the last quarter of 2010-11.0 11.0 Apr-11 Oct-09 Contribution in percentage points led by decline in contribution of food inflation to overall inflation (Chart II. the contribution of non-food manufactured products to overall inflation increased.0 9.0 Y-o-Y. Chart II. Supply shocks and rigidities in the supply chain sustained the price pressures II. Mineral prices also rose. Despite a normal monsoon.0 1. WPI rose by 7. inflation in primaryfoodarticlesdidnotmoderateontheexpected lines as the contribution to food inflation largely emanated from the protein-rich items. Per cent 10.

In addition. Even at this level.ANNUAL REPORT Chart II. LPG and kerosene prices in June 2011.19). The Government took fiscal measures suchasremovingimportdutiesonrice. they still remain high.19: Global and Domestic Fuel 80.2. Per cent Non-Administered Group Indian Basket Crude Oil Administered Group .pulses.0 35.0 20.6 Fuel inflation was driven by both increases in administeredandfreelypricedproductsunderthefuel 28 Y-o-Y.Administered price increases. though these actions may still be required to prevent generalisation of inflation.0 0.0 25.0 40. significantly lag behind the trends in international crude prices indicating the presence of suppressed inflation. Per cent group (Chart II. These lags impact fiscal deficit and inflation.0 15.0 May-10 May-11 Aug-10 Mar-11 Jun-10 Jun-11 Jan-11 Nov-10 Dec-10 Feb-11 Apr-10 Sep-10 Apr-11 Oct-10 Jul-10 Jul-11 II.0 60. II.0 0.0 20. Demand for food is not very sensitive to interest rate actions.0 10.wheat. It also took several steps to pave way for more sugar imports.0 10.0 Y-o-Y. edible oils and sugar and reduced import duties on some other agro-commodities.7 Lags in price adjustment of petroleum products lead to suppressed inflation and build-up of inflation expectations when discrete price adjustment is made.0 50.2. leading to further pressures on prices. There is a need for free pricing of all petroleum products with better targeting of subsidies in order to ensure necessary demand adjustment in an import Chart II. besides more wheat for open market sales by FCI. This was partly corrected with increases in diesel. freely priced products exhibited significant pick-up in inflation during the second half of the year.0 5. The Government also banned export of non-Basmati rice.5 During November-December 2010 unseasonal rains in certain parts of the country led to significant loss of output of perishable food articles.000 crore. however. it took many administrative measures. including enhancing allocation of wheat and rice to States and for distribution by NAFED and NCCF through their outlets.18: Trends in Food Inflation 40.globalcrudeoilpriceshavesoftened somewhat after S&P‘s sovereign rating downgrade of the US. in view of the known limitations of monetary policy in dealing with such inflation. The Indian basket price for crude oil averaged US$ 106.2. Food inflation moderated from January 2011. reflecting the arrival of fresh crop in the market as also Government‘s measures to ease price pressures. As international crude oil prices increased significantly during the year.Sincethen. edible oils and pulses (except Kabuli chana).0 30. especially vegetables. Supply augmenting measures become crucial to deal with food inflation.0 Inflation (Y-o-Y) 70. II. the under recoveries are estimated at over `90.6 per barrel Jun-09 Jun-10 Dec-10 Jun-11 Aug-09 Dec-09 Oct-09 Feb-11 Apr-09 Apr-11 Aug-10 Feb-10 Food Excluding Protein Based Items Primary Food Articles Apr-10 Oct-10 Protein Based Food Jul-11 during the first fortnight of August 2011. of which a major portion may have to be borne by the Government. One important development during the course of the year was the deregulation of petrol prices in June 2010 along with the upward revision in administered prices of other petroleum products.0 30.

both on account of weather related supply disruptions in a number of primary commodity producing countries and geo-political tensions in the Middle East and North Africa (MENA) region. inflation in this category increased significantly reaching 8. however. but reverted course subsequently. which was still higher than the average over the last decade at about 4 per cent. In the last quarter of the year.10 The year 2010-11 started with significant divergence between inflation as measured by WPI Chart II.8 Inflation in non-food manufactured products remained range-bound between 5.2.21). as also pricing power of producers amidst strong private consumption demand that supported momentum in industrial growth (Chart II. However. Per cent dependant item and also encourage investment in alternative sources of energy. however. prices rebounded significantly 15. was witnessed during the initial months of 2011-12.2. with severe welfare implications for low income countries.5 per cent in March 2011. Manufacturedfood productsinflationdeclined sharply during the initial period of the year reflecting largely decline in sugar prices and strong base effects.9 International commodity prices moderated somewhat during the first quarter of 2010-11 as greater uncertainty relating to recovery in advanced economies impacted commodity markets (Chart II. Any short-term price stabilisation objective could be attained through a separatefundcreatedforthatpurposewithaprovision for annual fiscal transfers from the budget within the limits of fiscal prudence. WPI and CPIs exhibited convergence II.20: Manufactured Products Inflation 25. partly reflecting geo-political developments and weather related disturbances II.3). indicating stronger pass-through of input costs than expected.0 0.0 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 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 -5. The impact of increase in international commodity prices on domestic inflation has been different for different commodity groups (Box II.Somesofteningofglobalcommodityprices.0 10. Chart II.0 20.21: International Commodity Prices 430 380 330 280 230 180 130 Jun-11 Feb-11 Apr-11 Dec-08 Dec-09 Jun-08 Jun-09 Jun-10 Dec-10 Aug-08 Aug-09 Aug-10 Feb-09 Feb-10 Apr-08 Apr-09 Apr-10 Oct-08 Oct-09 Oct-10 Jan-11 Jan-09 Jan-10 Apr-11 Apr-08 Apr-09 Apr-10 Oct-08 Oct-09 Food Price Index Cereals Meat Edible Oils Dairy Sugar IMF Primary Commodity Price Index Metals Oct-10 Jul-08 Jul-09 Jul-10 Food Crude Oil 29 Jul-11 80 Index: 2005=100 480 Index: 2002-04=100 International Food Prices (FAO) 310 260 210 160 110 60 International Commodity Prices .20). necessitating sustained anti-inflationary monetary policy actions II.3 to 5.9 per cent in the first eight months of 2010-11.0 5.0 Manufactured Products Manufactured Food products Manufactured Non-food Products thereafter. The increase in global food prices was also significant.0 Y-o-Y.2. Global commodity prices hardened during 2010-11.ECONOMIC REVIEW Generalisation of price pressures accelerated.

Oil prices crossed US$ 100 per barrel mark in the last quarter of 2010-11 and have remained high thereafter.1 -1.5 0.9 Petroleum 9. The estimates presented for different commodities in Table-1 reflect the combined impact.5 9.3 3.2 -4.9 2.3 -4. The demand for metals and minerals.28** 5.34** 0.1 0.6 13.―Inflation in Developing Asia: Pass-through from Global Food and Oil Price Shocks‘.1 65. Given the uncertain outlook for commodity prices.0 -46.6 90.5 Soyabean Oil 0.7 167.5 Cotton 0. Climatic changes and weather related disturbances are also impacting global food prices.8 19.8 44.8 Coal 2. The FAO food price index increased through 2009 and 2010 to regain the pre-crisis peak by February 2011. aluminium. such as meat and dairy products.55 -0. References: FoodandAgriculturalOrganisation(FAO)(2010).7 25.0 Maize 0. particularly steel. oil and coal have increased. The actual impact of global commodity shocks on consumer price inflation in developing countries depends on government policy measures (Jongwaninch and Park.4 2.9 36.2 0.00 0. Import barriers and large farm subsidies in advanced economies are influencing the supply response through price distortions. domestic supplydemand trends. covering food.3 3.03** 0. November 2010 Jongwaninch. Rising per capita income is changing food habits resulting in higher demand for protein-rich food items. as has been the case since the beginning of 2011. metals and other commodities. May Table 1: Impact of Global Commodity Price Movements on Domestic Prices Item 2010-11 (Y-o-Y Increase in Per cent.9 30 . The global food price pressures reflect the combined impact of growing demand and weak supply response.9 Rubber 0. copper.3 Transmission of Global Commodity Price Shocks to Domestic Inflation With a surfeit of liquidity as a result of very low levels of interestratesandsuccessivemeasuresofquantitativeeasing by global central banks.07** 5.08 0. The recent concerns on nuclear power post-Japanese earthquake can only worsen the energy supplies.ANNUAL REPORT Box II.1 27. ** : Significant at 1 per cent level of significance.53 1.9 29.5 Gold 0.1 33. The second round effect reflects responseofwagesandpricesaimedatprotectingrealwages and profit margins as input costs rise. due to increasing urbanization as well as diversion of land for bio-fuels production.03** -2. administered price interventions and pricing power at the wholesale level. # : Estimated using Partial Adjustment Model $ : Long-run elasticities are not reported for products where short-run elasticity is not significant.6 103.2 Estimated Elasticity Shortrun# 7 0. Low energy efficiency and policies on oil subsidies have also contributed to the demand growth.2 Copper 0.4 27.03** 0.5 0.3 6.6 -7. upside risks to India‘s inflation path could persist. the availability of arable land is shrinking.06** -0. Financialisation of commodities has added a new dimension to the commodity price cycle.98 1. oil.8 0.0 109.4 0.0 Aluminium 0.0 Source: World Bank and Ministry of Commerce and Industry. Thespillovereffectstodomesticpricesdependonthedegree of import dependence in a commodity.8 Wheat 1.2 63.1 7.02 3.00 Rice 1. with the direction of causation presumed from global prices to domestic prices.47 0. global commodity prices recovered faster than the global economy supported by leveraged trades.2 10.66 0. The impact ultimately depends on the weight of respective commodities in the WPI and the linkages with other commodities that determine the second round effects (Table-1).8 -12. On the supply side.0 6. including transportation and fertilizer costs.41** Longrun$ 8 ---0.WorldFood Outlook.2 82. Progress on alternative sources of energy also lags behind the demand trends. GOI. March) Weight in WPI 1 2 International Prices 3 Domestic Prices (WPI) 4 July 2011 over March 2011 (Increase in Per cent) International Prices@ 5 Domestic Prices (WPI) 6 -1. Recent spikes in oil prices have also raised the input costs for farms.5 15.2 1. Asian-Pacific Economic Literature.4 0. Geo-political factors continue to be an important factor behind sudden and sharp increases in oil prices. the peak oil hypothesis seems to suggest that global production may be peaking.3 Sugar 1.3 8. The significant reversal in the commodity price cycle was also broad based.01 1. despite the softening of price pressures so far in the year. This has become a major source of pressure on headline inflation in India during 2010-11. The pace of urbanisation in EMEs with emphasis on physical infrastructure has increased demand-supply imbalances.00 1.02 7. In the case of oil.4 Silver 0.7 28. 0.0 33. 25(1): 79-92.2 2. 2011).05** -31.17** -1.JuthathipandDonghyunPark(2011).5 0.8 0.42 0.48 0.3 -0. Robust growth in EMEs and growing population have boosted the demand for food items.4 37.7 40.7 0.7 Fertilizers 2.4 42.8 -1.2 0.9 2.

Per cent 8. While some still subscribe to the conventional view (influenced by the Philipscurve)thathigherinflationtolerancecouldyield higher growth.23).0 6. this gap narrowed significantly. In the Indian case.ECONOMIC REVIEW Chart II.0 4.2. Historical experience does not provide much evidence for any conventional growth-inflation trade-off in the Indian casethatcouldsupportinflationtoleranceasameans to higher growth. the high WPI inflation reflected increasing generalisation of price pressures. domestic producers could find it difficult to pass on higher input costs in 31 . II.23: Trends in GDP Growth and Inflation 14.whichinturnbecameasourceofcontention in terms of the relevant measure of inflation used in India for conduct of policies (Chart II. ―low and stable inflation‖ remains a dominant policy objective for the Reserve Bank.0 10. especially when inflation is high and above a threshold. II. While the decline in CPI inflation primarily reflected lower food inflation. however. the empirical evidence and theoretical justifications over time have led to a shift in the mainstream thinking from ―inflation tolerancecangreasegrowth‖to―inflationhurtsgrowth and hence must be contained‖. which could weaken growth by impacting export prospects. and also the possibility of a threshold level of inflation beyond which the risks from inflation to growth could magnify.11 As inflation persisted at above the comfort leveloftheReserveBankthroughtheyear. others view that inflation itself is a risk to growth. long-term data show that high inflation has generally been associated with lower. Growth-inflation trade-off acquired the centre stage of policy debate II.22: CPI and WPI Inflation 18 16 14 Chart II.0 2. in an open economy. During the course of the year.2. not higher. II.13 If inflation is a risk to the medium-term growth. and (c) fiscal consolidation. it is important to recognise the transmission channels throughwhichtheimpactongrowthcouldmaterialise. These three factors have been: (a) growing openness (and the resultant competition on a global scale).adecision on the difficult choice of sacrificing some growth to contain inflation became inevitable.2. three important factors that contributed to the high growth performance prior to the global crisis can be expected to be adversely affected by persistent high inflation. because of the associated real appreciation of the exchange rate.0 Per cent 12 10 8 6 4 2 Y-o-Y. (b) strong growthininvestmentdemandledbytheprivatesector.14 High persistent inflation is a risk to external competitiveness.0 0 -2 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 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 5 Year Moving Average WPI Inflation 5 Year Moving Average Real GDP Growth Difference WPI CPI-IW andCPIs. economic growth (Chart II. Moreover.0 12.22). As such.2. In fact.12 In the debate on growth-inflation trade-off and the role of monetary policy.0 1957-58 1961-62 1965-66 1969-70 1973-74 1977-78 1981-82 1985-86 1989-90 1993-94 1997-98 2001-02 2005-06 2010-11 0.

In pursuing the anti-inflationary policy.2. which adjusts back to its ‗natural rate‘. necessitating much larger subsidies than may be planned. Fall in asset prices in response to high inflation which involve wealth and income effects also may not be congenial to growth.AtinflationlowerthanP*. Chart 1: The Backward Bending Phillips Curve Inflation (%) P* MUR U* Unemployment Rate (%) MUR = Minimum Unemployment Rate Following the work of Palley (2003). In an environment of rising inflation government expenditure may continue to grow at a pace exceeding the rate of inflation but revenue collections may not keep up with inflation..ANNUAL REPORT the form of higher output prices. however.ThePhillipscurverelationship–theempirically observed negative relation between change in nominal money wages and rate of unemployment – gained popularity in the late 1950s and 1960s.15 The fiscal situation may not improve in an environment of high inflation. there is a threshold inflation at P*. despite planned intention for consolidation. then the actual inflation will exceed the expected inflation. because of the competition from imports resulting in pressures on earnings and dampening of investment plans.. So Phillips curve becomes vertical in the long run. which could affect capital flows. The stagflation of the 1970s destroyed faith in it.) 32 . a high inflation environmentmayinitselfbecomeaconstrainttofaster fiscal consolidation.16 Inflation could also work against growth through other channels. which may be consistent with the highest sustainable growth path.4 Growth Inflation Trade-off and Threshold Inflation The growth-inflation trade-off debate in economics is a long standingone.At NAIRU. Phelps and Friedman helped explain the existence of stagflationbydistinguishingthe‗short-runPhillipscurve‘. it is now being realised that the Phillips curve relationship may be lot more complex. II. then the trade-off relationship may not exist even in the short-run. at which higher inflation will co-exist with NAIRU. Desirable level of inflation Box II. In these models. foreign investors may also see inflation as a risk factor. in the long run monetary policy cannot affect unemployment. In the policy debate on the trade-off. as expectedinflationequalsactualinflation. there would not be any exploitable trade-off (Contd. Private investment is particularly impacted by distortions through both high inflation and inflation volatility.also called the ‗expectations-augmented Phillips curve‘. Even though short-run Phillips curve shifts up when inflationary expectations rise.Phillips curve is negatively sloped at low levels of inflation. While delayed fiscal consolidationcoulddampengrowthimpulsesandalso increase the risk of inflation. Moreover. If a central bank uses the trade-off in the short-run and gives an inflation surprise (which was not anticipated) in its attempt to allow growth to remain above potential. If expectations are rational.4).causinganupwardshiftintheshort-runPhillips curve. with the likelihood of the relationship changing from low inflation to high inflation. and when it has to just focus on containing inflation even at thecostofsacrificinggrowth. which could be country specific and is an important guidepost for monetary policy in terms of when it could use the short-run trade-off. becomes positively sloped at high levels of inflation and turns vertical if inflation expectations converge to actual inflation (Chart1). Inflation higher than the threshold level would have to be contained to avoid the welfare loss arising from both high inflation and lower growth. and the trade-off relationship may work in the short-run. but has been long discredited by economists. But the adaptive expectation process could soon lead to revision in inflation expectations.Thelong-runPhillips curve is known as the Non-Accelerating Inflation Rate of Unemployment (NAIRU).relying onshort-runtrade-offcouldmakesense. inflation is fully anticipated. the most important one being monetary policy response to inflation and the associated increase in the interest cost of capital.2. Thus. Private investors have to spend time and money to understand and manage the effects of inflation on their business.Butatinflationrates above P*. This would especially occur when global commodity prices drive inflation. II. inflation expectationsareapositivefunctionofactualinflation. Estimates on threshold inflation for India are found to be in a range of 4-6 per cent (Box II. a common distinction is oftenmadebetweentheshort-runPhillipscurveandthelongrun NAIRU. it is important for a central bank to identify the threshold level of inflation.

as also the distributional and other objectives behind containing inflation. The average of the non-food manufactured products inflation in the last one decade has been about 4 per cent. This has motivated Reserve Bank‘s emphasis on containing perceptions of inflationintherangeof4. Senhadji. and by containing inflation a central bank could best contribute to sustainable employment and growth levels in the medium-run (Gokarn. Three broad approaches have been: (1) running a series of spline regression to find threshold value of inflation which maximises adjusted R2 and minimises Root Mean Square Error (RMSE). Different techniques have been used in the literature to estimate threshold inflation. (2003). ‗urban‘ and ‗All India‘ from January 2011 (Box II.5). (2001). High inflation and repeated supply shocks impacted the inflation expectations adversely.17 Two significant improvements in database on prices during the year were the revision of WPI base from 1993-94 to 2004-05 and the introduction of a new Consumer Price Index for ‗rural‘. R. and Abdelhak S.. 48(1)." IMF Staff Papers. need not completely conditiontheinflationobjectiveofmonetarypolicy. Significant revisions of provisional data over successivemonthsalsowidenedtheinformationlags. IMF Working Paper 10/76.thewelfarecostsofinflationparticularly for the poorer section of the society. 71(1): 35-50.2. it will be closer to the measure of inflation that is being commonly used in other countries for the conduct of monetary policy. (2010).2. particularly the information on the extent of generalisation of price pressures. Subir (2011).ECONOMIC REVIEW (. Sarel. ―The Backward Bending Phillips Curve and the Minimum Unemployment Rate of Inflation (MURI): WageAdjustmentwithOpportunisticFirms‖. No. Mumbai."Threshold Effects in the Relationship Between Inflation and Growth. following Sarel (1996).I.18 The changing dynamics of inflation had a major element of uncertainty throughout the year. Palley. Khan. T. A. however. ―Estimating the Inflation-Growth Nexus.. the emphasis has always been on the short-run stabilisation role for monetary policy. ―Sustainability of Economic Growth and Controlling Inflation – The Way Forward‖.sinceeven atthethresholdlevel. The introduction of new CPIs provides a nationwide price index which is more comprehensive both in coverage across regions and commodity groups..Intheageold policy debate on growth inflation trade-off. and Prasad. 2001) and (3) estimating threshold using Logistic Smooth Transition Regression (LSTR) model (Espinoza et. vol. This is because thenaturaltrendgrowthoftheeconomyisconditioned by structural factors. H.1. 2011). The new series of WPI marks a major improvement in terms of scope and coverage of commodities and is also more representative of the changing underlying economic structure.5percent. Mohsin S.0-4. TheManchester School of Economic and Social Studies. Price statistics improved.The weighting pattern also reflects more recent consumption pattern as compared to the existing CPIs. Leon.. which is consistent with changes in the production and consumption patterns. may be even lower than any estimated threshold level in view of the distributional consequences of inflation andothermacro-economicconsiderations.43. Gokarn. the Reserve Bank‘s medium-term inflation objective has been 3 per cent. Address at FICCI‘s National Executive Committee Meeting. with a revised WPI base and new indices of CPI II. 2010). April 5.) relationship for policy. Keeping in view the distributional consequences and the macro-economic requirements of an open economy to keep inflation low relative to the rest of the world. which added significant complexity to the Reserve Bank‘s forward looking assessment of the inflation outlook. Vol. IMF Staff Papers.ASmoothTransition Model‖.Anchoring inflationexpectationstocheckinflationhasbeenanimportant element behind monetary policy actions. Anti-inflationary thrust of policy sustained in 2010-11 amidst changing dynamics of inflation II.al. and the Reserve Bank 33 .Clearcommunication has been made in the policy statements to this effect.Concld. M (1996). (2) to estimate the unknown threshold inflation along with other regression parameters using non-linear least squares (NLLS) (Khan and Senhadji. As year-on-year inflation data based on the new CPI become available from January 2012. The importance of containing inflation even at the cost of some marginal sacrifice of growth in the short-run appears to be consistent with the estimates of growth-inflation trade-off for India. have to be contained.Itcapturesthepresentunderlyingeconomic structure. References Espinoza. Empirical estimates for threshold inflation for India using these alternative techniques are found to be in 4-6 per cent range. ―Non-linear Effects of Inflation on Economic Growth‖. Estimated threshold level.

is about 5. A comparison of the new CPI series against the existing series suggests that while the weight of food group has declined significantly for both rural and urban groups. of which 406 are new manufactured products. Table 1: Major Changes in the Weights and Commodities in the Revised WPI Series Weights Items 1 All Commodities I. The weighting pattern is derived from the NSSO‘s Consumer Expenditure Survey of 2004-05. Ministry of Statistics and Programme Implementation introduced a new series of Consumer Price Indices (CPI) for all-India and States/ UTs separately for rural. Tobacco & Intoxicants Fuel & Light Housing Clothing.54 52. The weight of primary articles declined in the revised WPI. . CPI-Urban Weights 50 45 40 35 30 25 20 15 10 5 0 Food Group 6. Miscellaneous Bedding Group & Footwear CPI Rural Labourers (1986-87=100) New CPI-Rural (2010=100) CPI-Industrial Workers (2001=100) New CPI-Urban (2010=100) sustaineditsanti-inflationarythrustofmonetarypolicy to anchor inflation expectations and contain demand induced pressures on inflation.97 9.must beto ease supplyconstraintsinkeysectorswheredemandcould be expected to continue to grow.00 22. A substantial increase in the number of new items added/revised reflects the changes in production pattern during the decade.II.482 in the new series. CPI-Rural Weights 80 70 60 Per cent 50 40 30 20 10 3. there has been a shift in weights towards non-food manufactured products.Although the changes in the weights for manufactured products are not substantial for the group as a whole.ANNUAL REPORT Box. The new series has 417 new commodities. Supari.75 11. Fuel and Power III.Also the new series has wider coverage as the price quotations have increased from 1.70 2.271. Supari.23 63.5 Towards Better Price Statistics Revision of WPI Base Year One significant development during 2010-11 relating to prices data was the revision of base year of WPI from 199394 to 2004-05.5 per cent for the overlapping period for which data are available (i.76 11.80 28.43 2. Introduction of new Consumer Price Index The Central Statistics Office (CSO).20 35.87 5.00 20.53 15. Higher food inflation (both primary and manufactured) in the new series is largely offset by the lower inflation in the non-food manufactured products leading to smaller difference in the overall inflation. Miscellaneous Bedding Group & Footwear Pan. These include items from unorganised manufacturing activity. Manufactured Products Food Non-Food New Series (Base:2004-05) 2 100. while the weight increased for fuel group and manufactured products (Table 1).27 6. the miscellaneous group.26 Per cent 3.91 64. has shown increase in its share (Chart 1).57 23.03 15.91 0 Food Group Pan.21 New Series (Base:2004-05) 4 676 102 55 47 19 555 57 498 Number of Commodities Old Series (Base:1993-94) 5 435 98 54 44 19 318 41 277 New Items added/ revised 6 417 11 1 10 0 406 25 381 Chart 1: CPI Weights (Old and New) a: CPI-RL vs.58 b: CPI-IW vs. 200506 to 2009-10) indicating that there is not much difference in the rate of inflation between the two series. The focus of medium34 term inflationmanagement.34 5. urban and combined.36 24. This.00 Old Series (Base:1993-94) 3 100. however is marked by differential inflation rates for food and non-food products in the old and new series. however. The average overall inflation rate. Tobacco & Intoxicants Fuel & Light Clothing.90 10.35 8.40 46.77 56.63 14. Primary Articles Food Non-Food and Minerals II. largely including services.00 22.918 in the old series to 5.42 9.97 55.78 14. Indices are being released from the month of January 2011 with 2010 as the base year.12 14.91 66.73 7. according to the new series and the old series..40 6.e.

ECONOMIC REVIEW III. credit growth remained strong throughout the year. reflected in rise in depositandlendingratesofthebanksduringthelatter part of the year.24: Growth in Reserve Money 20 15 Per cent 10 5 2008-09 Reserve Money 2009-10 2010-11 Adjusted Reserve Money determined by demand. LAF and Marginal Standing Facility (MSF . Strong growth in reserve money in 2010-11 reflected increase in currency demand and large injection of primary liquidity II. Besides.6 The most notable source of increase in net Reserve Bank credit to the Centre during 2010-11 II. due to increased demandonaccountofeconomicgrowth. in line with the strong growth of the economy.Moneysupply.4 Currency in circulation is the largest component of reserve money and is primarily 2 Changes in net Reserve Bank credit to the Centre primarily reflect the combined impact of the Reserve Bank‘s liquidity management operations conducted through OMO. Increase in repo under LAF/OMO purchases/availment of MSF and decline in reverse repo under LAF/MSS balances/government‘s surplus balances with Reserve Bank lead to increase in net Reserve Bank credit to the Centre. Chart II. there were large scale injections under liquidity adjustment facility (LAF) and open market operations (OMO) purchase auctions during times of liquidity duress in these three years. net Reserve Bank credit to the Centre2 has been the dominant source of increase in reserve money since 2008-09 (Chart II.3. as liquidity eased and was broadly within the desirable level of deficit (one per cent of NDTL of banks). There was acceleration in currency in circulation in 2010-11. the Reserve Bank‘s monetary policy stance became strongly antiinflationary. remained strong on the back of strong growth in deposits. Primary liquidity injected mainly in the form of large scale repo and OMO in 2010-11 II.1 During 2010-11.3.2 In 2011-12 till July. There was strong growth inreservemoneyduring2010-11duetolargeinjection of primary liquidity in response to the tight liquidity conditions that prevailed since end-May 2010.6). This is because government borrowing shot upsignificantlyinthewakeoftheglobalfinancialcrisis and necessitated active management of liquidity in the form of unwinding/de-sequestering of market stabilisation scheme (MSS) balances (in 2008-09 and 2009-10).3 Trends in reserve money largely reflect the impact of the monetary policy changes and liquidity management operations. reflectingmainlytheborrowingsbytelecomcompanies to pay for spectrum auctions. II. MONEY AND CREDIT II.introduced in 2011-12) as also the government‘s cash management operations. operations under the MSS.highinflation and low yield on deposits for most part of the year (Box II.5 On the sources side. the pace of injection of primary liquidity declined leading to a deceleration in basemoneygrowth. Even adjusting for the policy-induced change in the cash reserve ratio (CRR).ontheotherhand.3. reserve money growth in 201011 was higher than that in 2009-10 (Chart II. Money growth was moderate during the year but picked up during the last quarter of 2010-11.3. Notwithstanding some deceleration in the second quarter of 2010-11.3.25). The tight liquidity helped in strengthening the monetary policy transmission. Liquidity remained in deficit mode for a major part of the year on account of both structural and frictional factors.24 and Appendix Table 9). Credit to the commercial sector increased rapidly during the first quarter of 2010-11. II. and vice versa.3. 35 .

Open Market Purchases.3. Currency 36 II.27). though the pace of deceleration was lower than that of the previous year.000 crore conducted mainly through the auction route. Detailed discussions on liquidity management operations of the Reserve Bank are presented in Chapter III. reflecting the resurgence in economic activity (Appendix Table 10). there was a significant increase in government‘s balances with the Reserve Bank reflecting the higher-than-expected proceeds from auctions of telecom spectrums.whichthoughreversed trend during the latter part of the year as banks raised interest rates markedly (Chart II. The Reserve Bank undertook liquidity injections through LAF repos that peaked at nearly two times more than the level conforming to the comfort zone of the Reserve Bank. The stronger transmission of monetary policy led to a substitution from demand deposits to time deposits during the last quarter of 2010-11 and in 2011-12 so far.26: Liquidity Management Operations ( Thousand crore) ` Q1 -150 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2011-12 LAF Centre's Surplus MSS Open Market Purchases Net Foreign Currency Assets Adjusted for Valuation Note: Net Reserve Bank Credit to the Centre represents the combined impact of changes in MSS. The aggregate outcome of variations in autonomous and discretionary components of liquidity match with the changes in banks‘ reserves (Chart II. The sharp drawdown of government balances during the fourth quarter improved the liquidity situation.3. There was a slowdown in the growthoftimedepositsinitially. Slower pace of deposit mobilisation and dip in multiplier led to low rate of money growth in 2010-11 II. The government balances continued to build up till the end of the third quarter of 2010-11. large liquidity deficit occurred amidst tight monetary policy stance.25: Important Sources of Variation in Reserve Money Chart II. The balance was further boosted by the quarterly advance tax collections.ANNUAL REPORT 300 150 200 100 100 50 0 0 -50 -100 -100 -200 2008-09 2009-10 2010-11 Variations in ` Thousand crore Chart II.7 EventhoughLAFoperationsandopenmarket purchases explain almost the entire fiscal variation in net Reserve Bank credit to the Centre. whichisanautonomousdeterminantofliquidity. the most significant liquidity impacting variable intra-year was the Centre‘s surplus balances with the Reserve Bank. 2009-10 2010-11 Autonomous Drivers of Liquidity RBI's Management of Liquidity Change in Bank Reserves was LAF operations. The Reserve Bank also unwound the remaining MSS balances amounting to `2. The OMO was confined to the second half of the year. During the third quarter of 2010-11.737 crore by July 2010. This reflected the change in the mode of the LAF from reverse repo (absorption of liquidity)torepo(injectionofliquidity). On the components side.8 Overall monetary conditions reflected significant changes in the autonomous drivers of liquidity as well as the offsetting discretionary liquidity .26).From June 2010.3.9 Broad money (M3) growth decelerated for the third successive year in 2010-11. II.Theothermajor source of injection of liquidity was open market purchases worth about `67. management operations of the Reserve Bank. LAF and Centre's SurplusBalance. the deceleration was mainly on account of contraction in demand deposits.

remained the dominant source of increase in M3 during the year.10 The significant increase in currency with the public was on account of prevalence of high inflation. Net domestic assets.5 Y-o-Y growth in per cent 9. decelerated due to the Chart II.12 On the sources side.07. 2011 May 6.5 76. This explains the rather subdued growth in broad money despite high growth in reserve money in 2010-11.0 July 3.29).3. reflecting heightened nominal activity (Box II. In 2011-12 so far. there was an increase in the velocity of money in successive quarters of 201011. the Reserve Bank increased the CRR in April 2010 leading to an increase in the reserve-deposit ratio. Concomitant with the dip in the money multiplier.815 `5. Share of bank credit to the commercial sector in the annual increment in M3 increased significantly II.11 The strong growth in currency coupled with the subdued growth in deposits led to an increase in the currency-deposit ratio in 2010-11.6 16. real income growth and low return on deposits for most part of the year (Box II. 2010 November 19. 2009 December 18.0 Demand Deposits Time Deposits Interest Rate on Time Deposits (RHS) M3 with the public.5 Per cent 8.0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Currency with the Public Time Deposits with Banks Demand Deposits with Banks 2009-10 2010-11 Fortnight 2011-12 37 .0 7. The share of bank credit to the commercial sector in the annual increment in M3 increased significantly reflecting the strong growth in credit to the commercial sector. net foreign assets registeredanincreasein2010-11asagainstadecline in the previous year. 2011 April 23.0 1.0 -5.28: Variations in M3 in ` crore and per cent share of Major Components of M3 in the Variation `8. Chart II.90.6).3.96.0 9. 2009 August 27.6 73. 2009 May 22.ECONOMIC REVIEW Chart II. In 2011-12 so far (up to July).0 5. 2011 November 6. 2009 April 10.919 (Y-o-Y.1 16.0 8. The increase in these two behavioural ratios led to a dip in the money multiplier.29: Non-food Credit Growth 30.3.3 12. 2010 -10.6 83.0 August 14. 2009 6. 2011 June 4.0 20.0 15. 2010 December 31. however.0 15.0 September 25.0 0. II.0 10. This is also reflectedinthestronggrowthinnon-foodcreditduring the year (Chart II.07. 2010 July 29. 2011 March 25. 2009 increaseinopportunitycostofholdingcashasinterest rates on time deposits increased.9 12. the share of currency in the annual increment in M3 also increased in 2010-11 (Chart II. 2010 February 11. however.817 `7. 2010 June 17.0 86. currency demand.0 11. however.27: Money and Deposit Growth 25.2 12. 2009 January 29.4 2006-07 2007-08 2008-09 2009-10 2010-11 10.929 `7.28).0 14.0 20. Moreover.5 7.549 71. increased at a rapid pace and accordingly. per cent) 25.7).76.5 12. 2010 October 8.5 6. II. 2010 July 16. 2010 March 12.6 `8.0 -15.

Sveriges Riksbank. eg. crosscountryevidencesuggeststhattheattractivenessofcurrency as a medium of exchange can increase as against card payments.―WhitherLoose Change? The Diminishing Demand for Small Denomination Currency‖. etc. in the years when the real return on term deposits is negative (the average inflation being higher than the average rate on deposits of one-three year maturity).5 10. ― Tax Evasion and CurrencyRatio:PanelEvidencefromDevelopingCountries‖.credit/debitcards. Empirical Economics.6 per cent in 2008-09 to 19.0 9.0 Per cent 11. currency demand shot up significantly. etc.e.0 10.05 per cent increase in the demand for currency. Second. pulses. With increasingimportanceofKYCandCBSandreportingoflarge value bank transactions for tax purposes in the recent years. During the 2000s.8 per cent in 2008-09 to 8. which experienced a low and stable inflation for a major part.6 Determinants of Currency Demand – What Caused the Shift in Trend? The demand for currency is determined by a number of factors such as income. References: Amromin.0 10.5 8.GeneandSujitChakravorti(2009).5 per cent in 2010-11. yen and pound have large off-shore demand as medium of international transactions. when inflation was relatively high. often in double digits. March-April. and availability of higher denomination notes appear to have maintained the increasing growth trend of the cash economy operating from both the demand and the supply sides.0 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 8. and milk during 2009-10 and 2010-11 – where transactions are expected to be cash-intensive.0 Y-o-y growth in per cent Currency Growth Cash to GDP (RHS) Over the long term. there was a step-up in real economic activity from 6.0 per cent in 2010-11.0 20.) also seems to have boosted demand for cash. the opportunity cost of holding currency. Speech at Cards & Cash Payments Forum in Stockholm. being anonymous. Chart 1: Currency to Demand Deposits 143 138 133 Per cent 128 123 118 113 108 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 and urbanisation. increase in ATM network (increase in number of ATMs as well as access usage rules such as freer access to ATMs of other banks) decreases show leather costs.implyinganegativerealrateofreturn on deposits.ANNUAL REPORT Box II. Several factors could explain the growth in currency demand in India in 2010-11.This is observed in India also (Chart 1).afteralongperiodofseculardecline. the interestrateseemstobeasignificantdeterminantofcurrency demand. In the remaining years.0 12. Further. Chart 2: Growth in Currency and the Cash Economy 22.. i. Third. The social sector expenditure by the Government. it was found that interest rate per se is not a significant determinant of currency.0 16. The price effect on the demand for currency is also found to be close to unity..This could have facilitated the substitutability between currency and demand deposits in recent years.5 9. the interest rate on bank deposits was generally lower than inflationduring2010-11. reflected in uptrend in the currency to GDP ratio (Chart 2). However. Journal of Money. currency use.0 18. ―Will Cash Replace Cards?‖. However. Lars (2011). fruits and vegetables. currency demand can potentially rise. Currencies such as the US dollar. Also. In theory. May. (2010). A study of the decadal trend reveals that even as income elasticity of currency demand has stayed relatively stable.24 per cent increase in the demand for currency. Inflation remained high. Nyberg. Embaye. particularly in 2008-09 when the currency to GDP ratio peaked.ATMs.Abel and Wei-Choun Yu. particularly in countries with low inflation or large shadow economies. Credit and Banking. Currency is also used as a store of value.theshare of agriculture and allied activities in nominal GDP increased from 17. Consequently.chequepayments. particularly in rural areas (MGNREGS. A 1 per cent increase in the prices (WPI) leads to a 1. in respect of commodities such as foodgrain. the interest rate on interest bearing assets and the availability of alternative instruments of transactions. the acceleration in per capita real GDP growth. facilitates tax evasion. relating to demand for currency in India for the period 197273 to 2010-11 reveals that a 1 per cent increase in the real income (GDP) leads to a 1. an estimated relationship using VECM.0 8. 41(2-3): 315-335. priceelasticityincreasedsignificantlyinthedecadeof2000s. commercialisation of agriculture and allied activities 38 . price level. euro.0 14.

38 1.8 4.30 1. Subsequently. In recent years. with the return of confidence in the financial system and the economy.0 -2. remained below the Reserve Bank‘s indicative trajectory.0 -4. would suggest a corresponding increase in the velocity of money (following the conventional quantity theory of money equation MV=PY). as the country develops. In almost every country. money demand Chart 1: Falling Velocity of Money over the Last Six Decades 10000000 8000000 ` crore 6000000 4000000 2000000 5.20 2008-09: Q3 2008-09: Q4 2009-10: Q1 2009-10: Q2 2009-10: Q3 2009-10: Q4 2010-11: Q1 2010-11: Q2 2010-11: Q3 2010-11: Q4 1.) .35 1. In a theoretical framework.6 1. Also anticipated and unanticipated shocks to money demand and the resultant shift in the velocity pattern could add further noise to the trend in money growth. thereby complicating the analysis of monetary trends vis-à-vis those of output and prices. the economic growth of the last decade has plausibly accelerated the monetisation process so much that it more than offset the gains from the financial sophistication.40 1.7 Short-run Shocks to Money Velocity and the Behaviour of Money Growth M3 growth. for most part of 2010-11. velocity of money has exhibited significant deviations from its respective medium-term trend post the global crisis. increasing confidence in the stability of the financial system lowers the income elasticity of money demand which can be seen as the rising phase of velocity.0 2010-11 1.especiallycontagionriskarisingfrom crises. could add significant instability to domestic money demand.0 -8. the velocity of money. Despite the financial sector reforms and the enhanced financial deepening.6 5. the velocity of money is generally presumed to be stable.4 2.Accentuatedliquiditypreferenceandslackcredit demand in the aftermath of the crisis were reflected in sharp fall in velocity (Chart 2).30 1.2 4.0 0.28 1. due to the increasing monetization of the economy. both annual and quarterly data correspond to the initial falling phase of velocity which could be ascribed to the increasing monetization of the economy (Chart 1).32 1.26 1.ECONOMIC REVIEW Box II.24 1. Oncethefinancialsystemdeepensaccompaniedbyfinancial and technological innovations...8 2.40 1. RHS) (Contd.15 Velocity Change in Velocity (Y-o-Y %.0 1.4 4. especially in the short run. particularly due to significant short run shocks. has declined since the late 1960s. if not constant.6 3. In the Indian context.25 1.0 -6.2 Nominal GDP rises (reflected in money supply growth) and velocity falls. RHS) Velocity 39 1952-53 1955-56 1958-59 1961-62 1964-65 1967-68 1970-71 1973-74 1976-77 1979-80 1982-83 1985-86 1988-89 1991-92 1994-95 1997-98 2000-01 2003-04 2006-07 2009-10 0 Broad Money Velocity (RHS) Quarterly 12 8 4 0 -4 -8 -12 Change in Velocity (Y-o-Y %.36 1.0 3. however. In the initial developing phase of a country.. This deceleration in money growth alongside both a robust pick-up in growth as well as a high inflation environment. velocity Chart 2: Money Velocity Trends Since the Global Crisis 1. The sharp fall in velocity for the US (because of the financial crisis) despite the massive quantitative easing in the aftermath of the Great Recession and the ensuing ―velocity crowding out of quantitative easing‖ highlights that externaldevelopments.2 2. Hence the continued decline in velocity.34 1. output and prices (as set out in the conventional monetary arithmetic above).0 2. and the volatility therein could either amplify or dampen the expected relationship between money. Bordo and Jonung (1987) in their pioneering study identified a ―U‖ shaped velocity pattern across countries with distinct phases corresponding to the level of development. Any breakdown in its stability. the rate of decline in velocity had accelerated. In India.22 2007-08 2008-09 2009-10 Annual 4. computed as a ratio of the nominal income to broad money.

Cambridge: Cambridge University Press. Empirical estimates suggest that the conventional determinants of velocity (GDP. even in the short run. Sitikantha and Subhadhra S (2011). basic metal and metal products and engineering in incremental credit to industry increased (Chart II.) increased to its normal trend. Annual Data: V = 54. while the dominant share of incremental industrial credit went to infrastructure sector.6 7. Chart II. it remains above the Reserve Bank‘s indicative trajectory for the year.MichaelD.98) Money growth trajectory projection involves the conditional predictabilityofvelocity. basic metal and metal products.30 CY.1 2..andLarsJonung. AVector Error Correcting Model (VECM) estimation of some determinants of velocity as suggested by theoretical and empirical literature – output [Y . inflation expectations (WPI).6 2.04 R1 + 1.2 7.52 – 3.90 WPI + 2.3 40 . however.29) Quarterly Data: V = 39.Hence.96) (2.30). This increase in velocity following the fast paced fall witnessed in the past two years.3 4.4 3. money growth in the medium-term is morelikelytobeconsistentwiththeinflationandoutputtrends than in the short-run.Annual SBI lending rate. the share of other industry groups such as food processing.0..TheLong-RunBehavior of the Velocity of Circulation: The International Evidence. 1987. ―The Velocity Crowding-out Impact: Why high money growth is not always inflationary‖. May 2011.9 12.8 13.03 Y + 0. interest rate (R1 .3 47.05 R2+ 1.06) (6..18D2 (5. even as credit growth is decelerating.ANNUAL REPORT (.GDP at factor cost (constant price)].34) (6.81) (1. financial deepening indicator proxied by bank credit to GDP ratio(CY).D2-Quarterly) capturing the impact of short run disturbances on velocity – yielded the following results. R2 Quarterly 91-day T-Bill rate).moneygrowthintheabsence of reference to velocity trends could at times be misleading.13 Disaggregated data suggest that the flow of credit to industry during 2010-11 remained strong while that to services and personal loans increased significantly (Appendix Table 11). and hence. In the medium run. explains the subdued growth in M3in 2010-11.30: Share of Various Sub-sectors in Incremental Industrial Credit Flow 2009-10 4.2 6.19Y + 0. Bordo. II.8 15.3. even though infrastructure continued to account for the largest share of industrial credit.Butintimes of major uncertainty velocity could significantly deviate from its medium trend and weaken any forward-looking assessment.Concld.28 D1 (9. Short-run trends in money growth should be seen along with expected changes in velocity. Reference: Pattanaik.65) (6. petroleum and mining and quarrying also together accounted for one third of the incremental industrial credit during the quarter.39) (6. RBI Working Paper.6 Basic Metal & Metal Product Infrastructure 42.0 2010-11 6. velocity could be expected to remain anchored to the long run trend.andadummyvariable(D1-Annual.8 Food Processing All Engineering Textiles Construction Chemicals & Chemical Products Other Industries 1. Within industry. interest rate and financial deepening) as well as the short term shocksarestatisticallysignificantforIndiandata.2 22.38 – 4. During the first quarter of 2011-12.

Y-o-Y growth rate in per cent 11.0 22. II.This was mainly on account of revival of FDI inflow. on the other hand. 2009 January 15. 2010 December 17. declined (Chart II.0 Per cent 600000 550000 500000 450000 400000 The incremental funding for the commercial sector in 2010-11 was entirely accounted for by banks II. 2011 March 11.0 -7. 2011 June 3. 2009 October 23.0 2. accounted for nearly 70 per cent of the funding for the commercial sector.0 16.0 September 24. 2010 April 9.0 0.ECONOMIC REVIEW Growing disparity between credit and deposit growth added to the strain on liquidity for most of 2010-11 II. 2011 April 8. 2009 July 31. the flow of resourcesfromnon-banks. 2010 January 14. 2009 November 20. 2010 February 12. 2010 November 19. The Monetary Policy Statement for 2011-12 imposed limits on total investment in debt-oriented instruments of mutual funds by SCBs. 2011 August 28. 2009 December 18.3. 2010 July 30. The moderation in nonChart II.0 Divergence in percentage points between growth rate of credit and deposit (RHS) Aggregate Deposits Bank Credit Per cent 41 . 2010 October 22.0 -10. there was a decline in FDI inflow leading to an overall dip in foreign funding for the commercial sector.0 20. 2009 May 8.32: Flow of Financial Resources to the Commercial Sector 750000 700000 650000 ` crore 50. it increased by nearly 1.17 Banks‘investments in liquid schemes of debtoriented mutual funds had grown manifold in the recent period.31).0 10.0 -4. 2011 February 11.0 -20. Resultantly. and declined thereafter as credit growth showed slight moderation and bank deposits increased following hike in deposit rates reflecting stronger monetary policy transmission (Chart II.0 -10. 2010 July 2.0 40.0 19.3. the investment in such schemes moderated from mid-May 2011. nonbanking sources. 2009 2008-09 2009-10 2010-11 Banks Non-banks Increase in Bank Sources (RHS) Increase in Non-bank Sources (RHS) Increase in Total Flow (RHS) banking sources of finance subdued the pace of increase in the total flow of resources to the commercial sector in 2010-11. Subscription to commercial papers by non-banks also declined. 2010 April 10.5 times between end-March 2011 and early May 2011. Chart II.14 The continued strong growth in credit juxtaposedwithsubduedgrowthindepositsforalarge partoftheyearwasastructuralfactorthatconstrained liquidity in the system.EventhoughSCBs‘investmentininstruments issued by mutual funds declined marginally in 2010-11.0 September 25. Such circular flow of funds can lead to systemic risk in times of stress/liquidity crunch.32).0 -1. 2010 August 27.31: Aggregate Deposits and Bank Credit of SCBs 25. 2010 March 12. 2011 July 1. notwithstanding the near 49 per cent increase in resource flow from banks. 2011 May 6.0 30.bothdomesticandforeign.0 13.0 8. The difference between the growth rate of credit and deposits peaked in midDecember 2010. The mutual funds.3.0 5. 2011 July 29. As for the foreign sources. with some reversal seen in July 2011. 2010 June 4. The sharp decline in domestic non-bank funding was mainly on account of a decrease in resources raised through private placements. II. 2009 June 5. 2009 July 3. 2009 7. while external commercial borrowings and short-term credit from abroad increased.3.16 During the first four months of 2011-12. however.0 10. 2010 May 7. are large lenders in the over-night money markets where banks are large borrowers and in certificates of deposit (CDs) of banks.15 Even as bank credit to the commercial sector recovered strongly during 2010-11.

a number of EMEs resorted to monetary tightening in response to inflationary pressures. Sovereign risk concerns. exerted upward pressures on EME currencies and asset prices. there was a rebalancing of global portfolios on the back of strengthening economic recovery in AEs. EMEs attracted greater portfolio flows given the easy availability of liquidity in AEs. While advanced economies (AEs) either maintained or further eased their monetary policy to stimulate economic growth. and equity prices in these economies increased.4. particularly the US.62 0.1 International financial markets witnessed frequent re-pricing of risks during 2010-11.33a to d).ANNUAL REPORT IV. in turn.2 Towards the end of 2010 and early 2011. The multipaced global recovery led to divergent policy responses. prompting some of these economies to take recourse to macro prudential measures and soft capital controls. notably Ireland. By end-February 2011.84 0. however. with the contagion of Greece‘s sovereign debt problem spreading to other economies in the Euro Area. II.51 16-May-09 30-Jun-09 27-Dec-09 22-Mar-11 11-May-10 27-Mar-10 25-Jun-10 22-Dec-10 23-Sep-10 10-Feb-10 20-Jun-11 14-Aug-09 12-Nov-09 28-Sep-09 6-May-11 9-Aug-10 7-Nov-10 110 100 90 80 70 60 4-Aug-11 5-Feb-11 1-Apr-09 Index 1000 800 600 400 200 4-Aug-11 6000 0 0. These flows. Portugal and Spain. sovereign CDS spreads widened in the region (Chart II. especially after the announcement of the second round of quantitative easing (QE2) by the US Fed. As a result.4 50 DOW JONES SENSEX MSCI WORLD (RHS) MSCI EM (RHS) GBP/USD EUR/USD JPY/USD (RHS) 42 4-Aug-11 5-Feb-11 1-Apr-09 2 20-Jun-11 27-Dec-09 14-Aug-09 22-Dec-10 12-Nov-09 28-Sep-09 23-Sep-10 10-Feb-10 6-May-11 0 11-May-10 20-Jun-11 3 . AEs Chart II.73 0. geopolitical risks in Middle East and North Africa (MENA) region and the repercussions on oil prices affected investor sentiments and sovereign CDS spreads increased in a few vulnerable economies in the Euro Area. bond yields firmed up reflecting the post-crisis rise in debt to GDP ratio as well as incipient signs of inflationary concerns.4.33: Indicators of Global Financial Market Developments a: Sovereign CDS Spreads: Euro Area 3000 b: 10-year Government Bond Yields in EMEs 9 8 Per cent 22-Mar-11 Basis Points 2500 2000 1500 1000 500 16-May-09 27-Dec-09 30-Jun-09 27-Mar-10 25-Jun-10 14-Aug-09 22-Dec-10 12-Nov-09 28-Sep-09 23-Sep-10 10-Feb-10 6-May-11 4-Aug-11 5-Feb-11 9-Aug-10 1-Apr-09 7-Nov-10 7 6 5 4 16-May-09 11-May-10 30-Jun-09 27-Mar-10 25-Jun-10 22-Mar-11 9-Aug-10 7-Nov-10 Greece Italy Ireland Belgium Portugal Germany Spain India China c: Stock Prices: Global and EME 22000 20000 18000 16000 14000 12000 10000 8000 22-Mar-11 20-Jun-11 16-May-09 11-May-10 30-Jun-09 27-Mar-10 25-Jun-10 9-Aug-10 14-Aug-09 27-Dec-09 22-Dec-10 5-Feb-11 12-Nov-09 28-Sep-09 23-Sep-10 10-Feb-10 6-May-11 7-Nov-10 1-Apr-09 d: Exchange Rate Movements 1600 1400 1200 Index 0. While credit spread narrowed down considerably in many AEs. particularly in the Euro Area affected the financial markets for a greater part of the year. despite transient stabilityresultingfromthesignificantEuropeanrescue package. FINANCIAL MARKETS Sovereign risks come to fore in the international financial markets II.95 0. reflecting persisting uncertainties. During 2010.

4. high unemployment and weak sovereign balance sheets.byandlarge. Yield curves in both AEs and EMEs flattened.34).4. II.34: Transmission of Policy Rates to Financial Markets 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 May-09 Aug-09 Jun-09 Sep-09 Nov-09 Oct-09 Apr-09 Jul-09 a: LAF Corridor and Overnight Interest Rates 230 180 130 80 30 -20 -70 May-11 May-10 Aug-10 Jun-11 Jan-11 Mar-11 Feb-11 Apr-11 Dec-09 Jun-10 Mar-10 LAF absorption(+)/injection(-) (RHS) Market Repo Rate Call Money Rate CBLO Rate Reverse Repo Rate Dec-10 Jan-10 Sep-10 Nov-10 Feb-10 Apr-10 Oct-10 Jul-10 Repo Rate Note: With effect from May 9. the primary concern of the Reserve Bank was to anchor inflationaryexpectationsthroughpolicyratehikes.3 With the Indian economy reverting to its precrisis growth trajectory during 2010-11.The effectiveness of the police rate hikes would hinge on the transmission of the same to the financial markets. During the liquidity surplus phase (April-May 2010). in response to the hike in the repo rate by 25 bps. b: Policy Rates and Short-term Money Market Rates 12 10 Per cent c: Policy Rate and Bond Market Rates 10 9 Per cent 8 6 4 2 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 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 8 7 6 5 Mar-09 Mar-10 May-09 May-10 Mar-11 May-11 Jan-10 Jan-11 Sep-09 Nov-09 Sep-10 Nov-10 Jul-09 Jul-10 TBILL 3M CP 3M CD 3M Reverse Repo Repo AAA 5-Yr Corp Bond 5-Yr Govt Bond Repo 43 Jul-11 0 4 Jul-11 -120 MSF Rate ` Thousand crore Per cent . Liquidity conditions transited from a surplus mode to a deficit mode during the year.beeninacorrectivemode since end-April 2011 but risks have been on the rise. Global financial marketshave. The developmentsintheglobalmarketshadtheirspillover effectonequityandforeignexchangemarketsinIndia.particularlysinceend-March2011indicating economic growth moderation.ECONOMIC REVIEW continuedtobeweigheddownbystagnantrealestate markets. As part of its calibrated exit from the crisis driven expansionary monetary policy stance. the Reserve Bank raised its repo rate by 175 bps and its reverse repo rate by 225 bps during April 2010 – March 2011. 2011 the MSF Rate and Reverse Repo Rate constitute the upper and lower bounds of the formal corridor. Chart II. The second half of 2011 could be more volatile in an environment of widening interest rate differentials betweenAEs and EMEs and enhanced financial risks following downgrade of US sovereign debt and apprehension of lower growth in AEs. The Working Group on Operating Procedure of Monetary Policy (Chairman: Shri Deepak Mohanty) observed that monetary policy transmission is the strongest in the money market and is more effective in a deficit liquidity situation than in a surplus liquidity situation. the average daily call money rates increased by 32 bps.4 The moneymarketratesmovementduringthe year was mainly influenced by the underlying liquidity conditions and the policy rate changes (Chart II. resulting in an effective policy rate hike of 325 bps. Monetary policy transmission strengthens with liquidity shifting to a deficit mode II.

35). the share of the primary issuances of the longer dated securities was raised during the year.4. monetary transmission strengthened. Monetary transmission strengthens further during 2011-12 so far.1 of Chapter III on monetary policy transmission after the switch over to the Base Rate). the rise in the medium term (5-year)andlong-term(10-year)yieldswaslowerthan that of money market rates (Chart II.ANNUAL REPORT The certificates of deposit (CD) rates declined.4. OMO purchases by the Reserve Bank during the third quarter of 2010-11.5 During the liquidity deficit phase. increase in the investment limits of FIIs in government securities.35: Movement in Government Securities Yield Curve 9 8. Several banks increased their Base Rates by 25-250 bps between end-July 2010 and end-March Chart II. The other money market rates also increased. along with a well-anchored medium to long-term inflation expectations and a moderation in growth outlook contributed to the flattening of the yield curve. Banks increased deposit rates by 25-500 bps across various maturities between end-June 2010 and end-March 2011 to accommodate the accelerated growth in credit. The lower than budgeted market borrowing programme for the second half of 2010-11. but mostly remained below it. With a repo rate hike of 150 bps during the period June 2010-March 2011.5 7 6. Accordingly.TheyieldsondatedGovernment securities increased across maturities during 201112 (April-August 12) rising more at the shorter end than at the longer end. reflecting the preferred market habitat and the liquidity of the 10-year segment resulting in a kinked yield curve. II.6 The transmission of policy rate hikes to the credit markets.5 5 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930 31-Mar-10 29-Jul-11 31-Mar-11 12-Aug-11 Term in years 30-Jun-11 2011. the yield curve shifted up reflecting the hardening of the short to medium-term rates.theyieldon10-yearsecuritieswaslower than the yields at the shorter end. II. At the medium to longer end. the yields on 5-year and 10-year G-secs too declined by 21 bps and 38 bps. II. The Base Rate system has improved the transmission from the policy rate to banks‘ lending rates (Please refer to Box III. money market rates moved in step with the policy rate hikes.000croreduringApril-July2011 to meet temporary mismatches between Government receipts and expenditure also exerted pressure on moneymarketrates.7 The transmission mechanism strengthened further during 2011-12 so far. In view of the flattening of the yield curve at the longer end. respectively. strengthened significantly thereafter following the introduction of the Base Rate in July 2010 and the prevailing deficit liquidity conditions turning tight from end-May 2010. In tune with the monetary policy stance. which remained weak during the first quarter of 2010-11.The issuances of cash management billstothetuneof `58. The highercallmoneyratesalsoreflectedtheskewedSLR holding across the banks. Base Rates ruled in a narrow range reflecting a greater convergence of rates across banks. The rates in the collateralised segment generally moved in tandem with the call rate. as also the lower than expected market borrowings announced for the first half of 2011-12 improved the market sentiment.4.5 Yield in per cent 8 7. the average daily call rate increased by 332 bps and hovered around the upper bound of the corridor. Interestingly. These factors.5 6 5. 44 . Following a cumulative increase of 125 bps in the repo rate during April-July 2011. reflecting the impact of policy rate hikes and larger issuances at the short-end.

8 In the credit market.4. However.10 Since an excessive liquidity deficit can destabilise the financial markets and impede credit flow to the commercial sector. In the primary market.4.) Divergent volume growth across market segments II. the individual issue size was lower. However.4.Thepersistenceofsovereigndebt problems in the Euro Area and the delay in finalising a higher public debt ceiling in the US on the global front.12 The volatility1 in the Indian financial markets was generally lower in 2010-11 than in the previous year.9 The Indian capital market witnessed some revival in April 2011.4.4.36). better corporate performances and relatively strong economic growth. Reduced volatility in financial markets II. weakening investment climate and global uncertainty.11 As the financial market conditions normalised post global financial crisis. Although the number of IPOs was higher in 2010-11 than a year ago. relatively better performance of equity markets in AEs weighed on marketsentiments. reflecting mainly follow-on public offers (FPOs) and rights issues (Appendix Table 12).37). reflecting muted participation by retail participants and corporates. Resources raised by mutual funds in the equity market.barringabriefspellofheightenedvolatilityduring May 2010 (Chart II. During 201112 (April-August 11).4. banks increased their deposit and lending rates in response to the increase in the policy rate by the Reserve Bank. Equity markets remain range bound in absence of improved earnings visibility II. The CP market witnessed large issuances in the immediate post-Base Rate environment and reached a peak in October 2010 mainly on account of sharp increase in issuances by leasing and finance as well as manufacturing companies. The issuances of CDs increased sharply during the second half of the year reflecting banks‘ efforts to mobilise more funds to meet the increased credit demand. reflecting 1 Volatility has been measured by using Generalised Autoregressive Conditional Heteroskedasticity (GARCH) model. 52 major banks with a credit share of around 99 per cent raised their Base Rates by 50-175 bps and 23 major banks accounting for around 75 per cent of bank deposits raised their deposit rates in the range of 25-250 bps. During Q4 of 2010-11. the resources raised by mutual funds in the debt segment increased during 2010-11 over the previous year. Equity markets. turned negative. II. the Reserve Bank drew a distinction between its monetary stance and its liquidity management and undertook liquidity enhancing measures to promote orderliness in the financial markets (Please see Table III. Much of the gains during Q2 and Q3 of 2010-11 were offset by a correction during Q4 of 2010-11.ECONOMIC REVIEW II. aided by steady FII inflows and strong global cues. which were negatively impacted by the sovereign debt crisis in the Euro Area in May 2010. II. resource mobilisation through public issues was higher than a year ago. The collateralisedsegmentoftheovernightmoneymarket accounted for around 85 per cent of the total volume during 2010-11. and lower than expected earnings by some of the major corporates on the domestic front. The rise in deposit rates was relatively sharper for maturities up to 1 year for all categories of banks. adversely affected the markets and the stock markets remained subdued since May 2011.13 Equity markets remained range-bound during 2010-11 (Chart II. however. the various segments of financialmarketswitnessedfurtherrecoveryintrading volumes during 2010-11 (Chart II.1 of Chapter III for details of the measures taken by the Reserve Bank. The volumes in G-secs market declined in a rising interest rate environment. equity markets were weighed down by concerns over domestic corporate profitability. rallied during JulyDecember 2010 on the back of large FII investments.3.38). 45 .The increased volatility during May 2010 could be attributed to the transition of the liquidity situation from surplus to deficit mode for the money and G-sec markets and to the resurfacing of sovereign debt concerns in the Euro Area for the equity and forex markets.

has been increasing steadily over the years (Box II. Volumes rising in equity and currency derivatives II.5 3.36 : Activities in Domestic Financial Markets a:Average Daily Volume in Money Market 100 80 60 40 20 Jan-11 Apr-11 Jan-10 Apr-09 Apr-10 Oct-09 Oct-10 Jul-09 Jul-10 Jul-11 ` Thousand crore ` Thousand crore b: Fortnightly Issuance in CP Market 40 35 30 25 20 15 10 5 15-Apr-09 15-May-09 14-Jun-09 14-Jul-09 13-Aug-09 12-Sep-09 12-Oct-09 11-Nov-09 11-Dec-09 10-Jan-10 9-Feb-10 11-Mar-10 10-Apr-10 10-May-10 9-Jun-10 9-Jul-10 8-Aug-10 7-Sep-10 7-Oct-10 6-Nov-10 6-Dec-10 5-Jan-11 4-Feb-11 6-Mar-11 5-Apr-11 5-May-11 4-Jun-11 4-Jul-11 Jan-11 Apr-11 Apr-11 Jul-11 Jan-10 Apr-09 Apr-10 Oct-09 Oct-10 Jul-09 Jul-10 120 0 0 Call Money Market Repo CBLO d: Average Daily Volume in Government Securities Market 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 Jul-11 c: Fortnightly Issuance in CD Market 90 80 70 60 50 40 30 20 10 0 ` Thousand crore 22-May-09 3-Jul-09 25-Mar-11 12-Mar-10 23-Apr-10 29-Jan-10 27-Aug-10 8-Oct-10 31-Dec-10 19-Nov-10 17-Jun-11 14-Aug-09 18-Dec-09 25-Sep-09 6-Nov-09 11-Feb-11 10-Apr-09 16-Jul-10 4-Jun-10 6-May-11 ` crore e: Equity Market Turnover (Monthly turnover in the Cash Segment at BSE and NSE) 700000 600000 500000 ` crore 400000 300000 200000 100000 0 Jan-11 Apr-11 Jan-10 Apr-09 Apr-10 Oct-09 Oct-10 Jul-09 Jul-10 Jul-11 80 70 US $ billion f: Foreign Exchange Market Average Daily Turnover 4.0 Jan-10 Apr-09 Apr-10 Oct-09 Oct-10 Jul-09 Jul-10 Jan-11 60 50 40 30 20 10 0 Merchant Inter-bank Inter-bank to merchant (RHS) institutional investor preference in a rising interest rate environment. The daily trading volumes in currency futures exhibited a gradual secular uptrend thereafter.0 1.15 In the currency futures segment. which introduced currency futures in four currency pairs (Appendix Table 13). with the commencement of operations by the United Stock Exchange (USE).5 1. The volumes of the derivatives segment of the equity market increased substantially during 2010-11 and their volumes were considerably higher than those of the cash segment.39).OTC and exchange traded . II.14 The presenceandroleofderivativesegments .4.5 0.5 2.0 0. The increased turnover in the equityderivativesduring2010-11wasassociatedwith reduced volatility in the stock price indices. The increased 46 .0 2.8 and Chart II.4.0 3. the volumes increased sharply in September 2010.ANNUAL REPORT Chart II.

ECONOMIC REVIEW Chart II.0 -0.0 0.6 0.16 Housing prices continued to remain firm during 2010-11. 38: Movement in Equity Markets 21000 19000 17000 15000 13000 11000 9000 7000 5000 Apr-09 a: Movement in Stock Price Indices Jan-11 Apr-11 Jan-10 Jul-11 Jan-11 Apr-10 Apr-11 Oct-09 Oct-10 Jul-09 Jul-10 Jan-10 Apr-09 Apr-10 Oct-09 REALTY IT Auto BANKEX SENSEX Oct-10 Jul-09 Jul-10 FII Investment Mutual Fund Investment Average BSE Sensex (RHS) 47 Jul-11 3000 1000 35000 30000 25000 20000 15000 10000 5000 0 -5000 -10000 -15000 b: Stock Prices Index and Institutional Investment 8-Nov-10 2-Apr-09 25000 20000 15000 10000 5000 0 Index ` Crore Index 5-Aug-11 1-Jul-09 6-Feb-11 0.50 1.2 17-May-09 12-May-10 29-Sep-09 15-Aug-09 10-Aug-10 24-Sep-10 11-Feb-10 28-Dec-09 23-Dec-10 13-Nov-09 7-May-11 Call Rate CBLO Rate 10 year G-sec Rate d: Forex Market 45 40 35 30 25 20 15 10 5 16-May-09 c: Stock Market 2.8 1.00 1. the speculative interest in the backdrop of non-requirement of underlying exposure and the absence of restrictions on cancellation and re-booking.4.2 2.50 2.50 11-May-10 30-Jun-09 25-Jun-10 20-Jun-11 27-Mar-10 22-Mar-11 12-Nov-09 27-Dec-09 14-Aug-09 22-Dec-10 28-Sep-09 23-Sep-10 10-Feb-10 6-May-11 9-Aug-10 7-Nov-10 4-Aug-11 5-Feb-11 1-Apr-09 23-Mar-11 17-May-09 12-May-10 28-Mar-10 26-Jun-10 29-Sep-09 15-Aug-09 10-Aug-10 24-Sep-10 28-Dec-09 11-Feb-10 13-Nov-09 Nifty USD-INR Exchange Rate volumes in the currency futures market are mainly attributable to the cash settlement (which obviates the need for payment of the principal amount).0 1.00 0.2 0.4 2.00 23-Dec-10 21-Jun-11 0 8-Nov-10 2-Apr-09 7-May-11 5-Aug-11 1-Jul-09 6-Feb-11 0 26-Jun-10 28-Mar-10 21-Jun-11 23-Mar-11 .6 1.4 0. despite the hardening of mortgage rates in response to policy rate hikes as evidenced by the Reserve Bank‘s Quarterly House Chart II.2 1. Housing prices remain firm and volumes decline II.4 1. barring a brief phase of moderation in the metros during Q3.8 0.37: Volatility in the Indian Financial Markets a: Money Market 25 20 15 10 5 26-Jun-10 21-Jun-11 28-Mar-10 23-Mar-11 17-May-09 12-May-10 15-Aug-09 29-Sep-09 10-Aug-10 28-Dec-09 24-Sep-10 11-Feb-10 23-Dec-10 6-Feb-11 13-Nov-09 7-May-11 5-Aug-11 8-Nov-10 2-Apr-09 1-Jul-09 b: G-sec Market 2.

IRF Trading on 91-day Treasury bills issued by the Government of India has been permitted by the Reserve Bank in March 2011 with cash settlement. These derivative contracts are settled by cash payment and do not involve physical delivery of the underlying product. Currency futures witnessed substantial increase in volumes since it was launched in NSE in August 2008 on RupeeUSD pair. The volume of transactions. The May 2011 Annual Policy Statement has proposed the introduction of IRFs for 2. permitted the use of cross currency swaps. however. Securities and Exchange Board of India (SEBI) and Forward Markets Commission (FMC). The Reserve Bank issued the guidelines on forward rate agreements (FRAs) and Interest Rate Swaps (IRS) in 1999 to enable banks. the NSE and MCX subsequently launched futures trading in three new currency pairs. CCIL has been providing non-guaranteed settlement of FRA/IRS trades since November 2008. while housing prices increased in six cities. The Reserve Bank has. Housing prices and transaction volumes in Mumbai and Delhi continued to increase on a y-o-y basis.introduced in the Indian stock exchanges in October 2010 .saw a significant increase in volume and open interest. Trading in Interest Rate Futures (IRF) was re-activated in August 2009 on a 7 per cent notional coupon bearing 10year Government of India security settled through physical delivery. Guaranteed settlement in IRS/ FRAsegment is expected to be started soon by CCIL. FIIs have an increasing presence in the equity derivatives markets and currently contribute around 21 per cent of the market turnover. GBP-INR and JPY-INR in February 2010. however. EUR-INR. Equity derivatives have grown rapidly since their inception. and options and futures on individual securities in July 2001 and November 2001. It is mandatory for entities regulated by the Reserve Bank to report their IRS/FRA trades on the reporting platform developed by the Clearing Corporation of India (CCIL). Certain products like swaps having explicit/implicit option features such as caps/ floors/ collars are not permitted. Financial institutions in India can use OTC derivatives for their own balance sheet management while non-financial firms are only permitted to hedge their exposures. the 22 commodities exchanges operating in the country mostly trade in futures. On a y-o-y basis. CCIL has also started providing portfolio compression exercise in the OTC interest rate swaps aimed at reducing the overall notional outstandings and the number of outstanding contracts. Quarterly credit deployment in the housing sector continued to increase during 2010- 2 The Reserve Bank‘s housing price and volume indices are based on data in respect of seven cities collected from the Department of Registration and Stamps (DRS) of the respective State Governments. Exchange-traded commodity derivatives have been trading in the commodities exchanges since 2000. the Reserve Bank introduced various plain vanilla interest rate and foreign currency derivatives. the IRF segment remains dormant in India despite the fact that globally it occupies 70 per cent of the overall derivatives turnover in the stock exchanges. followed by index options in June 2001. Following the guidelines issued by the Reserve Bank and the SEBI in January 2010. respectively. exhibited a declining trend during the second and third quarters of 2010-11 but revived during the Q4 in most cities.40 a and b). The Reserve Bank has issued guidelines on credit default swaps and securitisation to develop the credit derivative market. 48 . primary dealers and all-India financial institutions to use these products for their own balance sheet management and corporates to hedge interest rate risks.ANNUAL REPORT Box II. As compared to the exchange traded equity and currency derivatives segments. OTC derivatives Over the years. although other benchmarks beyond the overnight have not become popular possibly due to the absence of a vibrant inter-bank term money market. Exchange Traded Derivatives The experience of exchange traded derivatives in India has been mixed. out of the seven cities. caps and collars and FRAs for specific purposes.8 Financial Derivatives in India . Rupee-foreign exchange options allowed in July 2003 is gradually picking up. exchange-traded derivatives are governed by the rules of the respective exchanges and overseen by the SEBI. Foreign banks dominate the IRS market. Equity derivatives like Index futures were introduced in June 2000. Price Index (HPI)2 (Chart II. 1934 (as amended in 2006) empowers the Reserve Bank to regulate OTC derivative products as long as at least one of the parties in the transaction is regulated by it. Currently. Overnight index swaps (OIS) based on overnight Mumbai Interbank Offered Rate (MIBOR) benchmark registered significant growth over the years. transactions volumes fell in five cities. Within the OTC foreign currency derivatives market.and 5-year tenors also. The Reserve Bank of India Act. namely.Current Status Derivatives instruments in India are regulated by the Reserve Bank of India. the swap segment is the most active. Currency options .

ECONOMIC REVIEW

Chart II.39 : Activity in Financial Derivatives Market
` Thousand crore ` Thousand crore

7,000 6,000 5,000 4,000 3,000 2,000 1,000
17-May-09 12-May-10 15-Aug-09 10-Aug-10 28-Dec-09 28-Mar-10 26-Jun-10 23-Dec-10 23-Mar-11 21-Jun-11 29-Sep-09 13-Nov-09 24-Sep-10 11-Feb-10 7-May-11 5-Aug-11 8-Nov-10 6-Feb-11 2-Apr-09 1-Jul-09

3,000 2,500 2,000 1,500 1,000 500
Jan-11 Apr-11 Jan-10 Apr-09 Apr-10 Oct-09 Oct-10 Jul-09 Jul-10 Jul-11
Q4:1011

0

` Thousand crore

8,000

a: Currency Futures (Total of NSE, USE and MCX-SX for all Currencies)

100 90 80 70 60 50 40 30 20 10 0

3,500

b: Monthly Turnover in Equity Derivatives

0

Open Interest

Value (RHS)

Index Futures

Index Options

Stock Futures

Stock Options

11, notwithstanding increase in interest rates and macro prudential policy measures such as increase in provisioning requirement for housing loans with teaser interest rates, increase in risk weights for high value housing credit and the stipulation of a higher margin. Real exchange rate appreciates reflecting inflation differential II.4.17 During2010-11,whileseveralAsiancountries resorted to capital control, India hardly intervened through purchase/sale of foreign currency or active capital account management. The rupee dollar exchange rate showed two-way movement in the range of `44.03-47.58 per US dollar (Chart II.41).The rupeeappreciatedby4.0percentonanaveragebasis against the U.S. dollar during the year. Most of this appreciation occurred during Q2, on the back of strong equity inflows. On an average basis,

the 6-currency real effective exchange rate (REER) appreciated by 13.1 per cent in 2010-11, the 30-currency REER by 4.5 per cent and the 36currency REER by 7.7 per cent. The 6-currency index showed the maximum appreciation compared to other indices reflecting higher inflation differential with these countries (Appendix Table 14). Financial system remains bank dominated II.4.18 TheIndianfinancialsystemisprimarilyabankdominated system. The dominance of banks has increased further during the post-crisis period, which essentiallyreflectedanincreasingpreferenceforsafer avenues of savings (Box II.9). Financial markets may imperfectly track banking indicators II.4.19 The banking system is usually closely integrated with the financial market developments

Chart II.40 : Movement in Housing Prices and Transactions
a: Trends in Housing Price Index (2008-09:Q4=100)
175 150
Index

275 175
Index

b: Trends in Housing Transactions Volume Index (2008-09:Q4=100)

125

125

100

75

75

Q1:0910

Q2:0910

Q3:0910

Q4:0910

Q1:1011

Q2:1011

Q3:1011

Q4:1011

25

Q1:0910

Q2:0910

Q3:0910

Q4:0910

Q1:1011

Q2:1011

Q3:1011

Delhi Bengaluru

Mumbai Ahmedabad

Kolkata Lucknow

Chennai* All India

Delhi Bengaluru

Mumbai Ahmedabad

Kolkata Lucknow

Chennai* All India

*:Chennai index includes both residential and commercial properties.

*:Chennai index includes both residential and commercial properties.

49

ANNUAL REPORT

Chart II.41 : Exchange Rate and Forward Premia
65 60 55 50 45
23-Mar-11 17-May-09 12-May-10 28-Dec-09 28-Mar-10 26-Jun-10 15-Aug-09 10-Aug-10 23-Dec-10 13-Nov-09 29-Sep-09 24-Sep-10 11-Feb-10 21-Jun-11 7-May-11 2-Apr-09 8-Nov-10 1-Jul-09 6-Feb-11

85 80 75 70 65 60 55
5-Aug-11

10 8 6 4 2

Mar-08

Mar-09

Mar-10

May-08

May-09

May-10

Mar-11

May-11

Jan-09

Jan-10

Jan-11

Sep-08

Nov-08

Sep-09

Nov-09

Sep-10

Nov-10

Jul-08

Jul-09

Jul-10

`/US Dollar

`/100 Yen

`/Pound Sterling (RHS)

`/Euro (RHS)

1 Month

3 Month

6 Month

owing to its interface with market forces, which can generate market risks, impact on profitability and even lead to defaults. Banks in India, however,

remained resilient even during the crisis period and did not face funding and maturity risks to the extent faced by the global banks (Box II.10). This is,

Box II.9 Trends in Non-Bank Financing - Is the Financial System still Bank Dominant ?
In India, commercial banks account for more than 60 per cent of the total assets of the financial system (Chart 1). The other major components of the financial system include, inter alia, insurance institutions, Non-Banking Financial Companies (NBFCs), cooperative banks and mutual funds in a descending order of their assets share. About 72 per cent of total assets of the banking sector were held with public sector banks at end-March 2009. Evidently, the perceived sovereign backing triggered an inflow of assets into the public sector banks.The dominance of banks in the financial system is also evident from the flow of financial resources to the commercial sector (Table 1). The flow of bank credit to the commercial sector picked up phenomenally in 2010-11 to 58.2 per cent, registering a growth of 47.7 per cent.

70 60 Per cent 50 40 30 20 10

Chart 1: Composition of Assets of the Financial System
61 63

13 13

9

9

8

7

6

5

3

3

0
Commercial Insurance banks institutions NBFCs Cooperative banks Mutual Funds Others

2007

2009

Table 1: Flow of Financial Resources to the Commercial Sector
Amount in ` crore Item 1 A. B. Flow from Banks Flow from Non-banks (B1+B2) 2007-08 2 4,44,807 (44.5) 5,54,333 (55.5) 2,47,926 (24.8) 3,06,407 (30.7) 9,99,140 (100.0) 2008-09 3 4,21,091 (48.3) 4,51,399 (51.7) 2,58,132 (29.6) 1,93,267 (22.2) 8,72,490 (100.0) 2009-10 4 4,78,614 (44.8) 5,88,784 (55.2) 3,65,214 (34.2) 2,23,570 (20.9) 10,67,398 (100.0) 2010-11 5 7,11,031 (58.2) 5,11,0 06 (41.8) 2,92,084 (23.9) 2,18,922 (17.9) 12,22,037 (100.0)

B1. Domestic Sources B2. Foreign Sources C. Total Flow of Resources (A+B)

Source: RBI. Note: Figures in brackets indicate percentage share in total resources.

50

Jul-11

40

50

0

Per cent per annum

a: Exchange Rate

b: Movement in Rupees/US Dollar Forward Premia

ECONOMIC REVIEW

Box II.10 Impact of Financial Market Developments on Financial Soundness Indicators of the Banking System
While the Indian banking sector has significantly grown in size in the recent years, its soundness has largely been maintained even during financial crises. The impact of sub-primecrisisonbankswasalmostnegligibleduetolimited exposure to toxic assets owing to the counter-cyclical prudential norms prescribed by the Reserve Bank. The impact of financial market developments on banks is reflected by the trends in their various soundness indicators, namely, Return on Asset (RoA), Capital to Risk Weighted Assets Ratio (CRAR) and Non-Performing Assets (NPAs). Some of these major soundness indicators of the banking system showed significant resilience even during the times of the crisis (Table 1). The Returns on Advances and Investments moved in opposite directions during phases of rising and falling interest rates. As a result, banks could earn a stable RoA in a volatile market environment by making appropriate adjustments to their portfolios, while ensuring sound asset quality and high levels of CRAR. The stable performance and sound health of the Indian banking system, however, does not preclude important initiatives that need to be taken in order to further increase operational efficiency of banks. There is also a need to strengthen the countercyclical prudential regulatory framework and step up capital adequacy to meet unforeseen risks emanating from developments in the financial markets.

Table 1: Size and Soundness of the Indian Banking Sector
(in per cent) Year 1 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Average Standard Deviation Banking assets to GDP 2 72.4 75.6 80.6 86.8 93.8 92.0 83.5 8.7 RoA 3 1.01 1.01 1.05 1.12 1.13 1.05 1.10 0.05 Return on Investments 4 7.9 7.7 7.2 7.3 7.0 6.6 7.3 0.46 Return on Advances 5 8.1 8.2 8.9 8.9 9.9 9.3 9.2 0.95 Gross NPAs 6 5.2 3.3 2.5 2.3 2.3 2.4 3.0 1.14 CRAR 7 12.8 12.3 12.3 13.0 13.2 13.6 12.8 0.51

Source: Reports on Trend and Progress of Banking in India, various issues. Statistical Tables Relating to Banks in India, various issues.

however, not borne out from the CDS spreads and the stock prices of the banks in India which largely paralleled the global trends, reflecting increasing integration with the global financial markets.

Financing of infrastructure poses challenge ahead II.4.20 The development of the financial markets and healthy balance sheets of the financial sector entities areprerequisitesforfinancialintermediationwithaview to bridging enormous infrastructure deficit (Box II.11).

Box II.11 Infrastructure Financing
Infrastructure deficit remains a major stumbling block in the growthprocessoftheIndianeconomy.Itiswidelyrecognised that poor and inadequate infrastructure is adding to production costs, affecting productivity of capital and eroding competitiveness of productive sectors of the economy (Subbarao, 2009). The Planning Commission has projected the investment requirement for the infrastructure sector for the Twelfth Five Year Plan (2012-2017) to be of the order of `40,99,240 crore (about US$ 1,025 billion), which cannot be met by the public sector alone due to fiscal constraints. Gross Capital Formation (GCF) in infrastructure has hovered around 5 per cent of GDP and is likely to fall short of the 11th Five Year Plan‘s (2007-2012) target of raising it to 9 per cent of GDP by 2012, which is also the level attained in some of the Asian economies. In India, there has been a significant increase in the share of bank credit to infrastructure from 2.2 per cent of gross bank credit as at end-March 2001 to around 13.4 per cent as at end-March 2011. Credit extended by commercial banks is, however, constrained by the risk of asset-liability mismatch. Globally, the corporate bond market plays a significant role in financing infrastructure development. In India, the corporate bond market is underdeveloped and the stock of listed non-public sector debt at 2 per cent of GDP is
(Contd...)

51

ANNUAL REPORT

(...Concld.)

significantlylowerascomparedwiththatofotherEMEs,such as, Malaysia, Korea, and China. In order to develop the corporate bond market, some of the measures which need considerationincludeexemptionfromwithholdingtaxforFIIs, rationalisation of stamp duties across states, tax treatment of pass through certificates, reconciliation of definitional differences in respect of bonds and debentures, enhancement of scope of investment by insurance companiesandprovident/pension/gratuityfunds,permission to FIIs to invest in to-be-listed bonds, repo lending by insurance companies and mutual funds, single unified database to ensure reporting by all entities and partial credit enhancement by banks. Securitisation of infrastructure bonds/loans is an important way of increasing the quantum of debt financing of infrastructure projects by banks/FIs/NBFCs. The infrastructure sector has a high potential for bundling of securities of infrastructure bonds/loans and selling them to institutional and retail investors based on their perceived risks. Credit derivatives and credit insurance are also expected to provide efficient risk transfer mechanisms and, thus, play a significant role in the corporate bond market development. In this context, the Reserve Bank has come outwithcreditdefaultswap(CDS)guidelines,whichwillcome intoeffectfromOctober24,2011.CDSwouldallowcorporate entities including insurers, FIIs and mutual funds (MFs) to hedge the risk of default in repayment of corporate bonds. Private equity and venture capital funds may have to be encouraged to accept higher levels of risk in return for higher expected returns. Take out financing, which is another important and innovative way of enhancing the quantum of banks‘/NBFCs‘ financing of infrastructure projects and which also facilitates better asset-liability management, has not taken off despite efforts by the Reserve Bank and the government and needs to be pushed further. Foreign sources are supplementing the domestic finance in financing infrastructure in recent years. The share of FDI in

infrastructure sector as a percentage of total FDI has increased significantly from around 4 per cent in 2002-03 to around 16.7 per cent in 2010-11. Public-Private Partnership (PPP) has been an important mode of financing infrastructure worldwide. PPPs have received a somewhat lukewarm response in India except in the case of telecom, airport and roadways, despite their potential to attract private investments. A number of factors, which need to be addressed expeditiously in order to bring down the time and cost overruns in a significant way, are responsible for this, e.g., deficiencies in the project appraisal skills, problems in developing an optimal risk sharing mechanism, lack of transparency in bidding procedures, overlapping regulatory jurisdictions and governance related concerns. PPP projects that are economically essential but commercially unviable are provided financial assistance in the form of Viability Gap Funding (VGF) and long tenor loans through IIFCL (UK), a subsidiary of the India Infrastructure Finance Company Ltd. (IIFCL). The Reserve Bank has significantly relaxed prudential norms for infrastructure projectsandhasinitiatedanumberofregulatoryconcessions for infrastructure finance. Additionally, SEBI has raised the FII limit for investment in corporate bonds, with residual maturity of over five years issued by companies in infrastructure sector, to US$ 25 billion. References Deepak Parekh Committee Report (2007), The Report of the Committee on Infrastructure Financing, Planning Commission, New Delhi. Economic Survey, 2010-11. R H Patil Committee (2005), High Level Expert Committee on Corporate Bonds and Securitisation, Ministry of Finance, Government of India, New Delhi. Subbarao,Duvvuri(2009),‗ShouldBankingBeMadeBoring? - An Indian Perspective‘, RBI Bulletin, December.

V. GOVERNMENT FINANCES
Lower combined fiscal deficit reflects improvement in Central and State finances, but its sustainability

outcome of both Centre and States returning to the path of fiscal consolidation. However, these ratios are still well above 2007-08 levels.

requires further reforms II.5.1 The combined finances of the Central and State governments showed distinct improvement in terms of the key deficit indicators during 2010-11 (RE) ascomparedwith2009-10.Thecombinedgrossfiscal deficit (GFD) of Central and State governments as a ratio of GDP declined markedly to 7.7 per cent in 2010-11from9.3percentin2009-10(AppendixTable 15). The combined revenue deficit (RD) also fell perceptibly. The lower fiscal deficit ratios are the
52

II.5.2 The budgets of the Central and State governments envisage further fiscal consolidation during 2011-12 driven by expected moderation in expenditure growth. The combined GFD and RD as ratios to GDP are budgeted to decline further in 201112.However,inordertomeetthesetargets,concerted efforts would be necessary to avoid fiscal slippages in 2011-12, especially arising from higher expenditure on subsidies if global commodity and fuel prices continue at an elevated level.

0 3. exceeded the budgeted level.0 2. reflecting buoyancy in domestic economic activity and the increase in indirect tax rates following partial fiscal exit. plan assistance to States and recapitalisation of public sector banks).0 5. Benefiting from more than anticipated realisation of non-tax revenue receipts and GDP.ECONOMIC REVIEW II. Centre‟s lower deficit ratios reflect one-off unanticipated revenue and higher nominal GDP growth financing increased outlays in key priority areas (rural infrastructure.6 However.thereby containing risks to macroeconomic stability. II.0 3. For a sustainable improvement in fiscal position.5 Provisional data from the Controller General ofAccounts(CGA)confirmtheexpectedimprovement in fiscal position of the Central government in 201011.0 -2. II. II.5. However.0 Per cent of GDP a: Central Government Rolling targets 6.however. Capital expenditure. Lower fiscal imbalances enabled reduction in government‘sdebt-GDPratioduring2010-11. II.0 2.5.42 a and b).0 1. the fiscal correction is far from over. however.0 200405 Revenue Revenue Revenue Revenue 200506 200607 200708 200809 200910 201011 (RE) Revenue Deficit Gross Fiscal Deficit Primary Deficit Deficit Deficit (Without excess sprectrum receipts) Deficit (With old GDP) Deficit (With old GDP and without excess spectrum receipts) 53 . fertiliser and petroleum) remained higher than the budget estimates reflecting the impact of higher international prices of these commodities. The revised estimates of total expenditure on subsidies (mainly on food.0 4.5. The revised estimates (RE) for 2010-11 show that the Central government receipts were better than budgeted. Nonetheless.0 2012-13 0.0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 (RE) 2011-12 (BE) b: Impact of Excess Non-tax Receipts and Higher GDP on Revenue Deficit 6.7 Expenditure growth remained higher than budgeted for 2010-11. Enduringcorrectionthroughexpenditurecompression and better returns on public investments has to be the cornerstone of an effective fiscal strategy. The estimates of key deficit indicators. the Centre‘s key deficit/ GDPratiosturnedouttobelowerinrevisedestimates than were originally budgeted (Chart II. implementation of Right to Education Act.5.0 4.5. turned out tobelowerintheprovisionalaccountsthantherevised estimates on account of higher than anticipated revenue receipts and reduction in plan expenditure.0 -1. This was on account of government‘s decision to utilise higher than anticipated receipts from 3G/BWA auctions for Chart II.the governmentrevertedtothepathoffiscalconsolidation with a partial exit from stimulus measures.0 5.0 1. as the 2010-11 improvement was led by the benefit of cyclical upswing and one-off gains in revenue.witheconomicrecoveryduring2010-11. thereby maintaining pressures on aggregate demand.3 The sustainability of lower deficits during 2011-12. aggregate expenditure-GDPratiolaywithinthebudgetestimates for 2010-11.42 : Key Deficit Indicators Per cent of GDP 2013-14 7.requiressubstantialnewmeasures in the arena of fiscal reforms. further expenditure compression as well as revenue raising measures would be necessary. benefiting from the better than anticipated GDP outcome.0 0. There are clear limits to one–off revenue generation measures over the medium to long run. Total expenditure.4 Central government finances had deteriorated significantly during 2008-09 and 200910 on account of expansionary fiscal policy stance adopted by the government to address growth concerns as a fallout of global financial crisis.

9 0. In particular. more drastic expenditure reforms alongwith the envisaged tax reforms – Direct Taxes Code (DTC) and Goods and Services Tax (GST) – have to be pursued.8 0.1 0. There is an urgent need to implement reforms in the system of subsidies.8 State governments also resumed the process of fiscal consolidation in 2010-11.9 0.43: Subsidies of Central Government 2.12). Lowering of these indicators are necessary for lower inflation and macroeconomic stability. a conservative stance on revenue projections has been adopted. reflecting the impact of lower growth in expenditure on salary. the States seem to be committed to bringing their finances on a sustainable path in the medium-term and the present pace appears to be in tandem with the path suggested by the Thirteenth Finance Commission. Going forward. remained higher than the budgeted levels in 2010-11.ANNUAL REPORT both plan and non-plan.theStates are likely to carry forward the process of fiscal consolidation in 2011-12 as the revenue account is expected to turn into surplus after remaining in deficit during 2009-10 and 2010-11.3 0. the moderation in revenue expenditure growth is attributable to a sharp decline in development expenditure growth (comprising social and economic services). In line with the improvement in revenue account.2 per cent in 2011-12 (BE). while the GFD-GDP ratio is expected to decline further. However. State governments resume fiscal consolidation II.11 ThefiscalconsolidationstrategyoftheCentral government for 2011-12 is primarily expenditure driven. all subsidies except interest subsidy are budgeted to decline in 2011-12 (Chart II. the fiscal deficit indicators are yet to reach the pre-crisis levels.5. based on the budgetsof28States. it is imperative for the government to strengthen the process of fiscal consolidation.7 0. after suffering a setback in 2008-09 and 2009-10 (AppendixTable 16).10 The improvement in government finances till 2007-08 under rule-based fiscal consolidation had provided cushion to the Centre and States for undertaking fiscal expansion during 2008-09 and 54 2009-10 to address the growth slowdown.5 0.1 0.43). States‘ GFD-GDP ratio is budgeted to be lower in 2011-12 (BE).9 A disaggregated analysis shows that the budgeted improvement in revenue account of States in 2011-12 is mainly on account of decline in revenue expenditure while revenue receipts-GDP ratio is expected to be marginally higher.7 0 Food 2009-10 Fertiliser 2010-11 RE Petroleum 2011-12 BE Others Interest subsidy .1 0. Although the Union Budget 2011-12 has opted not to further Chart II.5. Concomitantly. Notwithstanding an improvement in fiscal position in 2010-11. Accordingly. II.1 0. Expenditure driven fiscal consolidation strategy of the Centre may be challenging II.2 0. The revised estimates for 2010-11. however.1 0.Goingforward. Overall. expenditure growth not only turned out to be higher than that was budgeted for 2010-11 but also accelerated as compared with that of 2009-10.indicateareductioninkeydeficit ratios. This shows State governments‘ commitment towardsfiscalconsolidation.5.5 0.6 2 Per cent of GDP 1 1. Expenditure reforms have to be directed towards restraining built-in growth in expenditure and also to bring about structural changes in its composition (Box II. On the whole. Capital outlay as a ratio to GDP at 2.5 0. pensions and subsidies. is yet to revert to the high levels achieved during 2006-07 to 2008-09.5 0.5. Further fiscal consolidation necessary for macrostability II.

9 to 1. In this regard. New Delhi. especially at sub-national level can go a long way in correcting the fiscal imbalances. ―Expenditure Reform in Industrialised Countries: A Case Study Approach‖. other revenue enhancing measures would be needed. Revenue reforms alone may not suffice in keeping fiscal position on a sustainable path.canbestbeachievedbyadopting sustainable fiscal policies. The present State level VAT structure still has some element of cascading effect. efficient and broad-based tax system which is conducive to overall business environment. Revenue gains are also likely to be large coming from additional GDP as well as improved tax compliance. Sebastian.Fulfilling these commitments would require substantial outlays thereby necessitating a stable.12 Revenue and Expenditure Reforms – Improving the Fiscal Environment for Robust and Inclusive Growth Improvinggrowth. DTC would lead to repeal of the current IncomeTax and Wealth Tax Acts with the objectives of minimising exemptions. et al.makingitinclusiveandkeepingfiscaldeficits low and sustainable are all desirable objectives of economic policies. cost effectiveness andbetterdeliveryforkeroseneandfertiliser. tax rates lowered and tax base widened. The federal structure of our fiscal system entails tax reforms to be more challenging which require a pragmatic approach by all stakeholders. Major accomplishments include the introduction of services tax in 1994 and ValueAdded Tax (VAT) by the States during 2004-08. Both these important pillars of tax reforms have been deferred for want of political consensus and ironing out the operational details. various measures over the years were intended to rationalise manpower requirements and assessing the feasibility of ongoing schemes. States and Centre gain from these tax reforms. GST and DTC need to be rolled out without any further delay. Expenditure cutting holds the key to fiscal consolidation in India. the New Pension System has been introduced. Multiplicity of rates have been brought down. These multipleobjectives. While modes and speed of fiscalconsolidationhavedifferedacrosscountries. The Code also proposes to do away with profit linked deductions and introduce investment linked deductions for priority areas. Growth and equity objectives both can be served by keeping the balance between revenues and expenditures of the government at sustainable levels. GST is also expected to be a plus sum game for the Governments. In addition to tax reforms.Withtheobjective of rationalising petroleum subsidy. European Central Bank. they are often thought as irreconcilable. Revenue reforms in India have been pursued for sometime now. For instance. ―EU Fiscal Consolidation after the Financial Crisis: Lessons from Past Experiences‖. However. S. November. Total subsidies constituted 2. They send convincing signals regarding the political will of the fiscal retrenchment as well as ensure its medium-run viability.ECONOMIC REVIEW Box II. Direct Taxes Code (DTC) would contribute to enhance GDP growth. May. The process also involved review of the existing subsidy systems. Barrios. widening tax base. Yet. The financial positions of State Power Sector utilities require focused attention. As such. Deregulation of diesel and other fuel prices assumes importance in this context. Directorate General for Economic and Financial Affairs. bringingaboutreductioninadministrativeandcompliancecosts (GOI. expenditure reforms need to be pushed more aggressively. fertiliser and food subsidies are still large. The standard rates of services and excise taxes have now converged to a single rate of 10 per cent. Ministry of Finance.. (2010) find that public expenditure-cuts-based consolidations tend to be more effective.however. cascading effects of CENVAT and services tax are likely to be removed with a continuous chain of set-offs. Upscaling of inclusive growth programmes would then be possible through budgetary resources. Thirteenth Finance Commission (2009) estimated that GST could provide gains to India‘s GDP somewhere within a range of 0. References: Barrios.418. these measures are not sufficient as oil. raise tax-GDP ratio and improve allocative efficiency and equity (both horizontal and vertical) of the direct taxes. with introduction of GST. Martin Heipertz and Ludger Schuknecht (2007). Working Paper Series No 634. However. While benefiting taxpayers. which necessitate both revenue and expenditure reforms. European Economy Economic Paper No. Hauptmeier.foodsecurity. Brussels. subsidies and public consumption while ensuring that allocations for education and health remain adequate (Hauptmeier et al 2007). Appropriate user charges alongwith plugging of leakages are needed. 2009). Discussion Paper. and L R Pench (2010).educationandinformation. GOI (2009). In order to overcome perpetual committed expenditure. August. Both. 55 . government has decontrolled the pricing of petrol in June 2010.expenditure reforms have formed important component.1 per cent of GDP in 2010-11. However. EmpoweredCommitteeofStateFinanceMinisters(2009): First Discussion Paper on Goods and Services Tax in India. the government is gradually moving towardsnutrientbasedsubsidy(NBS)regimeinfertilisersector. which was much higher than 1. Expenditure reforms in India have been directed towards restraining built-in growth in expenditure and also bring about structural changes in its composition. Peak customs duty has been reduced from over 300 per cent in the late 1980s to 10 per cent as a part of committed stance of converging over the medium term to tariff prevailing in ASEAN countries. Revenue and expenditure reforms need to be speeded up to provide fiscal space for achieving the objective of inclusive growth.3 per cent of GDP in 2006-07. Better governance of public utilities. The government‘s strategy for inclusive growth is to empower people through legal entitlements in respect of employment.7 per cent. Improved returns on public investment can help. moderating tax rates and effective enforcement. Expenditure reforms in many countries have achieved large fiscal adjustments by reducing spending on transfers. The government has proposed to move towards direct transfer of cash subsidy to people living below poverty line in a phased manner in order to ensure greater efficiency. Direct Taxes Code. S Langedijk.

2003 is expected during the course of 2011-12. Quality of fiscal adjustment has long term growth implications II.5. the reduction in Centre‘s debt-GDPratio to below 50 per cent in 201011 is a positive development. Even though.5. the ratio of revenue deficit to gross fiscal deficit. at the current juncture achieving the revenue targets appear to be a challenge. First. which excludes liabilities not used for financing of GFD and calculates external debt at current exchange rates. in view of several domestic and international downside risks to economic growth. which is budgeted to be compressed during 2011-12. credible fiscal consolidation strategy will contribute to keeping the debt-GDP ratio at a sustainable level. may also result in decline in oil prices. However.16 Over the medium-term.2 per cent during 2011-12. Second. is expected to remain .Aslowdown. moderation in tax revenue collectionscannotberuledout. PDS kerosene and LPG have been partially revised on June 24. which is based on the underlying assumption of no major variationininternationalfertiliserandpetroleumprices during 2011-12.5.5. there are certain concerns with regard to fiscal consolidation. which is an important benchmark for assessment of the quality of fiscal consolidation.however. An amendment to the Fiscal Responsibility and Budget Management (FRBM) Act. II.5. In this regard. which would lay down the fiscal roadmap for the next five years. raises concerns regarding the quality of fiscal consolidation. The Union Budget for 2011-12 does not take into account any such one-off sources of revenues and remains conservative on tax buoyancy. There could be a shortfall in achieving thedeficittargetsprescribedbytheThirteenthFinance Commission for the medium-term. the Centre‘s debt-GDP ratio is budgeted to decline to 44. In terms of the revised methodology for compilation of debt. the reduction in expenditure growth for 201112 is on account of lower subsidy expenditure.17 While restraint on revenue expenditure growth not only ensures that the fiscal consolidation process is sustainable. First. Likely expenditure pressures on subsidies pose challenge for fiscal consolidation in 2011-12 II. Nonetheless.15 In spite of the Central government‘s commitment towards fiscal consolidation. which is essential for infrastructure financing and to provide an enabling environment for sustained economic growth. 2011. the progress towards this end hinges upon a few factors. However. the Central government announced tax rationalisation measures whichwouldhavedifferentialimpactonrelativeprices across sectors.5. Pace and nature of fiscal consolidation remains a concern over the medium term II. Even though 56 domestic prices of diesel. going forward. the Central governmentenvisagesgradualcorrectionsinrevenue and fiscal deficits under its rolling targets set out for 2012-13 and 2013-14. it also creates a fiscal space for undertaking additional capital outlay.ANNUAL REPORT raise the indirect taxes to the levels prevailing before the crisis and retained the standard rates of central excise duty and service tax at 10 per cent. capital expenditure. which is unlikely in 2011-12. II. the projectedlevelofpetroleumsubsidyislikelytoremain higher than the budgeted level for 2011-12.12 The moderation in non-plan revenue expenditure growth is welcome as it creates fiscal space for undertaking other expenditures. the subsequent developments indicated an uptrend in international prices of crude oil which could have significant implications for subsidy expenditure. II.13).13 The government recognises that fiscal correction for 2010-11 reflected the one-off windfall benefits of higher than anticipated revenue proceeds from spectrum auctions. rolling targets set for fiscal deficit seem achievable. which may help in containing subsidy expenditure. The elimination/ reduction of customs/ excise duty on petrol products would also cause revenue loss and impact the fiscal balance.14 Going forward. Fiscal rules defined during the pre-crisis period are also subject to review in many advanced and developing economies (Box II.

are also less linked to debt. countries also target structural or cyclically adjusted balance (CAB). therefore. and a windfall revenue rule in France). RRs do not generally account for the operation of automatic stabilisers on the revenue side in a downturn (or in an upturn for revenue ceilings). By targeting a zero level of revenue deficit. 2007). India‘s FRLs recognise the importance of (Condt. In order to improve the effectiveness of such legislations. such as expenditure ceilings and specific revenue rules in some countries (e. RRs do not constrain government spending. institutional capacity. some countries may set permanent limits or ceilings on total. or in per cent of GDP (expenditure rules: ER) or they may set floors/ceilings on revenues (to boost tax collection/limit tax burden) (revenue rules: RR)..theEMEshavepreferredcombinationofbalance budget rules and debt rules for working towards debt sustainability. ERs and RRs. predictable and transparent manner (Corbacho and Schwartz. revenue deficit and debt. As automatic stabilisers are stronger on the revenue side. Both these sets of rules are not directly linked to the control of public debt. whereby the government pursues the objective of achieving a nominal budget balance on average over a full economic cycle. Indonesia and Mexico) have adopted combination of budget balance and debt targets to improve the effectiveness of their fiscal rules to ensure debt sustainability. The number of countries adopting national and/or supranational fiscal rules has gone up from seven in 1990 to 80 in 2009 (IMF. Alternatively. they do not provide sufficient guidance for fiscal policy in terms of its constituents and can become misleading at times. High fiscal deficits and sovereign debt risks. but also provide sufficient flexibility to respond to shocks. particularly in the advanced economies by national rules. 2010). fiscal rules have come under strain across a number of countries as they do not distinguish between economic upturns and downturns. and exposure to global shocks. overall budget balance is targeted for moving towards debt-sustainability whereby debt-GDP ratio converges to a finite level. On the otherhand. as this indicator provides a low degree of cyclical flexibility for fiscal policy to respond to shocks. boost expenditures and raise the deficit to address the economic slowdown. which were accompanied. Increasingly many (60 per cent) countries including EMEs (Argentina. Conventionally. Supranational rules also have combined budget balance rules with debt rules (in 41 countries). advanced countries have generally not adopted FRLs reflecting strength in the existing legal and institutional framework (Lienert. they do not normally permit discretionary expenditure stimulus.ECONOMIC REVIEW Box II. primary.. Advanced economies have tended to favour flexibility in their fiscal rules by either adopting cyclically adjusted balances as target indicators or merely strengthening their fiscal frameworks without emphasising numerical targets. India‘s FRL system of targeting revenue and fiscal balances separately is quite unique internationally as other countries generally tend to target overall budgetary balance. However. tax revenue ceilings in Denmark. need to beaccompaniedbydebtorbudgetbalancerulesforensuring long term fiscal sustainability. Similarly. recognising inadequacies in stand-alone rule making. growth rates. While ERs provide flexibility for conduct of fiscal policy through cyclical anddiscretionaryreductionsinrevenuesduringaneconomic downturn. however. Historically.) 57 . Rule-based fiscal frameworks have varied across advanced and developing economies depending upon their different needs. On the other hand. fiscal policy under the rule-based framework is anchored to a variety of budgetary aggregates. While primary balance rules also exist. Notably. 2001). countries (New Zealand in 1994 followed by countries in Latin America. While in EMEs fiscal rules were accompanied by FRLs. the genesis of fiscal rules dates back to the midnineteenth century. Although DRs are most effective for ensuring convergence to a debt target. the FRLs in India have a combination of targets set for various fiscal indicators such as fiscal deficit. when debt level is below the ceiling but rising. 2009). the golden rules.13 Fiscal Indicators in a Rule-based Framework: Cross-country Survey In the aftermath of global financial crisis.g. these rules per se may tend to result in a procyclical fiscal policy. which target the overall balance net of capital expenditures.. Europe and Asia) started enacting fiscal responsibility legislations (FRLs) as a permanent institutional arrangement for promoting fiscal discipline in a credible. or current spending in absolute terms. Countries may also adopt debt rules (DR) by directly setting an explicit limit or target for public debt (in absolute or as ratio to GDP) either in gross terms or in net terms (after adjusting financial assets). In practice. However.Effectivefiscalrulesshould not only aim for numerical targets that have an unambiguous and stable link with an ultimate objective like public debt sustainability. they are less linked to debt sustainability as they tend to ignore imbalances being incurred on account of interest payments. have necessitated countries to re-examine their fiscal rules so as to anchor their fiscal imbalances even beforetheireconomiesstabilised.. Fiscal rules constrain budget makers by delineating a ‗numerical target‘ on budgetary aggregates over a ‗long lasting time period‘with a view to guiding fiscal policy (Kopits. Furthermore. many of them have either ignored or adjusted their rules and even taken discretionary action to cut revenues. followed by the States subsequently. Although countries have not repealed pre-crisis fiscal rules. India embarked on FRL framework with the enactment of Fiscal Responsibility and Budget Management (FRBM) Act by the Central government in 2003.

18 While laying out the revised fiscal roadmap in amended FRBM Acts. ―Fiscal Responsibility Laws. With the GFD-GDP ratio budgeted to be lower in 2011-12. wouldfacilitatelowerdependenceofStatesonCentre especially during the period of slowdown. States‟own initiatives important for their durable fiscal consolidation II. which are expected to be more durable than tax revenues. for facilitating greater decentralisation and undertake fiscal consolidation initiatives so as to benefit from State-specific grants as recommended by the Thirteenth FC. ―Should Advanced Countries Adopt a Fiscal Responsibility Law?‖ Fiscal Affairs Department.5.21 The Central Government had constituted an Expert Committee in July 2010 (Chairperson: Smt.‖ in Promoting Fiscal Discipline. whereby borrowing is mandated only for capital expenditure. This indicates that a large portion of borrowings are used to finance the revenue deficit. States may have to assess itsrevenueimplicationsbasedonthestructureoftheir State economies. Ian (2010).whichwouldlaydownthefiscal roadmap for the next five years. Kumar and Teresa Ter-Minassian (Washington: International Monetary Fund).14). Effective mobilisation of own non-tax revenues. While the taxbaseofStatesislikelytoexpandwiththeproposed implementation of GST. 2007.4 per cent in 2007-08. significantly higher at 74. the quality of fiscal adjustment may have long-term implications for growth as fiscal multiplier is generally found to be higher in the case of capital expenditure (Box II. and Gerd Schwartz. References: Corbacho. ―Fiscal Rules—Anchoring Expectations for Sustainable Public Finances‖.. Shyamala Gopinath) for comprehensive review of the National Small Savings Fund (NSSF).19 Keeping in view the cyclicality in tax collections at the Central level. This is consistent with the UK‘s ‗golden rule‘ fiscal framework. viz.5. taking into cognisance these factors. States need to amend their FRBM Acts to provide revised fiscal roadmap for medium term. IMF (2009).ANNUAL REPORT (. 2003 duringthecourseof2011-12.20 The recommendedshareofStatesintheform oftaxdevolutionfromtheCentrehasalsobeenraised by the Thirteenth Finance Commission (FC). States need to explore own non-tax sources of revenues by undertaking reforms in major sectors. (2001). Fiscal Affairs Department. inter alia. power and irrigation. viz. the Central government intends to introduce an amendment to the FRBM Act. ed. on their part. G. resource transfers from Centre to States in recent years have been mainly through current transfers.4 percent in 2011-12 (BE) than 41. higher RD-GFD ratio reflects that fiscal adjustment envisaged during 2011-12 will be mainly through compression in capital outlay.) phasing out the use of borrowed resources for current consumption of the government so as to ensure that borrowings are used only for capital expenditures for longterm fiscal sustainability. particularly since 2004-05.. thereby reducing the availability of resources to undertake capital outlays which could have implications for potential growth. Ana.5. to recommend mechanisms to make small saving schemes market linked and to recommend on the 58 . II. While current transfers from the Centre contributed to around one-third of correction in revenue account of States during the pre-crisis period (2003-04 to 2007-08). the Central government has started focusing on reducing ‗effective revenue deficit‘. Going forward.. Accordingly. Lienert. Recognising that fiscal consolidation is conducive to macroeconomic management. Kopits. From Union Budget 2011-12. by Manmohan S.. December 16. IMF Working Paper 10/254. States.5. The terms of reference of the Committee were. may have to devolve higher resources to local governments. lower tax devolution due to cyclical downturn in tax collections attheCentrallevelduringthecrisiswascompensated by higher grants.Concld. ―Fiscal Rules: Useful Policy Framework or Unnecessary Ornament?‖ IMF Working Paper 01/145. which excludes capital grantstoStatesfromtheheadlinemeasureofrevenuedeficit. With a sharp decline in loans from the Centre. II. States need to take cognisance of changing contours of Centre-State financial relations. II. tax devolution and grants.

With widespread adoption of expansionary fiscal policy during the crisis. In contrast. Mendoza and Carlos A. the empirical work on fiscal multiplier.ECONOMIC REVIEW Box II. cross-country findings as well as the results for India show that government consumption leads to crowding out with size of multiplier being significantly lower than one while investment multiplier. Thus. IMF Working Paper No. Végh (2011).11 and 0. has crowding-in impact with its size more than unity. fiscal multiplier calculated as an impact multiplier differs from cumulative multiplier or the peak multiplier. ―How Strong are Fiscal Multipliers in the GCC? An Empirical Investigation‖. lending arrangement of the net collection of small savings to Centre and States. working over the long-run. If with fiscal expansion. the cumulative multiplier works out to around 1. concerns with regard to long term fiscal sustainability may make it less effective and even negative.5 when the multiplier peaks. Based on quarterly data for 199697 to 2009-10. a long standing debate about the size of the fiscal multiplier has resurfaced both in theory and across countries.15). Raphael and Abdelhak Senhadji (2011).anumberofstudies were undertaken to examine the impact of fiscal stimulus under varying conditions. The recommendations would also empower the State Governments with greater discretion on borrowings from NSSF keeping in view their cash position and improve the viability of NSSF. has not settled the theoretical debates. This wouldreducethevolatilityinsmallsavingscollections. fiscal multipliers are expected to be larger than in the normal period when monetary and fiscal policies may be working at cross purposes.14 Fiscal Multiplier: A Cross-Country Experience The global financial crisis drew discretionary fiscal stimulus measures almost as reflex actions across countries mirroring an underlying belief about efficacy of government spending or taxation measures for stimulating desired change in aggregate demand. in advanced economies. Focusing on impact of Central government‘s investment as reflected in annual capital outlays (in real terms). and to suggest alternative investment avenues. Furthermore. Government consumption multiplier peaks within first three quarters (ranging between 0. Whilelowerlevelofleakagesinspendingincreasesthevalue of multiplier. originally propounded by Richard Kahn (1930) and later popularisedbyKeynes. 59 . IMF Working Paper No. monetary conditions remain accommodative. it was found that government consumption positively impacts GDP growth (both in real and nominal terms) in the short-term. fiscal multiplier is generally larger. ‗Multiplier effect‘. Fiscal multiplier exceeds unity in simple Keynesian framework but it is now known that it can vary considerably with impact varying from even negative values to large positive values. WP/11/61. In general. An exercise undertaken for estimating the size of fiscal multipliers in respect of government final consumption expenditure (GFCE) and the Central government‘s capital outlay using VAR framework adopting methodology similar to Espinoza and Senhadji (2011) suggests that fiscal multipliers in India are low. after which the impact is found to peter out. The composition of expenditure plays an important role in assessingtheeffectoffiscalstimulusindevelopingcountries. Enrique G. Interaction with a large number of macro-economic parameters ultimately determines the size of the multiplier. Espinoza. ―How Big (Small?) are Fiscal Multipliers?‖.measurestheefficacyofgovernment spending or tax measures to bring desired change in aggregate demand. The Committee submitteditsreporttotheGovernmentofIndiainJune 2011 (Box II.Fiscalexpansionsthatwereexpected to persist indefinitely have smaller multipliers due to stronger private-sector offsets. providing a broad range of results. the multipliers are statistically significant and moderately positive. References: Ilzetzki. Even though there has been a vast literature on estimating fiscal multiplier. Typically. the effects on output in the medium-term in emerging economies were found to be consistently negative indicating that discretionary fiscal measures taken in emerging economies might have a positive impact in the immediate period but they appear to be anti-growth in the medium-term as they become more of a structural nature and thus more difficult to phase out in later years. Inthewakeofoccurrenceofglobalcrisis. This calls for improving quality of public expenditure management by increasingly rationalising outlays towards investment as the Central and State governments revert to the rule-based fiscal consolidation path.20 under alternative specifications). Ilzetzki et al (2011) have shown that the cumulative impact of government consumption on output was lower in developing countries as compared with high-incomecountries. Ethan. during crisis when fiscal stimulus is designed to address recessionary conditions. which would facilitate a more efficient cash and debt management of the Central and State Governments and a smoother transmission of monetary policy signals. WP/11/52. The recommendations of the Committee are aimed at aligning the administered interest rates on small savings instruments with market related rates on government securities.

India.44a). or could be on-lent for financing infrastructure to companies which are wholly owned by Government. A positive spread of 25 bps. II. The Committee recommended a reduction in the mandatory share for States to 50 per cent from 80 per cent at present.1 per cent after contracting by 0. The global recovery lost some momentum in the second half of the year in the AEs.0 per cent growth in advanced economies (AEs) in 2010 (Chart II. However. respectively. the United States. effective 2012-13. The rate of interest on securities issued to the Central / State Governments would be equal to the sum of the weighted average interest cost on the outstanding small savings and the average administrative cost and would be announced every year onApril 1. performed better than expected. The growth in emerging market and developing economies (EMDEs) at 7. the Committee recommended a shorter tenor of 10 years for investments by NSSF that would largely address the asset-liability maturity mismatch of NSSF.6. on savings deposits to align with commercial bank savings deposit rate. (ii) measures to improve liquidity on recurring and time deposit schemes. The date of notification of the rate of interest on small savings by the Government would be April 1.6.5 per cent in 2009. however.4 per cent outstripped the 3. nevertheless. Accordingly. could either be taken by the Centre or could be onlent to other States if they so desire. The Committee recommended that the secondary market yields on Central government securities of comparable maturities should be the benchmarks for the small savings instruments (other than savings bank deposits). China.Act. (vii) discontinuance of Kisan Vikas Patra (KVP) which is prone to misuse being a bearerlike instrument. it rose to 6.1 The global economy rebounded in 2010 with a growth of 5. Ireland and Portugal and the weakening sovereign balance sheets in Italy and Spain. The negative gap between the outstanding assets and liabilities of NSSF may be funded by the Central Government. (v) withdrawal of Section 80C income tax benefit for accrued interest on NSC.particularlyintheUSandJapan.2 The recovery was marked by continued uncertainty about the durability of the growth process. Brazil and the ASEAN-5 grew at a significantly faster pace than the AEs. Emerging market economies (EMEs) led by China and India continued to grow at a faster rate compared to the AEs. Exceptions were made only in case of 10-year NSC and Senior Citizens‘ Savings Scheme (SCSS) by recommending a spread of 50 bps and 100 bps. On an average consumer price basis. The reinvestments may be as per the same terms as for fresh investments.2 per cent in the preceding 60 . After recovering strongly in the first half of 2010.a. A one-year reference period . EMEs face rising inflation led by commodity prices II.therecentdowngradingoftheUS sovereign debtbyStandardandPoors‘(S&P)adverselyaffected the sentiments in the financial markets across the world.6.taking the average of the month-end secondary market yields in the preceding calendar year may be adopted. renewing fears of slowdown amidst weakening global economic recovery. With the rule-based improvement in fiscal situation. if any. (iv) an increase in the annual investment limit on PPF to `1 lakh to coincide with the ceiling on Section 80C of the I. the global economy encountered heightened downside risksemanatingfromconcernsrelatingtothepossible sovereign debt defaults in Greece. After the States exercise their options. GermanyandJapanhadlargerswingsingrowthrates transiting from significant negative to moderately positive growth. lower maturity may not involve refinancing risk.T.ANNUAL REPORT Box II. vis-à-vis government securities of similar maturities (as against 50 bps recommended by the earlier Committees) would contribute to the viability of the NSSF. every year. the inter-year movement of interest rate fluctuations would be limited to maximum 100 bps on either direction. to broadly align with the maturity profile of the small savings instruments.15 Recommendations of Committee on the Comprehensive Review of the NSSF The Committee recommended the following measures on the rationalisation of savings instruments: (i) an increase in the rate of interest to 4 per cent p. VI. These measures would contribute to the viability of NSSF.Growthinworld industrial production also exhibited signs of deceleration after attaining peaks in March 2010. the balance amount. THE EXTERNAL SECTOR Global recovery loses momentum.3 Inflation accelerated in EMDEs during 2010. and (viii) introduction of a longer maturity instrument – 10 year NSC. sovereign balance sheet risks add to uncertainty II. However.1 per cent in 2010 from 5. The AEswhichfacedtheprospectofdouble-diprecession. (iii) abolition of maturity bonus on Monthly Income Scheme.

1 per cent overthesameperiod.but astarkdivergencehasoccurredinrecentmonthswith producer price inflation having risen faster with rising fuel and non-fuel commodity prices. If. monetary accommodation 61 Per cent . The core inflationary pressuresremainedsubduedintheseeconomies. Commodity prices are expected to remain firm in 2011. Unemployment Rate 11 10 9 Per cent Per cent of GDP 0 -1 -2 -3 -4 -5 -6 -7 -8 -9 2008 8 7 6 5 4 Jun-09 Dec-09 Dec-08 Jun-08 Jun-10 Aug-08 Aug-10 Dec-10 Feb-10 Apr-10 Oct-08 Oct-10 Jun-11 Aug-09 Feb-09 Feb-11 Apr-09 Apr-11 Oct-09 3 2005 -10 2009 2010 Est.0 per cent in 2010 from 3. Overall Fiscal Balance 2008 2009 2010Est. As a result.6. consumer price inflation in AEs rose to 1.44 : Key Global Indicators a: Output Growth 10 8 Per cent 6 4 2 0 -2 -4 40 30 Per cent 20 10 0 b: Growth in World Merchandise Exports (Value) 25 20 15 10 5 0 -5 -10 -15 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 -20 -25 -10 -20 2007 2008 2009 2010 2011f 2012f -30 -40 Source: IMF World Advanced Economies Emerging and Developing Economies Source: WTO c: Net Private Financial Flows to EMDEs 120 100 80 60 40 20 0 Per cent of GDP Q-on-Q (RHS) d. In contrast.Public Debt Y-o-Y 800 700 US$ billion 600 500 400 300 200 100 2003 2004 2005 2006 2007 2008 2009 2010 2011f 0 Source: IMF e. owing to rapid growth in EMDEs. Low global interest rates and large surplus liquidity in the global economy fuelled global commodity prices with players taking long positions. 2011P 2012P Advanced G-20 Economies Emerging G-20 Economies P: Projection Source: IMF Fiscal Monitor Update. June 2011 2012P f. US 2007 Japan Euro Area UK year.4 Global commodity prices firmed up during 2010. II. June 2011 Source: Websites of respective national statistics organisations. Developing Asia‘s inflation rate nearly doubled to 6.ECONOMIC REVIEW Chart II. however. Both India and China faced considerable inflationary pressures.1 per cent in 2009. OPEC‘s lower-than-expected output response during 2010 and unrest in the Middle East and North Africa (MENA) since January 2011 drove up oil prices.6 per cent from 0. 2011P Emerging G-20 Economies Advanced G-20 Economies P: Projection Source: IMF Fiscal Monitor Update.butwasstillwellbelowthelongrun average in these countries. strongerthan-expected growth of AEs and weather-related supply shocks.

Exports of EMDEs witnessed higher growth than those of AEs.The Government‘s export policy in terms of encouragement of FreeTrade Zones. the improving demand conditions helped in the recovery of world trade to its pre-crisis level. options for the pursuit of an independent monetary policy for EMEs like India can get constrained but this could be managed through appropriate policies (Box II. the composition of inflows poses some concern as there was slow down in FDI while the volatile components such as FII and short-term trade credits showed some rise that have implications for external debt sustainability.6. the share of labour intensive products declined from 29 per cent to 21 per cent during the same period. In an increasingly interdependent globalised world. and unrest in major oil exporting countries.16). respectively. including Brazil.6. Indonesia. level of external debt and import cover of foreign exchange reserves continued to remain comfortable.44b). Capital flows are likely to remain strong during 2011. On the capital account. Commodity prices could also experience a decline if the pace of global recovery slackens further. Coupled with a higher invisibles surplus. Trade diversification helps narrow trade deficit II. there is an urgent need for adopting fiscal consolidation plans.6. Key external sector indicators such as CAD. and Russia. it led to a moderation in the current account deficit (CAD) in 2010-11.6. coupled with the near full capacity utilisation have generated inflationary pressures in many EMEs. they do run the risks of turning volatile. While the share of engineering and petroleum products increased to 27 per cent and 17 per cent in 2010-11 from 21 per cent and 11 per cent.44c). However.Whilerecoveryinglobalgrowthauguredwell for pick-up in exports and invisibles.6. This need is particularly urgent in countries with debt sustainability issues in the Euro area and also in Japan and the US to avoid contagion spreading from the government balance sheet to the bank balance sheets and the financial markets. II. particularly crude oil. in 2005-06. the consequent rise in interest rates could reduce leveraged position in commodity markets and deflate commodity prices. II.5 Strong capital inflows induced by the multipaced global growth and the consequent differential exit from accommodative monetary policy.7 Fiscal policy continued to support economic activity in theAEs in 2010 (Chart II. impacted the import bill. the growth in global trade is expected to moderate due to rising prices of food and other primary products. The improved net capital inflows helped bridge the higher CAD and foreign exchange reserves increased modestly. Duty Exemption Entitlement Scheme. higher international commodity prices. Balance of Payments improve in 2010-11 II. India.ANNUAL REPORT in AEs is progressively withdrawn.44d and e). focus market scheme (FMS) and focus product scheme (FPS) appeared to have contributed to the diversification of exports in terms of products from labour intensive manufactures to higher value-added products in engineering and petroleum sectors and destinations acrossEMDEswhichledtomoderationintradedeficit during 2010-11 (Chart II. Exports surged during 2010 and global trade recovered to exceed the pre-crisis high of July 2008 for the first time in March 2011 (Chart II. with possible episodes of sudden reversals (Chart II. The 62 . but in view of the recent developments.6 In 2010.9 India‘s merchandise exports grew robustly during2010-11aidedbyhigherrateofgrowthinglobal income and diversification in direction and composition of trade. II. The bilateral nominal rupee-dollar exchange rate showed a two-way movement broadly reflecting demand and supply conditions in the foreign exchange market. Going forward.44f). China.45).8 The improvement in India‘s balance of payments (BoP) during 2010-11 primarily reflected pick-up in exports during the second half of the year. Unemployment situation has remained stubbornly high in the AEs throughout 2010 and is improving slowly in 2011 (Chart II.

interest earnings and valuation changes. especially if they are uncoordinated.a‟laJagdish Bhagwati. 4037. Its announcement caused a double whammy on the EMEs through a surge in capital inflows and a rise in commodity prices. Even without nominal price rigidities. November. or that domestic firms would borrow excessively from abroad without hedging their exposure. It may appear that growing global interdependence has increased the Indian economy‘s vulnerability to external demand and exchange rate shocks. In fact. They find that policies promoting sound macroeconomy. Ayhan. Ajay and Ila Patnaik (2011). financial sector development. 63 . we need to deal with them. The Globalisation Paradox. inter alia. Journal of Monetary Economics. fiscal or exchange rate policy becomes redundant with increased openness. interest rates. Open markets succeed only when embedded within social. WW Norton & Co.institutionalqualityandtradeopennessappear to help developing countries derive the benefits of financial integration. A typical case has been QE2. but those that have adopted parts of it selectively. both requiring them to tackle inflationary pressures. Globalisationisaphenomenonthathasnowacquiredaforce of its own. The small increase in the Reserve Bank‘s foreign exchange reserves mainly reflects various accruals. which has both positive and negative externalities. NIPFP Working Paper. Forinstance. It is important to recognise that globalisation represents a shock to relative. However. In the past two years. Subbarao. Our theoretical understanding of the channels through which nationaleconomiesarelinkedisalsoinadequate. Increased exchange rate flexibility has also minimised the danger that foreign inflows would be attracted by ―one-way bets‖ on appreciation. Shah. it has been time and again pointed out by the critiques that gains from trade in goods (widgets) are of first order. Comments at the SNBIMF Conference on The International Monetary System. (2011). The case for price stability as an optimal monetary rule becomes stronger.Trilemma in policy choice is a well known problem and needs to be managed by adopting less than corner solutions. Critiques of globalisation have re-emphasised that globalisation does not bring any additional gains than what can already come from free trade. What happens to the general price level depends on what monetary policy makers then decide to do. ―Financial Globalisation and Economic Policies‖. It is true that the exchange rate regime has evolved towards greater flexibility as a conscious policy choice. legal and political institutions that provide them legitimacy by ensuring that the benefits of capitalism are broadly shared (Rodrik. andAlan Sutherland (2008). not absolute prices.financialglobalisation has come under scrutiny once again. misaligned exchange rates amidst balance of payment shocks had a much larger adverse impact on the Indian economy in the earlier crisis episodes.itwould not be correct to say that domestic monetary. 2011-79. However. 2011). QE2. bringing back confidence in financial markets and ultimately helping EMEs through improved trade and capital account flows. depreciating to help the economy whenitwasweakandappreciatingtoreduceexcessdemand when it was strong. Kose. 2008). Another observation has been that countries that have benefited most from free-market globalisation are not those that have embraced it wholeheartedly. Dani (2011). Michael B. Effectiveness of national economic policies goes down in such cases. They put EMEs in a policy bind as higher interest rates to fight inflation could potentially intensify capital inflows further. a more recent concern has been: if globalisation is leading to a loss of national policy effectiveness? The answer is not easy to find. while gains fromtradeincapital(dollars)areofsecondorder. References: Devereux. Policy interventions can best aim at a right policy mix to reap gains from it while minimising the risks. After the Indian economy has become integrated globally. there has been no significant foreign exchange market intervention. These gains dynamically can be significant.Yet.ECONOMIC REVIEW Box II. external and internal balances. Eswar Prasad. 2011). IZA Discussion Paper No. 55(8): 1363-1375. A. Kenneth Rogoff and ShangJin Wei (2009). No. under globalisation national policies can be more carefully calibrated and fine-tuned to serve national interests. a large shock in the form of a swing of US$100 billion in total net capital inflows in a single year of peak of global crisis had been managed without too much impact on exchange rate. Zurich. Policies had supported this move over a period of time. ―India‘s Financial Globalisation‖. however. but this has been calibrated to the changing structure anddynamicsoftheeconomywithoutlossofmonetarypolicy independence. May 10. et al. Rodrik. It has increasingly allowed exchange rate to serve as a buffer. While spillovers occur. The impact of globalisation on national economic policy effectiveness is ultimately an empirical question. price stability is important because it enhances the risk sharing properties of nominal bonds (Devereux and Sutherlands. Contrarian arguments have been equally strong.(2009) review a large body of literature to highlight gains fromfinancialglobalisationandthevariouseconomicpolicies that could help developing economies effectively manage the process of financial globalisation. D. Kose. also helped shore up US recovery.monetarypolicytakesonnewimportanceunder globalisation due to need to contain spillovers and their impact on nominal asset returns. In the context of increasing capital flows. Subbarao (2011) suggests that there is a need to find ways to maximise the benefits of globalisation while minimising its costs. ―Policy Discipline and Spillovers in an Inter-connected Global Economy‖.16 Has Increasing Globalisation Limited the Effectiveness of National Policies in India? Inthewakeoftheglobalfinancialcrisis. by capacity building to withstand volatility and shocks. ―Financial Globalisation and Monetary Policy‖. It has been argued that de facto openness has risen sharply in India and has implied a loss of monetary policy autonomy when exchange rate pegging was attempted (Shah and Patnaik.

0 -16.0 -50.0 40. the Union Budget 2011-12 announced the following measures: (i) introduction of a system of self assessment in Customs to enable importers and exporterstoassesstheirdutyliabilities.0 Jan-11 Apr-11 Apr-08 Apr-09 Jan-09 Jan-10 Apr-10 Oct-08 Oct-09 Jan-09 Jan-10 Jan-11 Apr-08 Apr-09 Apr-10 Apr-11 Oct-08 Oct-09 Oct-10 Jul-08 Jul-09 Jul-10 Jul-11 Exports Imports Trade Balance (RHS) POL Imports Non Oil Imports Average Crude Oil Price of Indian Basket (RHS) share of developing economies in total exports improved to 42 per cent in 2010-11 from 38 per cent in 2005-06.0 29.0 -13.0 -20. 64 Oct-10 Jul-08 Jul-09 Jul-10 Jul-11 .0 -10. Eco.0 -7.0 -9. II. China. Engineering products. performance in case of valued added products such Chart II.0 * Based on DGCI&S data.0 20.0 -11. gems and jewellery witnessed a significantly higher growth (Chart II. II.46: Year-on-Year Export Growth of India vis-a-vis AEs and EMEs Argentina Brazil Chile China Emer.45 : India’s External Trade a. The share of gold and silver in total imports -40.0 60.0 50.& Dev. efforts to explore new markets particularly in Africa and Latin America along with added emphasis on exports to EMDEs also contributed to the export performance.47).0 -17.0 -40.10 Comparing across countries.13 Imports grew at a lower pace than exports during 2010-11. petroleum products.0 -6.6. II. France India* Indonesia Japan Korea.0 40.0 10.0 17.46).0 20.0 US $ Billion US $ billion 150 US $ per barrel Per cent Growth 130 110 90 70 50 30 10 26. of Malaysia Mexico Russia Singapore Sweden Switzerland Turkey US World Adv.0 -14. manufactured fertilisers and professional instruments). (iii) allowing tax-free receipt of services wholly consumed within the SEZs along with simplified refunds procedures.0 -1.6.0 -5. which was indicative of some qualitative shiftinthepatternofimports. bulk consumption goods. while the share of OECD countries declined to 33 per cent from 45 per cent during the same period.0 8.0 0. Moreover.0 -10. II. Brazil.0 -15.0 5.0 -30. There was an increase in the share of industrial inputs in total imports (non-oil imports net of gold and silver.0 -8.11 While exports of almost all major groups of commodities improved significantly during 2010-11. remained almost same as that of the previous year‘s level despite the rise in the price of gold and silver in the international market.0 Per Cent Growth 2009 2010 Source: IMF 0.0 30. Rep.0 20.0 23.6.0 32.(ii)simplification of tax refunds on services used for exports of goods on the lines of duty drawback schemes.0 14. and (iv) setting up of seven mega leather clusters and a handicraft mega cluster.ANNUAL REPORT Chart II.0 -4. exports from the group of EMDEs as a whole rose relative to world exports.0 11. as engineering and petroleum sector has been noteworthy.0 -20. Countries like India.0 b: India's POL Imports and International Crude Oil Prices 35.Exports and Imports 80.0 70.0 0.12 With a view to improving efficiency of export processes.6.0 -3. Indonesia and Russia witnessed higher growth during 2010 (Chart II.0 -12.0 -2.Importsofexportrelated itemsrecordedasteepriseofabout59percentduring the year.

tradedeficitasapercentageofGDPwashigher at 7.ECONOMIC REVIEW Chart II. II.6. Consequently.increased marginallyduring2010-11. declined by about one-third on account of low interest rates abroad. II. As a result.asignificantandresilientcomponent ofinvisiblesreceiptsduringtheglobalcrisis. trade deficit narrowed to US $ 98. Private transferreceipts. net invisibles recorded a modest increase over the preceding period. The sharpgrowthininvisiblepaymentswasledbyitsmajor components viz. performance of business and financial services also improved significantly during the year. services and investment income. While software services receipts accounted for 44. which is a major component of invisibles.Withtheturnaroundinother 65 Germany Australia 0 Saudi Arabia China China OPEC OPEC UAE UAE USA USA Iran EU UK EU . India‘s merchandise exports and imports increased by 42.6. on BoP basis.. Among the major components of invisibles. However.6.5 per cent during the previous year.5 per cent. services exports witnessed a turnaround and recorded a growth of 37.15 During 2010-11. Invisibles growth robust II.6.2 per cent and 3. as per DGCI&S data. This increase driven by services exports and private transfers . respectively.16 A noteworthy aspect in respect of services data was the release of provisional aggregate data on trade in services for the first time for the month of April 2011 as a follow up of the implementation of the recommendations of the Working Group on Balance ofPaymentsManualforIndia(Chairman:ShriDeepak Mohanty).3 per cent. invisibles receipts and payments exhibited robust growth in contrast to a decline in receipts during 2009-10. The aggregate data on trade in services will be released on a monthly basis after a gap of about 45 days.3 per cent and 22.was partly offset by a decline in investment income.7 per cent of total services exports.14 During 2010-11.7 per cent of GDP) from the previous year (Appendix Table 17).2 billion (5. as against a decline of 2.47: Exports and Imports of Major Commodities a:Growth in India's Major Commodities Exports Petroleum Products Handicrafts Gems & Jewellery Textiles and Textile Products Engineering Goods Chemicals & Related Products Leather & Manufactures Manufactured Goods Ores & Minerals Agricultural & Allied Products -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 b:Growth in India's Major Commodities Imports Gold & Silver Mainly Export Related Items Capital Goods Non-Bulk Imports Iron & Steel Bulk Consumption Goods POL Bulk Imports -30 -20 -10 0 10 20 30 40 50 60 70 80 90 2009-10 2010-11 Per cent 2009-10 2010-11 Per cent c: Percentage Share in India's Merchandise Exports 45 40 35 30 25 20 15 10 5 0 35 30 25 20 15 10 5 Netherlands d: Percentage Share in India's Merchandise Imports Switzerland Developing Countries Hong Kong Developing Countries Singapore Germany 2009-10 2010-11 2009-10 2010-11 II.17 Investment income receipts.8 per cent to US $ 132 billion.

the CAD narrowed to 2. While debt creating flows exhibit significant sensitivity to the interest rate differentials. The moderation in equity flows coupled with rising debt flows during 2010-11 poses risks to sustainability.5 per cent of GDP) during 2010-11 from US$ 118 billion (8.48a: Invisibles Receipts and Payments 100 US$ billion Chart II. Net FII inflows remained almost at the same level as that of the preceding year.ANNUAL REPORT Chart II. Net invisibles financed about 66.18 On BoP basis.1 per cent of trade deficit as compared with 67.6. There was the dominance of volatile flows such as FII investment and debt creating flows like ECBs and short term credit.48). while FDI flows moderated.19 The positive perception of India‘s growth prospects attracted capital inflows during 2010-11 which witnessed an increase of US$ 6. As a result. The composition and volatility of such flows posed some concern.6. Thus.49).73. Net FDI inflows were lower by almost US$11. the share of private transfer receipts in currentreceiptsdeclinedduring2010-11(Chart II. CAD is Chart II. of Balance of Payments -120 US$ billion 40 0 -40 -80 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 CAB TB NIV RES NKA CAB: Current Account Balance. Capitalaccountimprovesthoughcompositionofflows poses concerns II.6 per cent in the previous year.6 per cent of GDP) in the previous year despite higher growth in exports relative to imports (Appendix Table 18).3 billion over the preceding year. II.49: Trends in the Major Components 120 80 within the threshold level of sustainable CAD of 2.0 per cent (Box II. occasional bouts of net outflows when investor sentiments changed.20 Non-resident deposits during 2010-11 stood higher than the previous year mainly on account of higher inflows under NRO deposits (Chart II. there were. trade deficit widened in absolute terms to US$ 130 billion (7. TB: Trade Balance NIV: Net Invisibles.17).48 : Performance of India’s Invisibles 70 60 50 40 30 20 10 0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Growth in per cent Chart II.6 per cent of GDP during 2010-11 from 2.duetosignificantmoderationingross FDI inflows to India coupled with higher gross outflows.50).48b: Growth of Major Components of Invisibles Receipts 60 40 Per cent 80 60 40 20 0 -20 20 0 -10 -20 -40 Net Invisibles (RHS) Invisibles Payments Invisibles Receipts Services Payments Services Receipts 2005-06 2006-07 2007-08 Software 2008-09 2009-10 2010-11 Pvt Transfers Investment Income segments. RES: Change in Reserves NKA: Net Capital Account capital flows are only weakly sensitive to the interest rate differentials (Box II.8 per cent during the previous year (Chart II. at the aggregate level.6billion. however.6. Current account deficit shrinks II.18). Net external assistance received by India was higher by US$ 2 billion benefitting from financial sector loan from the World 66 .

Milessi-Ferretti and Razin (1996) point out that though generally a CAD at 5 per cent of GDP is considered as a red mark. debt-GDP ratio. NBER Working Paper No.0percentandinflationhovers around 5. Buoyant domestic economic activities. (2011). (ii) average interest cost on external liabilities ranges 2. The sustainable CAD/GDP ratio in India has gone up over a period of time. Tim and Paul Cashin P (1991). Historically. ―Current Account Imbalances Coming Back‖. Obstfeld. Under this model..5 per cent of GDP and about 3/5th of the flows are non-debt creating inflows. Gian Maria and Assaf Razin (1996). ―The Unsustainable US Current Account Position Revisited‖.though higher. More recently. this has improved.0 per cent. net foreign assets and oil prices. with much larger cross-border capital flows and improved institutional capability to absorb the same. In order to empirically workout the level of CAB that is consistent with historical sustainable peak level of NEL to GDP ratio. Generally. Obstfeld and Rogoff (2005) showed that the then US CAD of 5. concerns have resurfaced over CAD sustainability of a few Euro zone countries.22 The increase of US$ 13. By this method.0 per cent is found to be sustainable for India over the medium term subject to a set of conditions.5-2. the question whether CAD is excessive or not can only be answered by modeling the path of external imbalances. and debt-servicing ratio.1 billion). Gagnon (2011) warns that current account imbalances are coming back as a result of interplay of fiscal policy. were absorbed by the higher current account deficit.21 Country-wise. in India NEL ratio of about 21 per cent was the highest in 1996-97 and it did not cause any pressure on the economy. No.0 to 3. import cover. A nation is considered solvent if the sum of its discounted current account surpluses in future is more than the current level of net external liabilities. services and ‗construction.4 per cent of GDP had a high probability of the collapse of the US dollar. higher would be the size of CAB that is consistent with a stable NEL ratio. it can not a priori be determined what would be the sustainable level of NEL ratio. It varies from country to country depending upon a host of factors including credibility and ability of the nation to sustain interest of the investors.9 billion. a model akin to ‗Domar Model of Debt Sustainability‘ could be used.As a practical solution.52). Reference Callen.0to9. Peterson Institute of International Economics Working Paper. WP-11-1.6. FDI was mainly channeled into the manufacturing.17 India’s Threshold level of Sustainable Current Account Deficit Conceptually.Netcapitalflows. ―Assessing External Sector Sustainability in India‖. Maurice and Kenneth Rogoff (2004). Gagnon. the level of current account balance (CAB) that could be financed on a continuous basis without resulting in any external payment difficulties is termed as the sustainable level. any historically sustainable level could be assumed to be sustainable in future as well (IMF. 1999). Sustainable CAD in EMEs is likely to be far less than AEs. sustainability could also be assessed in terms of a range of economic indicators.5 per cent depending upon growth rate and cost of external finance. viz. CAD of 2. The level of CAB that stabilises the net external assets/liabilities in relation to the size of the economy is considered as sustainable. However. (i) GDP growthvariesbetween7. But 5 per cent clearly is a danger level even for countries which have unrestricted access to global capital markets. Solvency and sustainability are closely related as a continued unsustainable path of external balance would undermine the solvency of the nation.ECONOMIC REVIEW Box II. viz. sustainability refers to the ability of a nation to finance its CAD on an ongoing basis. Short-term trade credits(STC)alsoincreased. real estate and mining‘ sectors (Chart II. January. larger the absolute size of the differential between the growth rate and the interest rate. the sustainable level of CAD is measured in terms of net external liabilities (NEL) relative to the size of the economy. Sustainability of the CAB could also be seen in terms of solvency. 10869. Joseph E. October. The issue of current account sustainability has been raised in several countries from time to time. investments routed through Mauritius remained the largest component of gross FDI inflows to India during 2010-11 followed by Singapore and the Netherlands (Appendix Table 19) (Chart II. external financial policy. Therefore.81. During 2010-11.7 to 3. improvement in international financial markets and lower cost of funds abroad prompted the Indian corporates to take recourse to ECBs which more than quadrupled to US$ 11. Apart from NEL/GDP ratio. II. One of the early studies by Callen and Cashin (1999) had estimated it at 1. interest and funding 67 . Bank. ―Current Account Sustainability‖. Princeton Studies in International Finance.181.1 billion in foreign currency assets (FCA) on BoP basis during 2010-11 couldprimarilybeattributedtoreceiptsunderexternal assistance (US$ 6. IMF Working Paper.6.51). Theoretically. II. Milesi-Ferretti.. and (iii) capital flows range around 4-4. No.5 per cent.

51 Country-wise FDI Inflows 12 10 US$ billion 8 10 6 4 0 2 -10 Hong Kong Mauritius Singapore Cyprus -20 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 FDI Portfolio ECB NRI STC 2009-10 2010-11 Others 15 10 5 0 -5 -10 -15 -20 -25 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Per cent Japan 0 Netherlands USA FDI: Foreign Direct Investment. after financing a larger CAD.50: Trends in Major Components of Capital Flows (Net) 40 30 US$ billion 20 Chart II.ANNUAL REPORT Chart II. Foreign exchange reserves stable. STC: Short Term Credit.53: Exchange Rate flexibility in India 100 80 60 US$ billion Chart II. net capital account surplus. resulted in a net accretion to foreign exchange reserves of US$ 13. the Indian rupee depreciated against the major international currencies. partly reflecting higher demand from importers (Chart II.53).6.23 During 2010-11. During 2011-12 so far (up toAugust 12).52: Industry-wise FDI Flows 7 6 5 US$ billion 4 3 2 1 Construction.19). Portfolio: Portfolio Investments. reflecting flexible rupee II.1 billion (excluding valuation effect). The exchange rate of the rupee at the current level appears to be fairly valued (Box II. NRI: Non-Resident Indian Deposits. income (US$ 4. the foreign exchange Chart II. Inclusive of the valuation gains. Real Estate & Mining Manufacture Computer Services Trade Retail & Wholesale Transport Financial Services Electricity & other Business Services 40 20 0 0 Education. ECB: External Commercial Borrowings.7 billion).1 billion) and net purchases (RBI‘s market intervention) from Authorised Dealers (ADs) (US $ 1. R & D Others Communication Services Restaurants & Hotels Miscellaneous -20 -40 -60 Trading Net capital inflows in excess of CAD RBI's net forex purchase 2009-10 2010-11 Rupee app (+) / dep (-) against the US dollar (RHS) 68 UK .

RBI Working Paper. at times. India‘s foreign exchange reserves stood at US$ 316. Management of foreign exchange reserves II. 43 October 24. FDI inflows are essentially long-term in nature and are primarily driven by growth prospects of the Indian economy and confidence of international investors in India as an attractive long-term investment destination. 2011 (Appendix Table 20). as has been the case in the past.24 The guiding objectives of foreign exchange reserves management in India are safety. in search of higher return. reserves increased by US$ 25. Washington. In line with the expectations.‖ Inter-American Development Bank Working Paper No. Moreover. ECBs. Stock market returns have been found to be a major pull factor for FII flows into the domestic financial markets. and Ernesto Talvi (2001) ―The Growth-Interest Rate Cycle in the United States and its Consequences for Emerging Markets. near zero policy rates maintained in AEs.6. FCNR(B) and NR(E)RA deposits exhibit statistically significant sensitivity to interest rate differentials. during the normalisation of monetary policy in 201011 when policy interest rates were successively raised. the reserves which are built up mostly out of the volatile capital flows do not represent surplus earnings through trade like in the case of some other countries and they are required to be held as buffer during periods of sudden stops and reversal in capital flows. even though other determinants of these inflows dominate significantly the impact of interest rate differential. Guillermo A. At the aggregate level. Stronger recovery in a stable macroeconomic environment and the general assessmentofIndiacontinuingtobeoneofthefastestgrowing economies in the world for a long period of time provided the necessary pull to capital inflows. May.insteadofdiluting the action based on perception of attracting higher capital inflows and the resultant challenges for exchange rate and domestic liquidity. Among the push factors.6 billion as on August 12. References: Calvo.6.54). even though a higher CAD and the associated higher financing needs eased the pressure on the exchange rate.25 In order to strengthen the IMF‘s lendable resources.05percentagepointinresponseto1percentage point increase in interest rate differential. are not sensitive to interest rate differentials (Verma and Prakash. The magnitude and composition of capital flows could be managed using other instruments. 2011). ―Changing Contours of Capital Flows to India‖ Economic and Political Weekly. Recent empirical assessment for India using both causality and cointegration analyses suggests that FDI and FII equity flows. their weak growth prospects and ample global liquidity conditions reflecting quantitative easing. An outcome of this process has been return of excessive capital flows to EMEs. Investments under Note Purchase Agreement with IMF II.8 billion. Singh. which together on a net basis accounted for around three fourth of the total net capital inflows during the 10-year period from 2000-01 to 2009-10. similar concerns surfaced. debt creating flows. implied scope for larger inflows to EMEs. In India. and.ECONOMIC REVIEW Box II. The level of foreign exchange reserves has traditionally been the outcome of the Reserve Bank‘s intervention in the foreign exchange market to contain excessive exchange rate volatility and valuation changes due to movement in prices of securities and of the US dollar against other currencies. Bhupal (2009). The earlier commitment of US$ 10 billion under NPA has 69 . exerting pressure on their asset prices to inflate and the exchange rates to appreciate.multi-speedrecoveryanddivergentinflationary trends have led to asymmetric monetary exit between EMEs and the AEs. monetary policymeasuresthatmaybeconditionedbytheinflation-growth objectives could magnify or dampen the volume of capital inflows into a country. Verma. In the aftermath of the recent global financialcrisis. The weak sensitivity of capital flows to interest rate changes suggests that the Reserve Bank‘s monetary policy needs to continue its focus onobjectivesrelatingtoinflationandgrowth. particularly in the first half.. Radheyshyam andAnand Prakash (2011) ―Sensitivity of Capital Flows to Interest Rate Differentials: An Empirical Assessment for India‖.18 Interest Rate Sensitivity of Capital Flows to India Interest rate differential has often been viewed as a major determinant of capital flows to EMEs. including India. WPS (DEPR): 7/ 2011. cumulative gross capital inflows appear to increaseby0. in particular. Eduardo Fernández-Arias. liquidity and returns in line with the general international practices in this regard. Carmen Reinhart. 458. the Reserve Bank had entered into a Note PurchaseAgreement (NPA) with the IMF under which the Reserve Bank shall purchase IMF Notes for an amount up to the equivalent of US$10 billion. VOL XLIV No. The two-way movement in Indian rupee vis-à-vis US dollar and Euro was more pronounced since February 2007 than the earlier period indicating its flexibility (Chart II.

ANNUAL REPORT Box II. Gian Maria. shorttermtradecredits. From the policy makers perspective in the long-term horizon.26 India‘s external debt stock increased by 17. In terms of currency 70 . IMF has estimated that the real effective rupee. The ERER approach directly estimates an equilibrium real exchange rate for each country as a function of medium-term fundamentals such as the net foreign asset position of the country. the role of exchange rate has become important in the external adjustment process and calls for a credible assessment of equilibrium exchange rate. IMFStaffTechnicalNoteforArticleIVconsultationswithIndia. the relative productivity differential between the tradable and non-tradable sectors.54: Movements of Indian Rupee against US Dollar and Euro 75 70 65 60 55 50 45 40 35 30 been folded into the amended and expanded New Arrangements to Borrow (NAB) which has been activated on April 1. The ES approach. References Jaewoo Lee. covering about 85 per cent of India‘s total trade is generally hovering around the base level of 100. With respect to the exchange rate of the Indian Rupee. and the terms of trade. Occasional Paper No. The exchange rate policy in India is not guided by a fixed or pre-announced target or band. a measure of external competiveness.19 Equilibrium Exchange Rate With the increasing integration of the world economy. External debt rises moderately II. The assessment of equilibrium exchange rate is essentially an empirical exercise. As on June 30. However. there are three complementary methodologies for exchange ratearrangements. it is determined by the demand and supply in the foreign exchange market. While long-term debt increased by US$ 32. 261. Alessandra Prati and Luca Antonio Ricci (2008). shows that the sustainable level of CAD is for India is around 3 per cent. 2011 investments amounting to SDR 750 million (`5367. As the current level of CAD for India is around 3 per cent. Under this approach. involves calculating the difference between the actual CAB and the balance that would stabilise the NFA position of the country at some benchmark level. it could be inferred that the exchange rate is close to its equilibrium value. International Monetary Fund.90 crore) have been made in notes under NAB. short-term debt (on the basis of original maturity) increased by US$ 13 billion to US$ 65 billion Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 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 Feb-11 Apr-11 Jun-11 Aug-11 ` per US dollar ` Per Euro (Appendix Table 21). that is.2 billion to US$ 241 billion. which also corroborates the above empirical exercise. rather. IMF (2010). Exchange rate assessments are based on the notion of equilibrium. based on the MB approach. the objective of exchange rate policy has been to retain the flexibility to intervene in the foreign exchange market if the capital inflows are lumpy and volatile or if they disrupt the macroeconomic situation. Jonathan Ostry.a pillar of current account and exchange rate assessmentsforanumberofyears-calculatesthedifference between the CAB projected over the medium term at prevailingexchangeratesandanestimatedequilibriumCAB. is slightly undervalued but on average the rupee is in equilibrium (IMF 2010). November. ‗Exchange Rate Assessments: CGER Methodologies‘.Theseare:macroeconomicbalance(MB) approach. ‗Current Account and External Sustainability‘. 2011.6.2 per cent to US$ 306 billion as at end-March 2011 owing to increase in commercial borrowings. the preliminary exercise using the external sustainability approach. a reduced form equilibrium real exchange rate (ERER) approach and an external sustainability (ES) approach. The broadbased 36 currency trade weighted real effective exchange rate. consistency with external and internal balance over the medium to long-run. The exchange rate adjustment that would eliminate this difference over the medium term is obtained using countryspecific estimated responses of the trade balances to the real exchange rate.multilateralandbilateralborrowings as well as the valuation effects due to depreciation of the US dollar against other major currencies. Milesi-Ferretti. The MB approach . Chart II. the exchange rate adjustment needed to restore equilibrium over the medium term is calculated as the difference between the estimated equilibrium real exchange rate and its current value.

29 Financing of CAD for 2011-12 may not pose a problem as it is unlikely to be high. Rising commodity prices. The debt flows may be supported by interest rate differential. The increase in international liabilities from US$ 539 billion as at end-March 2010 to US$ 643 billion as at end-March 2011 was mainly onaccountofanincreaseininwarddirectandportfolio investments and other investments.2 per cent). Services exports are also likely to remain 0 2005-06 2006-07 2007-08 2008-09 200910 PR 201011 P 50 0 Total External Debt (RHS) Debt Service Ratio Short-Term to Total Debt Total Debt to GDP Short-Term to Reserves buoyant due to India‘s comparative advantage in software services.7 per cent) with the balance5.ECONOMIC REVIEW composition. particularly oil. the public debt fragilities in the Euro Zone and the growth slow down in the US may impact capital flows. Therefore. but global uncertainties can impact current and capital account movements II. net liabilities increased by US$ 61 billion.28 India‘s external sector remains resilient even after weathering the global financial crisis.6.6. global uncertainties can have considerable impact on movements in current and capital account of BoP. mainly on account of increases in direct investment abroad and reserve assets.55). is an indicator of the country‘s strength in terms of sustainability of the financing of its external sector. the BoP situation remains manageable.Pound Sterling and other currencies. With regard to portfolio flows they could be volatile. The international assets increased from US$ 381 billion at end-March 2010 to US$ 425 billion at end-March 2011.27 Net International investment position (IIP) computed as a gap between the economy‘s external financial assets and liabilities. The inward FDI flows are likely to be much larger during 2011-12takingintoaccounttheproposalsclearedand the initial trend available up to June 2011. though India is likely to remain one of the preferred destinations due to the differential growth rates.6. External sector resilient. 71 US$ billion . However. though it necessitates continuous monitoring due to the global uncertainties. However. followed by Indian Rupee (13. Japanese yen (11. continued product diversification and targeting new markets together with proactive policies pursued by the Government bode well for harnessing export growth potential. II. software exports could grow robustly by 16-18 per cent in 2011-12. may have implications for BoP. As a result.55: External Debt Indicators 25 350 300 20 250 Per cent 15 200 150 10 100 5 II.4 per cent) and SDR (9. As projected by NASSCOM. Private transfers continued to remain buoyant. and geo-political turmoil. Various debt sustainability indicators remained at a comfortable level (Chart II.8percentaccountedforbytheEuro.9 per cent. the US dollar denominated debt accounted for the major portion of total external debt at end-March 2011 with a share of 59. International investment position weakens Chart II. Exports which performed well in 2010-11 may not sustain high growth momentum if the downside risks to world growth materialise. However.

The operating framework for monetary policy was modified in May 2011.THE ANNUAL REPORT ON THE WORKING OF THE RESERVE BANK OF INDIA PART TWO: THE WORKING AND OPERATIONS OF THE RESERVE BANK OF INDIA III MONETARY POLICY OPERATIONS In balancing the twin objectives of price stability and growth. Effective communication along with appropriate monetary actions can help anchor inflation expectations. as the inflation process became generalised and sticky in an environment of strong growth. the Reserve Bank introduced MidQuarter Reviews (MQRs) to combine the rigour and comprehensiveness of the quarterly process with the need for flexibility to respond in a fast evolving global and domestic macroeconomic situation.2 Anumber of steps were taken during 2010-11 to enhance the communication of monetary policy. III. rationale for policy actions and expected outcomes is critical. The Reserve Bank introduced mid-quarter reviews during the year. Like other central banks.e. Furthering transparency about the monetary policy process.1).. policy was geared towards non-disruptive normalisation of the monetary policy stance. The anti-inflation accent of monetary policy became stronger during the second half of the year. frictional factors (large government surplus balances) and structural factors (i.3 Monetary policy acts on its ultimate objectives of price stability and growth with long and variable lags. The cumulative effect of transient factors (such as advance tax collections). The stance of monetary policy and the rationale are communicated to the public in a variety of ways – periodic monetary policy statements. Liquidity conditions remained consistent with the shift in monetary policy stance. though some of the key determinants of liquidity remained volatile. which were managed by the Reserve Bank through an appropriate mix of SLR.Inordertofurtherenhancetheefficacy of the communication process. Role of communication in monetary policy III. This helped in improving the assessment of the transmission of monetary policy (Box III. the Reserve Bank has also placed a lot of emphasis on effective communication of its policy objectives.1 The monetary policy stance in 2010-11 changed course during the year.highincreaseincurrencyincirculationandhigher credit growth relative to deposit growth) culminated in large deficit liquidity conditions. which supported consolidation of growth. OMO and LAF. Inflation stayed elevated. Given these lags in monetary transmission. During the first half of 2010-11. From September 2010. other publications. Another notable development during 2010-11wastheintroductionoftheBaseRatesystem which replaced the Benchmark Prime Lending Rate (BPLR) with effect from July 2010. a number of steps have been taken in the recent period. the conduct of monetary policy was conditioned by the shift in policy challenge from ―management of recovery‖ to ―management of inflation‖. effective communication of monetary policy objectives. speeches by the top management and pressreleases. minutes of the meetings of the Technical Advisory Committee on Monetary Policy are now being released in the public domain. from calibrated normalisation to tightening driven by inflation concerns. but the sources of inflationary pressures warranted cautious calibration of the normalisation process. with the switchover to repo rate as the single policy rate for better signalling the stance of monetary policy. 72 . III.

was expected to serve as the benchmark rate for pricing of loan products by reflecting the actual cost of funds forbanks. been of the order of 475 bps as the system migrated from surplus mode to deficit mode. 2010. In response. The system of Base Rate. Under the new system. the assessment of the transmission of monetary policy has strengthened under the new system. The interest rates on small loans up to `2 lakh and rupee export credit have been deregulated to increase the flow of credit to small borrowers and exporters at reasonable rates. followinggradualmoderationinthegrowthofnon-foodcredit. of days Base Rate taken to raise (bps) Base Rate 58 65 64 69 140 74 88 87 Thus. much narrower. i.4 Stepstakentostrengthentheexistingtwo-way communication process include webcasting of the Governor‘s press conference and interaction with researchers/analysts on monetary policy after the 73 quarterly reviews. the Reserve Bank issued guidelines on the Base Rate system in April 2010. the Base Rate system isfoundtobemoretransparentandmoreresponsivetohikes in policy rates by the Reserve Bank compared to the BPLR system.11/Dec. III. With these measures. Table 2: Extent of Increase in Base Rate and Time Taken by Public/Private Sector Banks Period (Month over Month) Dec.however. they have also become more responsive to increase in policy rates of the Reserve Bank. This was mainly because banks could lend below the BPLR under thesystem.11 August 11.MONETARY POLICY OPERATIONS Box III. before dropping to 70 per cent.10 May 11/Feb.fellshortofitsoriginal objective of bringing transparency to lending rates. which was still very high. however. it was difficult to assess the transmission of policy rates of the Reserve Bank to lending rates of banks. from that under the BPLR system. 11/May 11 Increase in Repo Rate (bps) 75 25 75 125 Average Average increase in no. The Base Rate is the minimum rate for all loans and banks are not permitted to resort to any lending below the Base Rate except some specified categories such as: (a) Differential Rate of Interest (DRI) advances.1 Monetary Policy Transmission after the Switchover to Base Rate The Benchmark Prime Lending Rate (BPLR). Though the experience so far is limited. the Reserve Bank achieved complete deregulation of interest rates relating to rupee lending by commercial banks.e. The effective tightening of the policy rate has. Audio recordings and transcripts of the press conference and the teleconference with researchers/analysts are also put on the Reserve Bank‘s website. 2011 (Table 1). The Base Rate system was expected to facilitate better pricing of loans..Also. (d) interest rate subvention given by government to agricultural loans and rupee export credit. As a result. the Reserve Bank announced the constitution of a Working Group (Chairman: Shri Deepak Mohanty) in the Annual Policy Statement of 2009-10 to review the BPLR system and suggest changes to make credit pricing more transparent.TheBPLRsystem. 2011 It has been observed that there is greater convergence amongst banks in fixing the Base Rate over time vis-a-vis under the BPLR system. As a result. the pace of increase in Base Rate relative to that of the repo rate slowed down from February 2011 onwards. . during the quarter ended June 2010. It is seen that the pace of increase in Base Rate in response to increase in policy rate was initially slower but picked up momentum during December 2010-February 2011. the actual lending rate charged to borrowers is the Base Rate plus borrower-specific charges. the number of days taken by these banks to raise their Base Rates went down during this period (Table 2).notonlyhastherebeenalargerdegreeofconvergence of the Base Rates across banks.(c)loanstobanks‘depositorsagainst their own deposits. The range of increase was. (b) loans to banks‘ownemployees. and (e) some specific cases of restructured loans. The Working Group submitted its Report in October 2009 and based on the recommendations of the Group and the suggestions from various stakeholders. However. Base Rates have been raised by 75-375 bps between July 2010 andAugust 11.Theshareofsub-BPLRlending(excludingexport credit and small loans) of SCBs was as high as 77 per cent in September 2008. As a result. however. replaced the BPLR system. Table 1: Variation in Policy Rate of the Reserve Bank and Deposit/Lending Rates of SCBs (bps) Period Increase in Repo Rate 50 275 Increase in Increase in Deposit Lending Rate Rates Base Rate BPLR Not No 25-160 Applicable Change 25-550 75-375 100-375 Mid-March 2010 to May 2010 June 2010 to August 11. The Reserve Bank has increased the repo rate by 325 basis points (bps) since mid-March 2010. it suggests that these objectives have been largely met. This is reflected in the average increase in the Base Rate by public and private sector banks since July 2010. In order to address these concerns.10/July 10 Feb. enhance transparency in lending rates and improve the assessment of the transmission of monetary policy. 175-375 bps for 49 major banks. that came into effect on July 1. while the number of days taken to raise the Base Rate also increased. introduced in 2003.

December and March by way of a press release. Headline inflation.1).7 The gap of a quarter between policy reviews was felt too long in a rapidly evolving macroeconomic situation. By instituting MQRs. June and September-December 2008. Though non-food manufactured products inflation declined from the elevated levels seen at the start of the year. both domestic and III. The proposed quarterly reviews of monetary policy were intended to provide the opportunity for structured communication with markets on a more frequent basis. the Reserve Bank intended to take the surprise element out of the off-cycle actions. the evolving macroeconomic developments. Introduction of mid-quarter reviews III. There were several occasions (April. In the first half of 2010-11.8 Accordingly. It was decided to announce the MQRs in June. whichtoucheddoubledigitsinthefirstquarterof201011. showed moderation in the second quarter of the year. the MQRs were intended to be a less intensive process.9 Unlike the Quarterly Reviews. while retaining the flexibility to take specific measures warranted by evolving circumstances. Monetary and credit policy was traditionally reviewed by the Reserve Bank twice a year. roughly four weeks after the meeting of the Committee. they also underscored the need for flexibility. the First Quarter Review of Monetary Policy for July 2010 announced the introduction of MQRs. there are no pre-policy consultations with the stakeholders from the financial market and theindustry. reserves the flexibility to take swift and preemptive policy actions. III. Food inflation remained high on account of structural demand-supply imbalances despite normal monsoons. The Reserve Bank. the thrust of monetary policy was on avoiding policy impediments to the recovery amidst global uncertainties. it remained sticky and above its medium term trend. the Reserve Bank has instituted a mechanism to obtain the views of the members through a structured feedback format.However. while also containing inflationary pressures.10 The monetary policy stance in 2010-11 evolvedinlinewithchangingdomesticgrowth-inflation dynamics.11 In the second half of 2010-11. Considering global uncertainties and associated implications for domestic growth and the fact that inflation was largely driven by supply side factors. MONETARY POLICY OPERATIONS: CONTEXT AND RATIONALE III.6 Most major central banks make frequent monetary policy announcements ranging from 8 to 12 announcements a year. III. however. while growth continued to consolidate. March and July 2010) when the Reserve Bank had to take policy actions in response to macroeconomic developments. at quarterly intervals. Over time. September. III. the main points of discussion in the meetings of the Technical Advisory Committee (TAC) on Monetary Policy are being placed on the website. the Reserve Bank is endeavouring to put in public domain all data/inputs that go into the formulation of monetary policy. as and when warranted by 74 .5 As a part of its communication policy and given the objective of more transparency. the Reserve Bank followed calibrated normalisation of policy (Table III. While these instances questioned the discipline of the quarterly schedule. In the run up to the MQRs. but remained above the comfort zone of the Reserve Bank. The first MQR was announced in September 2010. the moderating path of inflation reversed beginning December 2010 due to a series of supply side shocks. The first such release was in February 2011 of the TAC meeting in January 2011. a need was felt to increase the frequencyofthepolicycommunicationandtheAnnual Policy Statement of 2005-06 announced the introduction of more frequent reviews of monetary policy. January and March 2009.ANNUAL REPORT III.thereisaprocessofconsulting the members of the TAC. In order to take the advice of the TAC members in the run up to the MQRs. providing a rationale for either action or maintenance of the status quo. Accordingly.

MONETARY POLICY OPERATIONS Table III.25) 5.50) 6. therefore.25 (+0. Mid-Cycle Policy Measure: July 2. 2011 June 16.00 (+0.25) 7.evenifitmeantsacrificing some growth in the short-term (Table III.25) 6. Reverse repo indicates absorption of liquidity and repo indicates injection of liquidity.50) 4. 2010 Backdrop:  Double-digit headline inflation levels.50) 5.2).0 per cent and 20. monetary policy stance underwent a shift as the Reserve Bank deviated from the calibrated approach and took stronger monetary policy measures. Table III.) 75 .50 (+0.  Inflation expectations of the households at elevated level. 2010 January 25.25 6. Baseline Projection/Indicative Trajectory:  8.50 (+0.25) 6. 2010 April 24. during 2010-11.50 (+0.  Non-food manufactured products inflation much higher than the medium-term trend. Measures:  Increase in repo rate. towards the end of 2010-11.25) 6.  6. This was warranted to ensure that the long-term growth prospectswerenotharmed.75 5.  Corporates regaining pricing power in many sectors.00 9.00 (+0.25) 6. Expected Outcome:  Contain inflation and anchor inflationary expectations.1: Movements in Key Policy Rates and Reserve Requirements in India (Per cent) Effective since Reverse Repo Rate 2 3.00 6. (Contd. The sharp increase in global prices of raw cotton and rubber.0 per cent.50 (+0.00 6.0 per cent WPI inflation for March 2011. respectively.  Petrol prices were decontrolled and prices of remaining administered fuel such as diesel..00 (+0.25) 6. changes relating to operating procedures of monetary policy were announcedintheMonetaryPolicyStatementfor201112 (Box III. 2010 February 27.25 (+0. 2011 July 26.25) 6. III. crucial to ensure that the elevated inflationary expectations did not get entrenched. 2011 March 17.25) 7.25) 3.25) 5.  5.50 (+0.25) 5. becoming more generalized.00 6.2: Monetary Policy Reviews Monetary Policy Statement 2010-11 Backdrop:  Broad-based recovery taking firm hold with rising domestic and external demand. 2010 April 20. * : Marginal Standing Facility is with effect from May 9.25 (+0.0 per cent growth in M3. Measures:  Increase in repo rate and reverse repo rate by 25 basis points each (with the LAF window having moved to deficit mode from end-May 2010.00 5. Even as mineral oil price inflation showed an uptick.Robustdemandconditionssaw input price pressures being increasingly transmitted to final output prices and rising core inflation.75 (+0.00 (+0.2).50) 5.25) 5.50 (+0.25) 4.50 (+0.5 per cent WPI inflation for March 2011.00 (+0.00 7.00 6.75 5. It was.25) 3.50) Repo Rate Cash Reserve Ratio 4 Marginal Standing Facility Rate 5 8. global.75 (+0.25 3.00 (+0.25) 5.  Overall food inflation at elevated level. 2.00 (+0.50) 1. 2010 November 2.00 6.  Sustain the recovery process.0 per cent real GDP growth (with an upside bias) during 2010-11. effective tightening of 175 basis points).50) 6. 2010 March 19.25 (+0. 2010 July 27. First Quarter Review of Monetary Policy 2010-11 Backdrop:  Growth process registered further momentum during Q1 of 2010-11.25* metals and minerals were transmitted quickly to the domestic markets during the second half of the year.. Food prices registered sharp increases in December 2010 and January 2011 following unseasonal increase in vegetable prices.75 4.  17.25 (+0.00 8. reverse repo rate and CRR by 25 basis points each. respectively.75 (+0.75 (+0. Figures in parentheses indicate change in policy rates in per cent.25) 6.75 (+0. 2011.75 5.75 5. 2010 July 2. initially driven by food prices. Hence. 2011 Note: 3 4.  Align policy instruments in a manner consistent with the evolving state of the economy.25) 6.  Inflation pressures.5 per cent real GDP growth during 2010-11.12 Based on the Report of the Working Group to Review the Operating Procedures of Monetary Policy in India (Chairman: Shri Deepak Mohanty) and in the light of the feedback received. LPG and kerosene were increased in end-June 2010. aggregate deposits and non-food credit. 2011 May 3. 18. it was less than the extent of the global crude price inflation as the administered mineral oil prices remainedunchanged.25 3.50 (+0.00 (+0.25) 5.50) 8.50 (+0. 2010 September 16. Baseline Projection/Indicative Trajectory:  8.  Meet government borrowing requirements and the private credit demand. 1 February 13.  Rise in administered prices of iron ore and electricity. Measures:  Increase in repo rate and reverse repo rate by 25 basis points and 50 basis points.

 Interest rate on savings bank deposit rate increased from 3.0 per cent WPI inflation (with an upward bias) for March 2012. determined with a spread of 100 basis points below the repo rate.0 per cent and 19.25 per cent.25 per cent. 2010. reflecting strong domestic demand..0 per cent.  Reverse repo rate. Measures:  Repo rate increased by 50 basis points to 7.  Series of commodity price shocks – vegetable prices.  Staggered OMO auctions for purchase of government securities for an aggregate amount of `48. 76 . Baseline Projection/Indicative Trajectory:  8.  6. Third Quarter Review of Monetary Policy 2010-11 Backdrop:  Real GDP increased by 8.5 per cent and 18.5 per cent to 4. Measures:  Repo rate increased by 50 basis points to 8.  Signs of moderation in growth particularly investment spending. equivalent to 6.  Continued high level of inflation.  Rise in administered coal prices in end-February 2011. First Quarter Review of Monetary Policy 2011-12 Backdrop:  Some moderation underway in industrial production. respectively.ANNUAL REPORT (. while not disrupting growth. determined with a spread of 100 basis points above the repo rate.  Quarterly industrial outlook survey showed improvement in the overall business conditions. bringing down the liquidity deficit in the system close to the comfort zone of the Reserve Bank while stabilising interest rates in the overnight inter-bank marketclosertotheoperativepolicyrateoftheReserveBank.0 per cent growth in M3.  Rein in rising inflationary expectations that could be aggravated by the structural nature of food price increases.followingtheexcessivetightnessinmoneymarkets.  These measures were expected to release sizeable primary liquidity into the system. Baseline Projection/Indicative Trajectory:  8..5 per cent WPI inflation (under the new base) for March 2011. aggregatedepositsandnon-foodcreditofSCBs.  Marginal Standing Facility (MSF) rate.  Increase in repo rate and reverse repo rate by 25 basis points and 50 basis points.respectively. automatically adjusted to 6.determinedwithaspreadof100basispointsabove the repo rate.0 per cent.  Rise in inputs costs quickly passed on to domestic manufactured goods.0 per cent real GDP growth during 2011-12.000 crore announced.0 per cent growth in M3 and non-food credit of SCBs.  Reverse repo rate.0 per cent WPI inflation for March 2011.9 per cent during the first half of 2010-11.0 per cent. crude oil prices. Mid Quarter Review: March 2011  Inflation pressures accentuated further after January 2011.  TheSLRofSCBswasreducedfrom25percentoftheirNDTL to 24 per cent with effect from December 18.  Prospects of agriculture not clear.  7.  Repo rate increased by 25 basis points.0 per cent real GDP growth during 2011-12.0 per cent. fixed at 9.  15.25 per cent. Expected Outcome:  Sustain the anti-inflationary thrust of the recent monetary actions and outcomes in the face of persistent inflation risk. Second Quarter Review of Monetary Policy 2010-11 Backdrop:  Normal monsoons raised the prospects of good Kharif cultivation. due to continued elevated prices of protein-rich food items.  Rise in administered fuel prices in June 2011.5 per cent real GDP growth during 2010-11. Mid Quarter Review: December 2010  Management of liquidity came to the forefront of policy concerns.) Mid Quarter Review: September 2010  Inflation continued to be the dominant concern for policy. and improving external demand.0 per cent.  16. 17. Monetary Policy Statement 2011-12 Backdrop:  Very sharp rise in inflation and elevated inflationary expectations.5 per cent real GDP growth (with an upside bias) during 2010-11. determined with a spread of 100 basis points below the repo rate.  MSFrate. Baseline Projection/Indicative Trajectory:  8. Mid Quarter Review: June 2011  The monetary policy stance remains anti-inflationary.  Increase in repo rate and reverse repo rate by 25 basis points each. Measures:  Increase in repo rate and reverse repo rate by 25 basis points each.  Anchor inflationary expectations and sustain the growth in the medium-term by containing inflation.  Moderation in food inflation not commensurate with a normal monsoon. Measures:  Increase in repo rate and reverse repo rate by 25 basis points each.0 per cent inflation under the old base.Concld. specifically fibres registered significant inflation.  Inflation estimated at around 8 per cent for March 2011. Baseline Projection/Indicative Trajectory:  8. fixed at 8.  7. automatically adjusted to 7. especially private consumption and investment.  5.0 per cent WPI inflation for March 2012. Expected Outcome:  Contain inflation by reining in demand-side pressures.  Non-food primary articles. respectively.

Accordingly. Only a small portion of savings. should monetary conditions so warrant. both domestic and global. A new MSF has been instituted from which SCBs can borrow overnight up to 1. the LAF.Largevolatility in capital flows and sharp fluctuations in government cash balances.0 per cent of their respective NDTL at 100 basis points above the repo rate. introduced in June 2000. cooling of real estate prices should also not have any significant impact on consumption and hence aggregate demand.2 Changes in Operating Procedure of Monetary Policy Background The operating procedure of monetary policy in India has witnessed significant changes since the beginning of the 1990s with developments in money market and changes in liquidity conditions brought about by financial sector reforms. the stance of the monetary policy was for calibrated normalisation. enables an environment in which prudential regulation works more effectively.however. asset prices do not seem toinfluencetheinflationpathandconductofmonetary policy may refrain from responding directly to asset price cycles. do not borrow against the houses already purchased when their valuations go up.e. i. with the repo and the reverse repo rates as the key instruments for signalling the monetary policy stance. The inflation pressures and elevated inflation expectations emerged as a source of risk to future growth. the stance of monetary policy for 2011-12 gave foremost priority to containing inflation and anchoring inflation 77 . In this process. It had to be ensured that the primary liquidity needs of an expanding economy were met in a manner consistent with the anti-inflationary monetary policystance.14 During the major part of 2010-11. wealth impact is not observed to be very significant in India. LAF. supported by instruments such as the CRR. However.. financial market participants and the academia. Thus. liquidity management also became a central focus in 2010-11. The Reserve Bank has used both micro and macro prudential measures to limit the risks to financial stability from asset price cycles.Inflationpressures. home owners in India. as a macroeconomic policy tool.MONETARY POLICY OPERATIONS Box III. The proximate cause of theintensificationofinflationarypressurewasaseries of supply side shocks. The repo rate has acquired the status of being the only one independently varying policy rate. As such.13 In general. The repo rate has been placed in the middle of the corridor. Therefore. As the LAF window of the Reserve Bank transited from a surplus to a deficit mode. the real estate market. the Reserve Bankwillhavetheflexibilitytochangethewidthofthecorridor. Overall Assessment III. had served theIndianmonetaryandfinancialsystemwell. on October 1. OMO and MSS. Thus. Asset price implications for monetary policy III. 2010. Changes in the Extant Operating Procedures of Monetary Policy Based on the Group‘s recommendations and the feedback received. is invested in the equity market. In many advanced economies. The revised corridor has a fixed width of 200 basis points. Monetary policy. the share of such investment in total financial savings is much bigger. about 12 per cent of total savings of the household sector in financial assets. consistent with the Reserve Bank‘s anti-inflationary stance and its calibrated approach to absorb surplus liquidity. a Working Group (Chairman: Shri Deepak Mohanty) was constituted with members drawn from the Reserve Bank. the first Quarter Review of Monetary Policy for 201011 proposed the need for revisiting the operating procedures of monetary policy in India. posed several challenges to liquidity management by the Reserve Bank. with the reverse repo rate 100 basis points below it and the MSF rate 100 basis points above it. however. As regards. unlike advanced economies. emerged as the principal operating procedure of monetary policy.intensified in Q4 of 2010-11 even as the growth process showed some signs of moderation. which rapidly fed into a broad spectrum of manufactured products. the following changes in the extant operating procedures of monetary policy were effected as announced in the Monetary Policy Statement for 2011-12:    The weighted average overnight call money rate is now the operating target of monetary policy. Accordingly. cooling down of the equity market should not have any significant impact on the aggregate demand. The moderation in inflation in Q2 and Q3 of 2010-11 justified such a calibrated approach.

17 During Q2 2010-11.2: Outstanding LAF and GoI Balance 200000 150000 100000 100000 50000 crore ` 50000 0 -50000 crore ` 0 -50000 -100000 -150000 29-May-10 12-May-11 24-Aug-10 27-Jun-10 15-Mar-11 10-Jun-11 07-Aug-11 18-Dec-10 16-Jan-11 01-Apr-10 30-Apr-10 19-Nov-10 22-Sep-10 14-Feb-11 13-Apr-11 21-Oct-10 26-Jul-10 09-Jul-11 -100000 05-May-11 30-May-11 16-Mar-11 10-Apr-11 20-May-10 06-Dec-10 31-Dec-10 25-Jan-11 31-Mar-10 25-Apr-10 14-Jun-10 09-Jul-10 03-Aug-10 28-Aug-10 11-Nov-10 22-Sep-10 24-Jun-11 17-Oct-10 19-Jul-11 13-Aug-11 19-Feb-11 -150000 -200000 Reverse Repo Amount Repo Amount Net LAF Outstanding GoI Balance Note: (-)ve LAF indicates injection of liquidity into the system.1: Repo (+)/ Reverse Repo (-) under LAF 200000 150000 moderation in the volume of surplus liquidity in the system from February 2010. III. The Reserve Bank actively managed liquidity so that neither a surplus diluted monetary transmission. there was gradual Chart III. credit growth accelerated faster than deposit mobilisation. The liquidity conditions switched to deficit mode from end-May 2010. Chart III. it again switched to deficit mode as liquidity migrated to government balances with the Reserve Bank on account of the second quarterly advance tax payments. While the overall liquidity in the system remained in deficit. The government‘s surplus balance peaked in December 2010 reflecting advance tax collections.70. due to large increase in government balances with the Reserve Bank generated from 3G/BWA spectrum auctions and the first instalment of quarterly advance tax payments in June 2010. III.increaseinthegovernment‘ssurplusbalancewith the Reserve Bank and currency in circulation compounded by the structural liquidity mismatch faced by banks. The deficit liquidity conditions were reflected in large recourse to the LAF repo window (Chart III..15 During 2010-11.3). the Reserve Bank moved in a calibrated manner in the direction of normalising its policy instruments. With the consolidation of economic growth.2). Accordingly. With the recovery of the economy firmly in place.1). requiring appropriate policy measures (Table III.e.485 crore during the third week of December 2010 (Chart III. the liquidity conditions continued to remain in deficit mode till end-July 2010 and eased thereafter mainly on account of large scale publicdebtredemptions. leading to structural squeeze on liquidity for an extended period.ANNUAL REPORT expectations even at the cost of some growth in the short-run. the centre‘s cash balance with the Reserve Bank and currency in circulation were key drivers of autonomous liquidity. III. the extent of deficit went beyond the Reserve Bank‘s comfort zone of (+)/(-) one per cent of NDTL of banks. nor a deficit choked fund flows. 78 . i. Managementofliquidity–evolvingfactorsdriving Reserve Bank’s operations III. consistent with the policy stance.18 The liquidity conditions tightened significantly duringQ32010-11mainlyduetoautonomousfactors.16 The liquidity conditions changed significantly during Q1 of 2010-11.Afterabriefperiodofsurplus liquidity (from end-August to early-September 2010). The net injection under the LAF peaked at `1.

Thus. a special two-day repo auction under the LAF on October 30.the Reserve Bank purchased government securities for an aggregate amount of about `67. 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 1.000 crore over the next one month (staggered as purchases of `12. 2010. the Reserve Bank: (i) Reduced the SLR of SCBs from 25 per cent of NDTL to 24 per cent with effect from December 18. additional liquidity support of 1. 2010. SCBs were : (i) Allowed to avail additional liquidity support under the LAF to the extent of up to 0. 2010 to January 28. Announced conduct of OMO auctions for purchase of government securities for an aggregate amount of `48. 2010. On November 9. 2010 and extended the period of waiver of penal interest on shortfall in maintenance of SLR (to the extent of 1. the liquidity deficit remained controlled on account of higher government expenditure during the month. 2010.0 per cent of NDTL) for availing additional liquidity support under the LAF till November 7. 2011. and allowed waiver of penal interest on shortfall in maintenance of SLR (on October 30-31. 2011.MONETARY POLICY OPERATIONS Table III. both the measures were extended till May 6.0 per cent of NDTL for availing additional liquidity support under the LAF till December 16. 2010-July 2. 2011.3:Liquidity Management Measures taken by the Reserve Bank in 2010-11 Time Period/Event 1 End-May 2010 : Larger than anticipated collection from 3G/BWA spectrum auctions in addition to advance tax outflows resulted in migration of liquidity to central government‘s cash balance account with the Reserve Bank Measures 2 For the period May 28. The liquidity conditions improved furtherinFebruary2011withthedeclineinthesurplus balances of the Centre. With the persistence of deficit liquidity conditions. injections under the LAF declined marginally due to the cumulative impact of decline in surplus balances of the Centre and staggered OMO carried out by the Reserve Bank inDecember2010-January2011.0 per cent of their NDTL till January 28. (ii) End-January 2011: Frictional and structural liquidity pressure In the Third Quarter Review of January 2011. the Reserve Bank extended the daily SLAF and additional liquidity support to SCBs of 1. The Reserve Bank conducted special SLAF on October 29 and November 1. Given the permanent reduction in the SLR.000 crore under OMO auctions. 2010. Given access to second LAF (SLAF) on a daily basis. 2010 and measure (ii) up to July 30. III. 2010. 2010) to the extent of 1.0 per cent of NDTL for availing additional liquidity support under the LAF. The Reserve Bank extended these liquidity easing measures further and conducted SLAF on all days during November 1-4.5 per cent of their NDTL (for any shortfall in maintenance of SLR arising out of availment of this facility.19 At the start of Q4 2010-11. 2010. Subsequently. 2010.During2010-11. banks were allowed to seek waiver of penal interest). 2011. the quantum of liquidity deficit declined in Q4 79 . On November 29. the Reserve Bank extended the daily SLAF and allowed additional liquidity support to the SCBs under the LAF to the extent of up to 2.0 per cent of NDTL was made available from December 18. 2010. (ii) End-October2010:Frictionalliquidity pressure due to autonomous factors (i) (ii) (iii) (iv) (v) Mid-December2010:Continuedbuild up in government balances on account of third quarterly advance tax collections In the MQR. TheReserveBankpurchasedgovernmentsecuritiesunderOMOfromNovember 4. measure (i) was extended up to July 16. Notwithstanding the quarterly advance tax outflows during mid-March 2011.0 per cent of NDTL under the LAF till April 8.000 crore per week). 2010.

which had been narrowing from end-December 2010. The liquidity deficit. however. The liquidity conditions tightened further in May 2011 as the gap between pace of credit growth and deposit mobilisation by banks. While the negative government balance with the Reserve Bank added liquidity into the system. The liquidity conditions improved at the beginning of July 2011 partly on account of redemption of a security with outstanding stock of `37. 2011. III. The liquidity conditions again shifted to injection mode from the second week of April 2011. increased subsequently and the average daily net liquidity injection was around `44. mainly on account of the Reserve Bank‘s OMO purchases and the decline in government cash balances with the Reserve Bank. III. whichcameintooperationinMay2011.000 crore during April 2011 from about `81.20 The current financial year began with liquidity remaining in absorption mode in the first week of April 2011 on account of high government expenditure and the absence of normal government securities auctions.hashappened only twice.000 crore during August 1-16. The average daily net liquidity injection declined significantly to about `19.ANNUAL REPORT as compared with Q3.000 crore. There was also a decline in WMA/OD availed by the government. availment of funds under the MSF. The average daily net liquidity injection under the LAF was around `37. the Reserve Bank had to manage liquidity actively while avoiding any possible conflict with the monetary policystance.000 crore.21 The liquidity conditions remained in deficit mode in June 2011 due to quarterly advance tax outflows.22 As the main drivers of liquidity conditions varied from quarter to quarter as discussed above. Up to mid-August 2011. reversed trend and increased in May 2011. 80 . despite evidence of strengthening monetary policy transmission.000 crore in March 2011.Persistenceofinflationatelevatedlevel was a key challenge for monetary policy.000 crore during July 2011. The average daily net liquidity injection increased further to around `74. III. the increasing currency with the public acted in the opposite direction during the month.

Short Term Co-operative Rural Credit (STCRC)(Refinance)Fund(corpusof `10. 15 out of 81 banks had not achieved the priority sector lending target (Table IV. relaxing branch authorization policy. the Reserve Bank of India has made sustained efforts to increase the penetration of formal financial services in unbanked areas. Figures in brackets are percentages to ANBC or credit equivalent of OBE. Source:Provisional data reported by banks. widening eligible entities to function as business correspondents.000crore)withNABARD. improving credit delivery procedures in micro and small enterprises (MSE) sectors and encouraging adoption of Information and Communication Technology (ICT) solutions.63.960 (36. Micro. The corpus of such funds are announced every year by the Government of India.000 crore for flow of agricultural credit in 2010Table IV. Data for 2011 are provisional. Accordingly.000croreofwhich`2.7) Notes: 1. in the respective groups. and Rural HousingFund(corpusof `3.75.000 crore will be dedicated to creation of warehousing facilities). * : As on the Last Reporting Friday of March. Flow of Credit to Agriculture Sector IV. Small and Medium Enterprise (MSME) (Refinance) Fund (corpus of `5.22.2 The focus of priority sector lending is to enhance credit facilities for those priority sectors that impact large sections of the population.669 (45. IV.8) 2. PRIORITY SECTOR LENDING IV.5 The Government had announced a target of `3. whichever is higher for domestic banks and 32 per cent for the foreign banks. The target for aggregate advances to the priority sector is 40 per cent of the ANBC or credit equivalent of OBE. SIDBI. 4. respectively during the year.1) (41.particularlytheoutreachprogramme. 81 . IV. As on the last reporting Friday of March 2011. whichever are higher as on March 31 of the previous year. 2.000crore). the weaker sections and the sectors which are employment intensive such as agriculture and micro and small enterprise (MSE). IV.Regulatoryactionstofurtherfinancialinclusionincluded changes in KYC norms.139 Foreign Banks 4 59.generatedsignificantinterestandexuberant participationfrompublicandbanks/financialinstitutions.14.4 The Union Budget 2011-12 announced to set upRIDFXVII(corpusof`18.49. 3. The Reserve Bank of India continued with its various initiatives in this area such as rolling out the Financial Inclusion Plans (FIP).1 Credit delivery in a country as diverse as India poses many a challenge including bringing those sections of society that are financially excluded into the ambit of formal financial system. while continuing with its policy of ensuring adequate but viable flow of credit to priority sectors of the economy. encouraging multiple channels of lending and enhancing the scope of the Business Correspondent (BC) model. providing financial literacy.0) (46.1: Priority Sector Advances (Amount in ` crore) Public Sector Banks 1 2010* 2011* 2 8.000 crore). Financial literacyeffortsoftheReserveBank.3 Scheduled commercial banks (SCBs) having shortfall in lending to priority sector/subsectors vis-avis the stipulated targets.925 Private Sector Banks 3 2. NHB.0) 66.1).IV CREDIT DELIVERY AND FINANCIAL INCLUSION Financial inclusion is an important process to attain the goal of inclusive growth. reforming credit delivery mechanisms. will be required to contribute to the corpus of Rural Infrastructure Development Fund (RIDF) and similar funds set up with National Bank of Agriculture and Rural Development (NABARD) / Small Industries Development Bank of India (SIDBI) / National Housing Bank (NHB).777 (41.796 (39. among others.6) 10. and requiring minimum percentage of additional branches to be opened in unbanked rural centres.

9 As per the reimbursement schedule for Agricultural Debt Waiver and Debt Relief Scheme. SCBs were accordingly advised in June. the Government lowered the rate of interest subvention for short-term production credit up to `3 lakh to 1. IV.340croreinJanuary2011ofwhich`1.460 2.75.4 89.7 Recovery rate for direct agricultural advances for the year ended 2010 showed moderate decline as compared to the rise seen in the previous year (Table IV. Principal Secretary to the Prime Minster). Flow of Credit to Micro.29.240crore was passed on to NABARD for reimbursement to RRBs and co-operatives and the remainder amount (`10.000 Proposed Reimbursement* 2nd instalment Jul-09 3 10.9 1 2007-08 2008-09 2009-10 2010-11* 2 1.084 92.6 103.59.3: Recovery of Direct Agricultural Advances (Amount in ` crore) Year ended June 1 2008 2009 2010* Demand Recovery Overdues Percentage of recovery to demand 5 75.4 5 8. IV.4 76.Disbursements by the public sector banks under SACP for the last three years are as set out in Table IV.4: Compensation of lending institutions under Agricultural Debt Waiver and Debt Relief Scheme.800 9.5 per cent while the additional interest subvention for prompt paying farmers was raised to 2 per cent.240 *: Data are provisional.500 25.198 2.347 crore against that of `2.425 24.65.500 7.ANNUAL REPORT Table IV. a High Level Task Force was constituted by the Government of India (Chairman: Shri T K A Nair.95 Table IV.19.04. 2008 (Amount in ` crore) Lending Institutions 1st instalment Sep-08 1 RRBs and Co-operatives SCBs. *: Data are provisional. Banks have been advised to step up direct lending to agriculture and credit to small and marginal farmers. accordingly the effective interest rate charged to such farmers is likely to come down to 5 per cent per annum.07.452 crore against the projection of `62.3 101.100 crore) was utilised for reimbursing SCBs. IV. 2 17.3).000 crore for disbursement to agriculture by all agencies.500 15.04.200 12.470 2. Small and Medium Enterprises (MSMEs) IV.739 90. if any Balance amount 4th instalment Jul-11 5 82 .07.905 3 71.2: Disbursements under SACP by Public Sector Banks (Amount in ` crore) Year Target Achievement Percentage Annual growth of in Disbursement Achievement (%) 4 87.2.8 24. local area banks (LABs) and urban cooperative banks (UCBs) (Table IV.709 3 1.500 4.0 -0. if any Balance amount.460 crore last year (101.347 2.367 2 95. 11.4 per cent of the projected amount) whilst that of the private sector banks was a disbursal of `78.52. the Government of India released the 3rd instalment of`11.The target for the year 2011-12 is `4.33.665 4 23.226 1.000 3rd instalment Jul-10 4 2.660 68.1 73. of which 119 per cent had been achieved by endMarch.6 The disbursements by the public sector banks to agriculture under Special Agricultural Credit Plan (SACP) for the financial year 2009-10 was at `2. 2011(provisional) by banks including cooperativebanksandregionalruralbanks(RRBs).352crore (126percentoftheprojectedamount).8 For the year 2010-11. IV.10 In order to study various issues relating to MSMEs.361 28.100 1. UCBs and LABs Total *: Based on the current provisional estimates.0 26. 2010 to increase their share of lending to micro enterprises in MSE to 60 Table IV.133 1.05.4).000 Balance amount.

This covers more than 96 per cent of the ST CCS units in the country.84. they were allowed to open branches in Tier 3 to Tier 6 centres as identified in the Census 2001 (with population up to 49. Note: 1.7) 3 MSE/SSI credit as per cent of ANBC 4 13.7percentduringtheyear(TableIV.4 9. 83 .respectively.Srinivasan) *: As on the Last Reporting Friday of March.13 Based on the recommendations of the Task Force on Revival of Rural Co-operative Credit Institutions (Chairman: Prof. 2011) towards Government of India‘s share for recapitalisation of PACS in 16 states while the State Governments have also released their share of `854 crore.14 The twenty-five states willing to participate were required to enter into a Memorandum of Understanding (MoU) with the Central Government and NABARD.18 The Working Group of Technology Upgradation in RRBs (Chairman: Shri G. and (iii) take measures to improve the quality of management. twenty one states have amended their respective State CooperativeSocietiesActthroughlegislativeprocess. IV.993 crore has been released by NABARD (up to end-June. as at endJune. 2. set up by the Government of India.5). IV. especially the small and marginal farmers. IV.necessaryinstructions were issued to all SCBs (excluding RRBs) on April 21. The implementation of the revival package on an all India basis is supervised by the National Implementing and Monitoring Committee. 2011. A. Subsequent to the issuance of revised guidelines (in consultation with NABARD) in October 2009 on licensing of StCBs/ DCCBs.9 IV.3 3.11 The Union Budget 2011-12 proposed to liberalise the existing scheme of interest subvention of 1 per cent on housing loans by extending it up to `15 lakh where the cost of the house does not exceed `25 lakh from the present limit of `10 lakh and `20 lakh.62.15 An aggregate amount of `8. Accordingly. provided they fulfill certain conditions. while the NABARD supervises them. IV. IV.17 With a view to liberalizing the branch licensing for RRBs.12 Reflecting the revival in demand conditions in 2010-11. package also seeks to (i) provide financial assistance to bring the system to an acceptable level of health.in consultation with State Governments. Also.CREDIT DELIVERY AND FINANCIAL INCLUSION per cent in three stages (viz.e. Data for 2011 are provisional. the total credit to MSE from the SCBs increasedby33.Accordingly. (ii) introduce legal and institutional reforms necessary for its democratic. in March and September. 50 per cent in the year 2010-11. subject to reporting. A suitable format has been devised by the Reserve Bank to capture and closely monitor the achievement of these targets by banks on a half yearly basis i.5: Credit to MSE Sector by SCBs Outstanding credit to MSE No. Figures in parantheses indicate per cent growth in credit over the previous year.291 (41.4) 4. central cooperative banks (CCBs) at the intermediate level and thestateco-operativebanks(StCBs)attheapexlevel. self reliant and efficient functioning. consisting of Primary Agricultural Credit Societies (PACS) at the village/base level. had approved a package for revival of the short-term rural cooperative credit structure (ST CCS). without having the need to take permission from the Reserve Bank in each case. of Accounts Amount (in Million) (in ` crore) 1 2010 2011* 2 8. instructions were issued to all RRBs and their sponsor banks in November 2010. Aside from aiming at reviving the ST CCS to make it an efficient medium to serve the credit needs of rural India. 55 per cent and 60 per cent in the subsequent years) with 10 per cent annual growth in the number of micro enterprise accounts and also 20 per cent year-on-year growth in MSE lending.. 2011.16 The Reserve Bank regulates StCBs and district central co-operative banks (DCCBs) under the Banking Regulation Act. 10 StCBs and 160 DCCBs have been licensed taking the total number of licensed StCBs and DCCBs to 24 and 235 respectively. IV.999).5 9..473 (33. the Table IV. 1949 (AACS). Vaidyanathan) the Government of India . IV.

Nair. while it is in progress in the remainder. Speech at the National Finance Conclave 2010. income inequality. barring a few exceptions.G. This analytics of inclusive growth implies a direct link between the macro and micro determinants of growth. Further. Cross country studies on factors associated with financial inclusion show that the level of human development and that of financial inclusion are positively correlated.E.19 Financial inclusion broadly refers to the process of ensuring access to appropriate financial products and services needed by vulnerable groups such as the weaker sections and low income groups at an affordable cost. World Bank Policy Research Working Paper No.andS. Empiricalevidenceshowsthatcountrieswithlargeproportion of population excluded from the formal financial system also show higher poverty ratios and higher inequality. Financial inclusion is no longer a policy choice but a policy compulsion. Some of the important factors determining the level of financial inclusion in a country are per capita GDP. indicate that there has been a relative improvement in the status of financial inclusion between 2002 and 2006 with the number of districts in the lowest grade declining from 378 to 330.Sahoo(2009). a significant proportion of the households. NABARD Occasional Paper No.ANNUAL REPORT had recommended that Core Banking Solution (CBS) shouldbefullyimplementedinallRRBsbySeptember 2011. The proportion of rural residents who lack access to bank accounts is about 40 per cent.‗‗InclusiveGrowth Analytics: Framework and Application‘‘. physical and electronic connectivity and information availability such as telephone and internet usage also play positive role in enhancing financial inclusion. 48. remain outside the coverage of the formal banking system. Box IV. Mehrotra. assumes importance as a policy objective. inflexible. K. 84 . and include a large part of the country‘s labour force. Growth is inclusive when there is equality of economic opportunities. Banks and other financial services players are expected to mitigate the supply side bottlenecks that hinder the poor and disadvantaged social groups from gaining access to the financial system. ―Financial Inclusion – An Overview‖. Ianchovichina.Puhazhendhi. (2010). as countries having low GDP per capita.B. by Mehrotra et al (2009) at the state and district levels for India. Empirical evidence suggests that access to financial products is constrained by several factors which include: lack of awareness about the financial products. IV. FINANCIAL INCLUSION IV. relatively higher levels of income inequality. The main instrument for a sustainable and inclusive growth is productive employment. and products which are inconvenient. ‗‗Inclusive Growth – Role of Financial Sector‘‘. high transaction costs. Despite widespread expansion of the banking sector. Microfinance and financial literacy play pivotal roles in addressing these issues. CBS has been fully implemented in 45 out of the total 82 RRBs. The estimated values of a Financial Inclusion Index.1). in a fair and transparent manner by mainstream institutional players.20 Moving towards universal financial inclusion has been a policy priority for the Reserve Bank over the last few years since financial inclusion becomes a critical financial component for ensuring sustainable and equitable economic growth (Box IV. Financial inclusion makes growth broadbasedandsustainablebyprogressivelyencompassing the hitherto excluded population. C.andB.Lundstrom(2009). but for this growth to be sustainable in the long run. Against this backdrop. adult literacy and urbanisation. unaffordable products.G. The inclusive growth country analytics has a distinct character focusing on the pace and pattern of growth. The empirical findings strengthen the argument that financial exclusion is indeed a reflection of social exclusion. low rates of literacy.V. not customised and of low quality. 4851. Panel data studies of Bangladesh observe that access to microfinance contributes to poverty reduction. therefore. References: Chakrabarty.N.1 Financial Inclusion and Inclusive Growth: What the Empirical Evidence Suggests? Inclusive growth as a strategy of economic development has received renewed attention in recent years owing to rising concerns that the benefits of economic growth have not been equitably shared. Rapid pace of growth is unquestionably necessary for substantial poverty reduction. and this rises to over three-fifths in the eastern and north-eastern regions of India. especially for female participants. it should be broad-based across sectors. low urbanisation and poor connectivity appear to be less financially inclusive. studies based on application of the Tobit model on national-level cross-sectional household data for 2001 on the Indian economy show a highly significant positive relationship between productive loan amount and households poverty after controlling for socio-economic characteristics. especially in rural areas. Financial inclusion. As on date.

iii) Banks had been asked to consider introduction of a GCC facility up to `25. Regulatory measures i) KYC requirements for opening bank accounts have been further relaxed during the year. to freely open branches in Tier 3 to Tier 6 centres with population of less than50.2 million accounts using ICT through BCs.23 Reserve Bank is furthering financial inclusion with high priority through a combination of strategies ranging from relaxation of regulatory guidelines. Provision of new products i) As of March 2011.subject to reporting. domestic SCBs are permitted. The objective of the scheme is to provide hasslefree credit to banks‘ customers based on the assessment of cash flow without insistence 85 .000 at their rural and semi-urban braches. semi urban and urban centres without taking prior permission from the Reserve Bank. iii) Engaging Business Correspondents: During 2010-11. In the north eastern states and Sikkim. especially so if the deliverymodelsaimatgeneratingrevenueratherthan being cost centric such that customers get quality bankingservicesattheirdoorstepwhilesimultaneously creating business opportunities for the banks. ii) With a view to encourage transactions in No Frill accounts banks have been advised to provide small overdrafts (ODs) in such accounts. B.21 Financial inclusion can be seen as a viable business proposition for banks.000undergeneralpermission. ‗for-profit‘ companies were also allowed to be engaged as BC .intermediaries for providing financial and banking services. 74. to include job card issued by MGNREGA duly signed by an officer of the State Government orthelettersissuedbytheUniqueIdentification Authority of India containing details of name. purpose or end-use of the credit. banks had 0.4 million No Frill accounts have been opened by domestic commercial banks with outstanding balance of `6.CREDIT DELIVERY AND FINANCIAL INCLUSION Instruments used for strengthening delivery of services and assessment of their effectiveness IV. banks had opened 37. As at end-March. A. provision of new products and other supportive measures to achieve sustainable and scalable financial inclusion as outlined below.361 BCs/ customer service providers (CSPs). the need for opening more brick and mortar branches. iv) Opening of branches in unbanked rural centres: So as to improve banking penetration and financial inclusion rapidly in the rural areas. (iii) a pure savings product ideally a recurring deposit scheme. providing banking services in 76.308 crore. includes four products: (i) a savings cum overdraft account. and (iv) entrepreneurial credit in the form of General-purpose Credit Card (GCC) or Kisan Credit Card (KCC). banks have provided 4. besides using BCs.2 million ODs amounting to `199 crore. was felt. Up to end March 2011. as facilitators for banks.95 million GCC accounts with outstanding credit of `1.leveragingICTtoprovide benefits to their customers at their door step. As on March 2011. ii) Simplified branch authorisation: To address the issue of uneven spread of bank branches. 2011. Basic banking No Frill accounts have nil or very low minimum balances as well as charges that make such accounts accessible to vast sections of the population.22 It is feasible only if delivery of services.801 villages. domestic commercial banks have reported deploying 58. IV. address and Aadhaar number.As of March 2011. since December 2009. IV. domestic SCBs can now open branches in rural. subject to reporting. on security.566 crore. (ii) a remittance product for electronic benefits transfer and other remittances. iv) Banks have been advised to speed up openingofaccounts. This is in the nature of revolving credit entitling the holder to withdraw up to the limit sanctioned. at the minimum.

iii) In future. and the Financial Inclusion Technology Fund (FITF). issuance of KCC.000 as also other unbanked villages with population below 2. iv) Banks would expand financial inclusion initiatives in urban and semi-urban areas by targetingpocketsofmigrantworkersandsmall vendors.coverageofunbanked villages with population above 2.000 through branches/BCs/other modes. 2012 and 2013.ANNUAL REPORT Accordingly. opening of No Frill accounts including those opened through BCICT.000. v) PSBs shall formulate FIPs for all RRBs sponsored by them and develop an effective 86 . three-year FIP and submit the same to the Reserve Bank by March 2010. including BCs. to meet the cost of technology adoption has beensetupatNABARDwithanoverallcorpus of `500 crore each. C. the banks have submitted their FIPs containing targets for March 2011. the Reserve Bank has offered to fund the capital and running costs for five years.25 These plans broadly include self-set targets with respect to opening of rural brick and mortar branches. IV. ii) To improve banking penetration in the NorthEast. 2 in Tripura and 4 in Manipur. In the Union Budget for 2011-12 the corpus of these funds was enhanced by `100 crore each. iii) Withanobjectiveofensuringuniformprogress in provision of banking services in all parts of the country. the Reserve Bank has been conducting Annual FIP Review Meetings with banks. Banks were advised to integrate Board approved FIPs with their business plans and to include the criteria on financial inclusion as a parameter in the performance evaluation of their staff.employmentofBCs. IV. Progress of Financial Inclusion Plans during the year IV. banks would focus more on opening of brick and mortar branches in unbanked villages.based models.24 In January 2010. GCC and other specific products designed by them to cater to the financially excluded segments. provided the State Government concerned is willing to make available the premises and put in place appropriate security arrangements. requiring minimum infrastructure for operating small customer transactions and supporting up to 8-10BCsatareasonabledistanceof2-3Kms. Accordingly. A few important action points from the discussionsheldduringMay-June2011areasfollows: i) Banks would review their delivery models so that financial inclusion results in a profitable business for them. About 72. Supportive measures i) Two Funds. all public and private sector banks were advised to put in place a Board approved ii) Banks will also focus on providing banking services in peripheral villages with population of less than 2. leveraging Aadhaar enrollment for opening banks accounts. banks were advised to draw up a roadmap to provide banking services through a banking outlet in every unbanked village having a population of over 2. During the year. namely the Financial Inclusion Fund (FIF) for meeting the cost of developmental and promotional interventions for ensuring financial inclusion.000 by March 2012. It may be a low cost intermediary kiosk with a simple structure.26 In order to review the progress of banks in the implementation of FIPs and making way for accelerated progress in future. banks were mandated in the Annual Policy Statement of May 2011 to allocateatleast25percentofthetotalnumber of branches to be opened during a year to unbanked rural centres.800 such unbanked villages have been identified and allotted to various banks through State Level Bankers Committees (SLBCs). branches were opened at 2 of the agreed centres in Meghalaya. The Reserve Bank advised banks that such banking services need not necessarily be extended through a brick and mortar branchbutcouldbeprovidedalsothroughany of the various forms of ICT.

Financial literacy efforts including outreach activities IV. operate at the margin and are vulnerable to persistent downward financial pressures.and dissemination through radio and television. In view of the utility of these centres as expressed by state governments and other stakeholders. IV.28 Financial education can broadly be defined as the capacity to have a familiarity with and also an understandingoffinancialmarketproducts. savings. IV. defence personnel and senior citizens. the Reserve Bank organised ii) A multilingual website in 13 Indian languages on all matters concerning banking and the commonpersonwaslaunchedbytheReserve Bank in June. The Reserve Bank has taken a number of measures for increasing financial literacy. rural and urban poor. Similar books have been prepared for the different target groups and are widely distributed in regional languages through various Regional Offices of the Reserve Bank. IV. technology providers and representative customers of financial services from across the country participated in the conference. financial education is particularlyrelevantforpeoplewhoareresourcepoor.32 In the wake of the Andhra Pradesh micro finance crisis in 2010. As on March 2011. illustrated books have been made available on the website.especially risks and rewards to make informed choices. iv) Financial literacy programmes are being launched in each state with the active involvement of the State Government and the SLBC. a Sub-Committee of the Central Board of the Reserve Bank (Chairman: Shri Y. which in turn results in inclusive growth and development. remittance. In countries with diverse social and economic profiles as in India.30 Financial education stresses on the capacity building measures to enable small and marginal borrowers to avail of the entire suite of financial products and services i. Grassroot level functionaries of banks. in addition to credit. iii) With a view to introducing banking to school children. 252 FLCCs were set up in various states of the country.. 87 . such that the FLCCs‘ services are available even to other banks‘ customers in the district. concerns were expressed by various stakeholders and the need was felt to review regulation of NBFCs which function as MFIs. 2007. As indicated in the Second Quarter Review of November 2010.e. IV. banks have been advised to set up FLCCs in all districts. road shows.workshops.CREDIT DELIVERY AND FINANCIAL INCLUSION monitoring mechanism so that targets assigned to the RRBs are achieved meticulously.27 Financial literacy facilitates financial inclusion.seminars.33 Cognizant of the beneficial impact of outreach activities. women.exhibitions. the second Frontline Managers‘ Conferences on financial inclusion to review the progress made in furtheringfinancialinclusion. i) RBI has undertaken a project titled ‗Project Financial Literacy‘ with the objective of disseminating information regarding the central bank and general banking concepts to various target groups including school and college going children. H. MFIs.2). OUTREACH ACTIVITIES IV. These programmes include skits. insurance and pension from the banking sector. IV.29 A model scheme on financial literacy and credit counselling centres (FLCCs) was formulated by the Reserve Bank and communicated to all SCBs and RRBs with the advice to set up the centres as distinct entities.31 During 2010-11. BCs.understandtheproblems impeding financial inclusion at the ground level from demand and delivery perspective and get a feel of the ground realities on the current status of our financial inclusion efforts. these flagship events were carefully orchestrated to ensure financial inclusion. Malegam) was constituted to study issues and concerns in the MFI sector (Box IV.

.20. The Reserve Bank endeavours to ensure sustained postevent momentum so that long-term objectives of financial inclusion are attained. ii) Interest cap on individual loans at 26 per cent per annum for all MFIs to be calculated on a reducing balance basis. (ii) loan does not exceed `35. vii) No security deposit/ margin to be taken. extended for income generating activity. and (viii) continuation of categorisation of bank loans to MFIs. 2011 classified under priority sector will continue to be reckoned under priority sector till maturity of such loans. various events such as lectures. that (i) 85 per cent of total assets of the MFI are in the nature of ―qualifying assets‘‘. exhibitions and skits were organised to educate people about the role played by the Reserve Bank in their daily life. (vi) establishment of a proper system of grievance redressal procedure by MFIs. iii) Only three components are to be included in pricing of loans viz. (iii) total indebtedness of the borrower does not exceed `50. demonstrations.000 in the first cycle and `50. were taken up for being transformed into ‗Model Villages‘. Government officials and banks and attracted the interest of electronic and print media in the country.000 in non-rural areas. A total of 214 villages.000 in rural areas and `1. (v) loan is repayable by weekly. and micro credit (for other purposes). aggregate amount of loan. iv) v) The processing fee is not to be included in the margin cap or the interest cap of 26 per cent. health and livestock for borrower and spouse can be recovered. banks have to ensure that MFIs comply with the stipulated caps on margin and interest rate as also other pricing guidelines.. administrative charges to be recovered as per IRDA guidelines. (v) creation of one or more credit information bureaus.e. IV.e. (iv) the loan is without collateral.000 in the subsequent cycles. whichinteraliasatisfiescriteriasuchas(i)theborrower‘s household annual income does not exceed `60. extended for income generation activity. (a) a processing fee not exceeding 1 per cent of the gross loan amount. agriculture. The interest cost is to be calculated on average fortnightly balances of outstanding borrowings and interest income is to be calculated on average fortnightly balances of outstanding loan portfolio of qualifying assets. is not less than 75 per cent of the total loans given by MFIs. Government securities and money market instruments) are in the nature of ―qualifying assets‖. to be eligible to classify these loans as priority sector loans: i) Margin cap at 12 per cent for all MFIs. 2011 for onward-lending to individuals and also to members of self help groups (SHGs)/joint liability groups (JLGs) would be eligible for categorisation as priority sector advance under respective categories viz. at the end of each quarter.f. will not be reckoned as priority sector loans w. inter alia. (b) the interest charge and (c) the insurance premium. Based on the feedback received. 2011 that bank credit to MFIs extended on or after April 1. In addition. (vii) creation of one or more ―social capital funds‖. including 167 villages identified in the precedingPlatinumJubileeyearoftheReserveBank. fortnightly or monthly installments as per borrower‘s choice Further. (iv) lending by not more than two MFIs to any individual borrower. • A ―qualifying asset‖ shall mean a loan disbursed by MFI. MSE. a Chartered Accountant‘s Certificate stating. is not less than 75 per cent of the total loans given by the MFIs. under the priority sector. (ii) the aggregate amount of loan. The bank loans extended prior toApril 1. which do not comply with above conditions and bank loans to other NBFCs. (iii) transparency in interest charges. actual cost of group insurance for life. the broad regulation framework recommended by the Committee have been accepted. Bank loans to MFIs. . The SCBs have accordingly been advised in May. balances with banks and financial institutions. provided not less than 85 per cent of total assets of MFI (other than cash..ANNUAL REPORT Box IV. • The banks should obtain from MFIs. 2011. April 1. as indirect finance. inter alia. NABARD and State Government agencies generated new hopes among the public in rural areas as evident from their wholehearted involvement in these programmes. • • emphasising focus on financial education and literacy initiatives across the country during the year. complying with the regulation laid down for NBFC-MFIs.000. The participation of the top executives of the Bank (in 34 outreach programmes in 2010-11) along with other dignitaries from banks. recommended (i) creation of a separate category of NBFC-MFIs.34 During the outreach programmes of grassroot level sensitisation. The outreach events 88 received all round acclaim from the public. vi) No penalty for delayed payment. Only the actual cost of insurance i. and (iii) pricing guidelines are followed.2 Committee on the MFI Sector (Malegam Committee) The Malegam Committee in its January 2011 report. (ii) a margin cap and an interest rate cap on individual loans.

V DEVELOPMENT AND REGULATION OF FINANCIAL MARKETS The financial markets functioned smoothly during 2010-11. Financial stability entails stability of the financial markets and financial institutions. rating requirements. The Directions provide for regulation of the issuance of NCDs of maturity up to one year. Against this macroeconomic backdrop. With a view to further strengthening the regulatory architecture while promoting greater efficiency in the financial markets. entail trade-offs at least in the short run. however. the recognition of the tradeoffstoachievethebestpossibleoutcomeisarequisite for a central bank that is vested with the responsibility of the development and the regulation of the various segments of the financial markets. promote transparency and improve liquidity in the money markets. As per the Directions. the Reserve Bank initiated policy measures to address certain regulatory gaps. 2010. to destabilise economic activity. The policy initiatives in the area of foreign exchange management were directed towards procedural simplifications and maintaining sustainability of the liberalisation process. and fosters long-term savings and investment for growth. the Reserve Bank persisted with a calibrated and sequential approach towards launching of new market instruments keeping a balance between financial stability issues and market efficiency. With liquidity transiting to a deficit mode in May 2010. etc. promote transparency and improve liquidity in the money market..2010. policy measures were taken with a view to addressing certain regulatory gaps. Regulation of NCDs of maturity up to one year V. Financial market stability minimises uncertainties and facilitates investment decision making with due assignment of measurable risks. policy measures during 2010-11 were aimed at ensuring smooth functioning of the markets so as not 89 . when the regulatory measures that are designed to promote financial stability impede market efficiency. Development and regulation of financial markets can.theReserve Bank issued Directions in terms of section 45W of the RBI (Amendment) Act. promotes transparency. Taking into account the feedback received from the market participants. Market instability affects risk taking behaviour and impedes sustained growth and hence financial market regulation is necessary for growth.2 The money market is an important segment of the financial market because it not only reflects the impact of liquidity mismatch in the system but also operatesasthefirstlegintransmittingmonetarypolicy changes to the other parts of the financial system. for these NCDs have been prescribed broadly in line with the extant guidelines on issuance of CPs. 2006 on June 23. V. the Reserve Bank has issued an amendmentDirectiononDecember6. non-banking financial companies including Primary Dealers that do not maintain a working capital limit to issue NCDs of maturity up to one year. In the derivatives market. MONEY MARKET V. permitting financial institutions (FIs) to invest in NCDs of maturity up to one year. The Directions are applicable to both secured as well as unsecured NCDs.1 Financial stability has been recognised as a key objective of the Reserve Bank‘s monetary policy. establishes benchmarks for the purpose of pricing. which are money market instruments. Accordingly.interalia. NCDs cannot be issued for maturity less than 90 days and cannot have call/put options that are exercisable within 90 days from the date of issue. Market development augments market efficiency that reduces transaction costs.3 In order to address the regulatory gap that existed in the case of issuance of NCDs of maturity uptooneyearthroughprivateplacement. and FIIs to invest in NCDs of maturity up to one year subject to extant provisions of FEMA and SEBI guidelines issued in this regard. The eligibility criteria.

TheReserveBank. a review of the guidelines governing repo in corporate bonds was undertaken by the Reserve Bank in consultation with the market participants. external assistance and NRI deposits dominated capital flows during the year. the minimum haircut applicable on the underlying collateral has been revised from 25 per cent to 10 per cent (in case of AAA-rated bonds). 12 per cent (AA+) and 15 per cent (AA). however. ECBs. permitting repo in corporatebonds. During 2010-11. increasing transparency of the market and safeguarding the financial system. etc. the slowdown in inward FDI was a cause 90 . capital flows were largely absorbed by the current account deficit (CAD). Consequently. DvP III facilityhasbeenextendedinJuly2011totransactions by the gilt account holders (excluding transactions between the gilt account holders of the same custodian) so that the gilt account holders get the benefit of efficient use of funds and securities. 2006 and the existing regulatory penalty for SGL bouncing was replaced with a transparent and rule-based pecuniary penalty in July 2010. FOREIGN EXCHANGE MARKET V. Under the revised guidelines. provides reference points for the pricing of corporate debt. the Reserve Bank had issued guidelines in January 2010.2010. regarding the development of the government securities market during 2010-11 were aimed at ensuring a balance between greater market liquidity and effective regulation. FII investment. the Reserve Bank has been taking a series of measures that has contributed to price discovery.5 As a measure aimed at provision of liquidity to the corporate bond market.6 The government securities market is a key segment of the financial market as it finances the fisc in a cost effective manner. The initiatives V. settlement of repo trades in corporate bonds on a T+0 basis (in addition to T+1 and T+2) has also been permitted. However. the Reserve Bank introduced a reporting platform for all secondary market transactions in CDs and CPs.9 During 2010-11.7 TheguidelinesforSGLtransferwerereviewed in the light of the provisions of sections 27 and 30(3) of the Government Securities Act. Repo in corporate bonds V. Government Securities Act. Further. Sections 27 & 30 . the purchase of government securities from the market participants under the open market operations served to infuse liquidity and reduce the structural liquidity mismatches. serves as a conduit for monetary policy transmission across the maturity spectrum and also provides the wherewithal for the central bank‘s liquidity management by way of open market operations.SEBIandIRDA have mandated all their regulated entities to report their OTC trades in CDs and CPs on the FIMMDA reporting platform. available to transactions by the gilt account holders. Extension of DvP III facility in the Government Securities market to Gilt Account Holders GOVERNMENT SECURITIES MARKET V. widening of investor base.TheDvPIIIfacility was not. graded monetary penalties (subject to a maximum penalty of `5 lakh per instance) are charged for the first nine instances in a financial year while the tenth default would lead to debarment from undertaking short sales for the remaining part of the financial year. The permission to undertake short sales shall be restored in the next financial year subject to certain requirements in terms of improved internal controls.ANNUAL REPORT Reporting platform for CDs and CPs V.Imposition of penalty for bouncing of SGL forms V.4 Towards transparency in the secondary market for CDs and CPs.2004. With the stabilisation of the transaction and settlement infrastructure. 2006. During the recent years. The reporting platform was operationalised by FIMMDA with effect fromJuly1.Tofurtherfacilitaterepotransactions in corporate bonds.8 The settlement of trades in Government securities through CCIL was shifted from DvP II to DvPIIIwitheffectfromApril2.

Corporates engaged in the development of integrated township 91 . if availed of by the exporters under any of the Export Promotion Schemes under the Foreign Trade Policy 2009-14. if such a guarantee is issued against the counter guarantee of an international bank of repute situated outside India. 2010. as against US $ 2. V. stability of forex market and maintaining sustainability of the liberalisation process. The special rupee refinance facility to the EXIM Bank was discontinued with effect from April 1. including for farm level pre-cooling. The recent liberalisation measures include expansion of the definition of infrastructure to include ―cold storage or cold room facility. Government of India for advance remittances exceeding US $ 100. 2010. Current Account V.2011. AD Category – I banks were advised not to insist on surrender of the proportionate incentives.14 The currency component of foreign exchange for visits abroad was reviewed and increased during the year to US $ 3. although inward FDI during 2011-12 (April-June) has been encouraging.10 The specific counter cyclical measures initiated during the crisis period were either scaled down or rolled back as part of the exit policy. non-resident importers and exporters have now been permitted to hedge their currency risk in respect of exports from and imports to India invoiced in Indian Rupees with AD category I banks in India. other than those under the Duty Drawback Scheme. particularly for small value goods and services. suitable guidelines to ensure orderly conduct of such transactions in line with the FEMA Regulations. roads including bridges and power sector. subject to certain terms and conditions. V. for an advance remittance for imports of goods exceeding US $ 100.13 To facilitate greater use of Indian Rupee in trade transactions.DEVELOPMENT AND REGULATION OF FINANCIAL MARKETS for concern. the relaxation allowed to exporters in realisation and repatriation of export proceeds within 12 months from the date of export of goods andserviceswasextendeduptoSeptember30. Islamic Republic of Iran. for preservation or storage of agricultural and allied produce.000 or its equivalent.11 With the continued recession in the advanced economies impacting India‘s exports in the immediate post crisis period. have been issued to AD banks. Capital Account V.facility of credit enhancement for raising debt through capital market instruments by entities in the infrastructure sector and the scheme of take-out finance through ECB under the approval route for refinancing of rupee loans availed from domestic banks for development of new projects in the sea port and air port.000 or its equivalent. The policy initiatives in the area of foreign exchange management during the year under review were directed towards procedural simplifications. for importers other than a Public Sector Company or a Department/Undertaking of Central/State Governments where the requirement of bank guarantee is to be specifically waived by the Ministry of Finance. marine products and meat‖.000 or its equivalent. and the swap facility to it was scaled down from US $ 1 billion to US $ 525 million (the outstanding level as on January 25. Russian Federation and other Republics of Commonwealth of Independent States.000 earlier to a traveller proceeding to countries other than Iraq.15 AD Category – I banks were required to obtain an unconditional. Libya. V. V. allowing Infrastructure Finance Companies (IFCs) for availing ECBsforon-lendingtotheinfrastructuresector. In case of write-off of unrealised export bills.000 or its equivalent. 2010) and the same was made available up to September 30. without the prior permission from the Reserve Bank. irrevocable standby Letter of Credit (LC) or a guarantee from an international bank of repute situated outside India or a guarantee of an AD Category – I bank in India. The limit has been enhanced to US $ 200. V.16 ECB policies have been progressively liberalised to channelise more external funds to the infrastructure sector.12 Acknowledging the importance of the services provided by the Online Payment Gateway Service Providers (OPGSPs) to the exporters in facilitating export transactions.

The recommendations of the Committee are under examination. hospital and hotel have been allowed to avail ECB above US $ 100 million under the approval route.18 Keepinginviewtherequirementofhugefunds for the infrastructure sector and to enable the development of government securities and corporate bond markets in the country in a calibrated manner.21 Recognisingtheimportantcontributionofnonresident Indians (NRIs) and persons of Indian origin (PIOs) in India‘s growth process and the need for facilitating genuine foreign exchange transactions by non-resident Indians (NRIs) as well as resident individuals under the current regulatory framework of FEMA.20 Non-resident investors (other than SEBI registered FIIs and SEBI registered FVCIs) who meet the KYC requirements of SEBI.uptoend-December2010. 2011 has been extended up to end-March. V. subject to certain conditions. V. under the approval route. In order to meet the redemption obligations. These investors have alsobeenallowedtoinvestuptoanadditionalamount of US$ 3 billion in units of debt schemes of domestic MFs which invest in infrastructure (as defined under the ECB norms) with a minimum residual maturity of 5 years. have been permitted to purchase on repatriation basis rupee denominated units of equity schemes of domestic MFs.22 Derivatives can serve as important instruments in the development of the financial markets when these instruments permit portfolio diversification and risk hedging. within an overall ceiling of US$ 10 billion. the FII investment limits were enhanced from US $ 5 billion to US $ 10 billion in respect of government securities and from US $ 15 billion to US $ 40 billion in respect of corporate bonds issued by companies in the infrastructure sector. Udeshi) has been constituted in April 2011 to identify areas for streamlining and simplifying the procedure so as to remove the operational impediments.asdefinedundertheECBpolicy. such as software.henceforthonly50percentoftheamount of the performance guarantees would be reckoned for the purpose of computing financial commitment to its JV/WOS overseas. The incremental limit in corporate bonds will have to be earmarked for investment in the corporate bonds issued by the companies in the infrastructuresector. subject to the condition that the incremental limit should be earmarked for investmentincorporatebondswitharesidualmaturity of over five years. V.ANNUAL REPORT were permitted to avail of ECB. K.Corporatesinselect services sectors.J. turn out to be a double-edged sword as the global financial 92 . and assess the level of efficiency in the functioning of authorised persons. within the existing ceiling of US$ 25 billion for FII investment in corporate bonds issued by infrastructure companies.17 The facility of premature buyback of FCCBs which was available up to end-June. DERIVATIVES MARKET V. The Committee submitted its report in August 2011. Indian companies have been allowed to raise fresh ECBs/FCCBs as per the extant ECBguidelinesundertheautomaticroutetorefinance their outstanding obligations. within the prevailing limit for overseasdirectinvestment. thereby ensuring financial stability. within the 400 per cent of the net worth of the Indian Party.Further.19 Keeping in view the utility and usage of the instrument of performance guarantees in project executions abroad and also considering the risks associated with such guarantees vis-a-vis financial guarantees. would also enhance the liquidity of long-term papers. Thismeasure. however. a committee (Chairperson: Smt.besidesaugmentingtheflowoffinance to the infrastructure sector. V. the Indian promoter entity may extend corporate guarantee on behalf of the first generation step down operating company under the Automatic Route. 2012 with reduced minimum discount rates. Irrespective of whetherthedirectsubsidiaryisanoperatingcompany or a SPV.theareasrelating to restructuring of the balance sheet of the overseas entityinvolvingwrite-offofcapitalandreceivablesand disinvestment by the Indian Parties of their stake in an overseas JV/WOS involving write-off were liberalised. V. Derivatives can. including the infrastructure created by them.

V. Taiwanese dollar. Introduction of Credit Default Swaps (CDS) V.2). Though comprehensive information is not available on the global NDF market. During the post-crisis period. it was decided to introduce short-tenor IRF contracts. in order to provide participants with additional instruments to manage volatility in the short-term interest rates. IRFs on 91-day Treasury Bills were permitted since March 2011. This has necessitated introduction of various instruments by the Reserve Bank to hedge the exchange exposure by the residents.26 In order to expand the menu of tools for hedging currency risk. Accordingly.24 Lack of instruments to manage credit risk was a long-felt need and to address the same the introduction of credit default swaps was taken up in 2003 and further followed up in 2007. V. recognised stock exchanges were permitted to introduce plain vanilla currency options on spot US Dollar/Rupee exchange rate for residents. MCX-SX and USE) stood at US $ 8.0 billion in March 2011 as against US $ 7. Non-deliverable Forwards Market V. it was decided to permit CDS on corporate bonds and the final guidelines in this regard were issued in May 2011 (Box V. London. South Korean Won and the Indian Rupee reportedly account for the major share. However. Currently.27 In view of the large positions held by the FIIs and considering the increased depth of the Indian forex market to absorb the impact on the exchange rate. Chinese Renminbi. In India.1). the NDF market offers a convenient hedging mechanism for foreign investors who may not have full access to the onshore market of the concerned currency due to restrictions or may prefer to transact in an international financial centre they are familiar with for the sake of convenience.DEVELOPMENT AND REGULATION OF FINANCIAL MARKETS crisis would testify.28 NDF market exists mostly in non-convertible or in currencies with limited on-shore hedging options.23 The Interest Rate Futures contract on 10-year notional coupon bearing Government of India security was re-introduced on August 31. Exchange Traded Currency Derivatives domestic and global financial market developments. Taking into account the lessons learnt from global financial crisis. The exchange traded currency options market is functioning subject to the guidelines issued by the Reserve Bank and the Securities and Exchange Board of India (SEBI) from time to time. Brazilian Real. 2009. the Reserve Bank has persisted with a calibrated and sequentialapproachtowardslaunchingofnewmarket instruments in recognition of the trade-offs between financial stability issues and market efficiency. The major centres for the Indian Rupee NDF market are reportedly Singapore. the initiativeshadtobeputonholdinviewoftheunfolding of the global financial crisis. FIIs have now been permitted to cancel and rebook up to 10 per cent of the market value of the portfolio as at the beginning of the financial year as against 2 per cent that was permitted earlier. Foreign Exchange and Government Securities Markets. In India. The average daily turnover in currency futures on the three active exchanges (NSE.1 billion in March 2010. New York and Hong Kong. Based on the market feedback and the recommendations of the Technical Advisory Committee (TAC) on the Money. With increasing capital flows to the EMEs. Introduction Interest Rate Futures (IRF) on 91-Day T-Bills V. Increased globalisation of the economy increases the foreign exchange exposure of Indian firms and individuals with exchange rate risk arising from 93 .25 The currency futures market remained active during 2010-11. residents in India are permitted to trade in futures contracts in four currency pairs on recognised stock exchanges. derivatives emerged as the source of off balance sheet and hidden exposures of banks and financial institutions. the linkage between the NDF market and the domestic financial markets remains weak (Box V. V. instead of addressing the risks.

Marketmakers can opt for any of the three settlement methods (physical. Foreign Institutional Investors (FIIs) and listed corporates. Provident Funds. • Users cannot purchase CDS without having the underlying exposure and the protection can be bought only to the extent (both in terms of quantum and tenor) of such underlying risk. Market-makers shall report their CDS trades with both usersandothermarket-makersonthereportingplatform of CDS trade repository within 30 minutes from the deal time. Insurance Companies. such as. Obligationacceleration. both under the Change in price of Rs.1 Guidelines on Credit Default Swaps (CDS) for Corporate Bonds Introduction of credit derivatives in India was actively examined in the past to provide the market participants tools to manage credit risk.Obligationdefault. NBFCs and stand-alone Primary Dealers are permitted to undertake both protection buying and protection selling subject to satisfying the prescribed eligibility norms. Accordingly. The salient features of the guidelines are as under: • The CDS shall be permitted on listed corporate bonds. 2011 for public comments. monitoring and enforcing position and other limits for CDS. 2011.Restructuring approved under Board for Industrial and Financial Reconstruction(BIFR)andCorporateDebtRestructuring (CDR) mechanism and corporate bond restructuring are the eligible credit events for CDS. 94 . assessing performance. The important elements of the 1 revised guidelines. Failure to pay. physical settlement is mandatory. cash or auction settlement). market participants are required to take these risks into account and build robust and appropriate risk management system to manage such risks. Accordingly.29 The comprehensive guidelines on OTC foreign exchange derivatives and overseas hedging of commodity price and freight risks were issued in December 2010. Insurance Companies and Mutual Funds would be allowed to act as market-makers subject to the approval of their respective regulators.ANNUAL REPORT Box V. which became effective in February 2011 are: (i) AD Category I banks can only offer plain vanilla European cross currency options. provided the CDS documentation envisages such settlement. PV011 limit and an independent risk management framework for reporting. valuing exposures. the final guidelines on CDS were issued on May 23. However. etc. • • • • • • OTC Foreign Exchange Derivatives V. Bankruptcy. Taking into account the feedback received from the market participants and other stake holders. unlisted but rated bonds of infrastructure companies and unlisted/unrated bonds issued by the Special Purpose Vehicles (SPVs) set up by infrastructure companies as reference obligations. Mutual Funds. 2011 and would become effective from October 24. The CDS contracts shall be standardised in terms of coupon. Repudiation/moratorium. For users. Housing Finance Companies. The matter was reviewed and the Second Quarter Review of Monetary Policy of 2009-10 had proposed introduction of plain vanilla OTC single-name CDS for corporate bonds subject to appropriate safeguards. The permitted participants have been categorised into: a) Market Makers: Participants such as Commercial Banks. (ii) allowing embedded cross currency option in the case of foreign currency-rupee swaps. draft guidelines on introduction of CDS were issued in 2003 and 2007. such as. Commercial Banks. NBFCs. the issuance of final guidelines was deferred.100 nominal bond for one basis point change in yield. Based on the recommendations of the report. The Group submitted its final report in February. basis risk. coupon payment dates. etc. counterparty risks.. jump-to-default risk. • Primary Dealers. an internal Working Group was constituted to finalise the operational framework for the introduction of single-name CDS for corporate bonds in India. The trade repository would disseminate key information on market participants‘ positions and help regulators and market participants gain a clear and complete snapshot of the market‘s overall risk exposure to CDS.thedraftguidelinesonCDSwerepreparedandplaced on the Bank‘s website on February 23. 2011. sudden increases in credit spreads resulting in markto-market losses. monitoring and controlling all aspects of risks. The guidelines specifically prescribe for having counterparty credit exposure limits. taking into account the status of the risk management practices then prevailing in the banking system and also the experiences relating to the financial crisis. As CDS markets are exposed to various risks. b) Users: Participants permitted only to hedge their underlying exposures. (iii) permitting use of cost reduction structures. The reference entities shall be single legal resident entities.

‘ Keynote address at the seminar of Forex Association of India. and (iv) allowing swaps to move from rupee liability to forex liability. and Directional bet by the speculators on the Indian Rupee without any underlying exposure.2 NDF Market and its Implications for the Domestic Financial Markets A non deliverable forward (NDF) refers to an OTC forward transaction that is settled not by delivery but by exchange of the difference between the contracted rate and some reference rate. promoting transparency and improving liquidity in the financial markets. or an average rate published by several banks. ‗Forex Market Development Issues and Challenges: Thoughts of a Returning Forex Market Regulator. Hedge funds/FIIs for hedging potential future exposure to Indian equity/bond market (since the present dispensation allows hedging only of actual. This linkage would transmit the price movement in the NDF market to the domestic market or vice versa. G. This might be the daily rate fixed by the central bank in question. contracted exposures and past performance routes. The contract is for a fixed amount (of the non-convertible currency). At maturity.theReserveBankpersistedwithitsobjective of maintaining an appropriate balance between its market development objectives and effective regulation in order to promote financial stability which is a precondition for long term sustainable growth. Singapore. (2011).g. the prevailing spot rate (reference rate) is compared with the contracted NDF rate. 95 . Policymeasuresweretakenwithaviewtoaddressing certain regulatory gaps. and at an agreed forward rate. MNCs having manufacturing or business interests in India. on a specific due date. subject to certain safeguards. 2. 3. There is no delivery of the reference or domestic currency on the maturity date. therefore. the linkage is weak because corporates‘ domestic forex forward transaction is based on underlying exposure and there is a limit on the aggregate (cash and derivative) positions that banks can take. Reference : Padmanabhan.DEVELOPMENT AND REGULATION OF FINANCIAL MARKETS Box V. The linkage between the NDF market and the domestic market may come from banks and corporates who have global books and can. Such transactions usually involve a nonconvertible (with some degree of capital control) or in currencies with limited on-shore hedging options and take place in an offshore location either in order to overcome on-shore regulations or because it is convenient for the transacting parties. but not potential. exposures). who do their invoicing in Indian Rupee but are not allowed to hedge their rupee exposure. NDF market in Indian Rupee The demand for Rupee NDF may arise from many sources. The difference is usually paid in the convertible currency on the maturity date.30 With the return to normalcy in the financial markets. The empirical analysis also brings out a weak causality between the NDF and domestic market rates. When a NDF transaction is agreed. The Reserve Bank‘s calibrated and sequential approach towards the introduction of new market instruments in recognition of the trade-offs between financial stability issues and market efficiency has contributed to the stability of financial markets. NDFs require a special contract that meets the provisions of the internationally recognised International Swaps and Derivatives Association (ISDA). However. e. subject to certain safeguards. 1. the parties must also agree on a way to determine the reference rate (at maturity). No payment or account movement takes place in the nonconvertible currency. take offsetting positions in their foreign and Indian books. August 13. V.

2 The focus on regulation. is gaining prominence. the Financial Sector Legislative Reforms Commission (FSLRC) has been constituted . In India.1 The mandate of central banks in many countries is getting widened to include systemic regulation and macroprudential supervision in the aftermath of the global financial crisis. In India. The post crisis focus on establishing an institutional mechanism for coordination among regulators and the Government has culminated in the establishment of the Financial Stability and Development Council (FSDC) in December 2010. The Reserve Bank currently has the mandate to regulate banks as well as non-banking financial companies (NBFCs) and has conducted its regulatory and supervisoryfunctionswiththeobjectiveofmaintaining systemicfinancialstabilityaswellaspreventingfailure of individual entities. which was one of the causal factors behind the global financial crisis. The high level of leverage in developed countries. After the consolidation in the UCB sector there is substantial improvement in their financial health. The Indian banking system remained largely sound and resilient to shocks as indicated by various stress tests. VI. VI.The FSDC is chaired by the Finance Minister and assisted by a Sub-Committee to be chaired by the Governor of the Reserve Bank. The stress test results suggest that Indian banking system is largely resilient and can withstand plausible shocks. This structure attempts to strike a balance between the sovereign‘sobjectiveofensuringfinancialstabilityand theoperativearrangementsinvolvingthecentralbank and other regulators. While the Sub-Committee is expected to evolve as a more active. The important policy decisions for SCBs included. the Reserve Bank‘s regulatory and supervisory policies have always been oriented towards maintenance of systemic stability. a 96 Financial Stability Board (FSB) is set up to detect systemic vulnerabilities and strengthen the supervisory and regulatory structure with a view to promoting financial stability.2). FINANCIAL STABILITY ASSESSMENT VI. financial stability has come to be recognised as an integral element of macroeconomic policy framework globally. The Indian financial system still remainslargelybankorientedandthereforearesilient banking system is crucial in maintaining systemic stability.3 Post-crisis. measures to avoid excessive leverage in housing loan segment. the FSDC would have a broad oversight and will assume a central role during crises (Box VI.5 Further.VI REGULATION. The regulatory and supervisory structure of the Reserve Bank was further strengthened during the year. inter alia.1).4 The multiple indicator approach to monetary policyaswellasprudentfinancialsectormanagement has enabled the Reserve Bank to maintain financial stability in the country even in the face of strong headwinds from the global economy. VI. especially by central banks. India is also a member of FSB and has committed to adopt international best practices (Box VI. supervision and financial stability helped the Indian banking system to sustain the downturn witnessed during the global financial crisis. credit support to Micro Finance Institutions(MFIs) etc. hands-on body for financial stability in normal times. continues to remain low in India. Strong prudential regulations were adopted by the Reserve Bank much ahead of the outbreak of the crisis. In the international fora. VI. strengthening countercyclical provisioning norms. SUPERVISION AND FINANCIAL STABILITY After the outbreak of the global financial crisis. the regulation and supervision have since long been the most crucial functions of the Reserve Bank. pursuit of financial stability as an explicit policy objective.

5. India has had arrangements for reporting of various OTC derivative transactionsrangingfromsummaryinformationtotransaction leveldata. Board. though a few individual banks may need to raise additional capital to comply to these standards. It remains committed to adoption of international standards and best practices. rules and regulations to bring them in harmony with the requirements of India‘s fast growing financial sector. Reserve Bank of India as . Banks in India are well capitalised and the Basel III norms are unlikely to put undue pressure on the banking system in the aggregate.does not exist in India. 4.asitisunderstoodglobally. cleared through central counterparties. going forward. Reforming policies relating to Systemically Important Financial Institutions (SIFI). Exploring possible regulatory measures to address the systemic risk and regulatory arbitrage concerns posed by the shadow banking system. inter alia. government securities. internationally. to tackle these issues: 1. wherever necessary. A Working Group constituted by the Reserve Bank has further suggestedarangeofmeasurestowardsexpandingthemenu of products which are reported and requiring such reporting through regulatory mandates. provisioning for standard assets.REGULATION. The NBFC sector which is loosely identified with shadow banking is also largely regulated. with a view to reducing the probability and impact of failure. The tools used in India included specifying/revising exposure norms.1 Financial Stability Board (FSB) The FSB. now commonly known as Basel III.2010. Though none of the Indian institutions are likely to qualify as a global SIFI. Governor. Implementing the Basel Committee proposals to enhance the capital and liquidity standards of financial institutions.5 per cent. in a phased manner and calibrated to local conditions. reporting of OTC derivative contracts to trade repositories. A framework for monitoring the activities of the Financial Conglomerates (FCs) is in place in the country. To sustain the efficacy of such instruments. Theshadowbankingsector. SUPERVISION AND FINANCIAL STABILITY Box VI. interest rate. is an international body established to address financial system vulnerabilities and to drive the development and implementation of strong regulatory. Other measures such as reforming compensation practices of financial institutions. (CCIL). especially with respect to core capital.6 By the Securities and Insurance Laws (AmendmentandValidation)Act.withaview to rewriting and streamlining the financial sector laws. The proposals envisage a minimum Common Equity Capital ratio of 4.wherecentralisedtradereporting has come into focus only post-crisis. where appropriate. This chapter provides for a joint mechanism. supervisory and other policies in the interest of financial stability. under the Chairmanship of Justice B.5 per cent. Reserve Bank’s views India is a member of the FSB and the Reserve Bank is actively involved in the process of policy formulation in the and the results have been largely positive. once they are phased in.. specification of loan to value ratio. 3. consisting of Union Finance Minister as Chairperson. Macroprudential policy tools to address issues of systemic concerns have been employed in India for quite some time 2. etc.N. a wide range of qualitative and quantitative indicators will need to be developed and the integrity of data will have to be enhanced. enhancing and strengthening accounting standards and reducing reliance on Credit Rating Agencies (CRAs). a Capital Conservation Buffer of up to 2. Srikrishna bytheCentralGovernmentinMarch2011. which was established in 2009 as a successor to the Financial Stability Forum (FSF). calibration of a Liquidity Coverage Ratio (LCR) and a Net Stable Funding Ratio (NSFR).Theexistingreportingarrangementsrequiretrades in foreign exchange. The FSB has identified a range of issues with potential implications for systemic stability and various initiatives. the progress made in SIFI identification and resolution mechanism will have to be incorporated into the domestic regulatory regime. 97 VI. 1934. Many regulatory prescriptions being contemplated internationally. Unlikeinmostjurisdictions. as under. There remain some regulatory gaps which leave scope for arbitrage. etc. mandated to identify such gaps and suggest measures to plug them. Improving the OTC and Commodity Derivatives Market through measures requiring all standardised OTC derivative contracts to be traded on exchanges or electronic trading platforms and. corporate bonds and money market instruments to be reported to the Clearing Corporation of India Ltd. 6. nonetheless. had been inducted into the Indian regulatory framework well before the crisis. A Working Group has been. are now underway. improving resolution capacity and strengthening core financial infrastructures and markets. differentiated risk weights for sensitive sectors.anewchapter (chapter III-E) has been inserted in the Reserve Bank of India Act. Developing macroprudential frameworks and policy measures as an essential tool for ensuring financial stability. and higher capital requirements for non-centrally cleared contracts.

ANNUAL REPORT

Box VI.2 Developments Related to FSDC and its Sub-Committee
Following the announcement in the Union Budget of 201011, the Financial Stability and Development Council (FSDC) was set up in December 2010 with a view to institutionalise and strengthen the mechanism for maintaining financial stability. The FSDC will, inter alia, deal with issues relating to financial stability, financial sector development, interregulatory coordination and macroprudential supervision of the economy including the functioning of large financial conglomerates. The FSDC is chaired by the Union Finance Minister and its members include the heads of the financial sector regulators and representatives from key departments of the Ministry of Finance. The FSDC is assisted by its Sub-Committee, which meets frequently (at quarterly intervals) to assess the health of the financial sector and monitor any incipient signs of vulnerability. The Sub-Committee is chaired by the Governor of the Reserve Bank and its members also include the heads of the financial sector regulators and representatives from the Ministry of Finance. The Sub-Committee has replaced the erstwhile High Level Co-ordination Committee on Financial Markets (HLCCFM). Since its inception, the FSDC has met thrice and has taken stock of issues related to the macroeconomy, implications of the developments in the advanced countries on India, sovereign rating of India and the impact of competitive devaluation by different jurisdictions. The Sub-Committee has also met thrice since its constitution and has reviewed the major macroeconomic and financial sector developments, focusing on issues related to systemic risk. It is engaging itself on an institutional mechanism for inter-regulatory coordination for the supervision of financial conglomerates and putting in place a robust reporting platform for over-thecounter (OTC) derivatives market. Bridging the existing regulatory gaps in the NBFC sector, regulation of government sponsoredNBFCs,regulationofinvestmentadvisoryservices, conflict of interest in the distribution of financial products, development of repos in corporate bonds, introduction of infrastructuredevelopmentfunds(IDF),financialinclusionand financial literacy are also critical issues on its agenda.

Vice-Chairperson, the Secretary, Department of Economic Affairs, the Secretary, Department of Financial Services and the Chairpersons of SEBI, IRDA and PFRDA as members to resolve any difference of opinion amongst the regulators. TheAct provides for a reference being made to the Joint Committee only by the regulators and not by the Central Government. The decision of the Joint Committee shall be binding on the Reserve Bank of India, the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority (IRDA) and the Pension Fund Regulatory and Development Authority (PFRDA). MONITORING OF FINANCIAL STABILITY VI.7 Stress testing exercises are regularly carried outbytheReserveBankaspartofitsmacroprudential oversight.Aseriesofstresstestinginrespectofcredit, liquidity and interest rate risks showed that Indian banking system remained reasonably resilient though their profitability could be affected significantly. The stress tests show that credit risk would be well contained even if 30 per cent of restructured standard assets turned into NPAs. Though under the most stringent credit quality shock of 150 per cent on the baseline, the system level CRAR was adversely affected, the banking system was able to withstand

an adverse NPA shock reasonably with their capital fund. Liquidity stress tests revealed some areas of concern even though the scenario has improved as compared to the last assessment. The credit risk stress tests on systemically important non-deposit taking NBFCs (NBFC-ND-SI) and scheduled UCBs revealed that the impact on CRAR under different scenarios would not be alarming. Leverage of Corporate and Household Sector VI.8 In the recent period, high leverage levels of corporate and household sector are causes of concern, especially in developed countries. Of these, leverage in household and to a large extent even the corporatesectorhasbeenanareawhichisnotdirectly regulated, even though macroprudential guidelines exist for bank and non-bank lending to corporate sector and retail sector. In India, however, the level of leverage for corporate and household sector is much lower as compared to the high levels prevailing in developed countries (Box VI.3). ASSESSMENT OF THE BANKING SECTOR

VI.9 The robust economic growth during 2010-11 was accompanied by a strong credit growth, even though deposit growth did not keep pace and the gap was funded through an increasing share of market

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Box VI.3 Corporate and Household Leverage, Credit Cycle and Economic Growth
The high level of debt and steady and sharp rise in leverage in the developed economies, especially after 2000, has been identified as one of the major causal factors that sparked off the global financial crisis. The high level of leverage was particularly significant in case of household sector and corporate sector. In the years preceding the financial crisis, household debt rose significantly, especially in countries which experienced a boom in the housing sector, like USA, UK, Ireland and Spain. Corporate debt ratios also increased sharply in some countries like Ireland, Spain, Portugal and UK but were stable in the US (Chart 1). In contrast, the government debt ratios were stable in most of the countries. Surprisingly, even though household sector and corporate sector were highly leveraged, aggregate financial sector leverage in most countries grew only modestly or declined during the years preceding the crisis. This was mainly because of rise in securitisation which allowed banks to shift non-performing loans off their balance sheets. It is well documented in economic literature that financial crises often take place after a credit boom as reflected in a sharp rise in the ratio of credit to GDP. The leverage is high during credit boom periods, suggesting risk taking behaviour of both lenders as well as borrowers, thereby leading to build-up of systemic risk. This subsequently results in a bust when risk materialises. These types of credit cycles are fairly regular and clearly identifiable across countries and across time and may subsequently lead to banking crises. Thus, even though high leverage in the initial period may lead to a phase of high economic growth through credit boom, as the bubble bursts, the spillover effects may have adverse implications for growth. This is usually followed by a long and often painful process of deleveraging, as financial sector, households and corporates reduce their debt exposures. Following the recent crisis as well, the process of deleveraging has begun in developed economies, though by no means yet complete. Thus, while household and corporate sector debt is beginning to decline, government borrowing is increasing sharply in many economies to finance crisis related stimulus programmes and financial sector bailouts. In contrast, the process of deleveraging is faster in case of financial institutions as these institutions reduced lending and resorted to shrinking balance sheets. In sharp contrast to the developing countries, the debt levels in India have remained low. In fact, the leverage of corporate sector has been falling in recent years implying that the

Chart 1: Debt GDP Ratio: Cross Country Experience
100 90 Per cent 80 70 60 50 2001 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 40 USA 250 200 Per cent 150 100 50 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2008 2009 2009 0 Ireland

120 110 100 90 80 70 60 50 40 30 2001 1999 2000 2002

UK

140 120 Per cent 100 80 60 40

Spain

Per cent

2003

2004

2005

2006

2007

2008

2009

1999

2000

2001

2002

2003

2004

2005

2006

Household

Non-financial Corporate

Government

Data sources: Eurostat, OECD Stat, National Economic Accounts data, USA.

2007

20

(Contd...)

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ANNUAL REPORT

(Concld...)

Chart 2: Indebtedness in India
120 100
Per cent

a: Leverage Ratios in India

14.0 12.0 10.0 8.0 6.0 4.0 2.0
per cent

b: Growth of Personal Loans and Housing Loans
80 70 60 50

80 60 40 20
1982-83 1984-85 1986-87 1988-89 1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03 2004-05 2006-07 2008-09 2010-11

0

0.0

Per cent

40 30 20 10 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010 2011

Non-financial Corporate Sector Household Sector (RHS) Note:

Government Sector

Personal Loans

Housing Loans

In chart 2a, the leverage ratio refer to debt-equity ratio of non-Government non-financial companies, combined total liabilities of centre andstatetoGDPratioforGovernmentsectorandhouseholdsectorcreditbySCBstopersonaldisposableincomeforhouseholdsector.

corporates have preferred the equity route to raise money as compared to the debt route. Microstructure issues like improved ease of raising finances through capital markets due to liberalisation of norms relating to issue and pricing of shares coupled with encouraging market environment have playedacrucialroleinashiftfromdebttoequityforcorporate. The household indebtedness, which remains a major cause of concern in the developed countries, is comparatively very low in India. Even though the debt ratio witnessed a sharp rise during the period 2000-01 onwards, it has moderated in the post-financial crisis period. Housing loans constitute around half of the total personal loans in India and as a result a boom and bust in the housing market can affect quality of assets. The build-up of systemic risk in this area in India

was avoided mainly due to implementation of macroprudential policy by the Reserve Bank like changing the risk weights for loans to real estate. References: Tang, G. and Upper, C. (2010): ‗Debt Reduction after Crises‘, BIS Quarterly Review, September, 25-38. Roxburgh, C. et.al (2010): Debt and Deleveraging: The Global Credit Bubble and its Economic Consequence‘, McKinsey Global Initiative, January. Geanakoplos, J. (2010): ‗Solving the Present Crisis and Managing the Leverage Cycle‘, FRBNY Economic Policy Review, August, 101-131.

borrowings. This increased reliance on borrowed funds raised concerns about asset liability mismatches. In the recent period however, the divergent trend between credit and deposit growth has significantly reversed.

VI.10 The strong credit growth during 2010-11 outpaced the growth in NPAs resulting in better asset quality of the banking sector (chart VI.1a). The NPA write-offs by banks to cleanse their balance sheets alsohelpedinachievingalowergrossNPAratio.Even

Chart VI.1: Soundness Indicators on SCBs
12 10 Per cent 8 6 4 2 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 0

Chart VI.1 a: NPAs of SCBs

Chart VI.1b: Capital Adequacy of SCBs
15 14.5 14 Per cent 13.5 13 12.5 12 11.5 11 2001 2002 2003 2004 2005 2006 2007 2008 2009

End-March

End-March

Gross NPA to gross advances

Net NPAs to net advances

CRAR

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REGULATION, SUPERVISION AND FINANCIAL STABILITY

though the credit portfolio of banking system is fairly diversified, the credit growth mainly emanated from three sectors – infrastructure, retail and commercial real estate. As each of these sectors has a peculiar set of asset quality propositions, the brisk growth in exposureseenduring2010-11posessomeconcerns. VI.11 The system level CRAR under Basel-II norms stood at 14.2 per cent as at end-March 2011 which was well above the regulatory requirement of 9 per cent (Chart VI.1b). Subsequently however there was a decline in CRAR at 13.8 per cent as at end June 2011 largely due to robust credit off-take.All the bank groups had CRAR above 12 per cent as at end-March 2011 under Basel-II norms. VI.12 Despitesignificantdeclineinsecuritiestrading and hence in non-interest income and also higher risk provisioning, SCBs could record a growth of 20 per cent in their net profit during 2010-11, mainly due to an impressive growth of 35 per cent in net interest income.Accordingly,returnonequity(RoE)andreturn on assets (RoA) as well as net interest margin (NIM)

of SCBs recorded an increase. The ratio of liquid assets to total assets deteriorated during 2010-11 and stood at around 30 per cent at end-March 2011 as compared to more than 32 per cent for last several years.

VI.13 The financial soundness indicators of scheduled UCBs have improved in recent years. Asset quality and profitability of NBFCs-ND-SI also improved over the previous year. Asset quality of deposit taking NBFCs (NBFCs-D) showed an improvementin2010-11comparedwithlastyear,even though capital adequacy ratio declined marginally (Table VI.1).
MAJOR DECISIONS TAKEN BY BOARD FOR FINANCIAL SUPERVISION VI.14 The Board for Financial Supervision (BFS), constituted in November 1994, remains the chief guiding force behind the Reserve Bank‘s supervisory and regulatory initiatives. The BFS held twelve meetings during the period July 2010 to June 2011.

Table VI.1: Select Financial Indicators
(Per cent) Item EndMarch Scheduled Commercial Banks 3 14.5 14.2 2.5 2.3 1.1 0.9 1.1 1.1 13.3 13.7 45.8 46.0 2.7 3.1 Scheduled Urban Co-operative Banks 4 12.8 12.7 9.3 7.4 4.4 3.1 0.8 0.9 N.A. N.A. 58.8 49.9 N.A. N.A. All India Financial Institutions 5 24.2 22.1 0.3 0.3 0.1 0.1 1.2 1.0 10.4 9.2 14.6 19.3 2.3 2.0 Primary Dealers Non-Banking Financial Companies-D 7 22.2 21.0 2.0 0.9 1.5 N.A. 9.0 N.A. 81.8 N.A. 3.9 N.A. NBFCsND-SI

1 CRAR Gross NPAs to Gross Advances Net NPAs to Net Advances Return on Total Assets Return on Equity Efficiency (Cost/Income Ratio) Interest Spread (per cent)

2 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011

6 43.5 46.2 N.A. N.A. N.A. N.A. 1.8 1.1 6.8 5.1 31.2 36.1 N.A. N.A.

8 42.1 N.A. 2.5 1.9 1.2 0.8 2.0 2.2 7.0 8.7 73.5 68.7 1.8 1.9

N.A.: Not Available. Note: 1. Data for 2011 are unaudited and provisional. 2. Data for SCBs are excluding LABs. 3. Data for SCBs covers domestic operations, except for CRAR. 4. Data on CRAR on Scheduled UCBs exclude Madhavpura Mercantile Co-operative Bank Ltd. 5. For NBFC-D, data for 2011 pertain to period ended September 2010. Source: 1. SCBs: Off-site supervisory returns. 2. UCBs: Off-site surveillance returns.

101

The supervisory process (both on-site and off-site) in respect of the major banking groups is being brought together within a division (Financial Conglomerates Monitoring Division . BFS had observed that recovery is 102 . VI.ANNUAL REPORT In these meetings. the global financial markets were in turmoil andtherewereuncertaintiessurroundingthefinancial strength of banks around the world. procedures and processes. During the period. however. Based on the directions of the BFS. Chakrabarty) has been constituted to assess the adequacy of the RBI‘s supervisory policies. it considered. 28 of private sector banks. a High Level Committee (Chairman: Dr. with a view to address supervisory concerns arising out of growing volumes as well as complexity of business of banks. C. released in February 2005 was due inApril 2009. With a view to fine tuning of supervisory rating. that the banks may be advised to frame their own policy for identification of sensitive positions at all levels and for evolving a framework for periodic rotation and mandated leave periods. a discussion paper on new bank license was published in August 2010 inviting suggestions and comments from all concerned. Further a need-based reorganisation of the other operational areas of the Department will also be undertaken. which is currently under process. the supervisory processes and the organisational structure of the Department of Banking Supervision has been reorganised.anditwould be desirable for UCBs to incorporate in their bye-laws and loan agreements a provision for settling recovery of loans internally through an arbitration council set up by the general body. 2010 that the State Cooperative Societies Act may be amended for setting up an internal disputes resolution mechanism where the Act does not provide for arbitration. treatedasdisputeunderco-operativelaw.15 Based on the recommendations of BFS. inter alia.At that juncture.19 A revision to the Reserve Bank‘s ―Roadmap for Presence of Foreign Banks in India‖. Subsequently a gist of such comments received on the discussion paper and the views emerged in the discussions with stakeholders were placed on the Reserve Bank‘s website in December 2010. VI. 31 of foreign banks. and suggest enhancements for benchmarking the supervisory framework to global standards.16 While deliberating on issues relating to the Internal Vigilance Framework in private sector/foreign banks. Based on the experience gained from the licensing of new banks under the guidelines issued in 1993 and 2001 and the comments/ suggestions received from the stakeholders and general public. the BFS decided.18 Following the announcement made in the Annual Policy Statement for 2010-11. the BFS sought a complete review of the rating methodology. the performance and the financial position of banks and financial institutions during 2009-10. and 6 of financial institutions). the views of the respective Task Forces for Co-operative Urban Banks (TAFCUBs) and those of the Legal Department in the matter were obtained.17 While deliberating on the issues relating to constitution and performance of co-operative courts in different states. COMMERCIAL BANKS Regulatory Initiatives Entry of new banks in the private sector VI.FCMD) in the department so as to achieve better synergy and optimum utilisation of available supervisory resources. Entry of foreign banks VI. the BFS also reviewed 15 summaries of inspection reports pertaining to scheduled urban co-operative banks and 43 summaries of financial highlights pertaining to scheduled UCBs classified in Grade I/II. K. Subsequently. it was decided to review the roadmap once there was VI. In this backdrop. Further. inter alia. draft guidelines on ‗entry of new banks in the private sector‘ are in the process of being finalised in consultation with the Government of India. 4 of local area banks. the Secretaries and Registrars of Cooperative Societies of all the State Governments have been advised on July 8. It reviewed 94 inspection reports (25 reports of public sector banks.

so that such instruments can qualify for inclusion in the new definition of regulatory capital (Box VI. VI. which becomes operational beginning January 2013. banks have been advised not to issue Tier I and Tier II capital instruments with ‗step up options‘. Provisioning Coverage Ratio (PCR) for advances and other provisioning requirements VI. Basel II – Implementation of advanced approaches VI. Drawing lessons from the crisis. they may approach RBI with a notice of intention. taking the total numbers of foreign banks operating in India to 37 as at endJune 2011. The provisioning requirement for unsecured exposure in this category was increased from 20 per cent to 25 per cent. The provisioning in respect of secured portion of advances which have remained in ‗doubtful‘ category up to one year was increased from 20 per cent to 25 per cent.23 Pursuant to the release of the document titled ‗Basel III: A global regulatory framework for more resilient banks and banking system‘ by the BCBS in December 2010. SUPERVISION AND FINANCIAL STABILITY greater clarity regarding stability and recovery of the global financial system. The surplus of the provision over and above the prescribed prudential norms should be segregated into a separate account styled as ―countercyclical provisioning buffer‖ which will be allowed to be used during periods of system-wide downturn with the prior approval of Reserve Bank. The guidelines delineating the road-map for presence offoreignbanksinIndiawouldbefinalisedaftertaking into account the feedback/suggestions received from the stakeholders. banks were required to maintain PCR of 70 per cent of gross NPAs with reference to the position as on endSeptember 2010. As and when they are ready for implementation. During the year 2010-11. continues to grant licenses to foreign banks to open branches in India on a case to case basis.25 Reserve Bank increased the provision requirements in case of certain categories of nonperforming and restructured accounts in May 2011. Reserve Bank issued detailed guidelines on Advanced Measurement Approach (AMA) for computing capital charge for operational risk in April 2011. The provision requirement for ‗sub-standard‘ assets was increased from 10 per cent to 15 per cent. such advances will now attract a provision of 2 per cent for the period covering moratorium and two years thereafter. Basel III VI. VI. 103 . Banks intending to migrate to AMA were advised to assess theirpreparednesswithreferencetotheseguidelines. 2013 subject to review and ensurethattheirBaselIIminimumcapitalrequirement ishigherthan80percentoftheminimumrequirement under Basel I. VI.REGULATION.24 As a macroprudential measure. Restructured accounts classified as NPAs when upgraded to standard category will now attract a provision of 2 per cent in the first year from the date of upgradation.20 Reserve Bank.21 In line with the Basel II framework. however.22 All the commercial banks in India were advised to continue the parallel run under Basel I framework till March 31. In case of moratorium on payment of interest/ principal after restructuring. 47 foreign banks have also representative offices in India. theReserveBankissued4approvalstoforeignbanks for maiden presence in India. Presently various international fora are engaged in setting out policy frameworks incorporating the lessons learnt from the crisis. a discussion paper on ‗Presence of Foreign Banks in India‘ was released in January 2011 seeking feedback / suggestions from stakeholders and general public. VI. whereas that for advances which remained ‗doubtful‘ between one to three years was increased from 30 per cent to 40 per cent. Besides. This was intended to be an interim measure till such time the Reserve Bank introduces a more comprehensive methodology of countercyclical provisioning taking into account the evolving international standards.26 Restructured accounts classified as standard advances will now attract a provision of 2 per cent in the first two years from the date of restructuring.4).

both in terms of quality and quantity provides significant comfort to begin implementation of the new framework as per the time schedule fixed by the BCBS. 2011. However. the BCBS has released revised sets of rules for capital and liquidity regulations viz. Nevertheless. standards and monitoring‟ which inter alia aim at promoting a more resilient banking sector and strengthening liquidity regulations. notably. Though Basel III can be viewed as a modification to Basel II framework. RBI‘s representation attheFinancialStabilityBoard(FSB). 2011 in the case of MFI loans restructured under the consortium approach adopted by banks and under the CDR mechanism. The BCBS is monitoring the impact of Basel III proposals through the semi-annual Quantitative Impact Study (QIS) on banks. it differs significantly from Basel II in terms of its comprehensiveness. irrespective of the LTV ratio. The objective was to provide some liquidity support to MFIs and facilitate a ‗holding VI. This time line was extended up to June 6. for small value housing loans. particularly.40 per cent after one year from the date on which the rates are reset at higher rates if the accounts remain ‗standard‘.TenIndianbanksareparticipatinginthisQISexercise. apart from revising the definition of regulatory capital. availability of adequate amount of capital. Other initiatives taken by RBI include organising various training programmes through its training establishments.ANNUAL REPORT Box VI. The framework was bolstered significantly in July 2009 through a series of enhancements to each of the three pillars. This relaxation was granted purely as a temporary measure and was applicable to standard MFI accounts restructured up to March 31. 104 .4 Initiatives Taken by the Reserve Bank to Migrate Towards the Basel III Norms In the wake of financial crisis. even if they are not fully secured. the LTV ratio should not exceed 90 per cent. „Basel III: A global regulatory framework for more resilient banks and banking systems‟ and „Basel III: International framework for liquidity risk measurement.e. Basel III. will be 125 per cent. risk weight and provisioning Credit support to Micro Finance Institutions (MFIs) VI. housing loans up to `20 lakh.27 In order to prevent excessive leveraging in housing loans portfolio. Collectively. The provisioning on these assets would revert to 0. but will also help in enhancing the understanding of banks about the subtle nuances of various aspects of Basel III proposals. More particularly. So far as implementation of Basel III in India is concerned. it is much wider in risk coverage and encompasses measures to address the systemic risks. in December 2010.itwasdecidedinJanuary2011thatthespecial regulatory asset classification benefit could be extended to restructured MFI accounts. Housing loans by commercial banks – LTV ratio.28 Considering the fact that the problems afflicting the Micro Finance Institutions (MFIs) sector were not necessarily on account of any credit weakness per-se but were mainly due to exogenous factors. which were standard at the time of restructuring. Meanwhile. 2013 for implementation of Basel III. Subsequently. RBI would adhere to internationally agreed phasein period starting in January 1. i.40 per cent to 2 per cent. meetings and participation in seminars organised by the Indian Banks‘ Association (IBA) and other self regulatory bodies. RBI is also working on operationalisation of Countercyclical Capital Buffer under Basel III.BCBSandtheirvarious sub-groups provides the much needed opportunity to understand and contribute to the formulation of policies relating to regulation and supervision of the banking sector at the international level. seminars. Implementation of Basel III has thrown up significant challenges to both banks and the banking supervisors alike. banks were advised in December 2010 that the Loan to Value (LTV) ratio in respect of housing loans should not exceed 80 per cent. the revised Basel II capital framework and the new global standards have been commonly referred to as ―Basel III‖. In order to raise awareness among banks about Basel III. to address the undercapitalisation of trading book exposures of banks. The risk weight for residential housing loans of `75 lakh and above. These meetings also provide an opportunity to RBI to assess the level of preparedness of banks to implement Basel III and clarify any issues which they may have in this regard. The outcome of the QIS will not only give an idea about the impact of the Basel III rules on Indian banks. RBI is examining the Basel III regulations and will issue guidelines to the extent applicable for banks operating in India in due course of time. RBI has taken a number of initiatives to ensure smooth transition of the banking sector to Basel III framework.The standard asset provisioning on the outstanding amount of housing loans at teaser rates was increased from 0. the Basel Committee on Banking Supervision (BCBS) has initiated several post-crisis reform measures mainly building on the Basel II capital adequacy framework. RBI has been regularly briefing the Chief Executives of banks since RBI became member of BCBS in 2009.

to bring about uniformity. Therefore. Permanent diminution in the value of investments in banks‟ subsidiaries /joint ventures VI. In the guidelines. banks were not making any attempt to determine whether there is any permanent diminution in their strategic equity investments held under HTM or ‗Available for Sale‘(AFS) categories. Prudential norms on investment in Zero Coupon Bonds VI. SUPERVISION AND FINANCIAL STABILITY on‘ operation for some time till appropriate measures were taken to bring about long term and structural changes in the functioning of MFIs. However. 105 . they should disclose in the notes to accounts to the balance sheet the market value of the investments held in the HTM category and indicate the excess of book value over market value for which provision is not made.29 It was observed that banks were investing in long term Zero Coupon Bonds (ZCBs) issued by corporates including those issued by NBFCs. that too frequently to take advantage of favourable market conditions and to book profit. Investment in Non-SLR Securities VI. Similar guidelines were also issued for UCBs. Therefore. it was observed that many banks were resorting to sale of securities under HTM category. the creditriskinsuchinvestmentswouldgounrecognised till the maturity of bonds and this risk could especially be significant in the case of long term ZCBs. Further. since such issuances and investments if done on a large scale could pose systemic problems.34 Detailed guidelines on banks‘ Asset Liability Management(ALM)FrameworkonInterestRateRisk were issued by the Reserve Bank on November 4. 2010.REGULATION. banks were advised in September 2010 that they should not invest in ZCBs unless the issuer builds up sinking fund for all accrued interest and keeps it invested in liquid investments/securities (Government bonds). the banks were advised to adopt the Duration Gap Analysis (DGA) for interest rate risk management in addition to the Traditional Gap Analysis (TGA) previously mandated. subject to extant prudential guidelines. if any. Sale of Investments held under HTM category VI. However. will be excluded from the 5 per cent cap mentioned above. Accounting Procedure for Investment VI.32 It was observed that banks were not following a uniform methodology in accounting their investment in government securities. Similar guidelines were also issued for UCBs.30 In the absence of any specific instructions on the method of assessment/measurement of permanent diminution in the value of banks‘ investments in subsidiaries/ joint ventures which are included under ‗Held to Maturity‘ (HTM) category. the banks were advised to follow only the ‗Settlement Date‘ accounting.33 Reserve Bank issued a circular in December 2010 permitting banks to invest in non-convertible debentures (NCDs) with original or initial maturity up to one year issued by corporates (including NBFCs). In January 2011 banks were advised about the circumstances under which the need to determine impairment arises and insuchaneventualitytheywouldberequiredtoobtain valuation of such investments by a reputed/qualified valuer and make provision for the impairment required. banks were advised in August 2010 that if the value of sales and transfers ofsecuritiesto/fromHTMcategoryexceeds5percent ofthebookvalueofinvestmentsheldinHTMcategory at the beginning of the year. They were following either ‗trade date‘ accounting or ‗settlement date‘ accounting.31 Securities under HTM category are intended to be held till maturity by the banks and accordingly are not required to be marked to market. Since the issuers of ZCBs are not required to pay any interest or instalments till the maturity of bonds. Banks were also advised to put in place conservative limits for their investments in ZCBs. the one-time transfer of securities to/from HTM category with the approval of Board of Directors permitted to be undertaken by banks at the beginning of accounting year and sales to RBI under preannounced OMO auctions. Guidelines on banks‟ ALM-Interest Rate Risk VI.

which came under the 9th bipartite settlement under the aegis of Indian Banks‘ Association (IBA). subject to RBI guidelines.AllotherSCBsarepermittedtoparticipate only as clients. permitting banks to engage companies registered under the Companies Act.35 Certain risk mitigating measures were prescribed by the Reserve Bank in September 2010 in the context of banks issuing IPCs to various stock exchanges on behalf of mutual funds and FIIs.38 In view of the need to step up opening of branches in rural areas so as to meet the objectives of financial inclusion and increased banking penetration. this deadline was subsequently extended up to end-December 2010. Reopening of pension option.37 Inspite of instructions issued to banks from time to time on credit card operations. before November 1. Further the unamortised expenditure shall not include any Fair practices code-disclosure VI. on their own account and on behalf of theirclients. Banks were advised therein to incorporate a clause in the agreement with their clients which gives them an inalienable right over the securities to be received as payout in any settlement. banks were advised to disclose to the borrowers all-in cost information inclusive of all 106 . Credit card operations of banks VI. complaints are received from card holders both at Reserve Bank and attheofficesoftheBankingOmbudsmen. Banks were also advised to ensure that the charges/fees are non-discriminatory. the opening balance of reserves of banks will be reduced to the extent of the unamortised carry forward expenditure. In view of operational difficulties expressed by some banks. Upon the introduction of International Financial Reporting Standards (IFRS) from April 2013 as scheduled.39 With a view to bringing in fairness and transparency. special regulatory dispensation of amortisation was granted to such banks and was subsequently extended to ten old private sector banks. including levy of monetary penalties.41 To mitigate the difficulties faced by public sector banks in absorbing the enhanced expenditure arising on account of enhancement of gratuity limits and reopening of pension option to their employees. 2010. charges involved in processing/sanction of loans in the loan application in a transparent manner.onceagainadvisedthatiftheyfailtoadhere to the prescribed guidelines. Reserve Bank would initiate suitable penal action. 1956 (excluding NBFCs) with large and widespread retail outlets as BCs in addition to the individuals/entities permitted earlier. Such participation is allowed only for hedging underlying forex exposure arising from customer transactions.40 Pursuant to the issue of guidelines on trading of currency options on recognised stock/new exchanges.Bankswere therefore. These banks were permitted to amortise the expenditure over a period of 5 years beginning with the financial year 2010-11 subject to a minimum of 1/5th of the total amount being amortised every year.36 Guidelines were issued in September 2010. only as clients.prudential treatment VI. Branch authorisation policy VI. as a transitory measure up to end-October 2011. banks have been mandated to open at least 25 per cent of the total number of branches proposed to be opened during a year in unbanked rural (tier 5 and tier 6) centres. Bank‟s participation in trading of Currency Options VI. only for the purpose of hedging their underlying forex exposures.ANNUAL REPORT Issue of Irrevocable Payment Commitments (IPCs) VI. NBFCs-ND-SI were also permitted to participate in the designated currency options exchanges recognised by SEBI as clients. UCBs licensed as AD category I were allowedtoparticipateintheexchangetradedcurrency option market of a designated exchange recongnised by SEBI.ADcategory-1commercialbanksfulfilling required criteria were permitted to become trading and clearing members of the exchange traded currency options market of the recognised stock exchanges. Revised Business Correspondents (BC) guidelines VI.

The Bill seeks to amend certain provisions of the Banking Regulation Act. Internal vigilance in banks VI. Electronic Banking Technology.48 In an endeavour to align the vigilance function in private sector and foreign banks to that of the public sector banks. inter alia. to call for information from/ to inspect the associate enterprises of a banking company and to exempt mergers of banking companies from the applicability of the provisions of the CompetitionAct. During 2010-11. Enhancement of governance of IT security measures VI.44 The process of entering into bilateral MoUs with 16 identified jurisdictions/countries for cross border supervision has been initiated. the Reserve Bank took several measures for strengthening the frauds monitoring mechanism in banks.Gopalakrishna). the independent integrated financial services and market regulators of the Dubai International Financial Centre (DIFC). Regulatory and Audit Compliance VI. SUPERVISION AND FINANCIAL STABILITY amount relating to retired employees. MoUs with China Banking Regulatory Commission (CBRC) and Dubai Financial ServicesAuthority (DFSA). enable them to raise capital through right issue/issue of bonus shares and raising the restriction on voting rights. 2002. modus operandi of frauds and the measures to be taken by them to prevent/reduce incidence of frauds in banks on an ongoing basis. it was advised that for all foreign banks operating in India. 1949 and the Banking Companies (AcquisitionandTransferofUndertakings)Actof1970 and 1980.46 RBI as a part of its supervisory process alerts the banks about common fraud prone areas. detailed guidelines for the former have been issued so that all issues arising out of lapses in 107 .REGULATION. 2011 VI. Based on the recommendations of the group and the feedback received from stakeholders. VI. conferring powers on Reserve Bank to supersede the Board of Directors of a banking company in certain cases. The proposed amendments to the BR Act envisages. The Banking Laws (Amendment) Bill. independent assurance about the effectiveness of the IT controls and related areas. have been signed. Proposals in respect of 7 other overseas supervisors are at various stages of finalisation. These guidelines are aimed atenhancingthegovernanceofITinformationsecurity measures. 2011.42 TheBankingLaws(Amendment)Bill2011has been introduced in Lok Sabha in March 2011. as a special case in view of the exceptional nature of the event. the Chief Executive Officer would be responsible for effective oversight of regulatory and statutory compliance as also the audit process and the compliance thereof in respect of all operations in India. cyber frauds. formation of Depositors‘ Education and Awareness Fund. 1970 and 1980 envisages raising the authorised capital of the nationalised banks.45 In view of the concerns about the adequacy of regulatory compliance by foreign banks in India. detailed guidelines were issued to the banks on April 29. enabling banking companies to raise capital in accordance with the international best practices. The unamortised expenditure would not be reduced from Tier I capital. was formed by the Reserve Bank following the announcement in the Annual Monetary Policy Statement of 2010. removal of restriction on voting rights. thus making the regulatory powers of RBI more effective. Risk Management andCyberFrauds(Chairman:ShriG.43 The proposed amendments to the Banking Companies (Acquisition and Transfer of Undertakings) Act. Supervisory Initiatives Cross Border Supervision and Co-operation VI. Out of the 16 pre-identified overseas supervisors.47 A Working Group on Information Security. Developments in Fraud Monitoring VI.

loans against fixed deposit receipts etc. Transfer of assets and liabilities of UCBs to Commercial Banks VI. can be addressed uniformly by the banks for timely and appropriate action. The banks have been advised to suitably modify their policies and streamline the operating framework.25 lakh (for UCB with DTL up to `10 crore and CRAR below nine per cent) and `5. a review of unlicensed UCBs was made and 51 UCBs have been granted banking licenses. Pune were taken over by the Indian Overseas Bank and similarly the assets and liabilities of the Memon Cooperative Bank Ltd. In order to ensure close monitoring and tighter controls so as to thwart frauds especially in housing loan.. (i) Detection and reporting of frauds (ii) Corrective action and(iii) Preventive and punitive action.00 lakh (for UCB with DTL above `100 crore and CRAR above nine per cent).5). 95 mergers had actually been effected upon the issue of statutory orders by the Central Registrar of Co-operative Societies (CRCS)/Registrar of CooperativeSocieties(RCS)oftheStateconcerned. To overcome this problem.Out of the 95 mergers. there was lack of consistency in treatment of transactions having characteristics of fraud as also in their reporting to the competent authority. malpractices. Profit making UCBs were also permitted to merge with other financially strong UCBs with the aim of consolidation and strengthening the sector. 108 . the Reserve Bank has constituted an expert committee for studying the advisability of granting new urban cooperative banking licenses (Box VI. Out of the 120 NOCs issued.. The enhanced limits ranged between `0. The study revealed that while the banks do have control policies and processes.53 The maximum limits for grant of unsecured loans by the UCBs (with or without surety or for cheque purchase) for individual and group borrowers were enhanced suitably keeping in view the twin criteria of capital adequacy (CRAR) and size of demand and time liabilities (DTL) of the UCBs. Maximum limits on unsecured loans and advances VI.51 Certain financially weak UCBs with relatively bigger size balance-sheets (i. URBAN CO-OPERATIVE BANKS Consolidation through mergers VI. export finance.49 A study was also made across banks to ascertain the policy and operating framework in place for detection. these are not well structured andsystematictoensureproperfocusontypicalfraud events. Guidelines for prevention of frauds VI. Tier II UCBs) could not opt for mergers as there were no willing UCBs to takeoversuchUCBswithhigheraccumulatedlosses. 2011.50 The consolidation of the urban co-operative bankingsectorthroughtheprocessofmergerofweak banks with stronger ones while providing an avenue for non-disruptive exit to the weak entities has been set in motion since 2005-06.ANNUAL REPORT the functioning of the private sector and foreign banks especially relating to corruption. the banks have been asked to structure their operating framework on three tracks viz. Further. there are four unlicensed banks and review in respect of these UCBs is in progress. So far there have been two such cases of transfer of assets and liabilities of UCBs to SCBs. reporting and monitoring of frauds. 59 UCBs had negative net worth. The total unsecured loans and advances granted by an UCB are limited to 10 per cent of its total assets as per audited balance sheet as on 31 March of the preceding financial year. Mumbai were taken over by the Bank of Baroda. Specific assets and liabilities of Shree Suvarna Sahakari Bank Ltd. As on March 31.52 Based on the guidelines issued by the BFS in August 2009.e. The Reserve Bank issued no objection certificate (NOC) for 120 cases. frauds etc.. During last six years. Besides. the Reserve Bank has received 158 proposals for merger. specific guidelines about transfer of certain assets and liabilities with mutual consent of both the UCB and the interested SCBs were issued for the first time in February 2010. Unlicensed UCBs and licensing of new UCBs VI.

the Reserve Bank issued a comprehensive policy in 2005 on UCBs with a view to improving the financial health of this sector.TheReserveBankentered into memoranda of understanding (MoU) with all State Governments and the Central Government for coordination ofregulatorypoliciesandencouragedvoluntaryconsolidation in the sector by merger of non-viable UCBs with financially sound and well managed UCBs. As the financial position of the sector improved considerably. real estate and commercial real estate sectors was revised from the earlier limit of 15 per cent of deposits to 10 per cent of their total assets. VI.56 All financially sound and well managed UCBs having minimum assessed net worth of `50 crore. it was decided to consider requests from well managed and financially sound UCBs to engage business facilitator/business correspondent using ICT solutions. iv) To examine whether licensing could be restricted only tofinanciallysoundandwellmanagedcooperativecredit societies through conversion route.55 The permitted credit exposure of UCBs to housing. Pursuant to these policies.57 All financially sound and well managed UCBs havingrequiredheadroomcapitalintermsofassessed net worth per branch including existing branches and satisfying other criteria were allowed to open branches/extension counters beyond the annual ceiling of 10 per cent of existing branch network. Malegam). Credit exposure to housing and commercial real estate sectors VI. Use of business correspondents/ business facilitators by UCBs VI. were permitted to extend their area of operation beyond the State of original registration as also to any other States of their 109 .54 UCBs which maintain a minimum capital to risk-weighted assets ratio (CRAR) of 12 per cent on a continuous basis were exempted from the mandatory share linking norms. Liberalised norms for opening of branches by UCBs VI. as announced in the Second Quarter Review of Monetary Policy 2010-11.5 Expert Committee on Licensing of New Urban Cooperative Banks In the light of the past experience regarding newly licensed UCBs becoming financially unsound in short span of time and the prevailing precarious financial health of the UCB sector. the share of financially sound banks has increased from 61. Against this backdrop a Committee (Chairman: Shri Y. This limit of 10 per cent could be exceeded by an additional limit of five per cent of total assets in housing loans to individual up to `15 lakh. UCBs were permitted to enter into new areas of business.theywouldbeallowedtoextend theirareaofoperationtotheentireStateofregistration of the target bank. Further.3 per cent in 2005 to 80. Further if such UCBs have acquired weak banksinotherStates. ii) To review the need for organisation of new UCBs in the context of the existing legal framework for UCBs. v) To make recommendations relating to the legal and regulatory structure to facilitate the growth of sound UCBsespeciallyinthematterofraisingcapitalconsistent with co-operative principles.3 per cent in 2010. vi) To examine the feasibility of an umbrella organisation for the UCB Sector.REGULATION. vii) To examine other issues incidental to licensing of UCBs and make appropriate recommendations. iii) To review the extant regulatory policy on setting up of newUCBsandlaydownentrypointnormsfornewUCBs. SUPERVISION AND FINANCIAL STABILITY Box VI. the Committee was advised to look into the feasibility of an umbrella organisation for the UCB sector.58 Withtheobjectiveofensuringgreaterfinancial inclusion and increasing the outreach of the UCBs in providing basic and affordable banking services in their area of operation. subject to meeting other norms. Extension of area of operation of UCBs choice. The terms of references of the Committee are as under: i) To review the role and performance of UCBs over the last decade and especially since the adoption of Vision document in 2005. the thrust on financial inclusion in the economic policy and proposed entry of new commercial banks into the banking space. has been set up for studying the advisability of granting new urban co-operative banking licences. Share linking to borrowing norm in UCBs VI. It was also decided not to issue any fresh licencesthereafterfornewUCBs. H.

UCBs were permitted to collect account payee cheques drawn for an amount not exceeding `50. Raising RRB branches to CBS platform (Chairman: Shri G.. and Dadra and Nagar Haveli are also covered by deposit insurance. Deposit insurance extended by DICGC covers all commercial banks. As on date. excess of income (mainly comprising premia received from insured banks. RURAL CO-OPERATIVES Package for revival of Rural Co-operatives VI. Chandigarh. Vaidyanathan) and in consultation with state governments.63 times per capita GDP as on March 31.ANNUAL REPORT Collection of account payee cheques VI. With the present limit of deposit insurance in India at `1 lakh. VI.000 to the account of their customers who are co-operative credit societies. 2011 constituted 93 per cent of the total number of accounts (1.052 million) as against the international benchmark1 of 80 per cent. the central government had approved a package for revival of rural co-operatives at the apex level.63 Deposit insurance constitutes an important element in preventing any runs on the banks due to unforeseen events. The number of registered insured banks as on March 31. 82 RRBs.993 crore has been released by NABARD up to June 30. 2011 as against the international benchmark of around 1 to 2 times per capita GDP prior to the financial crisis. Subsequent to the issuance of revised guidelines. 2011.61 TheAnnualPolicyStatementofApril2009had announced a roadmap for licensing of unlicensed state and central co-operative banks in a nondisruptivemannerandrevisedguidelineswereissued for the same in October 2009. DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION VI.e.AllCo-operativeBanksacross the country except three UTs of Lakshadweep. including Local Area Banks (LABs) and Regional Rural Banks (RRBs) in all the States and UnionTerritories(UTs). Licensing of Rural Co-operative Banks VI. the number of fully protected accounts (977 million) as on March 31.217 comprising 82 Commercial Banks.52. interest income from investments and cash recovery out of assets of failed banks) over expenditure each year. At the current level. An aggregate amount of `8. Efforts are being made to ensure that the remaining unlicensed banks meet the criteria for licensing by the stipulated date.049 Co-operative Banks. 4 LABs and 2. i. A. 2011 stood at 2.insureddepositsat `17. This VI. Deposit Insurance and Credit Guarantee Corporation (DICGC) is a wholly owned subsidiary of Reserve Bank of India. 2011 towards Government of India‘s share for recapitalisation of PACS in sixteen States while the State Governments have also released `854 crore as their share. Amountwise. the insurance cover works out to 1. if the payees of such cheques are the constituents of such co-operative credit societies. 10 StCBs and 160 DCCBs have been licensed taking the total number of licensed StCBs and DCCBs to 24 and 235 respectively as at end-June.35.800croreconstituted 35 per cent of assessable deposits at `49. CBS has been fully implemented in 45 RRBs while in remaining 37 it is in progress.59 With a view to mitigating the difficulties faced by the members of co-operative credit societies in collection of account payee cheques. Switzerland in May 2002 110 .62 The Working Group of Technology Upgradation in Regional Rural Banks (RRBs) 1 : Accepted as a Rule of Thumb at the First Annual Conference of the International Association of Deposit Insurers (IADI) in Basel.60 Based on the recommendations of the Task Force on Revival of Rural Co-operative Credit Institutions (Chairman: Prof. out of total 82 RRBs. net of taxes.427 crore against the international benchmark1 of 20 to 40 per cent. Srinivasan) had recommended that CBS should be fully implemented in all RRBs by September 2011.64 The Corporation builds up its Deposit Insurance Fund (DIF) through transfer of its surplus.

yielding a Reserve Ratio (DIF/insured deposits) of 1. SUPERVISION AND FINANCIAL STABILITY fund is used for settlement of claims of depositors of banks taken into liquidation/reconstruction/ amalgamation. During the year. spread over 22 cities in India. In its ―paybox‖ function.000 branches and 135 hubs of 49 member banks (excluding RRBs and Urban Co-operative Banks).4 per cent. According to the assessment of the team. DICGC is compliant or largely compliant with about half of the 18 core principles for ‗effective deposit insurance systems‘.000 customers were also interviewed at the branches to obtain their responses. 1998. The Working Group on Reforms in Deposit Insurance. ThesizeoftheDIFstoodat`24. NON-BANKING FINANCIAL COMPANIES VI. 111 . Participation in currency futures VI. granting DICGC an access to a ―fast-track‖ source of funding from either RBI or Ministry of Finance (MoF) to provide funds needed for prompt depositor reimbursement. developing a formalpublicawarenessprogrammeandestablishing a reasonable target reserve fund by DICGC. obtaining deposit-specific information from banks in a standard format. BCSBI undertook a Survey of 1.65 An assessment team comprising representativesofIADIandIMFvisitedDICGCinendSeptember 2010 to undertake a field test of the Draft Assessment Methodology for Core Principles for Effective Deposit Insurance Systems. More than 2. In general. the Survey findings reveal perceptible improvement in customer service. NBFCs were advised to make appropriate disclosures regarding transactions undertaken in the balance sheet. the regulatory framework for Core Investment Companies (CICs) was announced (Box VI.68 In the interest of counter cyclicality and also to ensure that NBFCs create a financial buffer as a protection from the effect of economic downturns. executing MoUs by DICGC with other deposit insurers whose banks have a presence in India.70 Amountraisedbyissueofinfrastructurebonds by Infrastructure Finance Companies. 2011.69 NBFCs (excluding residuary non-banking companies (RNBCs)) were allowed to participate in the designated currency futures exchanges recognised by SEBI as clients only for the purpose of hedging their underlying forex exposures. VI.25 per cent for standard assets of NBFCs VI. etc. the Corporation settled aggregate claims for `379 crore in respect of a commercial bank (supplementary claim) and 73 Co-operative Banks (28 original claims and 45 supplementary claims) as compared with claimsforaround`655croreduringthepreviousyear. During the year 2010-11. However.25 per cent of the outstanding standard assets. provisioning for standard assets was introduced to NBFCs at 0.REGULATION. Exemption for Long Term Infrastructure Finance Bonds VI. to independently verify compliance with the provisions of the Code of Bank's Commitment to Customers and Code of Bank's Commitment to Micro and Small Enterprises.67 As announced in the Annual Policy 2010-11. would be looking into the recommendations of the field test team.704croreasonMarch 31. weaknesses in the overall insolvency framework which are outside the control of the DICGC makes overall compliance with many core principles limited. including Amendments to DICGC Act. the DICGC is fully or largely compliant on all core principles.6). shall not be treated as ‗public deposit‘ under the ‗Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions. Provision of 0. BANKING CODES AND STANDARDS BOARD OF INDIA VI. The report made several recommendations such as removing insolvent co-operative banks from the system.66 The membership of BCSBI has grown from 67 banks in 2006 to 112 banks in 2011 and the membership of 14 more banks is under process.

CICs find it difficult tocomplywiththeextantnetownedfund(NOF)requirements and exposure norms for NBFCs prescribed by the Reserve Bank. ii) CICs with asset size above Rs. in view of the peculiar business model of CICs. iv) Every CIC-ND-SI shall ensure that at all times it maintains a ‗minimum capital ratio‘ whereby its adjusted net worth shall not be less than 30 per cent of its aggregate risk weighted assets and risk adjusted value of off-balance sheet items. 2007‖ includingrequirementsofcapitaladequacyandexposure norms. In order to operationalise the changed policy environment in a nondisruptive manner.72 In view of the risks involved in NBFCs associating themselves with partnership firms. The salient features of the framework are as follows: i) Core Investment Companies (CIC) with an asset size of less than `100 crore will be exempted from the requirements of registration with RBI. NBFCs not to be Partners in Partnership firms VI.6 Regulatory Framework for Core Investment Companies (CICs) Core Investment Company (CIC) is a non-banking financial company carrying on the business of acquisition of shares and securities and which (a) holds not less than 90 per cent of its net assets in the form of investment in equity shares. It was therefore decided that investing in shares of other companies. 100 crore or above are categorised as Systemically Important Core Investment Companies (CICs-ND-SI) and are required to obtain CoR from the Reserve Bank. viz.debentures. Companies which presently have an asset size of less than `100 crore would be required to apply to RBI for CoR within three months of the date of achieving a balance sheet size of `100 crore. In practice however. it was decided to prohibit NBFCs from contributing capital to any partnership firm or to be partners in partnership firms. preferenceshares. were directed to apply for obtaining the CoR. it proved very difficult to determine whether a company has invested in the shares of another company for the purpose of holding stake or for the purpose of trade. inter-corporate deposits and borrowings from banks/FIs). iii) Due to systemic implications on account of access to public funds (such as funds raised through Commercial Paper. However. companies which apply for CoR within the stipulated time were directed to carry on the existing business till the disposal of their application by the Reserve Bank. Considering these issues.. all CICs-NDSI. be exemptedfromcompliancewithmaintenanceofstatutory minimum NOF and requirements of ―Non-Banking Financial(Non-Depositacceptingorholding)Companies Prudential Norms (Reserve Bank) Directions. irrespective of whether they were specifically exempted in the past from registration with the Reserve Bank or not. CICs having asset size of Amendment to Definition of Infrastructure Loan VI. In cases of existing partnerships. Every CIC-ND-SI shall ensure that its outside liabilities at all times shall not exceed 2. Loan facilities to the physically / visually challenged VI. v) vi) In view of the changed regulatory framework.debtorloansingroup companies and (b) its investments in the equity shares in group companies constitutes not less than 60 per cent of its net assets as on the date of the last audited balance sheet. holding stake in group companies and funding group concerns. NBFCs were advised that they may seek early retirement from the partnership firms. 1934. For this purpose all CICs belonging to a Group will be aggregated.71 NBFCs were advised to include telecom towers also as an infrastructure facility for availing credit facility. a revised regulatory framework for CICs was announced in August 2010. 100 crore but not accessing public funds are also exempted from the requirement of registration with RBI.bonds. A CIC-ND-SI which adheres to the requirements regarding capital and leverage ratio as specified at (iii) and (iv) above. debentures. companies which fail to apply for the CoR within the stipulated period will be regarded as contravening the provisions of Section 45IA of the Reserve Bank of India Act.5 times its adjusted net worth. Further NBFCs were advised that only Credit Rating Agencies (CRAs) approved by the Reserve Bank can give the rating to Infrastructure Finance Companies (IFCs).73 NBFCs were advised that there should be no discrimination in extending financial products and facilities including loan facilities to the physically/ visually challenged applicants on grounds of disability 112 .ANNUAL REPORT Box VI. CICs were not required to obtain Certificate of Registration (CoR) from Reserve Bank under Section 45 IA of the RBI Act 1934. may to the extent necessary. even for the purpose of holding stake should also be regarded as carrying on the business of acquisition of shares. Furthermore.

Opening of branch/subsidiary/ joint venture/ representative office or undertaking investment abroad by NBFCs. 113 . which shall not be less than 15 per cent of its aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet item with effect from March 31. an Indian party requires prior approval of the concerned regulatory authorities both inIndiaandabroad.REGULATION. 2012. any NBFC-ND-SI not accessing public funds. In case more than one company (irrespective of doing financial activity or not) in the same group of NBFC wishes to take a stake in the insurance company. Applicability of exemption from concentration norms VI. any NBFC-NDSI not accessing public funds. Enhancing CRAR to fifteen per cent VI.75 It was decided to align the minimum capital ratio of all deposit taking NBFCs as well as NBFCsND-SI to 15 per cent. or not issuing guarantees may approach Reserve Bank of India for appropriate dispensation.77 Presently. 2011.76 As per extant instructions. either directly or indirectly. VI.74 Under the extant instructions. may make an application to the Reserve Bank for modifications in the prescribed ceilings with regard to concentration of credit/investment norms. the contribution by all companies in the same group shall be counted for the limit of 50 per cent prescribed for the NBFCs in an insurance JV. The maximum equity contribution an NBFC can hold in a JV company is 50 per cent of its paid-up capital. Review of guidelines on entry of NBFCs into insurance business VI. all deposit taking NBFCs were advised to raise the minimum capital ratio consisting of Tier I and Tier II capital. Accordingly. either directly or indirectly.tomakeaninvestmentinanentity outside India engaged in financial services activities. No-objection certificate will be issued by Reserve Bank to the NBFC before opening of subsidiary/joint venture/representativeofficeorundertakinginvestment abroad subject to the NBFC fulfilling the conditions specified by Reserve Bank on June 14. NBFCs registered with the Reserve Bank and satisfying the eligibility criteria will be permitted to set up a joint venture (JV) company for undertaking insurance business with risk participation. Accordingly. NBFCs-ND-SI may also be issuing guarantees and devolvement of these guarantees might require access to public funds. SUPERVISION AND FINANCIAL STABILITY and all possible assistance may be provided to such customers.

411* -4.128 Actual@ 9 1.182 Actual 4 4. Further. as the Government‘s debt manager conducted the market borrowing programme smoothly.827 #: Dated securities and 364-day Treasury Bills. The Reserve Bank.1 The financial year 2010-11 was characterised by rising inflationary pressure and tight liquidity conditions coupled with successive hikes in policy rates.43.010 – 2010-11 Revised Estimate 6 4.411* -4.aimed Table VII. During 2010-11. A major challenge for the Reserve Bank.957* 3.35. which in turn. 2011. The inflationary pressures and successive hikes in policy rates alongwith large issuances exerted pressure on the yield. @: Up to July 31.69. and the market borrowing programme was modulated accordingly.203 1.053 Budget Estimate 5 4.94.1: Gross and Net Market Borrowings of the Central Government# (` crore) Item Budget Estimate 1 Gross borrowing Net Borrowing (i) Dated Securities (ii) 364-day TBs 2 4.98.010 3.482 3.368* 3. DEBT MANAGEMENT OF CENTRAL GOVERNMENT Market Borrowings VII.97. with the net amount raised through dated securities being lower by around 18 per cent than that in the previous year.398 3. The cost of borrowing.45.88.738 3.3 The gross and net amounts raised through dated securities in 2010-11 were lower by around 3 per cent and 18 per cent. Nonetheless.358 3.98. among others. guided by the twin objectives of minimisation of cost over time and pursuit of maturity profiles that are consistent with low rollover risk. during 2010-11 was themanagementofthegovernmentmarketborrowing programme in a situation of tight liquidity conditions and rise in inflationary expectations. The Reserve Bank‘s purchases of Government securities amounting to around ` 67.512 3.229* 3. however. contributed to lower market borrowings during the year.635 3.044* 3. the increase in key policy rates and a rise in inflationary expectations impacted the cost of market borrowings.92.theone-offrevenueitemslike 3G and broadband wireless access (BWA) auctions led to the accumulation of large Government balances.VII PUBLIC DEBT MANAGEMENT A major challenge for the Reserve Bank of India during 2010-11 was the management of market borrowing programme of both the Government of India and the State Governments in a situation of increasing inflationary pressure and tight liquidity conditions.128 3.200 crorethroughopenmarketoperations(OMOs). was largely contained by a judicious mix of maturities and yield.20.92.000 10.527 12.35. VII. respectively.94.33.497 3.595 3.354 1.414 98 Actual 7 4.98.414 984 2011-12 Budget Estimate 8 4. *: Includes MSS de-sequestering. the unanticipated build-up of surplus cash balances with the Government following the front loading of receipts and the back loading of expenditure resulted in frictional liquidity mismatches in the financial system that had implications for the Government‘s borrowing costs.26. than those raised in the previous year (Table VII.79. one-off revenue items like 3G and BWA auctions led to an accumulation of large Government balances.2 During2010-11. VII.45. particularly at the shorter end.91.97.25.53.957* – 2009-10 Revised Estimate 3 4.97. 114 .1). The market borrowing programme of the Central Government was completed successfully during 2010-11.

2010(TableVII.77 per cent in 2009-10 (Table VII.08 per cent ‗Postal Life Insurance Government of India Table VII.98-8.7 The Reserve Bank continued with the Uniform Price based auctions of Central Government dated securities during 2010-11 with a view to facilitating aggressive bidding by the market participants in an environment of uncertain market conditions.000 56. YTM: Yield to Maturity. The weighted average coupon on the outstanding stock of Government dated securities.2 100 Amount raised 4 52. A large volume of long dated securities was issued during the second half in consonance with the yield curve movements.inordertocontaininflationary pressures.45 9. at addressing the structural liquidity mismatch. 2011 from 9.000 crore (nominal) and 8.99 years 20 years & above Total 2 – 77.07-7.33 13.000 1.99 years 10 -14. which had an impact on the cost of Government‘s market borrowings.67 5-10 years 3 7.42 6.000 4.PUBLIC DEBT MANAGEMENT Table VII.52 34.000 54.53 12.37. declined moderately to 7. however.81 per cent as on March 31.16 years during the previous year. VII.89 7.89percentasonMarch31.06 21.69 7.000 99.000 71.Maturity Pattern (` crore) Residual Maturity Amount raised 1 Less than 5 years 5 . As a result.19 Over 10 years 4 7.53percentofthemarketborrowingswere raised through issuance of dated securities with residual maturity of 10-14.80.4 During2010-11.01 per cent ‗Postal Life Insurance Government of India Special Security 2021‘ for `4.82 9.3).78 Weighted Average Coupon 9 8.81 100 115 .52.71-8. VII.93 5.5 The yield curve turned increasingly flat during the course of 2010-11 as reflected in the significant decline in the yield spreads. inter alia.69-8.92 per cent in 2010-11 from 7.37.44 43.6 The weighted average maturity of the outstanding stock (based on residual maturity) decreased fractionally to 9. 2010.2: Central Government’s Market Loans .3: Issuance of GoI Dated Securities .000 4.77 9.000 2009-10 Percentage to total 5 12. VII.000 crore were issued during 2010-11 as against `5.99 years as compared to 21.8 The Central Government issued 8. During 2010-11.000 2010-11 Percentage to total 7 2.2). The weighted average yield of dated securities rose to 7.77 7. VII.85-8.81 6.36 12.23 7.16 11.000 1.82 years as on March 31.000 56.62 years from 11.23 per cent in 2009-10.64.78 37.09-7.4 100 Amount raised 6 11.99 15 -19.78 years as on March 31.000 14.000 2.9.64-8.000 1.23 7. 2011 from7.63 Issues during the year Weighted Average Yield 5 7.61.000 91. Floating rate bonds (FRBs) amounting to `3.77-8.36 27.81 #: Excludes issuances under MSS.000 crore in 2009-10.000 2008-09 Percentage to total 3 – 29.62 Outstanding Stock Weighted Average Maturity 8 10.000 39. facilitated the completion of large Government market borrowing during 2010-11. the weighted average maturity of debt issuances during 2010-11 increased to 11.77 6.5 37. VII.92 Range of Maturities 6 6-30 5-30 5-30 Weighted Average Maturity 7 13.18.25 5.8 11.43 7.A Profile# (Yield in per cent / Maturity in years) Year Range of YTMs at Primary Issues under 5 years 1 2008-09 2009-10 2010-11 2 7.17-8.theReserveBankincreasedthekeypolicy rates.

11 TheGovernmentstartedtheyear2010-11with a modest cash balance of `16.000 crore in April-July 2010-11).17. VII. Moreover.000 crore for the first half and `10. 2011 transfer of/trading in the Power Bonds maturingonOctober1. 2011 to April 20.84.000 crore for April 1. 2011 to September 30.2016. To tide over temporary cash mismatches. the net market borrowings would be higher than the previous year by 5. The Central Government repurchased the Fertilizer Bonds issued to various Fertilizer Companies amounting `5.2015andApril1.767 crore in 2010. 2011.000 crore for the second half of the year (October to March).000 crore on March 31. `30.916 crore on that day. 2011) (Table VII.12 The Government‘s cash balances remained positive for most part of the year on account of the 3G spectrum auction receipts and buoyant tax collections.4 per cent.000 crore). 2010. VII. inter alia. the gross market borrowings of the Centre through dated securities for 2011-12 are estimated at `4. the Government resorted to OD duringApril 23-25. The weighted average yield of dated securities issued during 2011-12 (up to July 31.67percentduringthecorresponding period of the previous year.9 As per the Union Budget 2011-12. the Government bought back dated securities to the tune of `11. During 2011-12. An amount of `2. 2011. respectively.101 crore as on December 27.000 crore is scheduled to be raised during the first half of 2011-12 as against `2. 2011) was higher at 8.61. The Government‘s cash balance gradually reached the peak at `1. The Reserve Bank permitted with effect from April 1.13 In order to meet the emergent temporary cash flow mismatches.000 crore for the second half.000 crore for April 21. 2010. 116 . held on March 31. 2010. during May 2010. in the first tranche of such repurchase.000 crore for July 1. 2011 to June 30. 2011 and `10. The Central Government has raised a large part of the scheduled borrowing programme during 2011-12 (up to July 31.759 crore on August 12.000 crore raisedduringthecorrespondingperiodoftheprevious year. Having breached the WMA ceiling of `30. 2010.000 crore each for 35 days and 28 days. Central Government and the Reserve Bank under OneTime Settlement Scheme for dues of State Electricity Boards. the WMA limits were revised to `30.000 crore for the first half. Ministry of Power. VII. reflecting tax refunds. the Reserve Bank in consultation with the Government issued CMBs amounting to `58.763 crore (face value). the Government availed of OD for three days and WMA for 57 days during 2010-11. held on July 26.1). Cash Management VII. the Government reverted to WMA on September 4 and 5. 2011.38 per cent as comparedwith7.000 crore during April-July 2011-12 (`12.10 Although the gross market borrowings of the Central Government through dated securities for 2011-12 are budgeted 4. The issuance calendar for dated securities for the first half of 201112 was issued in consultation with the Central Government on March 25.1).032 crore in the second tranche. After recording a positive cash balance on May 31.issued by various States to the Central Public Sector Undertakings (CPSUs) in terms of the Tripartite Agreement among 27 State Governments. 2011 and `6.000 crore over and above the rollover amount during April-July 2011-12 (Chart VII. 2011. 2010 for a day and continued with WMA up to May 30. due to the elevated temporary mismatchesintheCentralGovernment cashbalance. As part of cash management. 2010. The Government again entered into OD on May 14. 2010 due to its expenditure commitments. but soon took recourse to WMA on April 6. Overall.000 crore were issued in two tranches of `6. The WMA ceilings for the Central Government for 2010-11 were fixed at `30. 2010 boosted the Government‘s cash balance to `37.514 crore.50. `45.128 crore (net `3. The surplus transfer from the Reserve Bank to the Government amounting to `18. Cash Management Bills (CMBs) to the tune of `12. VII.ANNUAL REPORT Special Security 2023‘ for `3. 2011. the notified amount for issuance of Treasury bills was increased by `61.43.6 per cent lower than the previous year.

4).5).785 1. the gross allocation amounted to `1. Since 2005-06.442 33. the difference between the weighted average primary market yield of SDL on the day of auction and the secondary market yield of corresponding maturity of Central Government dated security on the same day) declined to 45 bps during the year from 86 bps during the previous year.039crorein2010-11asagainst `1.31.191 31.453 2.4: States’ Market Borrowings (`crore) Item 1 Net Allocation Additional Allocation Maturities during the year Gross Allocation Gross Sanctions under Article 293 (3) Gross Amount Raised during the Year@ Net Amount Raised during the Year Amount Raised during the year as a % of Total Sanctions 2009-10 2 1.11 per cent during the previous year (Table VII. Chhattisgarh.04.5: Residual Maturity Profile of Outstanding State Development Loans and Power Bonds (as at end-March 2011) (`crore) Year of Maturity 1 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 Total State Development Loans 2 21.14.539 6. VII.641 crore and additional allocation of `5. 2010.498 34.31.384 35.871 Power Bonds 3 1.575 – – – – 14. Taking into account the repayments of `15.948 1.157 5.989 30.097 67.769 crore (while gross sanctions under Article 293(3) amounted to `1.779 1.02.971 crore.09.138 1.1: Cash Balance of the Central Government 160000 140000 120000 100000 80000 ` Crore 60000 40000 20000 0 -20000 -40000 24-Jun 20-Jan 13-May 3-Jun 26-Aug 30-Dec 16-Sep 10-Feb 3-Mar 28-Oct -60000 crore.079 33.122 crore in the previous year (Table VII.294 15-Jul 5-Aug 2011-12 2009-10 2010-11 VII.30.522 67.949 36.14 In order to discharge its functions as a banker totheCentralandStateGovernmentsmoreeffectively andefficiently. The lower spread during 2010-11 reflected several factors including lower market borrowings on account of comfortable cash position of the States.1) DEBT MANAGEMENT OF STATE GOVERNMENTS Market Borrowings VII.971 15.04.870 2..238 1.42.063 1.16 The weighted average yield of State Government securities issued during 2010-11 stood higher at 8.679 16.18.769 1.870 2.18.423 Total 4 23.PUBLIC DEBT MANAGEMENT Chart VII.779 1.870 2.09. Orissa) in 200910.6).e.39 per cent as compared to 8.622 1.641 1..30.36.4 @ An amount of `500 crore was auctioned on March 31.42.398 95.375 1.063 crore).8 2010-11 3 1.628 32.04.254 37.138 1. the entire market borrowings of State Governments have been by way of issuances of 10year securities.539 6.04.622 1.20. Arunachal Pradesh. securities issued in 2010-11 would mature in 2020-21 (Table VII. the lower Table VII.21.15 The marketborrowingprogrammeoftheState Governments was conducted smoothly during 201011.458 2.63.63.039 88. The net allocation under the market borrowing programme for State Governments for 2010-11 was placed at `1.122 1.157 Table VII.05. Hence. Four States did not raise their full sanctions in 2010-11 as against five States in 2009-10. 24-Mar 18-Nov 9-Dec 22-Apr 1-Apr 7-Oct 117 . The gross market borrowings were lower than those of the previous year. The weighted average spread (i.976 33. The State Governments raised a grossamountof`1.theReserveBankhasinitiatedaseries of measures at the operational and technological levels in the recent years (Box VII. Orissa and Sikkim did not participate in the market borrowing programme in 2010-11 as against one State (viz.883 95.

Accordingly. In the State Finance Secretaries‘ Conference held at Mumbai in May 2011. 1934. ICICI Bank Ltd. the Reserve Bank prescribes as well as reviews the time limit for remittance of funds collected for credit to the Government accounts by Agency Banks and also the rate of penal interest in case of non-compliance with the prescribed norms.The Reserve Bank carries out the general banking business of the Governments through its own offices and branches of public sectorbanksandafewprivatesectorbanks(viz.NECS/ RECS. were advised to improve their position.ANNUAL REPORT Box VII. The various measures initiated by the Reserve Bank for further improvement in its functional responsibilities in this regard are summarised below..17 During 2011-12 (up to July 31.  For more safe. the Agency Banks. which are provided by the Agency Banks. 1934.) which act as the Agency Banks. and the Axis Bank Ltd. etc. the Reserve Bank appointed Jammu & Kashmir BankLtd. etc. the Reserve Bank. The compensation shall be credited to the account of the pensioners automatically without waiting for any claim from them. Agency Banks. under section 45 of the RBI Act. ten tranches of auctions were conducted under the market borrowing programme of the State 118 . Accordingly. the Reserve Bank has also hosted an FAQ on its website for the benefit of pensioners. average issuance size and lower volatility in the yield of the 10-year benchmark government securities in the secondary market. The period of remittance for electronic receipts has been brought down to T+1 days for all Agency Banks with effect from November 2010. RTGS. the Reserve Bank has been impressing upon the Government departments to switch over to electronic modes for effecting their payments and receiptsthroughvariouse-productssuchasNEFT. instructions were issued to the Agency Banks to pay penal interest for the delayed period at Bank Rate plus 2 per cent. Recently. AgencyBankshavebeenadvisedtoimplementthesame. The Regional Offices of the Reserve Bank play a pivotal and pro-active role in offering NEFT facility for remittance of funds to the account holders. the Reserve Bank associates with various Committees constituted by the Government for effective administration of Government revenue collection and accounting system. the State Governments were also urged upon to draw a roadmap for switching over to emode of receipts and payments in a phased and time bound manner. a number of Central and State Government departments have switched over to internet mode of collection of taxes. As the adviser to the Government of India in the formulation of accounting policies and other related matters of Government Business. from April 01.. The CPADS is a user friendly application with multiple facilities.  The Public Accounts Departments (PADs) at all the Regional Offices of the Reserve Bank which maintain and operate the accounts of Government departments have now switched over from the erstwhile stand-alone system to a more robust and secured Centralised Web-based application viz. the Centralised Public Accounts Department System (CPADS) for its operations. 2011).      were not satisfactory in this regard.HDFCBank Ltd. In order to compensate the pensioners for delayed payment of pensions beyond due date. IBA. which takes stock of various issues concerningconductofGovernmentBusinessthroughRBI/ Agency Banks and provides inputs for policy making. the Reserve Bank has conceptualized and formalized the ―High Level Meeting‖ as a forum. secure and efficient banking transactions. VII. NSDL. the Reserve Bank has also reviewed the performance of theAgency Banks under OLTAS (On Line Tax Accounting System) of the Central Board of Direct Taxes (CBDT) and EASIEST (Electronic Accounting System in Excise and Service Tax) of the Central Board of Excise and Customs (CBEC) on various parameters. whose performances  ToprovideaplatformtothetopfunctionariesoftheCentral Government. As a customer friendly measure. 21 & 21 (A) of the Reserve Bank of IndiaAct. In terms of the recommendations of a Committee constituted by the Reserve Bank (Chairman: Shri Prabhakar Rao) to look into the customer service aspects oftheservicesrenderedbyAgencyBanks. in consultation with the Government. to carry out Government Business as agents of the Bank. as a proactive stance.toconductthebusinessoftheStateGovernment of Jammu & Kashmir as an agent. 2011. As a result.mostoftheAgencyBankshaveestablished CPPCwhileothersareintheprocessofestablishingthem. Consequently.  The Reserve Bank launched an e-payment system in May 2011 for collection of commercial taxes of Government of Karnataka on the lines of Electronic Accounting Solutions for e-Receipts (EASeR) Model of CBEC.. As a facilitator to e-payment initiatives of Government of India.  The Reserve Bank also looks after the appointment of Agency Banks. customer friendly measures in the collection of taxes etc.whichincluded establishment of Centralised Pension Processing Centres (CPPCs) by theAgency Banks for pension disbursement. The Reserve Bank has been instrumental in playing a pivotal role to ensure timely remittance of funds to the Government accounts.1 Developments in RBI’s role as Banker to Government The Reserve Bank acts as a banker to the Central and the State Governments in terms of provisions of sections 20. for discussions on various issues.

39 8.7: WMA/ OD of State Governments (Average monthly outstanding) (` crore) Month 1 Apr May June July Aug Sept Oct Nov Dec Jan Feb Mar Avg.78-6. which was the same as in the previous year.99 9. 2011.147 crore) as compared to `31.36-8.11 8. the discount rate of which is presently fixed at 5 per cent. The liquidity pressures during 2010-11 were confined to a few State Governments (Table VII.58 8.40 5. The outstanding investmentsofStatesinITBsstoodat `1.680 crore in the previous year.19 Most State Governments have accumulated sizable cash balances in the recent years reflecting the fiscal consolidation measures undertaken since 2005-06. including Government of Union Territory of Puducherry.80-9.13 6.00 7.05 12.89 10.519 crore) raised by 17 States during the corresponding period of the previous year. The surplus cash balances of State Governments are automatically invested in 14-day Intermediate Treasury Bills (ITBs).620 crore from `2. Governments and 14 States raised an aggregate amountof`37.25 10.65-8.36 7.63 8.776 crore as at end-March 2010.82 12.35 11.55 entered with the Government of Jammu and Kashmir.53 6.30-13. Consequent upon the supplementary agreement Table VII.60-8.50 11.80-10.7 and 8).875crorefrom`84. Range 2 12. The monthly average utilisation of WMA and OD by the States in 2010-11 was higher than that of 2009-10 (Table VII.66 7.640 crore (net `23.50-12.10 8.32-7. The average investment in14-dayITBsdeclinedto`78.9). Cash Management VII.25 7. VII. the aggregate WMA limit for 2011-12 was increased to `10.023croreonagrossbasis(net`30.18 The aggregate Normal WMA limit for States. The outstanding investment of State Governments in ATBs as at end-March 2011 was higher at `10.462 crore during the previous year.9).45 7.05-8.00 5. 2 619 126 5 76 72 216 54 389 22 120 523 252 206 Special WMA 3 589 298 36 2 6 120 821 898 19 454 952 893 424 4 970 619 227 144 Normal WMA 5 294 50 67 7 52 246 161 74 31 47 35 252 110 6 290 14 – – 122 88 537 480 60 112 522 383 217 7 698 114 175 97 8 111 2 – – – 77 2 – – 25 – 90 26 Overdraft 9 191 – – – – 3 117 242 – – 194 295 87 10 868 39 16 – 11 1024 178 72 83 124 539 217 463 53 192 558 594 341 Total 12 1070 312 36 2 128 211 1475 1620 79 566 1668 1571 730 13 2536 772 418 241 2009-10 2010-11 2011-12 2009-10 2010-11 2011-12 2009-10 2010-11 2011-12 2009-10 2010-11 2011-12 119 . was placed at `9.240 crore in April 2011.49 6.90 7.58 8.PUBLIC DEBT MANAGEMENT TableVII.04-8.6:YieldonStateGovernmentSecurities (Per cent) Year 1 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12@ @ Up to July 31.01.84-8.87 8.60-7.15-12.68 Weighted Average 3 12.00-12. The rates of interest on Normal and Special WMA and OD continued to be linked to the repo rate.925 crore for 201011.301crore as at end-March 2011 as against ` 93.85 7. The average investment of the State Governments in Auction Treasury Bills (ATBs) more than tripled to `9.20 7.90 5.187 crore than that of `250 crore at end-March 2010 (Table VII.

742 85.143 69.166 74.754 92.810 67.321 73.125 798 750 637 500 500 339 2. 20 State Governments including Puducherry had notified CSF and 10 State Governments had set up GRF.640 100.468 15.053 78.644 2009-10 8 82. VII.271 87.446 74.462 2010-11 3 77.389 Auction Treasury Bills 2009-10 5 9.875 2011-12 4 86. which provides for the servicing of contingent liability arising from invocation of guarantees issued in respect of borrowings by State level undertakings or other bodies.329 8.620 2011-12 7 10.125 1. The issues discussed in the Conference included: States‘ role in addressing supply side constraints and strengthening Public Table VII.837 66.811 6.312 1.671 97.077 98.830 14.279 88.881 78. 2011.295 77.20 The Reserve Bank.814 66.323 17.003 99.142 Total 2010-11 9 77.369 88.177 120.461 9.As on March 31.521 87.182 84.203 82.983 75.979 32.444 68.494 76.787 78.340 92.680 2010-11 6 250 250 635 3.263 12.462 18.617 84.504 crore and `3.ANNUAL REPORT Table VII.015 84.495 2011-12 10 97.503 13. 120 . 2011.768 94.704 crore.121 71.116 83. respectively.954 76.839 98.089 98.714 105.818 78.21 The 24th Conference of the State Finance Secretaries was held in the Reserve Bank of India at Mumbai on May 24.862 14. as at end-March 2011.788 86.650 87.168 103.668 103.530 24.789 61.318 76. maintains the consolidated sinking fund (CSF) that provides a cushion for amortisation of market borrowing/liabilities and the guarantee redemption fund (GRF).8: No.001 7.214 105.099 20.068 76.931 1. The outstanding investments under CSF and GRF amounted to `36. of Days States Availed of Special / Normal WMA and OD Special WMA 2009-10 1 Andhra Pradesh Haryana Kerala Madhya Pradesh Maharashtra Karnataka Nagaland Punjab Rajasthan Uttar Pradesh West Bengal Himachal Pradesh Manipur Mizoram Goa Uttarakhand Meghalaya Jharkhand 2 1 7 18 11 – – 69 130 – 8 95 – – 29 – 69 – – 2010-11 3 3 10 – – – – – 133 – 4 195 – – 25 – 35 1 – 2011-12 4 – 13 – – – – 11 40 – – 79 – – 6 – 25 – 4 2009-10 5 – 5 2 11 – – 45 128 – 8 15 – – 15 1 26 – – Normal WMA 2010-11 6 – 10 – – – – – 132 – 4 113 – – 15 – 12 – – 2011-12 7 – 13 – – – – 6 40 – – 40 – – – – 8 – 4 2009-10 8 – – – – – – 13 29 – – 8 – – – – 9 – – Overdraft 2010-11 9 – 8 – – – – – 13 – – 62 – – – – 10 – – 2011-12 10 – 6 – – – – – 14 – – 24 – – – – – – – VII.122 77.347 105.853 * Average of daily data.167 88.995 11.956 95.077 78.409 72.631 78.754 80.033 72. on behalf of the State Governments.947 81.9 : Investments of the State Governments / UT* (` crore) Month Intermediate Treasury Bills 2009-10 1 April May June July August September October November December January February March Average 2 72.

Accordingly. switch over to electronic mode of payment and receipt for Governments‘ banking business and proposed classification structure of Union and State Governments‘ accounts. managing the borrowing programme would be a challenge in view of tight liquidity conditions and high level of excess SLR holdings of the banks and nonavailability of MSS securities for unwinding. challenges in the management of Central Government borrowing programme during 2011-12.22 Notwithstanding the relatively lower budgeted marketborrowingsoftheCentralGovernmentin201112. the conduct of the market borrowing programme will be influenced by the ability of the Governmenttoreininthefiscaldeficitanditsfinancing by way of market borrowings at the budgeted level coupled with the monetary policy actions that anchor inflationary expectations. VII. 121 .PUBLIC DEBT MANAGEMENT Distribution System for better inflation management. risks to State finances on account of power sector utilities. repayment / exchange rate risk in States‘ borrowing and building of sinking funds to meet these obligations. management of cash balances and market borrowings of the State Governments for 2011-12.

7) 4.311 (12.1).6) (15.5) 12.243 (28.6) (12.399 4. particularly `1.936 2.8) (2.35.March 2010 2009 2011 5 6 7 1 `2 & `5 `10 `20 `50 VIII.856 Note: Figures in parentheses represent percentage share in total.2 per cent in the previous year.2) (30.08. empowers the ReserveBankasthesoleauthoritytoissuebanknotes in India.March 2009 2010 2011 2 3 4 Value (` crore) End .6) (2.888 4. not only the responsibility of providing banknotes in adequate quantity throughout the country.5) (21.0) (1.281 (16.288 (25.222 18. the economy continues to witness a compositional shift towards higher denomination banknotes. The Reserve Bank in pursuing its clean note policy has made provision for a steady supply of fresh banknotes in response to the speedier disposal of soiled banknotes.836 14.549 64.3 Value.4) (0.8) (33. they are put into circulation only through the Reserve Bank of India. BANKNOTES IN CIRCULATION COINS IN CIRCULATION VIII.3) 2. In volume terms.166 7.000 Total 7.9) (13.7) 13.784 2.40.6) (0. 2011.4) (5. increased by 14.702 13. VIII.906 3.196 24.1: Banknotes in Circulation Denomination Volume (Million pieces) End . reflecting the continuing compositional shift towards higher denomination banknotes.1) (17.7) (20. The Reserve Bank continued with its efforts to strengthen the security features of banknotes and increase public awareness so as to address the challenge of counterfeit notes.024 1.2) (32. of the banknotes continued to increase during 2010-11 (Table VIII.6) 1.304 3.8 per cent a year ago (Table VIII.4) 48.37.028 1.5 per cent during 2010-11 as compared with 5.4) (2.2) (4.116 2.81.64.980 (10.2 The Reserve Bank has.0) (7.364 1.38.88.0) (3.Technologydrivenimprovements in customer service were also undertaken.000 and `500. VIII. accordingly.7) (28.299 9.1 per cent during 201011 as compared with 12. 1934.211 3. Further.290 8. 122 .040 (4.252 3.1) (4. so as to encourage reporting of counterfeit notes.479 4.7) (1.VIII CURRENCY MANAGEMENT Notwithstanding the increasing use of technology driven non-cash modes of payment.0) (14. Although one rupee notes / rupee coins and 50 paise coins are issued by the Government. the demand for currency continues to rise.0) (32.440 21.953 11.02.0) 6.6) (0. Exchange facilities for these Table VIII. the Government of India decided to call in from circulation coins of denomination of 25 paise and below with effect from end-June.1 The management of currency being one of the core functions of a central bank. the increase was 6.2) (47.020 4. including small coins in circulation. but also maintaining the quality of banknotes in circulation.5 IntheexerciseofpowersconferredbySection 15A of the Coinage Act. commands a high degree of public visibility.713 (3. Growth in the value of banknotes outpaced that of volume.383 3. Also.222 18.288 12. Prevention and detection of counterfeit notes continued to be accorded high priority.4 The total value of coins.027 1.930 4. While the current financial year marks the end of circulation for coins of denomination of 25 paise and below. these coins will cease to be legal tender for payment as well as on account. `100 `500 `1. Section 22 of the Reserve Bank of India Act. VIII.0) (24.963 56.200 2.057 15.536 21.45.5) (4.133 7.4) (0.7) (0.3) (46. Thereafter.9) (4.38. 1906 (3 of 1906). The ongoing process of enhancing security features of the banknotes was pursued with renewed vigour.341 3. the Act casts upon the Reserve Bank.2). as well as volume.681 6.918 2.865 7.577 6.536 21. carried out the functions of note issue and currency management during 2010-11.2) (0.91.8) (45.1) (17. conscious efforts were made for simplifying the administrative andlegalprocedures.

9) 32. the Reserve Bank of India pursued its multi-pronged approach involving regular supply of fresh banknotes.000 5.300 4.100 2.141 (7.696 (27.007 16. a currency chest at Kochi and a wide network of 4.017 100. 2010) Category 1 Treasuries State Bank of India SBI Associate Banks Nationalised Banks Private Sector Banks Co-operative Banks Regional Rural Banks Foreign Banks Total No.9 billion pieces of soiled banknotes (21.4: Indent and Supply of Banknotes (April – March) Volume (Million pieces) Denomination 1 `5 `10 `20 `50 `100 `500 `1.0) 11.8) 2.1) 15.306 112.143 1.0) 2011 4 54.4) Table VIII.000 Total 2009-10 2010-11 2011-12 Indent Indent Supply Indent Supply 2 3 4 5 6 1.570 (35.104 1.3) 2011 7 1.179 (11.738 (52.017 small coin depots.070 12.4 and 5). and measures to address the menace of counterfeit notes were continuously examined. Currency chests with Sub Treasury Offices (STOs) are being gradually phased out and their number has reduced to 11 during 2010-11.004 3.8) 3.964 (26. Disposal of Soiled Banknotes VIII.957 2009 5 1.760 (7.3).1) 2.070 (8.640 (23.4 billion pieces in 2009-10 to 16.000 4.5) 7.267 (25.184 11.797 (48.247 currency chests and 4. Infrastructure for Currency Management VIII.March 2010 6 1.236 (22. The supply in volume and value affirms the effective monitoring of supplies as also efficient allocation and management of the capacities at the presses (Table VIII.0) 149 (1.2) 7. The number of banknotes withdrawn from circulation and eventually disposed at the Reserve Bank offices Table VIII. of Currency Chests 2 11 2.6) 2.000 2.000 800 1.342 (13.540 5.4) 3.9) 3.8 About 93 per cent of the indent for banknotes for 2010-11 was met by the printing presses.7) 9.013 105.736 (57.800 674 5.628 CLEAN NOTE POLICY Indent and Supply of Fresh Banknotes and Coins VIII.068 (24.9) 300 (2.461 (28.969 4.500 2. speedier disposal of soiled banknotes and mechanisation of cash processing activity.The State Bank of India and its associates continue to have the largestshare(71percent)ofcurrencychestsfollowed by nationalised banks (26 per cent) (Table VIII.120 886 1.4 per cent of banknotes in circulation) were processed and removed from circulation (Table VIII.050 868 982 109 1 3 4 4.9) Value (` crore) End . CURRENCY OPERATIONS VIII.200 6. Various options to enhance the life of banknotes so as to ensure the clean note policy. under which the currency chest facility is granted to them.000 4.880 (35.008 1.7) 26.6 In a continued endeavour to provide good quality banknotes.700 600 1.6).3) 9.416 5000 1. one sub-office at Lucknow.000 17.800 548 5.535 (35.455 (14.0) 13.000 1.198 (12. 123 .130 467 16. the Reserve Bank carries out the issue of notes and management of currency.000 1.000 4.CURRENCY MANAGEMENT Table VIII.2: Coins in Circulation Denomination Volume (Million pieces) End .600 Note: Figures in parentheses represent percentage share in total. The Reserve Bank of India has agency agreement with SCBs.3) 4.247 No.420 4. as many as 13.7 Through its 18 Issue Offices.0) 29.March 2009 1 Small coin `1 `2 `5 `10 Total 2 54.112 110 1 3 4 4.602 3.458 (11.060 820 1.000 16.5) 3.3: Currency Chests and Small Coin Depots (as on December 31.000 17.455 (13.5 billion pieces in 2010-11.4) 149 (0. of Small Coin Depots 3 2.675 (29.9 During 2010-11.1) 2010 3 54.1) 2.1) 300 (0.975 (27. The total supply increased from 16. coins were made available at the branches of banks maintaining small coin depots and also at offices of the Reserve Bank.

000 800 100 6.11 To further augment the processing and disposal capacity of soiled notes.292 232 6. VIII.307 3.513 3.000 2.000 6.6: Disposal of Soiled Notes and Supply of Fresh Banknotes Volume (Million pieces) Denomination 1 `1.811 1.347 5. Measures to Improve the Quality of Banknotes in Circulation VIII. besides promoting efficient Banknote sorting.746 1.091 NSMs in their branches in above categories.918 2.100 Supply 3 100 2.607 3.9 billion pieces of banknotes disposed during 2010-11.114 664 1. in select locations of the country.809 13. on a ―field trial‖ basis. In compliance to one of the recommendations of the High Level Group on Systems & Procedures for Currency Distribution.518 increased during the year.003 605 790 467 3.000 6.962 13. VIII.ANNUAL REPORT Table VIII. 8.085 2. VIII.254 Value (` crore) 2010-11 Supply 10 3 275 362 646 232 1. Bank branches having average daily cash receipts of `50 lakh and above shall put to use such machines by end-March 2011.832 4.095 1.823 branches.348 Indent 9 4 260 340 650 1.247 3.852 17.700 4.227 4.140 2011-12 Indent 6 70 1.16 Counterfeit banknotes detected during the year were higher in magnitude on account of 124 . the banks have also made arrangements for issue of machine processed notes for another 1.5: Indent and Supply of Coins Denomination 2009-10 Indent 1 50 paise `1 `2 `5 `10 Total 2 200 3. the banks have installed 4.900 800 1.12 All currencychestbranchesareequippedwith Note Sorting Machines (NSMs). This is in line with the ongoing efforts for speedier removal of soiled banknotes from currency chests and augmenting the disposal at Reserve Bank offices.300 1.611 1.13 As on April 2011.580 166 549 13.370 2009-10 Indent 7 10 300 400 400 100 1.072 14. the Reserve Bank commissioned a study on the ―environmental impact (Carbon Footprint) of cotton based banknotes vis-avis polymer based alternative‖.864 4. VIII.657 5. While the process relating to the ―field trial‖ is under progress. before issuing them over the counters or through ATMs.400 791 1.700 1. Banks have been Table VIII.987 179 706 1.042 2. COUNTERFEIT BANKNOTES Note: Supply indicates fresh notes supplied to currency chests and members of public .000 `500 `100 `50 `20 `10 Up to `5 Total 2008-09 2 3 2009-10 4 5 2010-11 6 7 advised to ensure that all notes received by them are processed before re-issuing them to public.677 to introduce polymer / plastic banknotes in the denomination of `10. is seen to provide an impetus to both the Clean Note Policy and the detection of counterfeit notes. Further.690 4. banks have been further directed that notes in the denomination of `100 and above are to be processed through machines conforming to ―Note Authentication and Fitness Sorting Parameters‖ prescribed by Reserve Bank from time to time.05 billion pieces were processed through 54 Currency Verification and Processing Systems (CVPS).600 2. VIII.000 2.285 Indent 4 70 2.10 Out of the 13.210 Supply 8 5 292 457 389 205 1.975 392 3 418 441 11. VIII.284 778 205 6.600 1. 5 new CVPS machines have been installed during the year in 5 select offices of the Reserve Bank.14 The above measure.277 4. The remaining banknotesweredisposedundertheDynamicWorking Model (DWM).935 2.296 3.15 The Reserve Bank continued with its efforts Disposal Supply Disposal Supply Disposal Supply 39 664 78 865 735 2.403 1.670 Volume (Million pieces) 2010-11 Supply 5 59 2.

is required to immediately give information about such commission or intention to the nearest magistrate or police officer. of pieces) Year 1 2008-09 2009-10 2010-11 Detection at Reserve Bank 2 55.0) 348. The Bill.19 The Reserve Bank has also prepared a microsite for the web page which has incorporated all information on genuine Indian banknotes for the benefit of the public. or issue or possession of metal pieces to be used as money. VIII. 125 .4) Detection at other banks 3 342. The film‘s primary message to the common man is to form a habit of examining banknotes and it also aims at educating the general public (Aam Aadmi) about the security features of Indian banknotes. the film has been translated in 11 major Indian languages and is being shown over the regional channels of Doordarshan.4 million counterfeit notes identified were detected at bank branches. Central Government and an in-principle decision has been taken to : i) Consider designating one nodal police station at each district for registration of cases of forged note offences. in its report in August 2009.281 (86.7).7: Counterfeit Notes Detected (No. rationalisation of procedure for dealing with counterfeit currency (Box VIII.607 Doordarshan in August.rbi. Correspondingly. simplification of reporting system is under consideration of the Central Government. the procedure prescribed by the Reserve Bank of India for the commercial banks requires impounding all counterfeit notes detected by the banks and sending them to the police for lodging an FIR in accordance with the law. the Reserve Bank has also launched an awareness campaign on Indian banknotes. ii) The nodal officer of the bank will register a single report to designate police station with detailed information where recovery of forged notes in 1 piece to 4 pieces in a single transaction.in/ VIII. iii) In case of recovery of 5 or more pieces in a single transaction separate FIR would be filed.1) 45.. Note: Figures in parentheses represent percentage share in total.620 (13.Accordingly. While several states have designated nodal police stations. had recommended rationalizing the procedure with regard to the filling of FIR on detection of forged notes. aware of the commission of or of the intention of any other person to commit certain offences. improvements in the area of mechanised processing of notes.235 (10.CURRENCY MANAGEMENT Table VIII. The matter was taken up with the Ministry of Home Affairs. unlawful making. The Microsite. heightenedawarenessamongstbanksandincreased use of Note Sorting Machines. banks would designate one nodal officer in a district with responsibility of registering such cases with police.org. The High Level Group constituted by the Reserve Bank on Systems and Procedures for Currency Distribution.111 401. 2011 which has been passed by the Lok Sabha in March.372 (89.paisaboltahai. training to banks and other organisations. Withtheincreaseinincidenceofcounterfeitnotes. reflecting increased use of NSMs (Table VIII. named ―Paisa Bolta Hai‖.9) 390. apart from seeking to consolidatethelawsrelatingtocoinageandtheMints. is displayed on the home page of the RBI website and can also be accessed from the URL http://www. etc.856 (86.476 435. every person.20 The government introduced the Coinage Bill. Subsequently. also endeavours to prohibit as also impose penalty on the melting or destruction of coins. As per Section 39 of the Criminal Procedure Code.1 Procedure for Dealing with Counterfeit Currency Printing and/or circulation of forged Indian Currency Notes is an offence under Sections 489A to 489E of the Indian Penal Code. newspapers. VIII. 2010.0) 52. initially an ad film titled “Paisa Bolta Hai” in Hindi was launched on Box VIII. 2011. Future plans include campaigns through various media viz. including those relating to counterfeiting of currency.17 In conjunction with other steps to check the menace of counterfeit banknotes such as strengthening of security features. VIII. etc..individuals may come in possession of a counterfeit note without their knowledge of it being a counterfeit and unintentionally become a conduit for its circulation by presenting it to a bank or business establishment. other TV channels.18 Under this campaign.830 (14.1).6) Total 4 398. radio. Almost 90 per cent of the 0.

VIII.25 The expenditure incurred on security printing charges (note forms) in 2010-11 (July-June) decreased by `378 crore (13. came into force in August.1: Cost of Security Printing 3000 2. VIII. With a display of around 8. The first line of production with an annual capacity of 6000 MT is being setup at Mysore. in certain denominations. The procedure required to be followed by the branches for acceptance. Suitable measures would be taken to further improve the customer service.4).1 and Table VIII.INKANDOTHERRAW MATERIALS FOR PRODUCTION OF BANKNOTES VIII.26 Expenditure on remittance of treasure has increased from `37 crore in 2009-10 (July–June) to `45. in 2010-11 vis-a-vis the indent (Chart VIII.000 coins and 730 currency notes depicting the cultural and historical heritage of the country. interagency coordination and rationalisation of systems andprocedures. time for availing these services and mechanism for grievance redressal has been displayed on the Bank‘s website. VIII.468 visitors during 2010.5 crore in 2010-11 mainly on account of increased supply of banknotes / coins to the currency chests. easy to comprehend and implement.22 The Citizens‘ Charter containing detailed informationonexchangeofsoiledandmutilatednotes on public counters.23 The RBI as the monetary authority of the country has initiated the documentation and preservation of its rich and varied legacy of coins through the Monetary Museum in Mumbai.7 per cent) mainly on Chart VIII. EXPENDITURE ON SECURITY PRINTING AND DISTRIBUTION VIII. leaving less scope for subjectivity.21 A simplified Note Refund Rules. the museum was visited by nearly 27. is pursuing the goal of indigenisation of other critical inputs for production of banknotes. VIII.754 2500 2. procedure. cost.063 2000 1500 1000 2008-09 2009-10 2010-11 account of decrease in supply of banknotes.27 The Reserve Bank would continue to provide adequate quantity of banknotes and coins to the public.24 The work relating to establishment of a paper mill as a joint venture between Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) and Security Printing & Minting Corporation of India Limited (SPMCIL) on 50:50 shareholding basis has been initiated. These are simple. INDIGENISATIONOFPAPER. 2009. The museum has also been envisioned as a window to RBI‘s outreach programme. VIII. for exchange of soiled and mutilated / torn notes.28 The Bank will continue with its sustained efforts towards mitigating the risk posed by counterfeiting through awareness campaigns.TheReserveBankwouldalsopersist with its efforts to strengthen the security features of Indian banknotes so as to render them more difficult to counterfeit. in consultation with the Government of India. 126 . adjudication. Capacity creation for mechanised processing / distribution of banknotes and coins will receive high attention.376 ` Crore 2. 2009. The Reserve Bank. Withdrawal of soiled notes and supply of clean banknotes would continue on priority with due emphasis on further progress of the currency operations through improvement of systems and leveraging of technology. and maintenanceofrecordsofmutilatednoteswasbrought out as a booklet and distributed to all currency chests.ANNUAL REPORT CUSTOMER SERVICE VIII.

IX. accessible payment and settlement systems. self-assessment by the authorised entities. documents or other information (Section 12). efficient. Power of Reserve Bank to give directions generally (Section 18). IX.3 The Payment and Settlement Systems Act.2 During the year. May 2005. assessing them against these objectives and. efficient. Access to information (Section 13). various payment and settlement systems in the country continued to function efficiently. The assessmentprocesscomprisesofoff-sitesurveillance as well as on-site inspections. Power to call for returns. secure. IX. an efficient payment and settlement system is paramount. Enhanced use of prepaid payment instruments and mobile phone based payment services have been promoted with adequate security measures in place. OVERSIGHT OF PAYMENT SYSTEMS IN INDIA IX. CPSS.4 In terms of the PSS Act. BIS. In the Indian set up with an enormous spread of banking and nonbank financial institutions and other financial organisations. periodical system audits by qualified professionals and market intelligence. 1 2 The powers to regulate and supervise comprise: Power to determine standards (Section 10). 127 . exhibited a steady growth of 10 per cent in 2010-11 (Table IX. IX. ensuring adequate payment and settlement structures with strong security measures to harness efficacy assumes critical significance and hence is yet another unique responsibility of the Reserve Bank. the Reserve Bank monitors all planned payment systems and ensures that only those payment systems with strong system design. Oversight necessitates that ―the objectives of safety and efficiency are promoted by monitoring existing and planned systems. Periodical analysis of the data is carried out to discern patterns and/or trends for further policy actions. where necessary. 2007 (PSSAct) empowers the Reserve Bank of India to regulate and supervise payment systems within the country. Power to enter and inspect (Section 14). IX. secure.5 All authorised entities are assessed against their individual authorisation conditionalities and relevant policy guidelines issued by the Bank. Power to issue direction (Section 17).1 The scope of the oversight function of the Bank is guided by the policy objectives spelt out in the Mission Statement ―Payment Systems in India Vision 2009-12 (July-June)‖. the Reserve Bank persisted in its endeavour to incentivise electronic modes of payment.1 In a system of inter-woven financial and international economic linkages. System audit has been prescribed to ensure that the authorised payment systems perform to the best standards of data security and integrity and that the processes and procedures are in sync with the authorisation conditions.6 Off-site surveillance involves data collection and analysis. thereby facilitating smooth functioning of the financial markets in particular and the economy in general. Power to carry out audit and inspection (Section 16). if any.1). Directions of RBI to be generally complied with (Section 19). adequate risk management solutions and sound financial parameters are authorized to operate in the country. accessible and authorised‖. sound. in terms of which the Bank would strive ―to ensure that all payment and settlement systems operating in the country are safe. Notice of change in the payment system (Section 11). The total turnover under the various payment and settlement systems both in value as well as volume terms. inducing change‖2. the Bank has striven towards strategic use of IT and its applications.IX PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY Reflecting the need for technologically advanced. Driven by the objective of reinforcing RBI as a knowledge hub. Central Bank Oversight of Payment and Settlement Systems.

5.3 156.2 5.547 83.646 1.9) 61.83.516 35.1 0.3 406.133.6 127.e.59.486 3.9 65.51.69.575 20.644 0 4. The results of the self-assessment shared withtheReserveBank. 4.54.61.207 1.69.32.5) High value clearing has been discontinued w. MICR Clearing 7.83.66.6) 75.24.144. risk management and business continuity arrangements amongst other parameters based on international standards prescribed by the Committee on Payment and Settlement Systems (CPSS).425 69.909 73.78.87.5) 9.1 237.Annual Turnover Item 2008-09 1 Systemically Important Payment Systems (SIPS) 1.3 313.0 2.6 149.4 32.5 33.1 88.70.areusedtocreateariskprofile of the entity.4 2.91.8 1.149 11.87.79.976 97.8 234.2 1.3 49.130 (13.957 18. The figures of cards are for transactions at POS terminals only.2 280.6 1. 2.87.790 (1.079.68.142. procedural guidelines.0 233.50.744 69.60. Statutory powers conferred by the PSS Act are also used for giving necessary directions.524 1.87.9) 66.92. Debit Cards Total Cards Total Others (6 to 12) Grand Total (1 to12) Note:1.705 1. the MICR clearing was available at 66 centres (65 centres during previous year).7 Additionally.893 66.4 0. EFT/NEFT Total Retail Electronic Clearing Cards 11. At the end of April 2011.218 18.7 88. High Value Clearing 2.6) 18.3 132. Non-MICR Clearing Retail Electronic Clearing 8.9) 83.234 (6.1 66.7 117. Settlement of Government securities clearing and forex transactions is through Clearing Corporation of India Ltd.792 (5.13.2 2.667 3.481 0.39.96.2 0. 2010.72.60.268 (1.5) 7.53.01.2 2.236 1.14.2 404.2 230.296. each authorised entity is required to carry out a self-assessment of its operations.3 45. Figures in parentheses are ratios to GDP at current market prices.09.903 84.4 35.4 259.2 38. Government Securities Clearing 5.7 387.17.043.37.35.718 1.3 0.359 4.86.94.8 13. the global standards setting body for payment and settlement systems. regulations. A need based on-site inspection complements the assessment process.1 502.3 98.1 0.4 2.16.42.745 (1.0 49.356 18.22.9 1.3 0.6 160. April 1.0 265. IX.8 Based on the assessment carried out and market intelligence including consultation with stakeholders. IX.20.8 1.9 2.155.1 0.4 1.784 62.16.2 170.30.14. the Reserve Bank induces changes in the payment system/s for improving their safety and efficiency as well as customer convenience and service.11.919 (6.613 4.81. accesscriteriaandminimumstandardsforoperational efficiency for various products including the largevalue and retail payments are used for this purpose.153 3.824 26.418 88.14.548 (6.18. Rules.55.582 (5. CBLO 4.3) 1.84.378 89.956 4.f.560 3.13.22. 3.39.234 4. ECS CR 10.33. Credit Cards 12.94. RTGS Total SIPS (1+2) Financial Markets Clearing 3.112 (12.487 2.ANNUAL REPORT Table IX. 2 Volume (in million) 2009-10 3 2010-11 4 2008-09 5 Value (` crore) 2009-10 6 2010-11 7 21.4) 8.1 232.881 3. IX.346.092.242 92.489 3.769 (13.41. Forex Clearing Total Financial Markets Clearing (3-5) Others 6.419 1.8 0.57.7) 58. Regional Offices have been set up at four metros.1: Payment System Indicators .686 9. ECS DR 9. The inputs gathered through market intelligence are also used as a pointer.9 To aid the process of oversight.84.519 1.133 (4.90.2) 1.507 5. 128 .

serving the population of specific areas. iii) The service charge for cheque processing through MICR CPC and collection charge for outstation/speed clearing have been rationalized. It incorporates all the latest features and is expected to be rolled out across all the nonMagnetic Ink Character Recognition (MICR) locations in the country by September 2011 along with the speed clearing facility at all the centres.PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY POLICY INITIATIVES IX. i) To further refine the acceptance of multi-user inputs in a networked environment.10 Under the guidance of the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) several important policy initiatives were taken. corebanking integration and graphic interface compatibility.1). ii) RBI has been waiving processing charges for retail electronic payment systems since the year 2006. has witnessed a steady growth in both value and volume terms (Table IX. the destination banks will also levy some nominal charges on the originating banks as a compensation for usage of their infrastructure. iii) Regional Electronic Clearing Service (RECS) introduced in 2009 for facilitating state-wide payment and receipts. The Reserve Bank took several steps to both reduce the settlement time of paper clearing and also encourage the shift towards electronic mode of payments. IX. has been successfully 129 . Paper-based Payment Systems IX. Electronic Payment Systems IX. It has now been decided to allow theclearinghouses/processingcentrestolevy processing charges on the originating banks. in operation since March 2004.14 The RTGS system.11 The magnitude of the paper transactions despite recording a fall of 5 per cent over the previous year.13 During the introductory phase. ii) Speed clearing has since been extended to 216 centres including all 66 MICR centres. These systems were decentralised. electronic products like Electronic Clearing Service (ECS) and Electronic Funds Transfer (EFT) were introduced by the Reserve Bank. IX. continued to dominate the payment system accounting for 59 per cent of the total volume of transactions.12 The electronic payment products provide speedier. National Electronic Funds Transfer (NEFT) and National Electronic Clearing Service (NECS) that enable servicing customers spread throughout the country with settlement at a central location.15 Various initiatives taken to further refine the centralised systems during the year are as follows: i) To streamline the process flow in credit-push systems like NEFT. RTGS. iv) The second phase of the grid-based Cheque Truncation System (CTS) is nearing implementation at Chennai incorporating the CTS Standards-2010. a new automation software package called ‗Express Cheque Clearing System‘ (ECCS) has been developed. banks can credit beneficiaries‘ accounts based solely on account number details subject to safeguards. This phase also coincided with the implementation of Core Banking Solutions (CBS)/centralised liquidity management solutions in banks. ECS (Credit) and NECS systems. cost effective and secure payment mechanism to customers in comparison to traditional paper based payment instruments. Further. The focus during the rationalisation phase has been to introduce centralised pan-India payment solutions like the Real Time Gross Settlement (RTGS). IX. The evolution of electronic payment products in the country has progressedthroughtwophases:(i)introductoryphase and (ii) rationalisation phase.

Hyderabad.7 2009-10 Electronic 10. 400 million transactions valuing over a `1.21 Subsequent to issuance of the guidelines on prepaid payment instruments. New Payment Channels IX. IX.19 Thecardbasedpaymentsystemscovercredit/ debit and prepaid cards. On an average.1 2008-09 Paper 11.ANNUAL REPORT operating at Bengaluru. The Bank is in the process of addressing the security of card present transactions (transactions effected with cards at ATM and POS channels). IX.9 Per cent 100 80 60 40 59.2 64.16 The efforts of RBI aimed at promoting electronic payment systems vis-à-vis paper based payments are evident. 2011 for all types of card transactions irrespective of the amount and channel used.7 67. has been observed.9 88. Bhubaneswar and Jaipur. Guwahati. m-commerce.000 billion are being processed during a month using these cards. a directive on Settlement and Default Handling Procedures has been issued which covers all multilateral and deferred net settlement systems authorised by the Reserve Bank of India. IX. Bengaluru and Chennai also operate the debit scheme.20 To ensure the security in the usage of these products. e-commerce. To amplify these aspects. with customers having to pay lower charges.3 b: Value 89.17 To ensure timely resolution of disputes between system providers and system participants. Thiruvananthapuram. ii) Online alerts effective from July 01. the Reserve Bank has mandated i) An additional factor of authentication for all card-not-present transactions except the Mail Order Telephone Order (MOTO) transactions. Ahmedabad.18 The PSS Act. Kolkata. While all these centres operate the credit scheme.3 2010-11 83. this segment has also Chart IX. Chennai.7 2008-09 Paper 2009-10 Electronic 2010-11 130 . A time frame of a maximum 15 working days has been laid down for resolution of disputes. IX.1: Share of Paper Based Vs Electronic Transaction a: Volume 100 80 Per cent 60 40 20 0 32. with both the value and volumes of these systems registering impressive growth rates (Chart IX. iv) A new value band in the `1-2 lakh segment under NEFT was created. IX. A working group constituted by the Reserve Bank for securing card present transactions has submitted its recommendations which are being evaluated for implementation.1 20 0 16. 2007 has been framed.1).3 40. Interactive Voice Response (IVR). a spurt in the usage of these cards across various delivery channels like Automated Teller Machines (ATMs). The threshold value for RTGS transactions has since been raised to `2 lakh. a Dispute Resolution Mechanism (DRM) under the PSS Act. With more than 250 million cards (debit. credit) issued in the country. etc. Points of Sale (POS).8 35. 2007 and regulations framed thereafter have provided a firm legal basis for the process of netting and settlement finality.

the smooth functioning of an individual system often depends on the smooth functioning of other related systems (Box IX. The CPSS formed two other Working Groups in June 2009 to study the repo clearing and settlement arrangements and post trade services. were issued as consultative reports in May 2010. The semi closed m-wallets can be issued for value up to `50.financial and nonfinancial. As a consequence.1). Guidance on the application of 2004 CPSS-IOSCO recommendations for central counterparties to OTC derivatives CCPs and Considerations for trade repositories in OTC derivatives markets. the settlement flows. Banks as well as non-banks currently operate in the prepaid payments system segment. 131 . is currently being provided by 38 banks. Banks have also been permitted to facilitate mobile banking transactions without end-to-end encryption up to `5000. ‗Strengthening repo clearing and settlement arrangements‘. banks have been advised that the five free transactions in a month permitted to savings bank account holders at other bank ATMs would include all types of transactions . and suggested that a review of the existing clearing and settlement arrangements for repos could IX. IX.27 Ajoint Working Group (WG) of the CPSS and the Technical Committee of the International Organisation of Securities Commissions (IOSCO) was formed in June 2009 to provide guidance on the application of the recommendations for central counterparties (CCPs) to OTC derivatives and for trade repositories in OTC derivatives markets3.23 Mobile phone based banking. for purchase of air/train travel tickets (ii) permit banks to issue semi closed prepaid instruments through the agents in addition to the business correspondents and (iii) permit the issue of co-branded and gift prepaid payment instruments (iv) permit banks to issue prepaid instruments to government organisations and other financial institutions for onward issuance to the beneficiaries/ customers and to beneficiaries under MoneyTransfer Service Scheme (MTSS) for loading cross border inward remittances received by them.25 To ensure a level playing field among the stakeholders.26 The payment and settlement infrastructure of the country is becoming increasingly interdependent due to the direct/indirect relationships between systems and the use of common third party service providers.Thisproductisbeingleveragedbynon-bank system providers for entry into payments arena. IX.22 The guidelines on prepaid instruments have been amended to (i) extend the use of semi closed prepaid instruments intended for payment of utility bills/essential services. IX. Fifteen non-bank entities have been authorised to issue these products. one of the important evolutions in payment systems. CPSS INITIATIVES IX. operational processes and risk management procedures of many systems have become increasingly interdependent. IX. Interdependencies in Payment Systems IX. the time limit for resolution of complaints has been reduced from 12 to 7 working days from the date of complaint.24 As a further step to ensure timely and speedy reconciliation of failedATM transaction.PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY seen a spurt in activity. and this has ushered in innovative payment products leveraging payment channels like e-commerce and m-commerce.000 bringing them on par with other semi closed prepaid instruments. effective from July 2011.28 ThefirstWorkingGroupinitsSeptember2010 report4 studied the extent to which the clearing and settlement infrastructure for repos contributed to the instability evident in some repo markets during the crisis. The feedback received during the consultative process for both the reports has been incorporated in the FMI report. 3 4 The two reports of this working group. Thus. failing which `100 per day is payable as penalty by the bank (provided the complaint is lodged by the customer within 30 days of the transaction).

IX. the study also recognises that concentration risk is evident with few participants accounting for the bulk of transactions pointing to the potential disruption of operations in various payment systems on account of failure or disruption in the operations of one or more than one amongst the largest five participants. and other retail systems such as MICR cheque clearing in Mumbai. Astudy on the interdependencies in the Indian payment and settlement system infrastructure was carried out. the Committee on Payment and Settlement Systems (CPSS). participants and service providers to recognise. the use of central bank money as a • settlement asset for these key payment systems in the country has contributed to the reduction of both credit and liquidity risk. ‗Market structure developments in the clearing industry: implications for financial stability‘.29 The other Working Group on post-trade services in its November 2010 report5 detailed the 5 developments in the clearing industry and market structures between the years 2000 and 2010 in the CPSS countries and the impact of these developments on new risks which could have a bearing on the robustness of CCPs. CBLO). been minimised through the use of the Central Counterparty (CCP) infrastructure for various markets such as USD-INR Forex segment. The potential for disruption has. In addition. CCIL operated systems (Government securities. understand and manage these risks effectively arising out of the interdependencies for the safe and efficient functioning of the payments and settlement infrastructure. however. Forex. and assesses any associated risk management challenges. analyses the risk implications of these interdependencies. BIS. • be undertaken with a view to making necessary improvements. • On account of the high level of integration and interlinkages of the Indian payments and settlement system. The report states that the development of tight interdependencies has on the one hand helped in strengthening the global payment and settlement systems infrastructure by reducing various costs and risks. clearingcorporationssuchasIndiaClearingCorporation Limited (ICCL) and National Securities Clearing Corporation Limited (NSCCL) settle the funds leg of the corporate bond transactions in central bank money in the RTGS system on a Delivery versus Payment (DvP) basis. settling in central bank money. The study has also highlighted the presence of crosssystem liquidity and operational risks in the Indian payments and settlement system infrastructure. centralised retail payment systems with a panIndian presence such as NEFT. NFS-ATM. 132 . Thus. it is essential that the individual risk management rules and regulations of each payment system are understood for overall containment of systemic risk. CBLO and G-Sec markets. This is especially evident in the case of CCIL which while minimising liquidity needs and providing a guaranteed settlement in various market segments. but on the other hand also increased the potential for disruptions to spread quickly and widely across multiple systems and markets. This in turn has had an impact on the settlement flows between various systems and determines the smooth settlement of all payment obligations in central bank money. The study in its conclusion accordingly advocates for the adoption of international best practises in the conduct of oversight by the Reserve Bank. published a report on ‗The interdependencies of payment and settlement systems‘ in June 2008 which identifies various interdependencies that exist among the systems of CPSS countries. • The settlement in central bank money is a key characteristic which has led to the Indian payments systembecomingahighlyintegratedandinterdependent web of interrelationships with the central bank (RBI) at its centre. It has highlighted the need for system operators. Owing to the interconnectedness of systems the credit and liquidity risks can spread very fast throughout the system. Using the evidence presented in the Financial Stability Report (FSR). keeping in view the international efforts in this regard and the development of different market segments within the country and the inter-linkages between them. Some of the key takeaways from the study are as follows: • The Indian payments system infrastructure is characterised by a large number of payment systems such as the large value payment system (RTGS). is by itself the biggest source of concentration of counterparty risk and operational risk to the Indian payments and settlement system infrastructure.ANNUAL REPORT Box IX.1 Interdependencies in Payment Systems Highlighting the increasing interdependencies in payment system infrastructure and knock-on effects which could affect multiple systems due to their inter-linkages and interdependencies. NECS.

PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY Principles for Financial Market Infrastructure IX. These are: (i) the CPSS produced ―Core principles for systemically important payment systems (CP) (2001). Institute for Development and Research in Banking Technology (IDRBT). FMIs typically possess a set of common rules and procedures for all participants. trade repositories. clearing or settling payments.33 An FMI is defined as ‗a multilateral system amongparticipatingfinancialinstitutions. used for the purposes of recording. in international standards and addressing them. IX. Inter alia. derivatives or other financial transactions‘. (ii) the joint CPSSIOSCO ―Recommendations for Securities settlement systems (RSSS) (2001). The project will be implemented in a phased manner taking into account the technology and process maturity of individual banks.ajointCPSSIOSCO Steering Group was formed to chalk out a comprehensivelistofstandardsincorporatingnotonly the lessons from the crisis but also the experience of using these standards over the past decade in assessing and strengthening the payment and settlement system infrastructure in many countries. reduction in small transactions cost. a project for automating the flow of data from the core banking solution or other IT systems of banks to the Reserve Bank by a straight through process has been taken up . the Reserve Bank.34 The principles in the consultative report when finalised would replace the above three sets of standards. and a risk management framework.Accordingly. if any.30 In response to the Asian crisis in the late 90s. For commercial banks. IX. with a single set of standards. implementing new applications and initiating steps for further adoption of technology in the banking sector.C.IndianInstituteofManagement(IIM). the CPSS and theTechnical Committee of the IOSCO came out with three sets of standards for strengthening payments and settlement system infrastructure (including both payment and securities settlement systems). was released.31 The recent global financial crisis necessitated arelookatthesestandards. IX. IX. it envisages leveraging technology for enhanced efficiency.38 The vision to reinforce RBI as a knowledge organisation has invigorated an internal technological 133 . Towards this end.32 This initiative also supports the Financial Stability Board‘s (FSB) efforts in strengthening financial systems through identification of gaps. IX. IDRBT and the Indian BanksAssociation(IBA)wasconstitutedforpreparing an approach paper on the same. the vision document discusses the road map for enabling IT as a strategic resource for positioning RBI as a knowledge organisation. the consultative report ―Principles for Financial Market Infrastructures‖ (FMI) has been released for public comments in March 2011.35 During 2010-11 the Reserve Bank continued in its endeavour to facilitate the alignment of banking sector with innovations in technology by improving its own IT infrastructure.36 The IT Vision document 2011-17 prepared by a High Level Committee (Chairman Dr. Chakrabarty) with members from Indian Institute of Technology(IIT).includingthe operator of the system. and the steps to be taken for harnessing its human resource potential. INFORMATION TECHNOLOGY INFRASTRUCTURE IX. securities. The Principles (24 in total) cover the entire gamut of the payment and settlement system landscape and encompass payment systems.. central securities depositories. securities settlement systems.2). and (iii) the joint CPSSIOSCO―Recommendationsforcentralcounterparties‖ (RCCP) (2004).37 In order to improve the quality of data/ information received from commercial banks. banks and the Reserve Bank. CCPs and a new category of FMI viz. A core group consisting of experts from banks. a technical infrastructure. improvedcustomerserviceandbetterinformationflow to regulators (Box IX. IX. INFORMATION TECHNOLOGY IX. K.

DR drills have been conducted on a quarterly basis. the communication backbone for the Indian Banking and financial sector managed by IDRBT provides a secured platform for access to all paymentandsettlementapplications. debt management.Thenetworkavailability has considerably improved. Deputy Governor with experts from varied backgrounds within and outside Reserve Bank as members. • • • • Improving IT governance. enhanced use of IT in areas like MIS. at various offices of the Bank to provide connectivity to the users. IX. Conforming to internationally accepted data standards.42 LAN revamping at all RBI locations: The Local Area Network (LAN) was installed in phased manner during 1999 to 2002. which may also serve as a laboratory for research and development activity has also been mentioned in the document. the process of providing a single domain across all the RBI offices has been initiated. During the year.2 IT Vision Document: 2011-17 The IT Vision of the Reserve Bank of India 2011-17 was prepared by a High Level Committee.40 The Data Centres continued to provide necessary infrastructure support for running the critical payment and non-payment systems of the Bank. Department of Information Technology (DIT) in RBI would be the nodal department for coordinating and monitoring the progressofimplementationoftherecommendationsofvision document.41 Network: The INdian FInancial NETwork (INFINET).(iv)increasingoverallefficiency. all offices of the Reserve Bank have migrated to the more reliable and cost effective Multi Protocol Label Switching(MPLS)technology. To test the preparedness for business continuity. Evolving well defined information policies as well as information security framework.and(v)ensuring environment friendly systems. chaired by Dr. Using business intelligence tools for analysing information. Simultaneously. K. regulatory 134 .useofanalytics forimprovedcustomerrelationshipmanagement(CRM)have been set as priorities.adoptionoftechnologybasedstrategies forfinancialinclusion. the intranet site of the Bank for effective internal communication.C. The steps to attain the envisioned state have been identified as: • Adopting appropriate business process re-engineering and allocating resources before taking up the development of any new project.needforriskmitigation. INFORMATION TECHNOLOGY APPLICATIONS IX. (ii) improving customer service. Effective project management. bank and government account management. For commercial banks. currency management. three disaster recovery (DR) drills were conducted during the year for payment system applications. For nonpayment applications. • • • revamp augmented by the significant updation to the existing infrastructure support.Adequate redundancy has been built to ensure uninterrupted availability of applications and data. Desirability of evolving a Centre of Excellence (CoE) for serving the technical and technological needs of the banking sector. IX.Duringtheyear. Chakarbarty. and Better vendor management and outsourcing practices. (iii) strengthening governance. the LAN has been upgraded in each RBI office to take care of present and near future requirements. IX. Ensuring automated flow of data from the source systems of banks to their Management Information Systems (MIS) and then to the Reserve Bank without any manual intervention. The vision document discusses the need to move towards an integrated IT environment. IX.ANNUAL REPORT Box IX. The banks are gradually migrating to MPLS. regulatoryreporting. The objective of the IT Vision for 2011-17 is to enable IT as a strategic resource for (i) enhancing enterprise knowledge.39 Enterprise Knowledge Portal (EKP): An interdepartmental Technical Advisory Group with an external expert has been constituted to work towards the enhancement of the EKP.43 The RBI manages multiple IT applications which are utilised by external and internal users for the purposes of payment and settlement.

database management and communication. 2009) like data design. Public Debt Office (PDO).0. Box IX. buyback auctions for Market Stabilisation Scheme (MSS) and normal securities and development of MarginalStandingFacility(MSF)forSCBs(otherthan RRBs). Steps have been initiated to replace the existing RTGS system with the Next Generation Real Time Gross Settlement (NG-RTGS) system for adopting the latest technology and emerging business processes. IX. PublicAccounts Department (PAD) and Deposit Accounts Department (DAD).48 Core Banking Solution (CBS): A project for developing and implementing an RBI specific CBS has been taken up and is expected to integrate activities of the banking departments i.49 Database Management: A significant amount of statistical data is collected. IX. ranging from stand-alone spreadsheet based systems to sophisticated systems based on Business Intelligence (BI) tools are being used in the Bank. participant banks have migrated their PI to Windows 2008 environment. (Contd. AdvancedITapplicationshavebeenusedbytheBank to enhance the efficacy of the data management and dissemination process (Box IX. a significant development in this application was related to the software developed for collection of e-payment of commercial taxes for the state of Karnataka by Public Accounts Department (PAD). The approach may include centralisation of computing infrastructure. dissemination. IX. Some of the new features proposed to be implemented in the NGRTGS system are advanced liquidity management facility. In order to further improve efficiency. Presently. collection. a centralised approach is being envisaged for better manageability and control.44 Real Time Gross Settlement System (RTGS): Patches for removal of positive Inter-Bank Funds Transfer Processor (IFTP) acknowledgement and multithreading for handling increased volume of incoming messages in Participant Interface (PI) softwareweresuccessfullydeployed.PAYMENT AND SETTLEMENT SYSTEMS AND INFORMATION TECHNOLOGY surveillance.. Bangalore.46 Centralised Public Accounts Department Systems (CPADS): A centralised web based application with Public Key Infrastructure (PKI) based security for handling government transactions is working successfully from the data centres. IX. The technologies adopted will span across the entire spectrum of the Generic Statistical Business Processes (GSBPM 4. Recognizing the potential use of information technology solutions in the data management processes.47 Integrated Accounting System (IAS): BASIS has been replaced by IAS and has been rolled out in all centres.) 135 . the Bank has been using IT solutions consistently to enhance both coverage and quality of data to contribute to the policy making processes.Duringtheyear. This has facilitated the State Government of Karnataka to collect the commercial taxes through banks on T+0 basis. generalisation of data handling processes and integration of data elements.. extensible mark-up language (XML) based messaging system conforming to ISO 20022 standards. compiled and disseminated by the Reserve Bank. and financial statistics for India while Central Statistics Office produces most of the economic statistics. etc.45 Public Debt Office: Negotiated Dealing System (PDO-NDS): The application was suitably modified to support the system with respect to introduction of call and put options for Government securities. and real time information and transaction monitoring and control system. processing. IX. During the year. multiple domain specific Statistical Information Systems.3 Information Technology as a Vehicle for Data Dissemination The Reserve Bank of India compiles monetary.e. analysis..3). internal accounts management. This data generating system augments the policy making processes. banking. which is the core function of the Bank. This module is functioning from the secured web site and all the participating banks along with PAD Bangalore have been provided access to carry out e-payment of commercial taxes. extinguishing bought back securities. IX.

ETL tool carries out data cleansing and data transformation to integrate related datafromvarioussources. with suitable inputs from business owner departments. internet access to the publishable part of the data warehouse has been provided by the Bank to the public through a link called ‗Database on Indian Economy: RBI‘s Data Warehouse‘ on its website (www. This effort has been generally welcomed by the academicians. But with the adoption of technology based systems and applications to provide such services. a single window returns submission system. which update the data warehouse on incremental basis as per the pre-defined dataloadstrategywhichincludespush/pulltechnologybased on data changes in the source system. researchers and general public. Under ORFS. analysts and others users of such data outside the RBI. which the RBI had set up for its internal use in December 2002. 136 . in the first phase. Reserve Bank has adopted eXtensible Business Reporting Language (XBRL) format for reporting data by banks and financial institutions. commercial banks enter data or upload returns online through the web based front-end. the Bank prepared an Approach Paper on Automated Data Flow (a straight through process) from the CBS or other IT systems of commercial banks to the Reserve Bank. To address this issue. To take this forward an interdepartmental committee has been formed with an external expert as the Chairman. which is then pushed to the user departments in the Reserve Bank. without any manual intervention. The Bank is using various IT solutions to improve the dissemination of statistical data and chief among them is the Bank‘s data warehouse platform. Recently. business continuity preparedness has assumed greater significance. and XBRL is leveraging XML to the maximum extent. The data capturing process itself has been automated using ETL (Extract.) Improvement in the data collection and data exchange processes.in).50 The review process of the Information Security Policy. With time. has been facilitated byuseofOnlineReturnFilingSystem(ORFS)forsubmission of returns as against the earlier paper format or unstructured excel format. the scope of data released by the Reserve Bank hasenlargedandthemannerinwhichthedatawerereleased has changed from print to electronic version.51 The continuity of critical services in case of a disaster has always been a priority. according to which banks would be required.. Data are now made available in downloadable and reusable formats through the Bank‘s data warehouse. a comprehensive Business Continuity Planning (BCP) document covering business continuity as well as disaster recovery aspects for all the functions of the Bank is being prepared. XBRL is an extension of XML in finance and accounting. Apart from this ―Statistical Tables related to Banks in India‖ is also being brought out directly from data warehouse and more publications are envisaged to be added on this platform. which was issued in 2005. IX.asaresultdataindatawarehouse stands up-to-date.rbi. Returns submitted by banks first reaches a central data pool. Aligning with international standards on financial reporting. particularly from the banks.Concld. the Reserve Bank would introduce a system for the flow of data from the MIS server of banks in a straight through process. has been initiated in the backdrop of a changed environment for centralisation of all IT systems and also changes in the IT industry. In the second phase. POLICY INITIATIVES IX. it doesn‘t incorporate any standard for exchange of data.. While ORFS takes care of data capturing and transmission of returns from banks to the Reserve Bank. Transform and Load) tools.org.ANNUAL REPORT (. For the benefit of researchers. to ensure seamless flow of data from their transaction server to their MIS server and automatically generate all returns from the MIS server. Technically. For the first time ―Hand Book of Statistics on the Indian Economy‖ was generated and printed directly from RBI data warehouse and has been made available online also making it nearly real time. DIT has been entrusted with this responsibility.

X. management of foreign exchange reserves.4 Forty six weekly meetings of the Committee of the Central Board (CCB) were held during the year in Mumbai. 2010 X.1 The Reserve Bank has been steadily improving its governance in the recent years within its legal structure (Box X. X. Deputy Governor retired from Bank‘s service with effect from the forenoonofJune20. ShewasappointedasDirectorofCentreforAdvanced Financial Research and Learning (CAFRAL).schemesforhigherstudiesandincentiveschemesforattainingprofessionalqualifications by the staff. The Reserve Bank has taken several initiatives in recent years covering improved transparency and governance and knowledge initiatives apart from recruitment. As part of corporate social responsibility.2011.3 The Central Board held seven regular meetings during the year 2010-11 (July-June). 2004. the Act also entrusts other functions to the Reserve Bank such as regulation of non-bank financial intermediaries. regulation of forex. Of these. Governance. Mumbai. management of sovereign debt . two were held at non-traditional centres and one at Agartala.by statute in respect of central government and by agreement in respect of state governments.X GOVERNANCE. INITIATIVES FOR IMPROVED GOVERNANCE X. four were held at traditional metro centres including the post-Budget meeting which was graced by the Hon‘ble Finance Minister Shri Pranab Mukherjee. it has taken steps for improved communication of its decisions or the recommendations made by its advisory bodies (Paragraphs X. 2010.2 Amidst diverse functions. Meetings of the Central Board and its Committee X. It has also taken steps for providing more frequent and more reliable information to the members of its decisionmaking and advisory bodies. Various other statutes also entrust RBI with the responsibility of oversight of payment and settlementsystemsandstrengthensitsregulatoryand supervisory activities. ensuring orderly conditions in the financial markets.5 Smt Usha Thorat.The focus on governance has become necessary in view of the increasing complexities of the economy amidst a mandate that is wider than most other central banks.19 to X.7 Shri Anand Sinha took over the office of Deputy Governor of the Bank on January 19. Deputy Governor.6 Smt Shyamala Gopinath. retired as at the close of business on November 9.ShewasappointedDeputy Governor of the Bank on September 21.The CCB attended to the current business oftheBank. X. financial institutions. Some departments of the Reserve Bank were reorganised with a view to harnessing greater synergies. human resource development and organisation management is crucial to deliver on these multi-dimensional tasks efficiently. The RBI Act. RBI has created a multi-layered governance structure that allows decision-making to proceed smoothly in accordance with the statutory provisions.includingapprovaloftheweeklyaccounts of Issue and Banking Departments. 137 . In addition. money and government securities markets and their derivatives. However.trainingofstaff. regulation and supervision of banks and non-banking financial companies to maintaining financial stability. X. Tripura where a new office was opened in May 2011. 2011. Directors/MembersoftheCentralBoard/LocalBoards – Changes since July 1.1). several green initiatives were undertaken by the Bank. HUMAN RESOURCES DEVELOPMENT AND ORGANISATIONAL MANAGEMENT The Reserve Bank has been entrusted with the responsibility of handling diverse functions ranging from monetary policy. 1934 indicates that issuance of currency and acting as a monetary authority are core to the RBI functioning.25).

banker to the Governments and banks and also as lender of the last resort. managements and other decision making bodies function in order to deliver the central bank objectives that are mandated. 2004). Governance in the case of corporate firms is best described as the ways in which the suppliers of finance to the corporations assure themselves of getting return on their investment. BIS. as a Committee of the Central Board undertakes consolidated supervision of the financial sector comprising commercial banks. Local Boards Four Local Boards representing as far as possible. the territorial and economic interests of the local co-operatives and indigenous banks of the four regions of the country advise the Central Board on various matters relating to the regional issues of economic interest. The Reserve Bank functions as regulator and supervisor of the banks and non-bank financial companies. 1934 and from other specific statutes.1 Governance Framework in the Reserve Bank While Board practices differ widely amongst different central banks (Laybek and Morris. the Reserve Bank of India since long been functioning as a full-service central bank in terms of its wide mandate. the Deputy Governor in charge of monetary policy as the vice chairman and other three Deputy Governors as members. in particular. What sets apart the Reserve Bank from other central banks is the developmental role it plays in the economy. It is about how boards. There are fundamental differences between corporate and central bank governance.. A Board for Financial Supervision (BFS). The central bank governance deals with the ways in which the governments mandate the central banks certain objectives or sets goals or targets and central banks through their institutional arrangements go about delivering them. monetary and financial developments and provides overall direction to the Bank‘s affairs. advises the Reserve Bank on the stance of monetary policy and monetary measures that may be undertaken in the ensuing policy reviews. renovation of office and residential buildings. government securities and credit markets. The Human Resources Management Sub-committee reviews manpower planning in the Bank and gives necessary approval for addition/ upgradation of posts.ANNUAL REPORT Box X. Keeping in view its mandate. The role of the TAC is advisory in nature and (Contd. It is about legal foundations. Just as in case of corporate governance. it covers the contractual and legal arrangements and managerial practices. The Building sub-committee also reviews the utilisation of capital budgets during the year. Committees The Committee of the Central Board (CCB) with a balanced representation of management representatives and Directors meets every week to attend to the current business of the Bank including approval of the Reserve Bank‘s weekly accounts pertaining to the Issue and Banking Departments and assist the Central Board in the monitoring of implementation of various policy decisions. central bank governance is not about profit maximisation as central bank performs services in nature of pubic goods. 2010). However. supervises and ensures smooth operation of the payment and settlement systems. The Reserve Bank derives its mandate from the Reserve Bank of India Act. the committee has five external members who are appointed by the Governor. practices. processes and implementation mechanism in response to the evolving global and domestic situations. Technical Advisory Committee on Monetary Policy A Technical Advisory Committee (TAC) on Monetary Policy first constituted in July 2005. determine criteria for membership to these systems. termination and rejection of membership. the payment and settlement systems and regulator of money. financial institutions and non-banking finance companies. forex. The Building Sub-committee advises Reserve Bank on various matters. It comprises the Governor as chairman. including continuation. authorise the payment and settlement systems. in the rural economy as alsoinrespondingandreachingouttotheneedsoftheunderprivileged people of the society. The Central Board is assisted by various Committees and Sub-committees for smooth functioning of the affairs of the Reserve Bank. 2009. A Board for Payment and Settlement Systems (BPSS) also a Committee of the Central Board. Whileseveralcentralbanks. Sub-committees The Inspection and Audit Sub-committee examines the critical areas emanating from the Management Audit and SystemsInspection(MASI)oftheCentralOfficeDepartments and Regional Offices through compliance check and feedback to executive management. the Reserve Bank continues to strive for improvement in its functioning and raising its governance standards relating to the systems. Governance Structure The Central Board of Directors TheCentralBoardofDirectorsappointedbytheGovernment of India is entrusted with the governance functions of the Reserve Bank in accordance with the RBI Act. Besides.post-crisishavebroadenedtheir mandate to perform activities other than monetary policy. governance and accountability in relation to the mandate it has. The Central Board reviews key economic.) 138 .. there has been an increasing focus on governance issues amongst central banks (BIS. regulates. including construction of staff quarters. The BPSS is also empowered to set standards for existing and future systems.

Improving Governance The Reserve Bank is not an inflation targeting central bank and there is no formal memorandum of understanding (MoU) or a ‗Results Agreement‘ between the Government and the Reserve Bank. press meets. Basel.2010. thus enhancing accountability.publications. Krishnan. WP/4/226. Issues in the Governance of Central Banks. Subbarao. EDs and select HODs of the Reserve Bank. press releases. retired from the Bank‘s service as at the close of business on February 28. Ninth Annual BIS Conference. expected outcomes.8 Shri R Gopalan. 2011. daily / weekly statistical dissemination and interaction with the media. 2011 consequent upon his becoming a Member of the Legislative Assembly of West Bengal. A Report from the Central BankGovernanceGroup. Shri P.12 Shri C.Gandhiwere appointed as Executive Directors with effect from February 02. X. Ministry of Finance. BIS. (2011). Bank of International Settlements (2010).Concld. Vijaya Bhaskar and Shri B. The ReserveBankcommunicatesbywayofwebsite. The Reserve Bank reiterates its resolve towards transparency and responsibility to the members of the public and other stakeholders through these public responses.2010andSeptember 24. Address to the Meeting of the Central Bank Governance Group in Basel on May 9. Tonny and JoAnne Morris (2004). action. . timeliness and credibility. 2011 and March 01.. Secretary.11 Md Sohrab was appointed to the Local Board (EasternArea)onDecember28. IMF Working Paper. Governor chairs severalsidelinemeetingsgenerallyheldduringCentralBoard meetings and also during his visits to the Regional Offices. HUMAN RESOURCES DEVELOPMENT AND ORGANISATIONAL MANAGEMENT (. 2011. who retired at the close of was accepted with effect from May 13. 2011). D. June. Government of India was nominated on the Central Board of the Bank with effect from February 15. BIS Paper No.55. bankers of the region as also senior State Government officials and discusses various specific developmental and implementational issues. 2010.13 ShriS.Hisresignation 139 X. X.BISConsultativeDocument. Chartered Accountant and Shri Mihir Kumar Moitra were appointed as members of the Local Board (Northern Area)witheffectfromAugust26. 2011 X. Other Senior Management Group/Committee A Top Management Group (TMG) under the Chairmanship of Governor and attended by DGs.. Lybek. References: Bank of International Settlements (2009). Nevertheless. The minutes of the meetings of the TAC are now being posted on the RBI website with a time lag.9 Shri Harun Rashid Khan took over the office of Deputy Governor of the Bank on July 4. respectively. speeches of Governor / Deputy Governors. The Reserve Bank has made extensive use of communication policy with the objective of transparency.ACommittee of Deputy Governors meets at regular intervals to discuss and decide on various policy matters referred to it. X. Monetary and Economic Department. 2011 in place of Shri Ashok Chawla. monetary policy statements. periodicals. Department of Economic Affairs. policy successes and failures through several channels (Subbarao. 2011.) theresponsibility. Mahapatra were appointed as Executive Directors with effect from June 13.10 Shri Kamal Kishore Gupta. Executive Director. 2011. ―The Future of Central Banking Under Post-Crisis Mandates‖. X. The Governor meets the departmental heads and direct recruits of the Regional Offices. The decisions taken in these meetings are followed-up with the entities concerned for implementation. the Reserve Bank has functionedindependentlywithinabroadtwo-wayconsultative process with the Government. This has enhanced autonomy and accountability even in the absence of formal mechanism. It has taken several steps for improved governance by wide consultations for policy formulation and for intensive policy interactions communicating its stance.KaruppasamyandShriR. respectively. March.GOVERNANCE. meets once in a month and discusses key issues and prepares strategy for the future course of action in the short and medium term. 2011.accountabilityandtimepathofthedecision making remains entirely with the Reserve Bank. Appointment/Retirement of Executives business on January 31. Shri G Padmanabhan was appointed as the Executive Director with effect from July 4. ―Central Bank Governance: A Survey of Boards and Management‖.Basel. ―Central Bank Governance Issues: Some RBI Perspectives‖. 2011.

2006 and was a member of the Board for Financial Supervision.Prof. and Dr. Tendulkar was also a member of the Eastern Area Local Board and a member of Human Resource SubCommittee of the Bank. Smt Rajagopalan promoted credit co-operatives among rural women. She was a member of expert committee to review co-operative laws set up by International Labour Organisation (ILO).E.14 ShriAzimPremji. Managing Director of World Bank (Annex II). Tendulkar (72). Governor of Bank of Mauritius. Chairman of the Banking.16 Smt Shashi Rajagopalan (60). The publications include the two statutory publications the Annual Report and the Report on Trend and Progress of Banking in India . X. Tendulkar was an outstanding scholar and was widely respected across the academic and civil society for his ability to apply economic theory and insights to real world problems of poverty and inequality.Itspublicationshave become concise with precise messages. Dr. He was most known for his extensive work on poverty and had also written extensively on Indian development issues and policies. Director of the Central Board of the Bank passed away on June 21. 2011 for Trade and Industry and Public Affairs. Mr. including liberalization and globalization. Prof. George Osborne. these publications are well-read and commenteduponbyresearchersandanalystsaswell as by media. Dodd.DirectoroftheCentralBoard as also Shri Montek Singh Ahluwalia and Dr. He was a former Chairman of the Prime Minister‘s Economic Advisory Council. S. A wide spectrum of issues came up for discussion. These high level visits helped in exchange of ideas and signified the keen interest taken by the world community to understand India‘s economic and financial sector policies. former Government Directors of the Central Board of the Bank were conferred Padma Bhushan Award on Republic Day. 140 . inter alia.TheLord Mayor of the City of London Alderman Nick Anstee. She was actively involved in the watershed development in the country. Visit of Foreign Dignitaries X.17 During the year. U. 2006. Vijay Kelkar. Lord Stephen Green. She had a long and illustrious career with several civil society organisations. including the functions and policies of the Reserve Bank. X.Accompaniedbycrisppress releases. as also the Monetary Policy and the Macroeconomic and MonetaryDevelopments. banking supervision. UK Chancellor of the Exchequer. She was also a RBI nominee on the Board of National Bank for Agriculture and Rural Development (NABARD) and Chairperson of the Audit Committee constituted by its Board. which had enabled the country to successfully cope with the global crisis. Rundeersing Bheenick.and other publications such as the Report on Currency and Finance. Director on the Central Board of the Reserve Bank passed away on August 5. Prof. 38 delegations from seventeencountriesvisitedtheBank.Israel. INITIATIVES FOR IMPROVED COMMUNICATION X. Yuval Steinitz.19 The Reserve Bank has been striving towards a transparent communication policy and has taken severalinitiativesinthisdirection.Thedelegations held interactive meetings with the Governor and other senior executives. respectively. UK.15 Prof.Bank of Israel. H. She was a member of the Sub-Committee of the Central Board to study ‗Issues and Concerns in MFI Sector‘. Secretary of Commerce Gary Locke. trade and bilateral relations. Minister of Finance. Obituary X.Governor. HousingandUrbanAffairsCommittee. She was nominated on the Central Board on June 27. Suresh D. facets of monetary policy.USA. 2011 at Pune. Senator Christopher J. Hon.18 SeveralhighprofiledignitariesvisitedtheBank during 2010-11 including. Minister of State for Trade and Investment. He was nominated on the Bank‘s Central Board on June 27.ANNUAL REPORT Awards X. the Rt. 2011 at Hyderabad.StanleyFischer. Ngozi Okonjo-Iweale. economic policy.

Startingfrom2008tilldate. Second.23 During its Platinum Jubilee last year.20 With a view to further improving monetary policycommunicationthreenewinitiativesweretaken by the Reserve Bank during 2010-11. as also after the two quarterly policies. it started teleconferencing with researchers and analysts after announcing the annual and mid-term policies. with Executive Director (Shri V. it has started disseminating minutes of the Technical Advisory Committee on Monetary Policy with a lag. regular educational visits to the Central Office of the Reserve Bank are organised for students as well as senior citizens and young entrepreneurs. with student community as the main audience. In compliance with the directions of the Central Information Commission (CIC). regulatory issues and on developmental measuressuchasfinancialinclusion. X. S. RBI has been providing the necessary information under the RTI Act. Promoting interaction with stakeholders for better understanding X.morethan150educational visits have been conducted. Workshopsoncentralbankingfunctionsforjournalists who follow central banking were also organized which contributed towards creating a better understanding between the media and the central bank. The event for 2010 was conducted in Chandigarh.21 In an effort to promote research. First. the ReserveBankhadlaunchedan‗outreach‘programme in which the senior management of the Reserve Bank visited remote villages across the country to create awareness about banking and central banking. surveys done by the Reserve Bank as a precursor to monetary policy. from April 2011. the Reserve Bank has decided to conduct one town hall event every year. Outreach Programmes X. The size of the regional language websites has also increased significantly.25 The Reserve Bank also continued to make extensive use of its web-site to communicate with external audiences. This has proved to be an immensely rewarding learning experience for the Reserve Bank and it was decided to continue the outreach programme as a regular activity through 2010-11.the Reserve Bank‘s Platinum Jubilee publication brought out in 2010 that recorded milestones in the Reserve Bank‘s history largely drawing from reports and photographs appearing in newspapers. the newsibition is now scheduled to travel to ten centres. the Reserve Bank has been holding seminars on its research publications relating to monetary policy. Third. This enabled a first hand understanding of the rationale of the policy directly from policy makers. the Chief General Manager-in-Charge of Department of Administration and Personnel Management has been designated as the Transparency Officer. Right to Information Act (RTI). Sessions on financial literacy aimed at educating the audience about functions and working of the Reserve Bank were also organised.Theseseminars have helped in increasing interaction with various stakeholders and promoted a better understanding. 2005 X. 141 .22 As part of its financial literacy initiatives. The heads of various Central Office Departments and the 15 Banking Ombudsmen have been designated as Central Public Information Officers (CPIOs).000 registered users. An interactive session with Reserve Bank executives is also part of these visits. X.26 As part of its transparency goal and as part of the statutory obligations. mainly second tier and remote cities. X. After its inaugural run in Kolkata in December 2010. A newsibition was created out of Mint Road Milestones . HUMAN RESOURCES DEVELOPMENT AND ORGANISATIONAL MANAGEMENT Monetary policy communication X. The participants get an opportunity to visit the Monetary Museum to get a glimpse of the Reserve Bank‘s history and the National Clearing Cell to see the cheque clearing process.24 In an effort to bring the central bank closer to the common man. The site today has nearly 53. Das) as the Appellate Authority. it started live telecast of the Governor‘s statement to thebankers. as per the best international practices.GOVERNANCE.whichenabledtheReserveBanktobring in public domain the stance of the policy directly from the Governor before the market begins to analyse the policy.

viz. seminars.ANNUAL REPORT X. of Participants 5 2. Pune ZTCs (Class I) ZTCs (Class III) ZTCs (Class IV) 2 149 161 17 150 64 No. In compliancewiththedirectionsoftheCIC. 142 .theReserve Bank of India has formulated indicative negative list/ classes of information which the Reserve Bank considers as exempt from disclosure under the provisions of the RIA. This list was approved by the Committee of the Central Board and has been hosted on the Bank‘s website. of Programmes 4 143 160 47 112 63 No. of Participants 3 3. HUMAN RESOURCE DEVELOPMENT INITIATIVES Training / deputation / higher studies / distance learning X.087 in 2010-11.885 1. 1. Pune cater to the training needs of the officers of the Reserve Bank and the banking industry and serve theobjectivesforhumanresourcedevelopment. @: Includes 29 foreign participants.951@ 1. The two training establishments of the Reserve Bank.theReserveBankStaffCollege(RBSC). The Reserve Bank deputed 578 officers to attend training courses.30 The Zonal Training Centres (ZTCs).422 * : Includes 19 concurrent auditors. 166 Class III employees and 295 Class IV employees were deputed for in-house programmes within the Bank.904* 4.1).214 2010-11 (July-June) No.1: Reserve Bank Training Establishments . Chennai CAB. Repositioning of Zonal Training Centres (ZTCs) X. conferences and workshops conducted by Table X. CAB: College of Agricultural Banking.140 1. establishedin1963. while modernising the techniques for imparting training as well as revamping the course content in response to the evolving challenges for central banks and the changing needs for training in the banking sector. The capacity and infrastructure of these institutes were underutilised while the colleges were finding it difficult to cope up with the increase in training requirements.015 4.29 The Reserve Bank continued to provide avenues for skill upgradation to its staff.826 1. of Participants 7 2.867 370 2..350 in 2009-10 and further to 5. seminars and conferences organised by external management/banking institutions in India. of Programmes 1 RBSC. of Programmes 6 147 162 57 87 70 No.ThefourZonalTrainingCentres(ZTCs)mainly focusontrainingofClassIIIandIVstaffoftheReserve Bank (Table X.329 2009-10(July-June) No.Chennai and the College of Agricultural Banking (CAB). X. In addition. 4 chartered accountants and 31 foreign participants. both functional and soft.090 officers were deputed by the Bank to participate in training programmes. Training at external institutions X. A number ofClassIIIandClassIVemployeeswerealsodeputed for training in external institutions in India during the year. with a view to enhance the quality of human capital in the Bank.333 in 2008-09 (July-June) to 4.310 1. During 2010-11 (July-June) about 97 per cent of requests had been responded.31 During 2010-11. ZTC : Zonal Training Centre.066 1.They have been consistently striving for skill upgradation.atthefourmetrosweremandated to cater to the training needs of workmen employees of the Bank.27 The number of requests for information under RIA has increased from 3. continue to conduct training programmes for workmen employees also.960 4. RBSC: Reserve Bank Staff College.28 The Bank has initiated steps to digitise all the records which are frequently required for furnishing the information sought under the RTI Act.602 1. The ZTCs have therefore been repositioned as training centres for officers in basic skill building.Programmes Conducted Training Establishment 2008-09(July-June) No. however. They will.

In all 36 participants from the Reserve Bank took advantage of this training facility in 2010-11. One officer was selected during the year under the scheme of sponsoring officers for two-years Post Graduate Programme in Banking and Finance (PGPBF) at NIBM. undertaking a diagnostic study of engagement levels amongst the Bank‘s personnel. The ITP serves as a platform to disseminate policy lessons learned in other parts of the world and as a forum to discuss regional issues. Operationalisation of CAFRAL X. developing improved ways of employee collaboration and designing clearer and cascaded communication strategies.The CAFRALhas inplaceaGoverningCouncil. During the year. State Governments. With this merger. Creation of Human Resource Management Department (HRMD) X.CAFLhasbeensetupasaSociety on April 19. on macroeconomic management and financial sector issues. In all.36 The Reserve Bank during the year moved to reposition it as a knowledge institution. microeconomic diagnostics. government finance statistics. monetary and financial ManmohanSingh. A Concept Committee for CAFL under the chairmanship of Dr. officers of the Bank get an opportunity to pursue courses in leading international universities. banking and financial institutions and multilateral institutions in more than 34 countries (Table X. 143 . Ganguly was set up in 2009 which laid down the focus areas for CAFL.GOVERNANCE. of officers trained in India 2 718 1. 103 officers have been selected under this scheme since its inception in 1986.The Centre is a non-profit organization. Dr. six programmes were conducted under this joint training initiative covering topics. HUMAN RESOURCES DEVELOPMENT AND ORGANISATIONAL MANAGEMENT Table X. Six officers of the Bank availed study leave under different schemes for pursuing higher studies during the year. Governor inaugurated the Department on August 3. Furthermore. 450 employees availed the benefits under the incentive scheme for pursuing select categories of part-time and distance education courses during 2010-11.33 The Reserve Bank of India and the International Monetary Fund jointly established the JointIndia–IMFTrainingProgram(ITP)atNIBM.change ofnameofCentrefromCentreforAdvancedFinancial Learning (CAFL) to Centre for Advanced Financial Research and Learning (CAFRAL).32 Four officers were selected during the year under the Golden Jubilee Scholarship Scheme for higher studies abroad during 2011-12.2: Number of Officers Trained in External Training Institutions in India and Abroad Year 1 2008-09 2009-10 2010-11 No. 2011. X. Reserve Bank and other regulatory bodies) and the officials of countries from South Asia and East Africa.104 1.2). a new department called Human Resource Management Department (HRMD) has been created in the Bank. Joint India-IMF Training Programme (ITP)-Pune X. driving greater focus on the Bank‘s strategic imperatives and related capacity building measures.35 Consequent upon the amalgamation of the functions of the erstwhile Department of Administration and Personnel Management (DAPM) and Human Resources Development Department (HRDD). of officers trained abroad 3 426 553 578 statistics and anti-money laundering and combating the financing of terrorism.chairedbytheGovernor of Reserve Bank of India.Pune in May 2006 to impart policy oriented training in economics and related operational areas to Indian officials (from Central Government. Under this scheme. TheCommitteealsorecommended. 2007 and subsequently as a Trust under the BombayTrustAct 1950. it is expected that there would be greater synergy between framing of human resource policies in Reserve Bank and their execution.interalia. Ashok S.090 No. Pune. INITIATIVES IN ORGANISATION MANAGEMENT X.34 Launched by the Prime Minister. interalia.

With this in mind. the department was reorganised with thematic units reflecting the core areas of research. The economic research and analysis requirement of the Bank has increased significantly over last several years.which helps the employees in keeping abreast of the latest happenings both inside and outside the organization .and(e)The 'thematic video conference' every month which is an initiative towards information dissemination within the Bank on important developments in various work areas.RBI'sKnowledgePolicyhasbeendesigned with two sets of objectives. inter alia hold seminars on importantandemergingissuesasalsoorganizebroad-based Study Circles in the Bank for discussing and debating ideas and issues of mutual interest and concern. (b) Setting up in-house groups across the Bank's offices which. reflected in an organisation through both people and processes. a Knowledge Policy must articulate objectives and strategies related to both people and processes. These will require changes in both processes and people policies. It also has medium-term objectives of integrating knowledge into placement and transfer decisions and to design career paths for junior officers. to be effective. Medium-term objectives are more ambitious. by better aligning the Department‘s work to the research and analytical needs of the Bank. (d) The 'Knowledge Sharing Series' where external experts are invited to deliver lectures on diverse areas ranging from subjects of general interest. health. therefore. resulting in a quest for designs that are inherently flexible. In this context. As work gets increasingly knowledge intensive. The shift is now distinctly to organisations and industries referred to as 'knowledge-based' as opposed to the asset-based model of value creation in traditional organisations and industries. therefore. there is an emergent need to convert institutions into Knowledge Institutions. as the economic and operational environment in which the Bank operates has turned increasingly more complex and dynamic. To the extent that significant change is called for on both fronts. Box X. Consequently. These include (a) Leveraging technology for revamping the Bank's "Enterprise Knowledge Portal' .2). Apart from deputation on trainings. reflected in an organisation through both people and processes. were consistent with a medium-term timeframe.38 The Reserve Bank has been increasingly relying on research to provide a more scientific basis for its policy-making. TheReserveBank'sSeniorManagementRetreatfortheyear 2010 provided a number of inputs for follow-up actions for knowledge management by the Bank. it was felt necessary to streamline the organisational structure of Department of Economic Analysis and Policy (DEAP). a Knowledge Policy must articulate objectives and strategies related to both people and processes. the Reserve Bank‘s Knowledge Policy has been designed with two sets of objectives. Consequently. differentiated by time horizon. The Policy should phase in change so as to minimise disruption in current work practices even while enhancing the knowledge content of these practices. Short-term objectives articulated by the Policy provide the basis for immediate actions. Knowledge is a multi-dimensional phenomenon. issues of public concern. Some of these were consistent with a short-term horizon. (c) Building up well-stocked libraries at all the offices of Reserve Bank. Withthisinmind.with a focus shift from information to knowledge customization. The name of the department was also changed to ―Department of Economic and Policy Research (DEPR)‖ from September 2010. abruptness can be disruptive. while others called for discontinuous change in organisational policies and. Reserve Bank has undertaken a number of initiatives to enhance the knowledge base and skills of its human resources. to be effective.ANNUAL REPORT Knowledge Initiative X. highly oriented towards problem solving and has a bias for continuous learning through experimentation. recently initiated a reorientation initiative which puts a premium on enhancing the knowledge content of all its work practices. Reorganisation of Departments X. Based on the report of an Internal Committee. seeking to significantly enhance the role of knowledge in decision-making and implementation by the Bank.37 Knowledge is a multi-dimensional phenomenon. Reserve Bank of India has also been seized of this and has. short term and medium term (Box X. personalinvestmentstowomen'sempowerment.2 Knowledge Initiative There is now a fundamental rethinking of the principles of organising. TheKnowledgePolicyoftheReserveBankaimsatfacilitating the flow of knowledge through the organisation so as to enhance the quality of decision-making and implementation and to initiate a culture of information and knowledge sharing by departments and individuals. which are intended to exploit available opportunities for knowledge enhancement within existing process and people arrangements. 144 .

GOVERNANCE, HUMAN RESOURCES DEVELOPMENT AND ORGANISATIONAL MANAGEMENT

X.39 The vision of DEPR is to be a knowledge centre in policy-oriented research in monetary, financial, banking, international and macroeconomic issues. The management information system (MIS) of DEPR has been strengthened with a view to providing a quick snapshot of data and information coupled with analytical inputs in an integrated format to the top management. A near and medium term research agenda has been formulated to generate research output, which could form inputs for taking policy decisions on wide range of macroeconomic issues. X.40 In the wake of financial crisis, increased globalisation and changes in monetary and banking regulatory policies, the need for quality and timely statistics as inputs to policy making has been greater than ever before. With the monetary policy announcements becoming more frequent, need for high frequency forward looking information, mostly collected through surveys, has become essential. Against this background, in 2010, the Department of Statistics and Information Management (DSIM) has reorganised and reoriented its statistical activities around data generation, data management, data dissemination, surveys, analysis and research. With a view of disseminating key macroeconomic data more frequently, the ‗Handbook of Statistics on Indian Economy‘ has been made available on near real time basis on the Reserve Bank‘s web-site. X.41 A new publication viz. ‗RBI Working Paper Series‘ was introduced as an exclusive web publication to provide platform to the Reserve Bank‘s Staff for presenting their research papers as well as to receive feedback from informed researchers, with the first issue in the series commencing from March 2011. The RBI Working Paper Series would focus on quick analytical research on issues and challenges of contemporary relevance to the Bank. In addition, ‗RBIOccasionalPapers‘continuedtodisseminatethe research work of RBI Staff on broad range of issues, whichhavebeenattheforefrontofpolicydiscussions, withspecificperiodicity.ResearchersoftheBankhave also published several research articles in referred economic domestic as well as international journals.

Promotion of external research activities X.42 The broad categories of financial assistance provided by the Reserve Bank for promoting external research include: (a) establishment of RBI Chairs in Universities/ Research Institutions, (b) initiating Development Research Group (DRG) Studies, (c) financing of projects, (d) funding seminars/ conferences/workshops, (e) financial support for publication of research journals and (f) scholarship scheme for faculty members from academic institutions. X.43 In pursuance of the recommendations of the Expert Committee (Chairman: Dr. Bimal Jalan) and taking into account case-by-case analysis of functioning of the existing RBI Chairs, suggestions expressedduringinteractionwiththeChairProfessors and norms of pay structure announced in the 6th Pay Commission for UGC Professors, it was decided to enhance the corpus fund for RBI Chairs to Rs. 4 crore and also to strengthen the guidelines for operating various external research schemes. At present, there are 17 RBI Chairs (of which, corpus fund in one RBI Chair is being recalled due to non-compliance of terms and conditions) and two new RBI Chairs have been established to support research activities in emerging areas. Following the recommendations of Dr. Jalan Committee, a Steering Committee on Economic and Policy Research (SCEPR) was constituted with Deputy Governor-in-Charge of Research Departments as Chairman and Executive Director-in-ChargeofResearchDepartmentsasViceChairman and few distinguished academicians and senior officers of the Reserve Bank as members. The objectives of the Committee include preparing the research agenda and identifying research areas for external research, reviewing and ensuring accountability, transparency and usefulness of research activities funded by the Bank. Three subCommittees have also been formed to assist SCEPR in achieving its objectives. Performance Appraisal X.44 With a view to bringing about transparency in the appraisal process, it has been decided to allow

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all officers to view their Performance Appraisal Reports (PAR) after finalisation of the same by the Review Committee. Further, a redressal mechanism to hear appeals, if any, from officers on communication of the entries made in their PAR has also been put in place by designating appellate authorities for officers in all grades. Engagement Survey X.45 As part of its organisational development initiatives, the Bank took up, during 2010-11, an Employee Engagement Survey for gauging the engagementlevelsofitsemployeesacrossitsoffices. One of the Bank‘s empanelled consultants, i.e. Aon Hewitt Consultancy got the survey done for the Bank. While the engagement level of the staff has been foundtobehigh,thesurveybroughtoutspecificareas whereengagementappearstobelow.Focusonthese areas is on the anvil. Grants and Endowments X.46 The Reserve Bank has catalysed the creation of four research and training institutions in India, viz., (i) Indira Gandhi Institute of Development Research (IGIDR), Mumbai; (ii) National Institute of Bank Management (NIBM), Pune; (iii) Indian Institute of BankManagement(IIBM),Guwahati;and(iv)Institute for Development and Research in Banking Technology (IDRBT), Hyderabad apart from its own training colleges. During the year 2010-11, Reserve Bank extended financial support of `1,800 lakh, `263 lakh and `75 lakh to IGIDR, NIBM and IIBM, respectively. Industrial Relations X.47 Industrial relations in the Bank remained peaceful during the year 2010-11. Recognising the significance of designing reasonable compensation packages for appropriate harnessing of human capital, the pay and allowances of all categories of employees in the Reserve Bank were revised during the year, effective November 01, 2007. These changes have reflected the Reserve Bank‘s positive approach for organisational development through enhanced productivity strategies and better work-life balances for its employees.
25,000

Table X.3: Recruitment by the Reserve Bank – 2010*
Category of Recruitment 1 Class I Class III Class IV (a) Maintenance Attendant (b) Others Total * : January-December. Total 2 109 3 8 45 165 of which SC ST 3 13 0 5 0 18 4 08 0 1 3 12 Percentage SC ST 5 11.9 0.0 62.5 0.0 10.9 6 7.3 0.0 12.5 6.7 7.3

Recruitment X.48 During 2010 (January-December), the Reserve Bank recruited 165 employees. Of this, 18 belonged to Scheduled Castes (SCs) and 12 to Scheduled Tribes (STs) categories, constituting 18.2 per cent of total recruitment (Table X.3).

Staff Strength
X.49 The total staff strength of the Reserve Bank as on December 31, 2010 was 19,207 as compared to 20,295 a year ago (Table X.4 and Chart X.1). Of the total staff, 21 per cent belonged to Scheduled Castes and 8.9 per cent belonged to Scheduled Tribes.
Chart X.1: Total Staff Strength of the Reserve Bank
35,000

30,000

20,000

15,000

10,000 1999 2000 2001 2002 2003 2005 2008 2009 2004 2006 2007 2010

end-December

146

GOVERNANCE, HUMAN RESOURCES DEVELOPMENT AND ORGANISATIONAL MANAGEMENT

Table X.4: Staff Strength of the Reserve Bank
Category Total Strength December 31, 2009 1 Class I Class III Class IV Total 2 9,430 3,789 7,076 20,295 December 31, 2010 3 8,754 3,604 6,849 19,207 December 31, 2009 4 1,365 596 2,300 4,261 SC December 31, 2010 5 1,277 554 2,200 4,031 December 31, 2009 6 658 439 710 1,807 ST December 31, 2010 7 598 422 688 1,708 Per cent to Total Strength SC ST December 31, 2010 8 14.6 15.4 32.1 21.0 9 6.8 11.7 10.0 8.9

X.50 During the year 2010 (January-December), meetings between the management and the representatives of the All India Reserve Bank Scheduled Castes/Scheduled Tribes and the Buddhist Federation were held on four occasions to discuss issues relating to the implementation of reservationpolicyintheReserveBank.Inaccordance with the Central Government‘s policy, the Reserve BankprovidedreservationtoOtherBackwardClasses (OBCs) effective September 8, 1993. The representation of OBCs (recruited after September 1993) in the Reserve Bank as on December 31, 2010 stood at 942. Of these, 335 were in Class I, 82 in Class III and 525 in Class IV. X.51 One meeting was held between the management and the representative of the All India Reserve Bank OBC Employees‘ Welfare Association to discuss issues relating to implementation of reservation policy in Reserve Bank.

X.54 Mumbai centre (including the Central Office Departments) continued to have the maximum number of staff (of about 30 per cent) (Table X.6). Opening of Sub-Office of RBI at Agartala (Tripura) X.55 The Agartala Sub-Office of the Reserve Bank was opened on May 19, 2011, thus making Tripura thesecondstateintheNorth-EastafterAssamtohave an office of the Bank. The new office will further coordination with banks, State Government, local authorities, etc. so as to ensure that targets under Table X.5: Category-wise Staff Strength
(As on December 31, 2010) Class 1 A. 1. 2. 3. 4. 5. 6. 7. 8. 9. B. 1. 2. 3. 4. 5. 6. C. 1. 2. 3. 4. Class I Senior Officers in Grade F Senior Officers in Grade E Senior Officers in Grade D Officers in Grade C Officers in Grade B Officers in Grade A Treasurer Deputy Treasurer Assistant Treasurer Class III Sr. Assistant Assistant Secretarial assistant Word Processor Assistant Special Assistant (Teller) Class III (Others) Class IV Maintenance Staff Service Staff Technical Staff Other Staff Actual Strength 2 8,754 93 228 391 939 1,339 5,652 11 34 67 3,604 1,154 876 116 365 608 485 6,849 1,470 4,411 202 766 19,207

X.52 The total strength of ex-servicemen in the Reserve Bank as on December 31, 2010 stood at 216 in Class I, 113 in Class III and 728 in Class IV. The total number of physically handicapped employees in Class I, Class III and Class IV cadres in the Reserve Bank stood at 245, 81 and 136, respectively, as on December 31, 2010.
X.53 Of the total staff, 45.6 per cent belonged to Class I, 18.8 per cent to Class III and the remaining to Class IV (Table X.5).
147

Total Strength in the RBI (A+ B+C)

ANNUAL REPORT

Table X.6 : Reserve Bank’s Office-wise Strength of Staff
(As on December 31, 2010) Office (including sub-offices) 1 2 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. Ahmedabad Bengalaru Belapur Bhopal Bhubaneswar Chandigarh Chennai Dehradun Gangtok Guwahati Hyderabad Jaipur Jammu@ Kanpur Kochi Kolkata Lucknow Mumbai Nagpur New Delhi Panaji, Goa Patna Pune-CAB-CRDC-ITP Raipur Ranchi Shimla Class I Class III 3 4 179 145 68 26 73 34 316 2 0 99 127 125 8 182 44 417 58 534 250 275 4 69 19 0 0 0 Class IV 5 298 260 233 96 227 114 517 3 0 219 294 226 61 393 44 671 135 1,152 275 409 2 286 84 0 0 0 Total 6 856 873 456 306 509 347 1,374 16 4 562 774 641 171 860 140 1,789 393 2,658 825 1,278 13 613 172 12 11 7

Rajbhasha policy. During the year, several Hindi training programmes were conducted. A quarterly Hindi magazine on banking viz. ―Banking ChintanAnuchintan‖, containing original Hindi articles, with its special issue on ‗Co-operative Banking‘, was published. A reporting package on Rajbhasha was made live ensuring online submission of quarterly reports regarding the use of Hindi by the Regional Offices (ROs)/ Central Office Departments (CODs) of the Bank. Rajbhasha Officers‘ conference as well as region-wise review meetings with the concerned Rajbhasha Officers were held to monitor the progress made in the use of Hindi.All the handouts were made available in bilingual form in its training colleges and the Bank continued to bring out various publications in bilingual form i.e. both in Hindi and English. Management of the Bank‟s Premises X.57 Premises Department continued its efforts towards providing residential accommodation to the officers in a planned way during the year. In all, six projects including four projects for officers‘ flats and two projects for student hostels in IGIDR and RBSC have been taken up under ‗design and build (DB)‘ mode, which are expected to be completed by mid2013. All these buildings will be developed as one single project, which is first of its kind in the Bank. The contractor viz. M/s Shapoorji Pallonji & Co. Ltd. would be responsible for the planning, designing, obtaining permission from the controlling civic authorities and executing them, while Premises Department will monitor the mile stone events of the project with a view to complete the projects as per the specified quality and time. The Green Initiatives X.58 As a part of the Bank‘s corporate social responsibility, many initiatives aiming at environment preservation and protection have been undertaken. Premises Department undertakes energy as well as water audit to identify areas of wastages and devise more efficient ways of resource utilisation. New equipments for performance measurements on use of water and electricity have been installed at various points in Central Office Building. Further, most of the
148

379 468 155 184 209 199 541 11 4 244 353 290 102 285 52 701 200 972 300 594 7 258 69 12 11 7

27. Thiruvananthapuram A. Total B. CODs # Grand Total

218 71 6,825 3,125 479 1,929 8,754 3,604

167 456 6,166 16,116 683 3,091 6,849 19,207

CAB : College of Agricultural Banking. CRDC : Central Records and Documentation Centre. ITP : IMF Training Programme, Pune @ : Includes Srinagar Sub-Office. # : Central Office Departments Note: Agartala Sub-Office was opened on May 19, 2011.

special dispensation scheme and roadmap for providing banking services in villages with population of more than 2,000 under financial inclusion plans are met, as also to ensure that banks take initiative to inculcate the habit of banking amongst the ‗no- frills‘ account holders. It would also explore new avenues for credit so as to improve the CD ratio for the state andmonitoravailabilityofgoodqualitycurrencynotes. Rajbhasha X.56 The Reserve Bank continued with its efforts to promote the use of Hindi in its working during 201011 in pursuance of the statutory requirements of

an internal group was constituted with some Central Office Departments of the Bank to prepare criticality matrices to facilitate and support Enterprise Risk Management (ERM) and RBIAimplementation for the Bank. Based on suggestions of the audit. Technology audit of Enterprise Knowledge Portal (EKP). Mumbai was completed during the year. X. ‗generally conforms‘ on the Department. The new building construction projects being undertaken are as per the latest green building requirements. As a result of all these efforts. ISO certification process initiated at eight ROs is at final stage. recently an exercise has also been taken up for Carbon Footprint mapping for the Central Office Building. Mail Message Service (MMS) and Integrated Computerised Currency Operations Management System (ICCOMS) were also carried out by external experts during the year. HUMAN RESOURCES DEVELOPMENT AND ORGANISATIONAL MANAGEMENT old central air-conditioning equipments have been replaced with new energy efficient air-conditioning equipments using environment friendly refrigerants and the remaining equipments will also be replaced in the next two years. Information Security Management System (ISMS) certification of Central Accounts Section (CAS). 24 of the Reserve Bank‘s office buildings have received star ratings from the Bureau of Energy Efficiency.60 Inspection Department examines and evaluatessystems. Nagpur and FMD. As a pilot project.59 Theoldliftequipmentsarebeingreplacedwith new energy efficient equipments based on ‗variable voltage variable frequency (VVVF)‘ technology with microprocessor based smart traffic management systems. Management audit of four officesofBankingOmbudsman(BO)werealsocarried out during the year. The five regional offices were covered under Risk Based InternalAudit (RBIA) duringtheyear2010-11inanendeavortoqualitatively enhance audit process.GOVERNANCE. A system of IS audit on continuous assurance basis (akin to concurrent audit) was introduced initially at four metro offices with external assistance. 149 .61 Quality assurance of Inspection Department was carried out by a team from Institute of Internal Auditors (IIA) in December 2010. Ministry of Power. which conferred the highest rating viz. A compendium of Information Systems (IS) audit guidelinescoveringbothgenericaswellasapplication specific areas was prepared and circulated during 2010-11 to all stakeholders. Action is also initiated with all CODs in identification of functional risks and updation of risk registers and with all CODs and ROs in building up ‗Incident Database‘. X.62 DepartmentofEconomicandPolicyResearch (DEPR) received ISO 9001-2008 certification during the year. X.processesandcontrolstoprovide objective feedback to the top management regarding health of various offices / departments of the Bank. Internal Audit/Inspection in the Reserve Bank X.

On the liability side. XI.43 crore in 2010-11.952. XI.75 per cent) from `25. mainly reflecting the impact of liquidity management operations undertaken by the Bank. ` 15. discount. more than offset by earnings from domestic assets which have expanded. The major source of the net interest receipts is augmented by relatively small amounts of income from other sources. there was a significant increase in Bank‘s portfolio of domestic assets in the form of government securities on account of open market purchases. overall policy objectives relating to the economy and the financial system and not by commercial considerations.3).73 per cent over the previous year (Table XI.74 per cent in 2010-11 as compared with 2.59 per cent (Table XI.5 The gross income of the Reserve Bank for the year 2010-11 was `37. The second one reflecting the impact of all other functions of the Bank is known as the Balance Sheet of the Banking Department. 1949. etc. After meeting the needs of necessary transfer to the Contingency Reserve and the Asset Development Reserve. On the asset side.4 The two major components of the Bank‘s income are earnings from foreign sources and earnings from domestic sources.86 crore (15. commission.2). XI..009 crore was allocated for transferring to the Government. Earnings from Domestic Sources XI. Earnings from Foreign Sources XI.102.3 The Reserve Bank‘s assets and liabilities reflect the outcome of its operations guided by the 150 .12 crore in 2010-11. reflecting the low interest rates in international markets.09 per cent in 2009-10 (Table XI.1 The size of the Reserve Bank‘s balance sheet increased significantly in 2010-11 (July-June) mainly on account of its liquidity management operations. the expansion was on account of a large increase in notes in circulation as also an increase in banks‘ deposits with the Reserve Bank in line with the deposit growth in the banking system (see Box II. The rate of earnings on foreign currency assets and gold was lower at 1. however.2 The financial statements of the Reserve Bank are prepared in accordance with the Reserve Bank of India Act. The increase was mainly due to the effect of earnings on INCOME XI. The Reserve Bank presents two balance sheets. The first one relating to the sole function of currency management is presented as the Balance Sheet of the Issue Department.1). repo purchases and disinvestment of Government of India‘s surplus balance parked with the Reserve Bank. 1934 and the notifications issued thereunder and in the form prescribed by the Reserve Bank of India General Regulations. an increase of 12.59 crore in 2009-10 to `15. there was a 3 per cent increase in total expenditure to ` 8. The decline in income from foreign assets in 2010-11 was.070. The increase in foreign currency assets mainly reflected the valuation effect on the portfolio. While the Bank‘s gross income increased by 12. registering an increase of 104. exchange.920.6). The income from foreign assets declined for the second successive year.781. XI.69 crore in 2010-11.84 crore from `7.149.138. viz.XI THE RESERVE BANK’S ACCOUNTS FOR 2010-11 The balance sheet of the Reserve Bank expanded significantly during the year.55 crore in 2009-10 to `21.6 The Reserve Bank‘s earnings from the deployment of foreign currency assets and gold decreased by `3.655. The increase in income from domestic sources more than offset the decline in income from foreign sources.7 The earnings from domestic sources increased by `8.070.22 crore.73 per cent to ` 37.12 crore. The key financial results of the Reserve Bank‘s operations during the year 2010-11(July-June) are presented in this Chapter.

02 crore in 2009-10.50 9. Non-Establishment Expenditure EXPENDITURE XI.922. governments‘ cash management operations involving higher availment of ways and means advances (WMA) from the Reserve Bank and higher coupon receipt on an increased portfolio of government securities.731.403.12 crore in 2009-10 to `8.102.90 25.883.16 (-) 15.27 4.039.781.52 per cent) is mainly attributable to the increase in the volume of government business conducted by agency banks.655.69 1. XI.14 2010-11 6 21.17 5.308. such as.99 5.867.ThetotalexpenditureoftheReserve Bank increased by `252. Establishment Expenditure XI.24 7.855.149. Exchange gain/loss.52 2008-09 4 50. The rate of earnings on average domestic assets increased from 3.98 (41.55 6.80 per cent).35 1.031.828.52 34.82 crore for 2009-10 registering an increase of `313.750.1: Gross Income (` crore) Item 1 A. Discount.14 crore in 2009-10 to `36.22 crore in2010-11largelyduetoanincreaseinestablishment expenditure and agency charges.12 75.47 crore (5. Discount. 2011 3 Absolute 4 13.149.59 32.76 crore in 2010-11 and constituted 1. Table XI.056.33 57.22 40.144.86 Variation Per cent 5 1.21 21.195.886.74) 2007-08 3 51.10 crore (3.79 60.135. Capital gain/loss on securities) Earnings as percentage of Average FCA 12.22 per cent of the agency charges in 2010-11.646.952.751.03. Foreign Sources Interest.49 crore compared with `2.920.THE RESERVE BANK’S ACCOUNTS FOR 2010-11 Table XI. The increase is mainly due to the revision of wages of all categories of staff with retrospective effect.60 crore on sale of shares in SBI.55 2.77 per cent in 2010-11. moderated by a decline in security printing charges (Table XI.31 (-) 3.21 9.4). LAF operations. Agency charges also includes a small component of fees paid by the Reserve Bank to the Primary Dealers as underwriting commission.348.935.884.8 The Reserve Bank‘s expenditure comprises its establishment expenses besides expenditure that arises in the process of performing statutory functions of the Bank.27 879.070.60 742.35 909.34 (5.09 2 12.796. This component decreased from `64. agency charges and security printingcharges. Total Income (Gross) (A+B) 2006-07 2 35.69 15.17.84 888.10 The amount of agency charges paid during 2010-11 was `3.59 15. 2010 1 Average Foreign Currency Assets (FCA) Earnings (Interest.958.00 per cent) from `8.77 2009-10 5 25.43 37.308.012.45 per cent in the previous year to 3.89 crore (15.75 151 .74 As on June 30.300.2: Earnings from Foreign Sources (` crore) Item June 30.9 The establishment expenses for 2010-11 were `2.102. The increase of `157.152. Domestic Sources (i) Interest (ii) Profit on sale of shares of SBI (iii) Other Earnings Total : [(i)+(ii)+(iii)] C.71 crore as against `1. Exchange B.73) Note: Figures in parentheses indicate the amount excluding profit of `34.986.

47 107.376. note forms.82 15.020.600.448.299.34 - 13.14 2.009 crore.032. Establishment III.30 2.49 (-) 5.12 13.00* 2.920.17 (-) 64.65 0.00 13.80 1.49 2.646.00* 2.04 71.43 15. Overall.24 0.655.15 11.435.28 2.75 crore (13. This included `1.25 2007-08 3 2.59 126.12 8.90* 1. 2011 3 5.594.88.88 2009-10 5 1.306.134.663.415.05 43.58 1. LAF operations and Dividend (b) Depreciation on Securities (iii) Interest on Loans and Advances (iv) Other Interest Receipts Other Earnings (i) Discount (ii) Exchange (iii) Commission (iv) Rent realised and others Memo: Earnings in percentage terms (on average domestic assets) 2 3.097.15 22.74 (-) 76.59 0.72 per cent) to `2.45 3.376.10 3.091.65 Absolute 4 1.84 8.603. The interest differential was paid for compensating the Government for the difference in interest expenditure which the Government had to Table XI.67 11.b] of which (a) Interest on Domestic Securities.135.17 8.26 104.35. the supply of notes was 7 per cent less than the indent.12 2010-11 6 55.322 crore payable to the Government towards the interest differential on special securities converted into marketable securities.47.37 8.781.138. 2007.23 6.42 15.59 6.82 6.12 The surplus transferable to the Government of India for the year 2010-11 amounted to `15. 2010 1 Domestic Assets Weekly Average of Domestic Assets Earnings of which: Interest and Other Income (i) Profit on Sale of Securities (ii) Interest on Securities [a .768.300.027.38 1.312. Surplus transferable to the Government of India XI.11 9.) in 2010-11 decreased by `377.88 352.27 (-)2.91 87.4: Expenditure (` crore) Item 1 I.25.45 3.425.165.90 378.02 2.36 2.90 25.85 92.85 1. interest payable on eligible CRR balances was withdrawn with effect from fortnight beginning March 31.135. The amount in 2007-08 was paid towards interest on CRR balances relating to the previous year.77 - - XI.012.08 As on June 30.907.19 1.430. 152 .999.06 2.02 0.97 35.385.25 5.156.39 (-) 341. 1934.373.063.01 781.06 0.033.00 94.13 2008-09 4 1.855.73 0.321.50 2.01 687.71 6.22.64 8.3: Earnings from Domestic Sources (` crore) Item June 30.99 888.01 (-)21.462.08 448.00* 1.87 4.96.19 2.986.111.164.89 7. Non-Establishment of which: a) Agency charges b) Security printing Total [I+II+III] * : Pursuant to amendment to the Reserve Bank of India Act.403.22 II.78 7.667.000 (53 per cent) during 2010-11.08 8.68 2. This decrease was mainly on account of less supply made by presses vis-à-vis indents made for notes in the denomination of `100 (20 per cent) and `1.37 crore.ANNUAL REPORT Table XI.81 4.84 3.754.02 731. Interest Payment of which: Scheduled Banks 2006-07 2 1.16 4.042.217.11 The expenditure incurred on security printing charges (cheque.73 Variation Per cent 5 37.34 (-) 27.35 8.031.576.659.293.33 0.80 (-) 246.85 (-) 4. etc.

70 (2.00 15.207.13 # 26. The amounts of transfer to the Contingency Reserve and the Asset Development Reserve and the surplus transferred to the Government as a percentage to the total income are set out in Table XI. 153 .884.14 5.719.6.430.79 2008-09 4 60.02 27.88 25.00 18.00 15.27 1.98 26. exchange guarantees and risks arising out of monetary/ exchange rate policy compulsions.22 8.63 (3.015.73 * 20.5 : Trends in Gross Income.009.99) 29.27 (32.63 2010-11 6 37.51 (4. In order to meet the needs of internal capital expenditure and make investments in subsidiaries and associate institutions.48 18.00 (40.039.750.411.723. a further sum is provided and credited to the Asset Development Reserve.009.731.25 11.234.10 33.460.638.74 3.39 (15.12 8.69 2007-08 3 57.88 8.234.62 2009-10 5 32.00 6.39 549.411.67) 18.12 18.33) 15.011.40 1.00 (45.00 12.63 13.70 27.168.66 21.668.00 (41.00 * (27.207.013.011.112.013.501.971.00 5.415.06 2008-09 4 60.191.191.14 2010-11 6 37.00 # 4.63 5.18) 47.97 (49.THE RESERVE BANK’S ACCOUNTS FOR 2010-11 Table XI.55) 15.89) 3.070.230.763. * : An amount of ` one crore each has been transferred to the National Industrial Credit (Long Term Operations) Fund.13) 1.25 (52. Internal Reserves XI.82 * : Excluding profit on account of sale of shares of SBI.60) 4.884.488.039.98 2009-10 5 32.82) 1.718.164.16) 25.00 (25.60) # 2007-08 3 57.579.00 # # : Figures in parentheses indicate amounts including profit on sale of shares of the State Bank of India (SBI) divested on June 29.403.22 15.887.00 25.167.72) 549.401.009. expenditure and surplus transferred to the Government in the last five years is given in Table XI.5.40 (43.73 (75.070.167.097.92 36.168. bear consequent to conversion of such special securities.90 23.348.009. 2007. National Rural Credit (Stabilisation) Fund and National Housing Credit (Long Term Operations) Fund during each of the five years.750.759. including depreciation in the value of securities. The position of income.13 15.79 33.166.13 Contingency Reserve represents the amount set aside on a year-to-year basis for meeting unexpected and unforeseen contingencies.97 1.430.309.6: Contingency and Asset Development Reserves and Surplus Transfer to the Government (` crore) Item 1 Total Income (Gross) Transfer to Contingency Reserve Transfer to Asset Development Reserve Transfer of Surplus to the Government Transfer of Surplus to the Government as percentage of Total Income (Gross) less Expenditure 2006-07 2 41.488.731. National Rural Credit (Long Term Operations) Fund.80) 11.655.80) 33.51 22.49) 52.05) 76.00 4.00 4.00 11.92 (5.309.759.85) 7.00 4.217.92) 1.74 (57.33) 20.00 (57.14 The size of the overall balance sheet of the Reserve Bank increased noticeably during 2010-11 Table XI. Expenditure and Net Disposable Income (` crore) Item 1 Total Income (Gross) Less transfer to: (i) Contingency Reserve (ii) Asset Development Reserve Total (i + ii) Total Income (Net) Total Expenditure Net Disposable Income Less : Transfer to Funds * Transfer of surplus to the Government 2006-07 2 41. BALANCE SHEET XI.00 (45.12 12.63 (1.12 33. Note: Figures in parentheses indicate proportion to the total income (gross).971.

thus taking it to `6. Banking Department – Liabilities XI. foreign securities. all India financial institutions such as EXIM Bank.15 The liabilities of the Issue Department equal the currency notes issued by the Government of India before the commencement of operations of Reserve Bank on April 1. viz. `6. only a token amount of `1 crore is being contributed each year. as compared with 20 per cent during 2009-10. Issue Department . The notes in circulation increased by 15.. 1949 and the entire ownership is now vested in the Government of India. Since 1992-93.Assets XI.international financial institutions. A token contribution of `1 crore is made each year to each of these two Funds. While the first component is demand driven.effectedthroughtheinstrument of CRR.17 The liabilities of the Banking Department include the following: a) Capital paid-up: The Reserve Bank was constituted as a private shareholders‘ Bank in 1935 with an initial paid-up capital of `5 crore.500 crore. There are two other Funds. The Bank was nationalised with effect from January 1. banks. 154 b) Reserve Fund: The original Reserve Fund of `5 crore was created in terms of section 46 of the RBI Act as contribution from the Central Government for the currency liability of the then sovereigngovernmenttakenoverbytheReserve Bank. The remaining stock of gold is reckoned as assets of the Banking Department and is shown under ―Other Assets‖ in the balance sheet of the Banking Department. The paid-up capital continues to be `5 crore as per section 4 of the RBI Act. Since then such valuation gain/ loss is booked in the ―Currency and Gold Revaluation Account‖ under the head ―Other Liabilities‖ in the balance sheet. 1935 plus the bank notes issued by theReserveBanksincethenintermsofSection34(1) of the RBI Act. Gratuity and Superannuation Funds. only a token amount of `1 crore is being contributed each year. National Rural Credit (Long Term Operations) Fund and National Rural Credit (Stabilisation) Fund constituted under section 46A of the RBI Act which are now placed with NABARD.16 In terms of the RBI Act..ANNUAL REPORT due to increase in notes in circulation (liabilities of the Issue Department) and increase in the deposits of banks with the Reserve Bank (liabilities of the Banking Department). . the balance in different accounts relating to the Employees‘ Provident Fund. Issue Department – Liabilities XI.ifany.11 per cent during 2010-11. National Housing Credit (LongTerm Operations) Fund: This Fund was created in January 1989 under section 46D of the RBI Act with an initial corpus of `50 crore plus annual contributions by the Bank thereafter for extending financial accommodation to the National Housing Bank. under section 46C of the RBI Act with an initial corpus of `10 crore plus annual contributionsbytheBankforfinancialassistance to eligible financial institutions. Government securities and internal bills of exchange.etc. the second component changes in relation to growth in deposits as well as monetary policychanges.75 metric tonnes. c) d) e) Deposits: These represent the cash balances maintainedwiththeReserveBankbytheCentral and the State Governments. NABARD.foreigncentralbanks. A part of gold stock is marked as assets of the Issue Department and reflected accordingly in the balance sheet of the Issue Department.495 crore was credited to this Fund by way of gain on periodic revaluation of gold up to October 1990. the eligible assets for the Issue Department consist of gold coin and bullion. The total holding of gold by the Reserve Bank stands at 557. Thereafter. rupee coin. National Industrial Credit (Long Term Operations) Fund:This Fund was created in July 1964. Since 1992-93.

63.18 Gains/losses on valuation of foreign currency assets and gold due to movements in the exchange rates and/or price of gold are not taken to the Profit andLossAccountbutinsteadbookedunderabalance sheet head named as the Currency and Gold Revaluation Account (CGRA). The balance in the EEA as on June 30.286.133. thus increasing its balance from `1.22 To meet the internal capital expenditure and make investments in its subsidiaries and associate institutions.167. other liabilities include balances in Contingency Reserve (CR).15 crore as on June 30.500 crore held by the Reserve Bank as a distinct balance sheet head. EEA and IRA are grouped under ―Other Liabilities‖ in the balance sheet (Table XI.152.21 The Reserve Bank maintains a Contingency Reserve (CR) to enable it to absorb unexpected and unforeseen contingencies.70. there was an increase of `63.09 .19.87 crore as on June 30.The balance available in the CR is considered sufficient to meet contingent liabilities. The balance in this accountrepresentsaccumulatednetgainonvaluation of foreign currency assets and gold. 2011 was `1.09 crore.96 4. This reflected the increase in the value of gold as also appreciation of other currencies against the US dollar. The balances in CGRA.83 1.19 The balance in the Exchange Equalisation Account (EEA) represents provision made for the exchange losses arising out of forward commitments.68 0. Exchange EqualisationAccount (EEA). In 2010-11. 2011.12 IRA 4 – – – 9.58.87 1.197. Exchange Equalisation Account (EEA) and Investment Revaluation Account (IRA) (` crore) As on June 30 1 2007 2008 2009 2010 2011 CGRA 2 21. the balance in CR increased to `1. XI.98 18.842.98 1.28. The CR and the ADR reflected in ―Other Liabilities‖ are in addition to the ‗Reserve Fund‘ of `6. 2010 to `4. 155 XI.98 crore as on June 30. The balance in IRA as on June 30.560. Investment Revaluation Account (IRA) and also the surplus pending transfer to the Government and provision for outstanding expenses.269.60 crore as on June 30.27 crore from the Reserve Bank‘s income to CR during 2010-11.20 The Reserve Bank values foreign dated securities at market prices prevailing on the last business day of each month and the appreciation/ depreciation arising therefrom is transferred to the Investment Revaluation Account (IRA). Contingency Reserve XI.14.THE RESERVE BANK’S ACCOUNTS FOR 2010-11 f) Bills payable: This represents Demand Drafts (DDs) and Payment Orders outstanding for payment and balances under the Remittance Clearance Account pending encashment of the DDs issued.04 crore as on June 30.06 crore in the CGRA.03 1.04 EEA 3 9. mainly due to accretion to CGRA.133.63 crore was transferred from income to ADR raising its level from Table XI.00 26.723. Exchange Equalisation Account (EEA) and Investment Revaluation Account (IRA) XI.727.7: Balances in Currency and Gold Revaluation Account (CGRA). 2011. Other liabilities increased from `3. the Reserve Bank had created a separate Asset Development Reserve (ADR) in 1997-98 with the aim of reaching one per cent of the Reserve Bank‘s total assets within the overall indicative target of 12 per cent set for CR and ADR taken together. Currency and Gold Revaluation Account (CGRA). 2010 to `1.98. Asset Development Reserve (ADR). 2010. In terms of specific sub-heads.82. 2011 was `4. Asset Development Reserve g) OtherLiabilities:Internalreservesandprovisions of the Reserve Bank are the major components of other liabilities.36 crore as on June 30. h) Currency and Gold Revaluation Account (CGRA).52 1. With transfer of `12.370.82.211.286.12 crore.269. XI. 2011 from `1. an amount of `1. During 2010-11.19.7).809.234.

431. the Reserve Bank had investedUS$250million(`1.86. Banking Department .88 per cent of the total assets of the Bank as against the target of one per cent.ADR now accounts for 0. investments amounting to SDR 750 million (`5.772.21 Total Percentage to total assets 4 (2+3) 1.89 11.200. XI.82 Domestic Assets 3 1.27.866.431. The increase in the level of FCA in Rupee terms was mainly on account of appreciation of nonUS dollar currency assets. Rupee Coin and Small Coin XI.560.58 15. in the bonds issued by the India Infrastructure Finance Company (UK) Limited.10.06 1.594.360 crore).80 11.18 1.21 crore as on June 30.33 12.743.27 FCAform a major part of the foreign exchange reserves of the country.26 The foreign currency assets (FCA) comprise foreign securities and balances held abroad.552.Assets XI.24 This is the stock of bank notes.28 The Reserve Bank has agreed to make resources available under the IMF‘s New Arrangements to Borrow (NAB) up to an amount of SDR 8. The position of outstanding FCA and domestic assets over the last five years is given in Table XI.727.67.16 156 .81 1.05 12.62. XI. one rupee notes.07 1.13 1.559.58.058.82 million (`62.652. 2011 (Table XI.878.58 crore as on June 30.594.87 Balance in ADR 3 9.631. the aggregate of which shall not exceed US$ 5 billion (`22. 2010 to `15.39.334.118crore)insuchbonds.95 14.35.53. rupee coins of `1.740.8).68.90 crore) have been made in notes issued under NAB.31 9.16 1.79 12.9.367.9: Outstanding Foreign Currency and Domestic Assets (` crore) As on June 30 1 2007 2008 2009 2010 2011 Foreign Currency Assets 2 8. 5 and 10 and small coins kept in the vaults of the Banking Department to meet the day to day requirements arising out of usual receipt and payment transactions as a banker. Small Coin.40 1.57 11. As on June 30.23 The assets of the Banking Department comprise Notes.392. Foreign Currency Assets XI. Investments.39.03. Notes.866.21 1. foreign commercial banks. The RBIAct provides the legal framework for deployment of the FCA as well as gold.541. `14.98.770. CR and ADR together constituted 10.192.33 12. Balances Held Abroad.25 14. 2.88.973.73. Bills Purchased and Discounted.564. 2011.59 1.474. As on June 30. Balances Held Abroad XI.08 5 10.70.64. Rupee Coin.ANNUAL REPORT Table XI. these are held by the Government of India and therefore not reflected in the Reserve Bank‘s balance sheet. This is part of Bank‘s foreign currency assets shown under assets of the Banking Department.60 1.90.8 : Balances in Contingency Reserve and Asset Development Reserve (` crore) As on June 30 1 2007 2008 2009 2010 2011 Balance in CR 2 93. securities representing debt of sovereigns and supra-national institutions with residual maturity not exceeding 10 years and any other instrument or institution as approved by the Central Board of the Reserve Bank in accordance with the provisions of the Act. It may be noted that although SDRs and the Reserve Tranche Position (RTP) form part of India‘s official reserves.36 5.34 per cent of the total assets of the Reserve Bank as on June 30.081. They are presented in the balance sheet in the descending order of liquidity. 2011.64. the Bank for International Settlements (BIS). FCA comprise deposits XI.631. Table XI.17.29 The Reserve Bank has agreed to invest up to an amount.91 crore).25 This represents foreign currency balances held abroad.907. The comparative position of the foreign exchange reserves in the last two years is given in Table XI.15 10. Loans andAdvances and OtherAssets.34 with other central banks.64 3. 2011.

023. Jain Chowdhary & Co.704.086.18 117.96 19.00 450. Guha & Co. Kolkata.185.68 crore as on June 30.312. Other Assets XI.172.. 2010 June 30. 2004 has been included in the reserves from the week ended April 2.00 3 50.THE RESERVE BANK’S ACCOUNTS FOR 2010-11 Table XI.30 The investment in Government of India securities increased by `1. M.99 Variation Per cent 5 8.631. 2011.33 92.38 crore from `1.450. The auditors were appointed by the Central Government in terms of section 50 of the RBI Act.45 9.64. which was shown as a memo item from May 23. fixed assets (net of depreciation).848.510.70 crore as on June 30.04.00 (-) 9.126. 2010 1 Foreign Currency Assets (FCA) Gold Special Drawing Rights (SDR) Reserve Position in the IMF* Total Foreign Exchange Reserves (FER) 2 11.00 1. 4. Mankeshwar & Co.92 crore as on June 30.00 2. N.117.) Ltd.68 14. gold holdings in the Banking Department.083.K.13 22.66 7.320. V.901.302.70 Absolute 4 1. New Delhi.23 20.10 (-) 2.676. The ReserveBanknowholdsonepercentofshareholding in NABARD (Table XI.71 As on June 30. Auditors XI.89 crore as on June 30...K. Mumbai and M/s. K.181.00 450. 2010 to `2.11 : Investments in Shares of Subsidiaries/Associate Institutions (` crore) Institution Book value of shares held as on June 30.00 share capital of `2. 2010 to `69. Thus.03.85.718. Investments in shares of subsidiaries and associate institutions XI. The increase was primarily on account of open market purchases by the Reserve Bank and disinvestment of surplus cash balance by the Government. Mumbai as the Statutory Central Auditors. out of 72. Ramanand Aiyar & Co.96. 2003 to March 26.33 TheaccountsoftheReserveBankfortheyear 2010-11 were audited by M/s. amounts spent on projects pending completion and staff advances. M/s. The value of ‘Other Assets‘ increased by `11. S. 2010 to `52. Branch offices were audited by the Statutory Branch Auditors.613. Investment in Government of India Rupee Securities XI.00 800.11). Nagpur. S.00 crore as on June 30.00 20.62 crore as on June 30. 2004.21 crore from `58. M/s.12.743. 2011 3 12.317.32 ‗Other Assets‘ comprise income accrued but not received. 2011 2 50.27.. etc. Chennai and M/s.971. 2011 mainly on account of increase in the value of gold holdings by 19 per cent from `44..62 12. M/s.00 800.750.431..00 1.5 per cent was transferred to Government of India at par on October 13. Investments in shares are valued at cost.10. 1.10 : Foreign Exchange Reserves (` crore) Item June 30.82 1.995. excluding the securities purchased (Repo) under the Liquidity Adjustment Facility (LAF).92. Sankar Aiyar & Co.06 1.5 per cent of NABARD‘s total Table XI.000 crore earlier held by the Reserve Bank.63 6. namely. 2010. 71. Dandeker & Co.97 13. Total 157 .88 *: Reserve Position in the International Monetary Fund (IMF). 2.31 The Reserve Bank divested its stake in NABARD as per the decision of the Government of India. 3.49 17. 1 Deposit Insurance and Credit Guarantee Corporation National Bank for Agriculture and Rural Development National Housing Bank Bharatiya Reserve Bank Note Mudran (Pvt.68. 2011.

97.98 Loans and Advances to : (i) Central Government (ii) State Governments Loans and Advances to: (i) Scheduled Commercial Banks (ii) Scheduled State Co-operative Banks (iii) Other Scheduled Co-operative Banks (iv) Non-Scheduled State Co-operative Banks (v) NABARD (vi) Others Loans.60 Other Liabilities 414197.62 Bills Payable 833.94 158 .80 9224.69.15.22.75.21.57 910165.28.08 Notes Rupee Coin Small Coin ASSETS 2010-11 15.61.00.89 835389.00.33.00.ANNUAL REPORT RESERVE BANK OF INDIA BALANCE SHEET AS AT 30th JUNE 2011 ISSUE DEPARTMENT (` Thousands) 2009-10 32.35.94 711017.11 842040.44.36 2623.00 – 842040. 835389.23 100.38 3679.61.38.92.00 – 969276.14.98 328809.00 – – – – 795.40.76 4986.85 969276.82 68.00.34.18 5755.97.91 LIABILITIES Notes held in the Banking Department Notes in Circulation Total Notes Issued 15.00.51.48 257.75 36457.76.73.00 6500.38.35 381206.13 – – – – – – – – – – 58676.91 – 73.41.51 842008. (iv) Others Loans.00.91 Total Liabilities 969276.68.72.00.14.41.00 Balances Held Abroad Investments 303530.32.52.11 2010-11 – Total Rupee Coin Government of India Rupee Securities Internal Bills of Exchange and other Commercial Paper Total Assets BANKING DEPARTMENT 2009-10 LIABILITIES 2010-11 5.00.97.36.38.88.00 – 41.34 2.00 194.26 5.42 67.53 79.62 12807.26 969261.11 2010-11 2009-10 48577.03 12430.51 6.36.31.43.00 (Long Term Operations) Fund – – – 339226.43 1046.41. Advances and Investments from National Housing Credit (Long Term Operations) Fund: (a) Loans and Advances to National Housing Bank (b) Investments in bonds/debentures issued by National Housing Bank Other Assets Total Assets 770.00 4065.48 116.34 3.15 307759.23.25 5.43.08 41.14.00.91 967972.00 76.63.92.40 842040.80.17.00 – – – Deposits (a) Government (i) Central Government (ii) State Governments (b)Banks (i) Scheduled Commercial Banks (ii) Scheduled State Co-operative Banks (iii) Other Scheduled Co-operative Banks (iv) Non-Scheduled State Co-operative Banks (v) Other Banks (c) Others Bills Purchased and Discounted : (a) Internal (b) External (c) Government Treasury Bills 2009-10 32.79.45.43.00 20.14.73.32.38.81.98 Total Liabilities Significant Accounting Policies and Notes to the Accounts as per the Annex.49 711017.30 42.96 840878.00 Reserve Fund National Industrial Credit 19.00 1746. Advances and Investments from National Industrial Credit (Long Term Operations) Fund: (a) Loans and Advances to: (i) Industrial Development Bank of India (ii) Export Import Bank of India (iii) Industrial Investment Bank of India Ltd.97 458606.51.52 792300.00 (Long Term Operations) Fund National Housing Credit 193.61.81.82.91 Gold Coin and Bullion: (a) Held in India (b) Held outside India Foreign Securities ASSETS 57806.48 – – – – – – – – – – 69848.00.00 Capital paid-up 6500.63 1046. (iv) Others (b)Investments in bonds/ debentures issued by: (i) Industrial Development Bank of India (ii) Export Import Bank of India (iii) Industrial Investment Bank of India Ltd.00 – – 275.21.43 310068.80 10357.14.

etc.93 85. 2011 Place: Mumbai For Jain Chowdhary & Co.20 23. These financial statements are the responsibility of the Bank's management.83 thousands). These financial statements include the accounts of nineteenAccounting Units of the Bank which have been audited by the Statutory BranchAuditors.00 18759. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.13.27 3. Chartered Accountants Firm Registration No. An audit includes examining.00.24 Interest.72 15013.01.90.12. 14871 ) 159 .72 1.52.10 2855. 2011 and the Profit and LossAccount for the year ended on that date. After making the usual or necessary provisions in terms of section 47 of the Reserve Bank of IndiaAct.51. A.48. etc.00.) Printing and Stationery Postage and Telecommunication Charges Rent.37.doherebyreporttotheCentralGovernmentupontheBalanceSheetoftheBank as at June 30.56 2. Chartered Accountants Firm Registration No. We conducted our audit in accordance with auditing standards generally accepted in India. Insurance.26. 24 27166.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagementaswellasevaluatingthe overall financial statement presentation. Jain Partner (M.26 thousands (2009-10 .`5718.C.71 2.15 37.02.00 Interest Establishment Directors’ and Local Board Members’ Fees and Expenses Remittance of Treasure Agency Charges Security Printing (Cheque.00.113267W S.61 45.44 2300.12. on a test basis.00 1.72 23668.75. Bera Chief General Manager H.91.17 2.109208W S.67 8403. Subbarao Governor REPORT OF THE AUDITORS TO THE PRESIDENT OF INDIA We. Lighting.86 3.00.Venkatraman Partner (M. The branch audit reports have been furnished to us which we have considered in preparing our report.21. Auditors’ Fees and Expenses Law Charges Depreciation and Repairs to Bank’s Property Miscellaneous Expenses Total Available Balance Less: Contribution To: National Industrial Credit (Long Term Operations) Fund National Rural Credit (Long Term Operations) Fund 2 National Rural Credit (Stabilisation) Fund 2 National Housing Credit (Long Term Operations) Fund 4.35 26.06 2754.00 15009.83 2376.58.00. etc.00 55.00 INCOME 2010-11 23668. InouropinionandaccordingtothebestofourinformationandexplanationsgiventousandasshownbythebooksofaccountoftheBank.21. 34319) Dated:August 11. 1934 amounting to `13401.15.82. evidence supporting the amounts and disclosuresinthefinancialstatements.R. 2.theBalanceSheetreadwithSignificant AccountingPoliciesandNotestotheAccountsisafullandfairBalanceSheetcontainingallnecessaryparticularsandisproperlydrawnupinaccordancewiththeReserveBank ofIndiaAct.00.29 2.12.00. We believe that our audit provides a reasonable basis for our opinion.THE RESERVE BANK’S ACCOUNTS FOR 2010-11 PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30th JUNE 2011 (` thousands) 2009-10 27166. For V.22 8655.00 4.48.21.01. Commission.84 243.93 333.60 1986.12. WehaveexaminedtheBalanceSheetoftheBankasatJune30. Discount.00 1.24 18763.59 71.00.54 274.12. No.43 85.08.K. These funds are maintained by the National Bank forAgriculture and Rural Development (NABARD).C.95 431. Exchange. Our responsibility is to express an opinion on these financial statements based on our audit.76.32. Note forms.21.1 Total EXPENDITURE 1. such information and explanations have been given to our satisfaction. Taxes. No.70.00 Surplus payable to the Central Government 1.06. Khan Deputy Governor Anand Sinha Deputy Governor Subir Gokarn Deputy Governor K.00. SankarAiyar & Co.29.77 3012.84.00.1934andRegulationsframedthereundersoastoexhibitatrueandcorrectviewofthestateoftheBank'saffairsinconformitywiththeaccountingprinciplesgenerally accepted in India. Chakrabarty Deputy Governor D.21.50.2011andtheProfitandLossAccountoftheBankfortheyearendedonthatdateandreportthatwherewehave called for information and explanations from the Bank.89 42.00 1.theundersignedauditorsoftheReserveBankofIndia(hereinafterreferredtoastheBank).

The rupee equivalent is determined on . Payment Orders Account. Credit balance in IRA is carried forward to the subsequent year. REVENUE RECOGNITION Income and expenditure are recognised on accrual basis except penal interest and dividend.ANNUAL REPORT ANNEX RESERVE BANK OF INDIA SIGNIFICANT ACCOUNTING POLICIES AND NOTES the basis of the exchange rate prevailing on the last TO THE ACCOUNTS FOR THE YEAR 2010-11 business day of the month. Claims in this respect are considered and charged against income in the year of payment. where it is recognised with reference to the amortised cost. GOLD AND FOREIGN CURRENCY ASSETS AND LIABILITIES (a) Gold Gold is revalued at the end of the month at 90 per cent of the daily average price quoted at London for the month. if any. Unrealised gains/losses are adjusted to the Currency and Gold Revaluation SIGNIFICANT ACCOUNTING POLICIES Account (CGRA). is transferred to the Profit and Loss Account. at the end of the year in IRA is charged to the Profit and Loss Account and the same is reversed to the credit of the Profit and Loss Account on the opening day of the succeeding financial year. which are accounted for on receipt basis. on sale/ redemption of foreign dated securities. if any. The appreciation or depreciation. is provided for. lying in IRA. Forward exchange contracts are evaluated half-yearly and net loss. 1949 and are based on historical cost except where it is modified to reflect revaluation. Further. if any. Sundry Deposits Account. Profit/loss on sale of foreign currency assets is recognised with respect to the book value. 3. assets and liabilities in foreign currencies are translated at the exchange rates prevailing on the last business day except in cases where rates are contractually fixed. 160 The financial statements are prepared in accordance with the Reserve Bank of India Act. Premiumordiscountonforeignsecuritiesisamortised daily. CONVENTION (b) Foreign Currency Assets and Liabilities Allforeigncurrencyassetsandliabilitiesaretranslated at the exchange rates prevailing on the last business day of the week as well as on the last business day of the month. 1. Balances unclaimed and outstanding for more than three consecutive years in certain transit accounts including Drafts Payable Account. Only realised gains are recognised. 1934 and the notifications issued thereunder and in the form prescribed by the Reserve Bank of India General Regulations. The accounting practices and policies followed in the financialstatementsareconsistentwiththosefollowed in the previous year unless otherwise stated. At the year-end. gain/loss in relation to the securities sold. Income and expenditure in foreign currency are recorded at the exchange rates prevailing on the last businessdayoftheprecedingweek/precedingmonth/ year-end as applicable. Debit balance. is transferred to the Investment Revaluation Account (IRA). 2. ForeignsecuritiesotherthanTreasuryBillsarevalued at market price prevailing on the last business day of each month. Remittance Clearance Account and Earnest Money Deposit Account are reviewed and written back to income. Foreign Treasury Bills and Commercial Papers are carriedatcostasadjustedbyamortizationofdiscount. except in the case of foreign dated securities. Exchange gains and losses arising from such translation of foreign currency assets and liabilities are accounted for in CGRA and remain adjusted therein.

etc. a further sum is provided and credited to the Asset Development Reserve (ADR). . Where the market price for such securities is not available. is provided on straight-line basis at the following rates. is adjusted against current interest income. Software. 3. mobile phones. RUPEE SECURITIES 8.55crore(previousyear`9. 6. 5. exchange guarantees and risks arising out of monetary / exchange rate policy compulsions. The depreciation in the value.00 crore on account of revaluation of Gold up to October 1990. 2011 on account of conversion of special securities issued by the Government of India into marketable securities. Computers.00 crore) representing interest differential pertaining to the period April 1.495. SURPLUS TRANSFER TO GOVERNMENT OF INDIA Surplus transferable to the Government includes `1. EARMARKED SECURITIES Depreciation on leasehold land and building is provided on written-down value basis at the following rates. 161 Theliabilityonaccountoflongtermemployeebenefits is provided based on an actuarial valuation. held in the Issue and Banking Departments. Subsequent gains / losses on monthly revaluation of Gold are taken to the Currency and Gold Revaluation Account (CGRA). Gratuity and Superannuation Fund and Leave Encashment (Retiring Employees) Fund.407. NOTES TO THE ACCOUNTS 1. Microprocessors.466.066.00 crore (previous year – `1. EMPLOYEE BENEFITS Reserve Fund comprises initial contribution of `5.68crore)from its Investment Account in order to cover the liabilities in the Provident Fund. furniture. Rupee securities. etc. furniture. motor vehicles. 7. SHARES Investments in shares are valued at cost. 2010-March 31. RESERVE FUND Fixed Assets costing less than `1 lakh (except easily portable electronic assets such as laptops. other than Treasury Bills. 2.33 per cent CONTINGENCY RESERVE AND ASSET DEVELOPMENT RESERVE Contingency Reserve (CR) represents the amount set aside on a year-to-year basis for meeting unexpected and unforeseen contingencies including depreciation in value of securities. Asset Category Motor vehicles. Asset Category Leasehold Land and Building(s) constructed thereon Building(s) constructed on Freehold Land Rate of depreciation Proportionate to lease period but not less than 5 per cent 10 per cent The Reserve Bank has earmarked certain Government securities having a book value of `10. if any. are valued at lower of book value or market price (LOBOM).322. etc. Depreciation is provided on year-end balances of the Fixed Assets. Depreciation on computers. Treasury Bills are valued at cost. costing more than `10.00 crore made by the Government of India and appreciation of `6.THE RESERVE BANK’S ACCOUNTS FOR 2010-11 4.000) are charged to the Profit and Loss Account in the year of acquisition. etc. software (costing `1 lakh and above). microprocessors. Rate of depreciation 20 per cent 33. FIXED ASSETS Fixed Assets are stated at cost less depreciation. In order to meet the internal capital expenditure and make investments in subsidiaries and associate institutions. the rates are derived based on the yield curve prevailing on the last business day of the month.

631. DETAILS OF FOREIGN CURRENCY ASSETS (` crore) Particulars As on June 30 2010 2 7.63 14.517.047.21 1.167. Settlement Liabilities VII.60 14.00 crore (previous year `78.87 1.19.234.58.12 (-) 18.20.690. 9.009. Surplus Transferable to the Government of India IX.98 crore (SDR 1.743.600 crore) under the Note Purchase Agreement} up to a maximum amount of SDR 8.105. 162 .82 million (`62.82.807.133.370.63 15.00 7. 8. Accumulated Retirement Benefits IV.300.60 12.96 9. Miscellaneous Total (I to IX) Note : 1.842. RBI has agreed to invest up to an amount.817.91 12.560.58.62 55.286.560.33 3.05 63. 2 Rupee Deposits from the Foreign Central Banks and the Foreign Financial Institutions 2011 3 In accordance with the Accounting Standard (AS) 15 – Employee Benefits (Revised). Deposits from the Indian Financial Institutions III.39 1. 2 Contingency Reserve Balance at the beginning of the year Add: Accretion during the year Balance at the end of the year 1.367.96 26.34 11.152.370.631.98 18.94 9.65 4.431. Provision for Outstanding Expenses VIII.87 1.19 crore (corresponding figure in previous year was `18.19.06 1. Exchange Equalisation Account Balance at the beginning of the year Transfer from Exchange account Add: Net Accretion (+)/Net Utilization (-) during the year Balance at the end of the year VI.98 Particulars 1 I. Investment Revaluation Account Balance at the beginning of the year Add: Net Accretion (+)/Net Utilization (-) during the year Balance at the end of the year 1 I.87 14.53.740.786.87 (-) 26. 3.58 1. Uncalled amount on partly paid shares of the Bank for International Settlements (BIS) as on June 30.93 12. 7.00 crore) respectively.809. Currency And Gold Revaluation Account Balance at the beginning of the year Add: Net Accretion (+)/Net Depletion (-) during the year Balance at the end of the year IV.02 18.101. Presently.04.269.548. RBI has invested US dollar 250 million (`1.03. 2.93 32.20. Asset Development Reserve Balance at the beginning of the year Add: Accretion during the year Balance at the end of the year III.00 crore (previous year `20.246.06 3.21 5.250) in the previous year.392.95 549.68.430.10. in the bonds issued by India Infrastructure Finance Company (UK) Limited.401. DETAILS OF OTHER LIABILITIES (` crore) As on June 30 2010 2011 3 1.00 crore) and `2.27 3.73 725.03 II.708.23 198.250).28.13 227.37 crore) in respect of inter–office transactions and balances which are at various stages of reconciliation and necessary adjustments are being effected as and when reconciled.727.36 516.35 3.197.118 crore) in such bonds.226.91 crore).36 9.41.87 4. II.64 1.41.866.76 II.370.688. Miscellaneous Total 5. RBI GENERAL ACCOUNT ‗Other Assets‘ include `17.58 1. 2011.98 1.00 6. Deposits of State Governments include balance of Government of the Union Territory of Puducherry.92.ANNUAL REPORT 4.98. DEPOSITS 6. investments amounting to SDR 750 million (`5.04 – 9.559.96 (-)5.168.27 1.360 crore).39. EMPLOYEE BENEFITS (a) Government There is no outstanding balance maintained by the Central Government under the Market Stabilisation Scheme (MSS).630.87 1.14.165. the outstanding ReposandReverseReposamountedto`1.600. The amount was `82.64. RUPEE INVESTMENTS Securities purchased (Repo) and sold (Reverse Repo) under the Liquidity Adjustment Facility (LAF) are added to and reduced from ‗Investments‘ respectively. the liability for long term employee benefits has been ascertained under the ‗Projected Unit Credit‘ method and provided for in the accounts. 2011 3 Held in Issue Department 9.15 Held in Banking Department (a) Included in Investments (b) Balances Held Abroad Total V.081. As at the year-end.18 crore (SDR 1.831.98 18. RBI has agreed to make resources available under the IMF‘s New Arrangements to Borrow (NAB) {which subsumes the earlier commitment of US$ 10 billion (`46.904.53 15. the aggregate of which shall not exceed US dollar 5 billion (`22.133.09 18.12 16.45 12.90 crore) have been made under the NAB. (b) Others Particulars (` crore) As on June 30 2010 1 I.82 (-) 79.33 8.14 2.70.530. As on June 30.759. 2011 was ` 86.

to conform to current year‘s presentation. wherever necessary. Previous year‘s figures have been regrouped / reclassified. 163 . Discount. Gold III. COMMISSION. Fixed Assets (net of accumulated depreciation) II.89 11.92 12.064. Commission. AUDITORS’ FEES Out of total Auditors‘ Fees and Expenses of `3.537. Net profit on sale of Bank‘s Property 2 14.68 As on June 30 2011 3 488.04 948. EXCHANGE. a sum of `24.THE RESERVE BANK’S ACCOUNTS FOR 2010-11 10. include the following: (` crore) Particulars June 30. DISCOUNT. etc.901. etc.510.969. Interest.126. Income accrued but not received IV.45 1.08 44. INTEREST.29 2.93 12.87 69.14 crore.28 52.39 58.70 15. DETAILS OF OTHER ASSETS (` crore) Particulars 2010 1 I. Miscellaneous Total 2 516.00 lakh was paid to the Bank‘s Statutory Auditors as audit fees for audit of the Bank‘s accounts. 2010 1 I.87 Year ended June 30. 2011 3 5. 13.764. Exchange.29 1.848. Profit on sale of Foreign and Rupee Securities II.676.

Subir Gokarn. India and the Global Financial Crisis: Transcending from Recovery to Growth 6. K. K. Chakrabarty. Shyamala Gopinath. Governor Dr. Shyamala Gopinath. 2010 September 8. Deputy Governor Dr. Deputy Governor July 28. Technology in Banking: An Instrument for Economic Growth 21. 2010 September 3. Duvvuri Subbarao. 2010 23. K. 2010 Dr. Duvvuri Subbarao. Financial Deepening by Putting Financial Inclusion Campaign into Mission Mode 13. 1 Title of Speech 2 LIST OF SPEECHES BY GOVERNOR AND DEPUTY GOVERNORS: APRIL 2010 TO AUGUST 2011 Speech by 3 Dr. Inaugural Remarks at the Opening of Inter-bank Mobile Payment Service 34. C. Chakrabarty. K. Governor Dr. Duvvuri Subbarao. Shyamala Gopinath. 2010 August 27. 2010 September20. Keynote Address at Review Meet on Implementation of Revival Package for Short-term Rural Co-operative Credit Structure 8. 2010 September 9. Deputy Governor Dr. 2010 October 27. 2010 October 27. Subir Gokarn. 2010 July 2. Duvvuri Subbarao. 2010 Dr. Governor Dr. New Paradigms in IT Security in Indian Banks 7. Financial Regulation and Financial Inclusion – Working Together at Cross-purposes 12. Deputy Governor Dr. C. Economic Crisis and Crisis in Economics – Some Reflections 20. Duvvuri Subbarao. 2010 September 8. Chakrabarty. Duvvuri Subbarao. 2010 April 13. 2010 November 18. 2010 June 2. Chakrabarty. Bank Credit to MSMEs: Present Status and Way Forward 10. Deputy Governor Dr. Duvvuri Subbarao. Looking Back and Looking Ahead 2. 2010 October 26. Deputy Governor Dr. C. Deputy Governor August 10. Volatility in Capital Flows: Some Perspectives 9. Developing the Humanware to Improve Customer Service 32. Cheaper and Easier Dr. 2010 November 12. Inclusive Growth: Role of Financial Sector 35. Usha Thorat. 2010 Smt. Deputy Governor Date 4 April 1. Monetary Policy Considerations after the Crisis: Practitioners‘ Perspectives Dr. Governor Dr. Act Local 22. Frontier Issues on the Global Agenda: Need for Global Co-operation 30. 2010 April 26. C. K. 2010 May 21. Deputy Governor Dr. K. Over-the-counter Derivative Markets in India – Issues and Perspectives 16. Setting New Paradigm in Regulation Smt. Deputy Governor Dr. 2010 164 .ANNEX I Sr. 2010 December 1. Deputy Governor Smt. K. 2010 April 24. Governor Smt. Governor Dr. Subir Gokarn. Shyamala Gopinath. Governor Dr. C. Perspectives on Financial Sector Strategy 26. Duvvuri Subbarao. 2010 April 2. C. Deputy Governor Dr. Silver Jubilee Function of Institute of Banking Personnel Selection 3. Usha Thorat. Usha Thorat. Governor Dr. G-20 After the Crisis: An Indian Perspective 31. Governor Dr. C. 2010 June 18. K. Chakrabarty. Subir Gokarn. Deputy Governor November 22. C. Deputy Governor Dr. Deputy Governor August 5. Managing the Growth-Inflation Balance in India: Current Considerations and Long-term Perspectives 27.2010 October 5. 2010 April 29. Deputy Governor 24. The Economics of Ecosystems and Biodiversity Workshop 4. Deputy Governor Dr. 2010 April 26. Governor Smt. Banking Technology Beyond CBS: Issues and Way Forward 15. Deputy Governor Dr. Readers‘ Interview 33. Chakrabarty. Macroprudential Approach to Regulation – Scope and Issues 17. Duvvuri Subbarao. K. Post-crisis Reforms to Banking Regulation and Supervision – Think Global. 2010 May 11. 2010 1. Duvvuri Subbarao. C. Preparing Indian Banks for Global Competitiveness: Strategic and Policy Perspectives 25. Securitisation Markets in India – A Post-Crisis Perspective 19. Subir Gokarn. Harnessing Technology to Bank the Unbanked 14. Deputy Governor August 4. The Price of Protein 29. Banking Transactions in the Next Decade: Faster. Chakrabarty. C. Chakrabarty. 2010 June 17. Subir Gokarn. Chakrabarty. Duvvuri Subbarao. 2010 June 1. 2010 Smt. Financial Crisis – Some Old Questions and Maybe Some New Answers 18. K. Governor Dr. Statement at the IMFC 5. No. Chakrabarty. Duvvuri Subbarao. Deputy Governor Dr. 2010 September 7. Emerging Market Economies Leading Global Growth 28. Deputy Governor Dr. Deputy Governor November 27. Deputy Governor Dr. 2010 October 9. Governor Smt. RBI Archives – Way Forward 11.

2011 June 17. Subir Gokarn. Economic Reforms for Sustainable Growth 68. Subir Gokarn. K. 2011 June 23. Deputy Governor Dr. 2011 Dr. Deputy Governor Dr. Statistics in the World of RBI 72. Chakrabarty. 2011 April 5. 2011 April 15. 2011 June 25.LIST OF SPEECHES BY GOVERNOR AND DEPUTY GOVERNORS: APRIL 2010 TO AUGUST 2011 Sr. Deputy Governor Dr. 2011 June 22. C. Mutual Funds and Market Development in India 66. Deputy Governor Dr. Financial Inclusion: A Consumer-centric View 50. 2011 March 21. Centrality of Banks in the Financial System 41. C. Banking on Technology 60. 2011 February 11. Sustainability of Economic Growth and Controlling Inflation: The Way Forward 53. Deputy Governor February 18. Chakrabarty.0! 46. Duvvuri Subbarao. 2011 Smt. Duvvuri Subbarao. Subir Gokarn. Subir Gokarn. Deputy Governor Dr. Governor Dr. 2011 July 5. Duvvuri Subbarao. Governor Dr. Shyamala Gopinath. 2011 June 27. Deputy Governor January 19. Global Challenges. 2010 December 10. Welcome Remarks: Third P. 2011 June 28. 2010 December 8. Frontier Issues on the Global Agenda: Emerging Economy Perspective 51. Deputy Governor January 8. Policy Discipline and Spillovers in an Inter-connected Global Economy Dr. 2011 April 4. K. 2011 Dr. Duvvuri Subbarao. Implications of the Expansion of Central Bank Balance Sheets 43. 2011 June 23. Governor February 24. Duvvuri Subbarao. Governor 59. C. Governor Dr. Regulatory Perspectives on Derivatives Markets in India 57. Governor Dr. Duvvuri Subbarao. Global Solutions: Some Remarks 56. Duvvuri Subbarao. Governor Date 4 December 3. Chakrabarty.The Role of Financial System 52. 2011 January 31. Deputy Governor Dr. 2011 36. Deputy Governor Dr. Linking Entrepreneurship with Credit . K. The Global Economy and Framework 54. K. Subir Gokarn. Duvvuri Subbarao. Indian Education System – Issues and Challenges Shri Anand Sinha. Deputy Governor Dr. Emerging Trends in Payment Systems and Challenges 42. Technology in Banking – In pursuit of Excellence 73. K. 2011 June 2. Duvvuri Subbarao. Deputy Governor Dr. Chakrabarty. Five Frontier Issues in Indian Banking 37.Indian Perspective 63. Governor Dr. Governor Dr. Duvvuri Subbarao. No. K. 2010 January 7. Deputy Governor Dr. Deputy Governor Dr. Mint Road Milestones 38. K. Talent Acquisition and Management 61. Duvvuri Subbarao. 2011 May 9. 2011 June 6. C. C. Challenges and Opportunities in a Trillion Dollar Economy 65. Connecting the Dots 71. C. K. 2011 May 10. Governor Dr. Deputy Governor Dr. Banking and Beyond: New Challenges before Indian Financial System 49. 2011 February 11. 2011 May 13. Statement at IMFC 55. 1 Title of Speech 2 Speech by 3 Dr. Chakrabarty. R. Deputy Governor Dr. Chakrabarty. Non-financial Reporting . 2011 April 16. Why and How . 2011 May 4. K. Governor Dr. The Reserve Bank of India Making a Difference in Your Daily Life 48. Striking the Balance between Growth and Inflation in India 70. Chakrabarty. K. K. Duvvuri Subbarao.What. Chakrabarty. 2011 April 16. 2011 March 15. 2011 June 10. Beyond CBS: Fast Forward to Banking 2. Deputy Governor Shri Anand Sinha. 2011 February 18. Approach to Capital Account Management – Shifting Contours 47. Deputy Governor 165 . Duvvuri Subbarao. 2011 March 29. Deputy Governor Dr. Brahmananda Memorial Lecture 44. Chakrabarty. Introduction of IFRS – Issues and Challenges 45. 2011 May 31. 2011 58. Deputy Governor Dr. C. Deputy Governor Dr. Duvvuri Subbarao. Governor Dr. C. Shyamala Gopinath. Duvvuri Subbarao. C. Macroprudential Policies: Indian Experience 62. Prospects for Economic Growth and the Policy Imperatives for India 39. 2011 August 4. Chakrabarty. Governor Dr. Deputy Governor Dr. C. 2011 August 5. Governor Dr. Financial Stability Mandate of Central Banks: Issues in the International and Indian Context 64. Challenges for Next Generation Banking 69. Deputy Governor Dr. Dilemmas in Central Bank Communication: Some Reflections Based on Recent Experience 40. K. Subir Gokarn. India and the Global Financial Crisis: What Have We Learnt? 67. Governor Shri Anand Sinha. C. Chakrabarty. Chakrabarty. C. Central Bank Governance Issues! Some RBI Perspectives Smt.

Dr. Subbarao. 2010 14. Grace Koshie. Deputy Governor. UK Chancellor of the Exchequer. USA. Executive Director. Executive Directors. H. 2010 September 09. Usha Thorat. 2010 VISITS OF FOREIGN DELEGATIONS TO THE RESERVE BANK OF INDIA DURING JULY 01. U. Edgardo Torija-Zane. 2010 Smt. Senator. Executive Director. Sun Xiang. Smt. David Wayne Marsh. Housing and Urban Affairs Committee. Dr. August 10. Deputy Governors. Subir Gokarn. Khan and Deepak Mohanty. Dr. Shri V. Deputy Governors. 2010 Mr. the European Parliament (EPP). Anand Sinha. Shri Anand Sinha. Deputy Governor. 12. S/ShriAnand Sinha. Shyamala Gopinath. Shri Deepak Mohanty. Dr. 2010 October 28. Smt. Asian Development Bank. Economist responsible for the Shri Deepak Mohanty. Hormats. Economic. H. Chairman of the Banking. R. Date of Meeting 2 July 09.S. C. H. K. 2010 Smt. 1 1. Chakrabarty and Dr. Dr. Minister. Chinese Consulate and Head of the Economic and Commercial Section and Mr. October 27. Mr. Mr. Deputy Governors. July 18. RBI Executives 4 Dr. Das. UK. Subir Gokarn. R. Rundeersing Bheenick. Anand Sinha. 2010 5. October 28. Delegation from the State of Guernsey led by Ms Carla McNutty Bauer. UK. September 06. S/Shri V. Dr. Guernsey Government. Ms. K. No. R. Governor of Bank of Mauritius. Executive Directors. Usha Thorat. Director. Sharma. 2010 The Rt. Chief General Manager & Secretary. Consortium of Cooperative Banks from the Trentino region in Italy called ASDIR. Energy and Agricultural Affairs. Executive Director. 10. October 29. S. November 03. 9. Lord James Sassoon. Shyamala Gopinath and Smt. Canadian delegation led by Mr. 4. Mr. Deputy Governor. C. Subbarao. P. Under Secretary. SCCO International. 2011 Foreign Delegates/Delegation 3 Senator Christopher J. Mr. Lawrence Greenwood. Usha Thorat. Dodd. S/Shri V. Subrino Chow. Hon. D. 2010 High level delegation of the European Parliament led by Dr. Subir Gokarn. Head of the Industrial and Commercial Bank of China preparatory working team. UK. November 11. Smt. Executive Directors. Government of the Hong Kong Special Administrative Region. 2010 TO JUNE 30. 2010 Mr. 2010 November 22. Usha Thorat. 15. The Lord Mayor of the City of London. Shri Deepak Mohanty. Deputy Governor. emerging Asia macroeconomic scenario at the Economic Research Department of Natixis. Deputy Governor. Dr. H. Executive Directors Smt. Deputy Governor. Governor. 2010 Lord Megnad Desai and Mr. D. D. Krishnan. Chief General Manager & Secretary. Hong Kong Economic & Trade Office in Singapore. Dr. Executive Director. Sharma. Subbarao. K. Jose Manuel Garcia-Margallo Y Marfil. Khan and Deepak Mohanty. Governor. BMO Capital Markets. 166 .ANNEX II Sr. Robert D. Rayfield. Executive Directors. Smt. Alderman Nick Anstee and his delegation. Member of Executive Director. C. Commercial Secretary to the Treasury. Vice President of the Committee on Economic and Monetary Affairs Committee. Subir Gokarn. R. Executive Director. and Smt. Gopalakrishna. Subir Gokarn. Smt. 7. Khan. Shyamala Gopinath. Deputy Governor. S/Shri H. 8. Michael R. 2. Subbarao. Song Xuejun. Vice Chair. Subir Gokarn. 2010 13. London. 6. Governor. 3. G. K. S/ShriAnand Sinha. Khan and Deepak Mohanty. Commercial Consul. Governor. Vice President. D. 11. Sharma. George Osborne. August 25. Grace Koshie. 2010 October 20. Commerce & Employment. R. September 07. Deepak Mohanty. V. Khan and Deepak Mohanty. Investment and Corporate Banking. Shyamala Gopinath.

Secretary of Commerce Gary Locke and his delegation. Subbarao. Deputy Governor. D. 27. Mr. Executive Directors. 33. UK. US Treasury Department. February 28. 2011 March 03. C. Khan and Deepak Mohanty. Subbarao. Dr. Deputy Governors and Shri V. Subir Gokarn. S/Shri H.VISITS OF FOREIGN DELEGATIONS TO THE RESERVE BANK OF INDIA DURING JULY 01. 2011 Mr. 167 . Governor. Deputy Governor. D. H. John Clark. Subbarao. Subir Gokarn and Shri Anand Sinha. Dr. Governor. Regional Director. Mr. Executive Director. 19. 2011 April 26. Dr.E. Deputy Governor. 30. RBI Executives 4 Smt. Khan and Deepak Mohanty. Smt. R. Subbarao. Danish Ambassador Mr. 2010 Foreign Delegates/Delegation 3 Young Parliamentary Delegation from Australia. Treasury and Consulate. K. Dr. Executive Director. UK. C. Mr. 2011 March 18. 2011 February 25. 23. Executive Director and Shri Chandan Sinha. Khan. Dr. Adviser for India. 2011 April 26. 22. Shri B. R. 36. 17. Shri Anand Sinha. Mr. Executive Director. B. No. H. Subir Gokarn. Shri K. New Delhi. Mr. D. Deputy Governor. Chakrabarty. Shyamala Gopinath. Governor. Subir Gokarn. Russel Green. D. Deputy Governors. Governor. S/Shri Anand Sinha and Deepak Mohanty. K. D. Michael C. Macroeconomic analysis team of Agence Francaise Development (AFD). Israel. Shri Anand Sinha. 37. Executive Directors. Bank of Japan. RBI. 35. March 29. Minister of State for Trade and Investment. June 14. Rao. 2010 TO JUNE 30. USA. Deputy Governors. H. Date 2 November 29. Officer-in-Charge and other senior officers from Department of Economic and Policy Research. Governor.E. Executive Directors. Dr. Sharma. 29. Francisco Gonzalez. 2011 Mr. Mr. March 16. Ms. Federal Reserve Bank of New York‘s Emerging Group. 2011 June 14. Dr. Shri H. Shri Deepak Mohanty. Lael Brainard. Jiang Jianquing. Deputy Governor.S/Shri G. Subir Gokarn and Shri Anand Sinha. 2011 June 27. 2011 Canadian delegation of eight Assistant Deputy Ministers under Canada‘s Advanced Leadership Program (ALP). Bank of Israel. Economic Attaché. 21. Subbarao. Governor. Lord Stephen Green. C. Dr. Dr. 2011 Mr. Deputy Governor. 2011 34. Managing Director of World Bank. China and his delegation. Pierre Vaesen. S. Dr. Governor and Shri Anand Sinha. 2011 H. K. K. Treasury Attaché. S. Smt. D. D.S. S/Shri H. Stanley Fischer. Shri Deepak Mohanty. Deputy Governor and Shri Deepak Mohanty. May 16. Dr. Gopalakrishna. Sr. Governor. Chakrabarty. 2011 June 16. Chairman of Board of ICBC. Ambassador of Japan to India. Freddy Svane. 31. Member of Policy Board. Deputy Governor. February 22. Camunez. 2010 December 14. Executive Director. Subbarao. Dr. 26. Minister of Finance. Deputy Governor. 2011 June 17. Spencer Dale. November 30. Ngozi Okonjo-Iweale.S. U. Executive Director. Anil Kakani. Dr. 2011 Prof. Mahapatra. Subbarao. R. Subbarao. Consulate General of France and Economic Service of Bombay. 2011 Mr. Dr. Seiji Nakamura. Subir Gokarn. Shyamala Gopinath. Shri Anand Sinha. 32. Dr. Chakrabarty. High Commissioner. Dr. D. S/ Shri Anand Sinha and Deepak Mohanty. February 11. Florent Dauba. Dr. 1 16. 11 Congressional Staffers from U. BBVA delegation headed by Mr. Dr. Shyamala Gopinath. 2011 February 11. Dr. 2011 S r. 2010 January 18. Chairman and CEO of BBVA. 18. Chief Economist at Bank of England. Sr. Deputy Governor. Ambassador of Belgium to India. Executive Director. Governor. Vice President. Khan and Deepak Mohanty. Governor. 20. 2011 March 31. Governor and Shri Anand Sinha. Dr. Executive Directors. Spain. Executive Directors. Governor. Yuval Steinitz. Mr. Subbarao. Dr. U. France. Under Secretary for International Affairs. D. Governor. Akitaka Saiki. 38. R. Subbarao. D. U. Sir Richard Stagg. U. R. Assistant Secretary of Commerce for Market Access and Compliance (MAC). 2011 28. Subbarao. May 09.Dr. Subbarao. D. Dr. Khan. 24. D. 25.

6 22.8 32.3 1.0 6.0 39.2 5. Prices II.2 28.4 8.3 5.9 4.0 14.4 20.5 -2. Real Economy I.9 11.2 13.7 20.2 5.4 4.9 4.7 353.7 72.7 6.8 Gross Domestic Saving Rate (% of GDP) of which : Household Private Corporate Public I.6 9.0 9.3 8.4 34.4 10.4 20.5 QE 7 8.2 73.9 2.0 8.6 4.3 16.7 15.7 1.5 Food Stocks (Million tonnes) a) Procurement b) Off-take c) Stocks at end-March I.9 14.2 38.5 18.3 8.6 6.8 289.5 30.5 2.5 99.6 7.1 89.6 12.4 5.0 8.6 19.2 Share in GDP a) Agriculture (%) b) Industry (%) c) Services (%) I.7 5.0 10.3 10.3 31.6 Index of Industrial Production (% change) Sectoral a) Mining b) Manufacturing c) Electricity Use-Based d) Basic Goods e) Capital Goods f) Intermediate Goods g) Consumer Goods I.2 9.0 8.6 5.7 285.5 RE 6.3 Foodgrains Production (Million tonnes) of which : Rice Wheat Pulses I.4 13.0 10.6 7.3 2.1 4.6 13.8 52.2 234.2 56.9 23.7 1.8 6.7 3.8 33.9 18.9 292.4 41.9 6.5 6.7 5.4 5.2 8.4 8.3 6.5 308.8 1.9 44.7 11.9 13.6 6.0 9.1 4.1 414.2 9.3 24.7 1.5 0.6 15.7 3.ANNUAL REPORT APPENDIX TABLE 1: MACROECONOMIC AND FINANCIAL INDICATORS Item Average 1990-91 to 1999-2000 ( 10 years) 2 5.0 5.0 60.8 6.1 2.3 23.7 3.6 95.1 7.4 7.0 5.2 5.6 2.4 5.1 7.4 – 6.5 89.4 8.2 23.3 8.3 39.1 Overall Real GDP (% change) a) Agriculture (% change) b) Industry (% change) of which : Manufacturing (% change) c) Services (% change) Demand Side Aggregates d) Final Consumption Expenditure (% change) of which : PFCE (% change) GFCE (% change) e) Gross Fixed Capital Formation (% change) I.2 8.8 6.5 35.7 18.9 26.3 7.7 Core Infrastructure Industries (% change) I.9 0.6 11.1 6.3 2008-09 2009-10 2010-11 1 I.1 63.3 5.0 65.0 6.7 14.9 Gross Domestic Investment Rate (% of GDP) II.1 168 .7 15.2 Average 2003-04 to 2007-08 ( 5 years) 4 8.2 65.9 42.6 7.8 5.9 20.5 34.1 – 9.3 7.5 7.4 4.8 _ – – – – 8.8 7.4 Average 2000-01 to 2009-10 ( 10 years) 3 7.5 15.3 12.4 5.8 5.2 8.4 12.5 6 8.5 8.6 241.5 341.9 5.5 188.1 213.1 5.6 14.3 20.0 14.1 80.5 14.4 7.5 5.4 Commercial Crops (Million tonnes) $ of which : Oilseeds Sugarcane I.0 4.0 30.2 5.1 64.3 265.0 4.3 58.5 6.1 Wholesale Price Index Annual Average (% change) All Commodities All Commodities-Point to Point Primary Articles of which : Food Articles Non-food Articles Fuel and Power Manufactured Products of which : Food Products Non-Food Products 5 6.2 80.3 31.0 4.5 7.3 14.1 347.1 1.1 2.6 210.7 23.0 9.0 17.8 9.0 55.0 7.3 8.1 61.4 27.6 20.5 7.7 8.5 8.2 218.6 345.5 24.3 5.8 10.6 2.8 5.8 7.5 23.7 7.0 4.5 2.2 19.7 QE 23.3 23.7 4.8 5.5 30.3 6.8 14.2 9.5 – 6.4 2.9 43.3 85.3 3.3 6.2 7.1 8.7 6.0 48.8 -0.6 80.0 21.0 6.8 8.4 6.5 7.3 0.7 10.1 339.0 QE 0.7 3.1 36.0 5.6 33.3 5.4 20.1 4.8 8.2 7.1 8.2 8.6 90.3 9.1 12.8 10.1 51.3 291.7 17.0 0.

1 18.5 18.3 9.7 13.5 15.2 16.709 7.0 19.Agricultural Labourers III.9 10.7 22.0 47.6 21.2 0.1 19. Money and Credit III.8 22.2 6.5 21.5 2.7 12.4 3.3 13.4 9.5 16.485 88.Industrial Workers Food b) CPI.1 18.1 0.2 9.9 – – 8.3 30.924 14.8 56.1 Central Government Finances (% of GDP) # a) Total Revenue Receipts i) Tax Revenue ii) Non Tax Revenue b) Total Expenditure i) Revenue Expenditure of which : Interest Payment ii) Capital Expenditure c) Revenue Deficit d) Fiscal Deficit e) Primary Deficit f) Domestic Debt V.7 23.4 3.6 72.1 3.Industrial Workers of which : CPI.0 5.0 1.5 16.8 8.4 15.5 26.6 18.4 16.8 37.8 12.2 49.9 1.2 11.7 -0.5 2.9 1.2 6.6 5.436 10.4 4.6 54.5 9.1 20.5 21.9 6.1 2.9 15.3 1.2 15.4 12.727 14.5 18.9 15.2 3.7 5.3 9.3 4.2 Narrow Money (M1) ( % change) III.3 3.3 9.8 17.0 18.9 3.4 21.8 15.3 9.0 12.) Item Average 1990-91 to 1999-2000 ( 10 years) 2 Average 2000-01 to 2009-10 ( 10 years) 3 Average 2003-04 to 2007-08 ( 5 years) 4 2008-09 2009-10 2010-11 1 II.1 51.7 64.2 28.3 17.3 990 2.9 18.1 7.0 39.4 20.5 7.3 8.9 4.4 12.5 – – – – 6.5 21.7 0.1 2.005 – 17.8 2.0 169 .2 5.8 0.3 72.0 2.1 54.3 8.077 22.1 7.2 State Finances # a) Revenue Deficit (% of GDP)* b) Gross Fiscal Deficit (% of GDP)* c) Primary Deficit (% of GDP)* d) Outstanding Liabilities (% of GDP)* 5 6 7 9.8 9.9 23.5 7.4 13.8 15.7 15.7 12.0 23.6 15.1 Reserve Money (M0) (% change) Adjusted Reserve Money (% change) a) Currency in Circulation (% change) b) Bankers‘ Deposits with RBI (% change) III.7 7.8 16.2 13.2 7.1 Interest rates (%) a) Call / Notice Money rate b) 10 year G-Sec yield c) 91-Days T-bill yield d) Weighted Average interest rate on Central Government Borrowings e) Commercial Paper IV.9 -0.1 17.2 3.2 Liquidity ( `crore) a) LAF Outstanding b) MSS Outstanding c) Average Daily Call Money Market Turnover d) Average Daily G-Sec Market Turnover V.1 53.6 2.2 6.3 68.4 – 15.4 17.2 – – – – 5.0 22.5 15.9 17.6 13.2 2.5 10.7 1.0 5.2 2.6 26.8 7.4 4.4 0.9 17.APPENDIX TABLES APPENDIX TABLE 1: MACROECONOMIC AND FINANCIAL INDICATORS (Contd.4 15.9 16.4 Scheduled Commercial Banks a) Aggregate Deposits (% change) b) Time Deposits (% change) c) Demand Deposits (% change) d) Bank Credit (% change) e) Non-food Credit (% change) f) Investment in Government Securities (% change) g) Credit-Deposit Ratio (%) h) Credit-GDP Ratio (%) IV.7 5.492 7.8 7.2 17.0 19.6 48.6 7.8 20.0 12.3 2.2 3.2 3.2 16.7 15.9 – 15.4 5.8 29.4 17.1 7.1 7.1 4.6 2.4 19.1 1.5 17.7 -1.8 2.4 1.9 7.5 15.7 50.2 3.3 Broad Money (M3) ( % change) a) Currency with Public (% change) b) Bank Credit to Commercial Sector (% of GDP) c) Bank Credit to Government (% of GDP) d) Currency-Deposit Ratio (%) e) Money Multiplier III.2 2.1 42.7 10.1 19.7 3.1 9.1 18.5 6.7 0.5 9.426 5.5 3.2 6.2 Consumer Price Index (CPI) (Average % Change) a) CPI.2 58.0 19.6 75.3 10.1 20.2 18.4 – 15.6 7.0 1.9 44.0 10.0 3.256 9.3 14.1 12.9 23.6 1.5 5.9 25.737 15.0 11.4 49.06.0 7.0 2.2 23.0 17.2 16.3 25.3 4. Financial Markets IV.4 16.6 -0.1 3.8 25.8 15.7 21.879 3.6 17. Government Finances V.9 19.9 55.0 -11.2 17.8 20.9 4.3 15.9 33.2 7.9 1.6 4.7 19.8 1.5 6.3 4.4 -0.2 25.2 22.8 14.7 – – 18.0 17.0 18.5 15.9 16.3 53.3 12.0 5.9 0.7 7.

8 1.7 2.7 23.3 10.2 19.0 54.4 48.3 1.4 53.6 45.7 28.8 46.0 2. i.3 4.0 31.4 @@ -4.5 0.5 -44.Currency REER (Percentage Change) e) 6 .5 2.5 27.3 -3.0 6.7 35.5 × 19.2 99.1 37.5 5.5 8.9 17.9 26. GFCE: Government Final Consumption Expenditure.6 0.2 -13.1 Balance of Payments a) Merchandise Exports (% change) ∆ Oil Exports (% change) ∆ Non Oil Exports (% change) ∆ b) Merchandise Imports (% change) ∆ Oil Imports (% change) ∆ Non Oil Imports (% change) ∆ c) Trade Balance/GDP (%) d) Invisible Balance/GDP (%) e) Current Account Balance/GDP (%) f) Net Capital Flows /GDP(%) g) Current Account Balance (US$ billion) Net Invisibles of which : Services Private Transfers Investment Income h) Net Capital Flows (US$ billion) of which : FDI to India FIIs NRI Deposits i) Reserve Changes (BoP basis) (US $ billion) [(Increase (-)/Decrease (+)] VI.1 32.2 30. × : Figure pertains to average during 2000-01 to 2008-09.3 35.4 40. Agricultural production figures for 2010-11 are based on Fourth Advance Estimates as on 19-07-2011.6 6.9 35.6 1.0 29.2 47.0 -2.6 53.4 27.0 18.5 -22.6 -6.4 112.5 49.) Item Average 1990-91 to 1999-2000 ( 10 years) 2 Average 2000-01 to 2009-10 ( 10 years) 3 Average 2003-04 to 2007-08 ( 5 years) 4 2008-09 2009-10 2010-11 1 VI.4 45.1 51. 3.6 -4.1 33.3 156.1 29.2 99.6 3.7 QE : Quick Estimates.0 0.3 93.1 305.9 157.9 -38.1 -2.9 17.9 -13.0 18.8 3.0 24.0 17.3 0.5 7.4 261.0 -0.0 4.4 Exchange Rate Indicators a) Exchange Rate (Rupee/US Dollar) End of Period Average b) 36 .0 46.0 61.4 -0. @@ : Average of 1994-95 to 1999-2000.8 37.4 -3.4 15. : Not Available/Not applicable.0 12.8 -2.7 31.0 54.2 -3.0 1.0 19. # : Data for 2010-11 relates to Revised estimates.7 25.8 -0.5 6.2 21. Notes: 1.0 11.Currency NEER (Percentage Change) 5 6 7 8.0 29.8 23.3 1.1 41.8 96.7 53.6 -13. Average growth rate in the 4th column for item I.e..Currency REER (Percentage Change) c) 36 .3 44.7 8. $ : Includes oilseeds. RE : Revised Estimates.0 @@ 45.5 106.3 × 18.9 -10.ANNUAL REPORT APPENDIX TABLE 1: MACROECONOMIC AND FINANCIAL INDICATORS (Concld.6 31.9 59.2 45.6 -1.3 4.7 505. 2006-07 and 2007-08 are given in column.3 -13.1 224.9 23.7 -0.6 -0.6 36. sugarcane.3 20.6 5.9 17.0 5.Currency NEER (Percentage Change) d) 6 .6 45.1 20.1 44.4 -8.2 External Debt Indicators a) External Debt Stock (US$ billion)** b) Debt-GDP Ratio (%) c) Import cover of Reserves (in Months) ** d) Short-term Debt to Total Debt (%) e) Debt Service Ratio (%) f) Reserves to Debt (%) ** VI.0 -40.5 13.3 62.6 7.0 13.1 5.1 47.1 1.7 are calculated with the new base year (2004-05).2 -4.7 45. Average growth rate of 3 years.2 53. ** :At end-March.4 -13.7 -2.7 21. cotton (lint) and raw jute and mesta.3 114. * :Data for 2009-10 and 2010-11 pertains to 28 States of which five are Vote on Account. PFCE: Private Final Consumption Expenditure.9 108.4 5.7 44.6 2.8 19.6 -8. External Sector VI.8 17.4 43.5 3.1 2.8 83.9 13.9 18.1 -0. 170 .9 -9.5 22.1 112.6 36.7 -9.5 -1.3 86.7 52. REER: Real Effective Exchange Rate.3 Openness Indicators (%) a) Export plus Imports of Goods/GDP b) Export plus Imports of Goods & Services/GDP c) Current Receipts plus Current Payments/GDP d) Gross Capital Inflows plus Outflows/GDP e) Current Receipts & Payments plus Capital Receipts & Payments /GDP VI.3 4.4 26.2 41.4 29.8 7. 2.4 6.9 9.3 52.5 -2.3 9.6 2.9 44.6 21.6 78.6 -2.6 -27.8 46.3 -4.3 34.8 -2.1 -7.0 -5.4 3.5 -5.04 @@ -1.5 9.8 22.4 80.6 8.0 32.9 45.0 16.6 17.6 -4. ∆ : Based on DGCI&S data.6 -7.2 4.5 20. 200506.3 7.7 -15.9 -9.0 35.8 -7.3 -3.3 @@ 0.9 -5.3 2.5 39.8 15.7 1.9 91.6 and I.6 20.4 33.5 11.7 14.8 8.4 50.8 -3.3 7.9 44.

9 2.882 13.2 7.1 62.7 20.62.9 9.518 9.9 16.6 100 12 14.14.2 3.2 13.687 44.7 10. insurance.984 8.943 10.7 7.91.958 .4 10.297 11. 20.3 5 -0.3 9.0 16..8 6.9 7.3 8.2 16. Agriculture and Allied Activities of which : Agriculture 2.66.8 5.33.0 12.5 14.4 9.0 62.11.39.1 12.3 20.39.06. 4.03.4 14.36.52.3 4.990 Sector 1. 4.4 100 10 15.081 29.0 9.7 9.372 22. 2.7 6.3 11.5 8 17.2 8.4 9.52.0 65.3 6.1 8. gas and water supply 3.4 5.3 9.5 5.422 2008-09 9.36. Industry of which : a) Mining and quarrying b) Manufacturing c) Electricity.41.55.4 10.86.76. 2008-09 6.3 6.9 7. # : Revised Estimates.93.3 15.390 9. social and personal services 4.6 12.98. Source : Central Statistics Office.842 * : Quick Estimates.9 16.221 73. Agriculture and Allied Activities Industry Services Gross Domestic Product at factor cost 2006-07 6.8 1.5 16.8 8.7 3.2 4.28.0 2.1 10.404 38.91.9 8.5 10.0 8.7 100 9 16.5 11.30..0 2.3 9.6 2.4 13.0 9.2 2. 3..3 20.9 10.3 10.230 2010-11# 13.00.1 100 11 14.5 17.7 8.028 41.7 8.9 11.82.36.474 24.72.634 32.6 9.0 64.8 14.0 16.0 6.7 13.190 7.6 2.542 45.8 6 0.28.81.3 15.9 15.086 (at constant prices) 2009-10* 10.9 6.363 26.6 8.3 15. 2.1 12.0 8.22.1 12.1 -0.0 12.887 45.9 9.768 24.4 .0 13.19.7 12. storage and communications d) Financing.5 12.118 8.7 15.164 38.7 14.489 39.0 7 6.8 8.3 5.241 2007-08 8.362 28.1 8.0 1.5 4.8 6.6 16.6 7. real estate and business services e) Community.APPENDIX TABLES APPENDIX TABLE 2 : GROWTH RATES AND SECTORAL COMPOSITION OF REAL GROSS DOMESTIC PRODUCT (At 2004-05 Prices) (Per cent) Growth Rate Sector Share in real GDP Average 2005-06 to 2006-07 2007-08 2008-09 2009-10* 2010-11# 2006-07 2007-08 2008-09 2009-10* 2010-11# 2010-11 2 3.2 4.0 8.743 2010-11# 7. 171 .4 100 (` crore) (at current prices) 1 1.9 65.6 4.1 2. Agriculture and Allied Activities Industry Services Gross Domestic Product at factor cost 2006-07 7. Services of which : a) Construction b) Trade.080 8.8 2.0 12.1 9. : Not available.3 20.2 17.509 2009-10* 6.7 10.7 11.9 9. hotels and restaurants c) Transport.011 2007-08 6.8 9.769 61.5 17. 7.1 9.6 3 4.54.06.6 .3 10.819 48.89.00. 3.1 2.1 12.0 2.1 16.04.975 9.56.2 11.030 33.4 -0. Gross Domestic Product at factor cost Memo : Sector 1.77.2 8.10.6 4 5.113 52.449 35.17.

64.426 69.707 2.5 32.1 7.13.01.8 9.923 8.1 33. 172 .3 11. 8.41.544 5.3 8.8 -7.63.2 2.4 2009-10* 5 23.3 34. * : Quick Estimates.3 -1.892 72.3 57.86. 5.8 65.4 12.107 -46.1 -3.1 11.430 19.949 22.5 11.8 Amount in ` crore 2007-08 6 11.98.5 13.0 7.3 2007-08 3 22.9 11.365 18.0 36. 3.39.3 9.29.0 2008-09 P 4 23.7 49.894 4.527 7.36.73.1 1.28.5 0.935 5.2 11.30.563 2008-09 P 7 13.81.7 -5.4 58.81.38.8 13.894 53.50.2 12.37.962 18.31.9 17.7 12.544 1.592 5.271 2 23. 4.033 6.760 19.8 36.4 5. excluding works of art and antiques.9 2. 7.7 8.2 -3.8 55.403 1.376 28.3 -9.44.5 35.1 2.618 8.00.89.623 69.9 3.034 23.213 45.8 10.928 5.7 2.5 11. 6.7 1.1 0.82.2 13.199 7.179 2. # : Valuables cover the expenditures made on acquisition of valuables.141 7.535 2009-10* 8 15.7 10.1 7.8 -7.7 33.374 P : Provisional Estimates. Source : Central Statistics Office.3 10.48.8 1.ANNUAL REPORT APPENDIX TABLE 3: GROSS DOMESTIC SAVING AND INVESTMENT Item Per cent of GDP at current market prices Average 2004-05 to 2009-10 1 1.0 10.27.9 1.4 11.4 0.0 6.71.96.5 13.154 5.1 9.231 6.37.071 7.30.68. Household Saving of which : a) Financial Assets b) Physical Assets Private corporate sector Public sector Gross Domestic Saving Net capital inflow Gross Domestic Capital Formation Errors and Omissions Gross Capital Formation of which : a) Public sector b) Private corporate sector c) Household sector d) Valuables # Memo: Total Consumption Expenditure (a+b) a) Private Final Consumption Expenditure b) Government Final Consumption Expenditure Saving-Investment Balance (4-6) Public Sector Balance # Private Sector Balance # a) Private Corporate Sector b) Household Sector GDP at Market Prices (at current prices) 67.347 1. 8.0 -2.428 19.790 23.5 -0.41.64.7 4.213 6.0 -2.829 5.643 7.8 11.1 1.31.9 1.892 4.5 11.19.07.7 35.938 17.9 0.64.6 10.8 35.423 1.01.37.3 38.1 35.1 38.498 64.7 57.

0 9.919 R : Revised.441 231 446 -10.7 1.063 3.67.0 0.8 21.338 12.9 2.070 7.822 1.1 -1.24.2 -0.488 -5. 173 .8 6.483 766 828 -18. e) Life Insurance Funds of which : i) Life Funds of LIC and private insurance companies f) Provident and Pension Funds 20.397 2.38.097 45.3 0.097 -4.041 42.47.9 3.4 1.487 2010-11 P 7 10.17.575 4.43.5 -0.369 2.0 12.91.237 4.0 13.5 0.344 4.13.1 22.713 67.3 0.1 -0.7 1.795 73.861 `crore 2009-10 R 6 9.742 34.3 47.220 36.977 1.484 2.APPENDIX TABLES APPENDIX TABLE 4: FINANCIAL SAVING OF THE HOUSEHOLD SECTOR (GROSS) Item Per cent to Total Financial Saving 2008-09 R 1 Financial Saving (Gross) a) Currency b) Deposits i) With Commercial Banks ii) With Non-banking Companies iii) With Coperative Banks and Societies iv) Trade Debt (Net) c) Share and Debentures of which : i) Private Corporate Business ii) Banking iii) Bonds of public Sector undertakings iv) Mutual Funds (including UTI) d) Claims on Government i) Investment in Government securities ii) Investment in Small Savings.0 0.7 1.3 10.188 441.47.5 24.3 22.6 1.8 47.1 0.1 -1.943 -1.7 60.5 23.048 30.4 -3.0 2.450 -27.2 2008-09 R 5 7.3 4.0 11.26.1 3.8 0.3 42.940 4.551 271 -27.973 1. P : Preliminary Estimates.6 -0. Note : Components may not add up to the totals due to rounding off.0 -3.889 92.52.159 2 100.2 0. etc.313 19.6 2010-11 P 4 100.83.154 8.0 4.8 9.954 321 67.1 1.582 96.758 954 606 33.993 95.679 14.8 2.93.2 41.633 2.1 4.343 25.39.0 2009-10 R 3 100.636 12.14.872 389 42.0 6.1 0.52.140 -1.0 4.7 52.

7 287.3 7.1 3.9 8.9 3.3 24.7 98.3 846.2 25.5 24.3 8 3. Data for 2010-11 are averages for period 1994-95 to 2007-08.0 2.ANNUAL REPORT APPENDIX TABLE 5: AGRICULTURAL PRODUCTION (Million Tonnes) Crop 1 I.3 6.4 8.3 13.7 14.4 15.0 22.3 0.6 8.8 1.9 7.7 7.8 2. 6.0 292.7 9.6 32.0 78.0 297.7 3.1 2.7 339.2 10. each.1 15.1 2. a+b) 1. 5.2 13.5 7.1 6.6 -8.5 6 12.3 100.8 -18.8 3.4 2. Government of India.4 972.1 7.1 1.6 4.9 274.7 5.4 6.7 13.1 7.3 1. Rice Wheat Coarse Cereals of which : i) Jowar ii) Bajra iii) Maize 4.1 5. Coarse Cereals of which : i) Jowar ii) Bajra iii) Maize 3.8 2.2 2.2 878.5 10.1 6.4 34.1 8.7 117.3 5.6 198.3 24.8 33.0 15.9 4.3 906.1 80.0 262.6 1.5 9.1 10.0 11.3 5.9 4.9 237.7 2.5 3 -12. 2011.8 72.8 2.2 80. # $ : Fourth Advance Estimates as on July 19.9 13.2 11.9 8.1 20.2 6.7 174.6 6.3 116. * : Million kilograms.6 6.0 8.0 78.1 118.2 2.6 8.8 33.0 19.2 2.8 275.2 8.1 208. Pulses of which : i) Tur ii) Gram Kharif 1.7 78.2 8.5 10.5 28.2 75.2 5.2 6.1 288.1 10 -1.6 3.9 7.4 7.3 25.7 5.9 10.6 12.2 7.8 96.4 300.1 14.2 63.2 5.3 80.2 37.2 4.2 5.3 10.8 1. Coarse Cereals of which : i) Jowar ii) Maize Pulses of which : i) Gram 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11# 2 6.1 16.5 3.3 85.4 10.2 4. ++ : For nine oilseeds out of eleven in all.3 1.4 1.2 87.2 80.6 9. 2.8 948.5 114.2 7. + : Million bales of 180 kg.2 9.4 5.5 5.9 7.2 289. 3.3 120.4 83.8 3.9 11.2 8.8 2.4 1.2 80.2 11.3 106.5 11.1 3.7 32.7 14.8 26.5 26.8 12.7 6.7 13.5 -5.7 2.2 33.7 16.9 285.9 355.1 2.8 3.4 75. 174 .0 14.6 40.3 4.7 3.7 7.8 233.8 71.0 7.6 11.8 4.1 84.1 89.1 21.5 16.9 9. Rice 2.2 987.0 212.9 11.9 42. Rice 2.5 7.0 11.6 7.9 72.7 11.7 10.3 3.2 5.8 9 -6.9 7.4 95.8 69.2 4 7.0 4.1 10.0 14. : Growth rates are based on Index of Agricultural Production with base triennium ending 1993-94=100.7 12.9 0.5 217.7 2.5 72.5 241.7 851.7 11.8 230.6 33.6 31.9 28.2 9.7 31.6 7.4 3.1 7.7 14.9 14.4 14.4 2. B Non-foodgrains 1.9 68.4 11.9 213.4 5.5 99.2 8.5 5.0 75.0 9. Source: Ministry of Agriculture.9 4.4 -7.8 65.1 16.4 22.3 a) 4.0 275.0 82. @ : Million bales of 170 kg.8 8. Wheat 3.3 281.4 3.4 8.0 4.2 8. Oilseeds++ of which : i) Groundnut ii) Rapeseed & Mustard iii) Sunflower iv) Soyabean Sugarcane Cotton @ Jute and Mesta + Tea* Coffee* 20.2 13.5 218.2 88.3 26.1 68.0 1.1 0. Tea production for 2010-11 is average of 2001-02 to 2009-10.1 19.6 109.5 11 11.2 13.4 7.1 2.3 72.3 72.8 12.7 4.9 2.2 1.2 25. each.7 85.8 6.3 3.9 7.6 7 14.7 65.2 2. Pulses of which : i) Tur b) Rabi 1.2 2.6 -7.7 270.0 4.7 5 -1.3 4.2 18.3 7.0 8.5 22.2 13.9 19.9 78.4 5.6 95.8 7.1 1.4 10.5 112.3 4. 4.3 11.8 6.8 9.2 6.9 5.8 33. 3. All Crops: Annual Growth Rate (per cent) $ A) Foodgrains B) Non-foodgrains A Foodgrains (1+2+3+4.3 110.9 93.8 262.4 5.3 8.8 14.3 973.4 10.4 6.6 -9.7 12.7 8.8 9.6 14.2 26.5 4.7 8.0 348.0 29.9 14.8 7.6 11.2 4.8 8.7 4.7 6.1 109.6 8.7 299.3 93.9 8.2 87.5 12.7 40.6 8.6 91.8 6.1 12.3 4.7 6.4 4.5 103.7 13.6 0.5 69.6 2.7 11.0 24.9 10.5 104.6 966.4 6.5 7.0 7.9 234.3 14.1 4.9 2.4 3.9 23.9 121.3 18.4 2.2 4.1 80.6 2.6 80.5 4.1 2.2 1.1 7.0 5.5 7.3 4.8 991.0 27.7 0.4 96.0 8.8 121.

19 24.31 11.32 7.27 Stocks* Wheat 9 7.50 48.93 4.80 13.69 25.80 14.22 24.28 Off-take Wheat 6 12.72 13.38 25.68 13.03 15.62 26.27 17.07 2.43 16.23 11.07 1.77 37.73 23.63 18.06 13.17 13.68 Total 7 24.: Not Available. Source : Ministry of Food.55 16.82 28.99 24.13 7.90 10.96 Rice 8 13.33 41.91 44.72 23.88 Total 4 22. Government of India.43 39.92 27.62 17.63 12.30 49.58 40.04 23.76 3.57 3.93 21.85 25.29 18. .35 61.88 Total # 10 20. # : Includes coarse grains.30 12.04 26.84 49.65 Rice 5 11.25 36.08 25. Consumer Affairs and Public Distribution.03 36.93 19.70 5.62 18.08 9.99 24.16 13.36 35.84 24.34 13.20 30.79 35.83 41.78 24.05 12.02 32.63 19.77 Procurement Wheat 3 12.16 20.75 35.41 18.17 13. OFF-TAKE AND STOCKS OF FOODGRAINS (Million tonnes) Year Rice 1 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11P 2011-12P 2 9.66 13.16 15.82 16.76 8. 2011.97 16.47 42.01 4.42 15.86 80.20 14.75 38.19 21.50 26.21 31.91 17.97 23.APPENDIX TABLES APPENDIX TABLE 6: PROCUREMENT. Procurement for 2011-12 is as on August 12.82 25.63 7.04 15.69 26.12 21. 175 .71 12.80 16. Note : Off-take for 2011-12 is for the month of April.98 56.48 35.79 9.20 11.53 37.31 26.76 35.33 8.59 31.96 20.84 21.04 23.06 25.30 * : Stocks as at end-March.93 11.42 10.88 14.58 43.36 44.54 11.16 9.35 25.83 12.17 11.29 32.36 20.80 2.98 51.14 16.81 20.42 55.32 24.24 5.13 22.20 25.65 17.29 41.65 6.89 29.00 20.07 13.71 28.13 15.84 32.12 19. P : Provisional.79 15.60 26.53 57.88 21.05 18.65 14.

6 (11.8 138.7 145.6 131.7 5 15.6 (3.6 5.3 (5.5 131.5 140.5 133.4 143.1 14.1 145.4 -1.1 153.8 7.0 149.7 (9.7 129.1 162.4 113.3 1.6 131.5 (5.7 1.3 6.0 158.3) Manufacturing 75.1 3.0 3 5.5 6.4 124.3 P : Provisional.5 9 12.2 7.4 3.8 2.1) 9.1 15.5 (100.5 112.9 146.3) 4.2 (100.8 138.8 120.6 134.5 10.3 Index Growth Rate (per cent) 6 112.4 123.0) 2.0) 8.3 7.9 115.9 (16.7) Electricity 10.1 159.0 175.0 7 7.3 130.0) 15.6 183.0 6. Source : Central Statistical Office.6 141.9 158.5 10.0 168.6 7.1 139.3 (3.9 (100.8 7.0) 5. Note : Figures in parentheses are relative contributions.4 2.4 169.2 3.1) 5.9 190.1 141.0 Index Growth Rate (per cent) 8 122.4 9.ANNUAL REPORT APPENDIX TABLE 7: TRENDS IN INDEX OF INDUSTRIAL PRODUCTION (Base : 2004-05=100) Sector Weight Period 1 2006-07 2007-08 2008-09 2009-10 2010-11 P Mining & Quarrying 14.3 (100.5 (78.4 (92.3 157.4) 2.8 5.9 8.5 115.6 127.6) 6.7 167.1 154.1 130.2 152.9 135.0) 2009-10 April-June July-September October-December January-March April-September October-March 2010-11 P April-June July-September October-December January-March April-September October-March 117.5 165.8 134.0 6.2 (5.0 7.1 126.2 Index Growth Rate (per cent) 2 107.0 135. 176 .9 8.7 -1.2 149.2 8.1 6.5 165.7 179.9 6.5 -3.8 8.8 150.5 Index Growth Rate (per cent) 4 126.4 136.1 136.7 9.3 6.8 10.2 8.5) 7.9) General 100.1 172.9 165.8) 5.6) 6.0) 18.8 161.2 (7. computed as the ratio (in percentage terms) of the change in the index of the respective industry group to the change in the overall index adjusted for the weight of the relevant industry group.0 (89.0 123.1 (10.2 8.8 (73.3 175.0 0.1 6.0 159.1 153.0 (86.0 10.9) 4.9 9.7) 2.2 7.8 6.9) 2.9 9.2 166.6 6.8 120.5 (100.5 8.7 127.1 7.8 176.

3 6.1 0.4 20. Food Products a) Dairy Products b) Grain Mill Products c) Sugar.7 8.2 26.3 15.5 2.3 -0.0 Year-on-Year July 2010 July 2011 P 7 10.4 13.6 3.0 6.2 -2.0 3.9 8.1 3.3 -3.APPENDIX TABLES APPENDIX TABLE 8: VARIATIONS IN INDEX NUMBERS OF WHOLESALE PRICES (Base:2004-05 = 100) (Per cent) Major Group/Sub-group/Commodity Weight Year-on-Year March 2010 March 2011 1 All Commodities I.7 8.3 2.5 -1.0 0.9 4.2 20.3 3.2 5.2 3.8 7.3 3.7 11.5 -0.3 10.6 10.1 19.7 0.4 20.4 1.0 3.7 1.3 5.5 7.2 11.7 0.7 -0.4 4.5 2.5 20.0 8.6 0.9 4.3 3.7 11.0 -3.8 78.2 8. Tobacco and Tobacco Products 3.4 0.6 3.8 9.8 3.4 6.0 5.0 20.3 -1.5 1.9 7.1 58.3 2.9 1.3 0.0 13.2 1.0 0.7 15.9 15.9 P : Provisional.7 35.5 9.0 2.4 11.3 5.4 43.6 2.8 1.9 -7.3 9.1 -9.5 2.6 0.1 14.4 9. Rubber and Plastic Products 8.9 22.7 1.5 8.4 7.0 13.7 6.4 0.6 5.1 12.2 4.3 15.5 7.7 3.4 3.8 24.3 0.2 14. Khandsari and Gur d) Edible Oils e) Oil Cakes 2.5 33.1 18.0 1. 177 .8 20.9 3.3 10.1 1.3 12.4 2.5 8.9 42.9 6.1 15.0 19.3 1.7 8.7 15.7 -4.2 0.0 7.Transport.6 -7.1 3.9 10.2 -4.7 13.7 -0.6 18.9 46.8 7.5 8.8 9.1 8.6 5.0 16.1 3.1 18.5 7.2 0.7 43.2 53.0 13.7 3.7 -0.8 7.5 -6.5 12.6 6.1 12.3 2.7 9.8 12.8 1.3 15. Beverages.6 10.5 8.9 18.3 2.6 7.5 65.3 2.6 6. Coal 2.9 1.5 20.1 21.5 33.9 9.2 5.6 1.1 31.0 2.1 9.3 24.1 25.5 3.3 -1.4 12.5 2.1 14.8 1.5 -17.8 22.8 2.5 13.0 6.9 1.6 2.2 8.3 87.5 1.9 7.3 22.3 7.2 2.2 16.2 3.8 -1.6 2.2 0.6 3.7 5.8 12.3 24.7 103.4 10. Non-Food Articles a) Fibres i) Raw Cotton b) Oilseeds c) Sugarcane 3.7 27.1 3.9 9.2 2.9 3.8 2.1 9.3 5.6 5.2 3.2 14.3 7.6 Variations Average 2009-10 5 3.9 35.4 -4. Leather and Leather Products 7.0 -0.7 25.0 3.3 37.4 3.1 2. Primary Articles 1. Wood and Wood Products 5. Government of India.8 13.7 46.8 1.7 10.4 5.6 7.5 3.8 2.8 8 9.1 25.2 13.6 12.9 7.2 6.3 41.8 15.3 33.1 1.3 14.5 0.8 3. Mineral Oils 3.4 0.7 3.3 12.8 41.3 31.5 29. Food Articles a) Cereals i) Rice ii) Wheat b) Pulses c) Fruits and Vegetables d) Milk e) Eggs.3 2.7 3.6 12.2 3 10.7 10.9 15.3 17.7 1.5 3.4 4.6 2.7 16.3 1.8 0.2 2.3 3.4 5.3 6.3 14. Equipment and Parts 2 100.4 10. Minerals a) Iron Ore b) Crude Petroleum II.0 5.5 0.1 9.3 16.7 8.2 2.6 1. Textiles a) Cotton Textiles b) Man Made Textiles 4.7 10. Equipment and Batteries 12.0 7.9 2.0 10.4 3.4 4.3 4.3 13.9 2. Meat and Fish f) Condiments and Spices g) Tea and Coffee 2.7 5.0 0.4 -1.1 7. Alloys and Metal Products a) Ferrous Metals b) Non-Ferrous Metals c) Metal Products 11.5 14.8 0.0 2.8 12.8 18.6 -5.0 18. Non-Metallic Mineral Products a) Cement and Lime 10.4 22.1 5.3 12.6 -1.7 15.0 1. Machinery and Machine Tools a) Non-Electrical Machinery b) Electrical Machinery.0 1.4 9.0 0.4 6.7 2.2 7. Paper and Paper Products 6. Electricity III.1 1.7 0.7 1. Source : Office of the Economic Adviser.9 0.3 1.6 1.1 14.Basic Metals.2 0.2 4 9. Manufactured Products 1.4 2.4 4.7 7.2 4.8 11.9 0.7 2.5 7.0 4.0 2.4 5.9 4.3 8.6 8.0 7.9 14.9 5.2 13.5 1.6 117.7 1.2 40.6 17.1 10.4 -1.7 8.9 5.9 -0.0 5. Chemicals and Chemical Products a) Basic Inorganic Chemicals b) Basic Organic Chemicals c) Fertilizers d) Pesticides e) Drugs and Medicines 9. Ministry of Commerce and Industry.0 12.3 12.1 5.2 2.7 3. Fuel and Power 1.5 15.7 53.5 20.8 12.8 7.0 0.5 10.1 2.5 7.9 8.1 51.8 20.7 2.5 10.5 8.6 12.9 2.0 10.9 9.1 2010-11 6 9.9 4.7 -7.3 0.9 -1.4 13.

1+S.754 Per cent 8 26.395 61.969 1.3 20.3 1.1 96.111 71.0 1.115 2.14.132 -9.454 1.02.195 Per cent 6 19.5 3.995 -12.515 2.1 Year-on-year up to Aug 13.455 7.8 20.3.3 = S. -86.164 -8.Net RBI Credit to Government (a+b) a) Net RBI credit to Central Government (i-ii) i) Claims on Central Government ii) Deposits of Central Government b) Net RBI credit to State Governments (i-ii) i) Claims on State Governments ii) Deposits of State Governments S.9 -12.0 47.024 56.033 – -87.368 -2.71.Currency in Circulation C.676 -16.50.474 -1.3+S.1 -52.4+S.2+S.740 1.5 1 Reserve Money (C.44.28.1.740 -1 224 225 1 -11 – – – – – – – – 5.188 – – – – – – – – 1.992 2.2+S.1 up to Aug 12.RBI‘s Credit to Commercial Sector S.9 -16.660 1.23.157 79.6.183 -12 -12 0 1.1 – -64.818 -9.49.605 1.3.76.713 1.7 21.31.24.8 12.2 – 83.08.964 1.132 – – – – – – – – 1.6 -3.1.656 3.919 399 5.82.379 25.3 – 66.Bankers‘ Deposits with the RBI of which : Scheduled Commercial Banks C.5-S.50.922 1.60.93.1+C.‗Other‘ Deposits with the RBI Sources S.2 S.211 68.328 (S.9 1.553 12.1 13. 2011 Absolute 9 1.6) Data are provisional.713 2.60.167 1.2 47.492 – -90.216 15.215 -3.RBI‘s Claims on Commercial and Co-operative Banks of which : Loans and Advances to Scheduled Commercial Banks S.94.317 62.00.946 836 – 63.006 1.43.Net Domestic Assets of the RBI 48.4 -31.135 100 2.173 95.2 -16 385 – 29.198 8.1+S.555 3.634 186 -1.520 2.60.4.881 Financial year 2009-10 Absolute 3 1.155 1.Net Foreign Exchange Assets of the RBI S.820 65.68.0 20.84.1 1.0 – 178 .21.0 1.725 1.5.5-S.591 22.731 15.592 -574 20.2.274 S.7.520 2.0 2010-11 Absolute 5 2.423 64.159 1. 2011 2 13.3 12.96.67.8 12.632 -1.2 20.3+S.509 4.659 4.035 3.2.9 10.873 358 3.4 3.185 -84.990 – – – – – – – – 2.02. 2010 Absolute 7 2.44.724 -48.94.542 -58.345 -1.02.60.49.462 -10.856 -22.5 21.523 Per cent 10 16.688 Per cent 4 17.720 -126 18.Net Non-monetary Liabilities of the RBI 3.2+C.15.144 1.Government‘s Currency Liabilities to the Public 9.ANNUAL REPORT APPENDIX TABLE 9: VARIATIONS IN RESERVE MONEY ( Amount in `crore) Variations Item Outstanding as on March 31.6) Components C.315 2.

2011 2 16.692 8.043 7.8 -31.5 -14.8 16.050 -86.676 Per cent 8 19.1 -22.3] Broad Money (M3) (C.07.87.Aggregate Deposits with Banks (a+b) a) Demand Deposits b) Time Deposits C. 2010 Absolute 7 2.63.26.771 3.2(a)+C.49.29.2+S.4 3.4 1 Narrow Money (M1)[C.8 18.4 13.98.605 15.89.168 14.331 5. Other banks‘ credit to commercial sector S.7 7.94.616 7.2 22.520 15.994 1.2.789 1.35.84.265 30.1.025 -9.91.50.492 4. Net RBI credit to Government (a+b) a.1+C.5 0.242 13.9 16.Net Foreign Exchange Assets of Banking Sector (A+B) A.2 -3.Currency with the Public C.9 S.161 1.820 186 2.17.1 1.1 -1.594 8.0 18.724 3.2 20.46.516 -12.965 8.8 21.789 0 1.254 1.3 = S.28.6 – – – 10.164 42.327 13.54.640 5.56.8 12.477 21.36.215 -9.105 9.78.499 1.969 1.008 -70.0 35.680 A.35.216 42.14.1 37.858 96.38.43.607 1.5 19.967 474 6. 2011 Absolute 9 68.54.198 1.6 54.120 1.715 -48.33.68.660 2.3 -5.817 Per cent 6 9.47.079 66.8 – – – 8.76.3 20.700 Per cent 10 4.1+S.501 49.07.20.8 3.07.047 -11.406 2.5.406 179 .2.363 23.07.99.1 6.548 1.84.009 1.0 Year-on-year up to July 30.419 18.35.8 – 16.774 12.0 16.4 14.5 -0.902 -50.676 84.3 8.24.354 -63.43.5 -48.Banking Sector’s Net Non-Monetary Liabilities (A+B) 11.0 8.569 64.94.81.8 2010-11 Absolute 5 1.022 1.07.21.274 B.612 -10. Other banks‘ net foreign exchange assets S.585 1.360 1.345 1. Net non-monetary liabilities of other banks (residual) Note : Data are provisional.82.549 -126 19.49.713 1.9 51.731 15.639 7.Net Bank Credit to Government (A+B) A.76.5 16.35.4.4 – – – 40.‗Other‘ Deposits with the RBI Sources S.3 12.4 -31. Other banks‘ credit to Government S.1+C.Bank Credit to Commercial Sector (a+b) A.93.7 12.9 32.861 6.7 10.02.8 18.326 -1.455 2.1 15.483 16 2.50. Net RBI credit to Central Government b.7 – – – 19.454 2.54.46.3.331 6.9 15.5 15.28.9 15.55.1 19.8 -17.900 1.13.7 -7.84. Net non-monetary liabilities of RBI 3.5) Components C.3+S.515 1.11.3 3.74.6 20.035 2.82.321 7.94.493 1.847 4.7 up to July 29.93.49.197 55. RBI‘s credit to commercial sector B.2 16.594 -2.239 -310 7.50.7 24.40.3.553 64.0 18.96.2+C.555 3.704 7.5 5.3 16.282 5.315 77.5 15.7 -88.Government’s Currency Liabilities to the Public 9.29.3 – 21. 7.8 30.006 1.354 216 20.943 -20.3 1.997 836 7.86.41.4-S.979 3.08.2 -3.853 1. Net RBI credit to State Governments B.46.465 6.2 22.96.660 48.APPENDIX TABLES APPENDIX TABLE 10: VARIATIONS IN MONEY STOCK ( Amount in `crore) Variations Item Outstanding as on March 31. RBI‘s net foreign exchange assets B.919 Per cent 4 18.548 Financial year 2009-10 Absolute 3 2.3 17.1 -1.775 22.268 8.1.167 -22.1 1.024 1.

299 13.544 26.862 45.4 12.386 2.20.790 16.061 80.8 17.38.8 32.847 -10. other financial institutions and inter-bank participations.67.2 5.) 4.710 -7.31.497 92.686 1.85.64.676 8.6 8.564 -22 1. Data are provisional and relate to select banks which cover 95 per cent of total non-food credit extended by all scheduled commercial banks.347 44.577 6.365 48.9 98.11. Industry (Micro & Small.207 12.4 2 26.75.0 24.466 64.562 30.011 23.4 15.201 3.0 @: Direct housing loans.145 36.853 5.897 15.463 60.368 45.44.54.739 54.181 11.4 Commercial Real Estate 3.633 1.111 36.110 10.2 Professional Services 3.182 77.6 -1.187 2.9 13.284 -28.66.13.1 10.294 3.257 1.870 22.40.32.018 4.767 17.491 24.801 2.9 28. Exim Bank.836 13.372 14.459 1.09. 2009 March 26.120 -293 33.85.2 Housing @ 4.ANNUAL REPORT APPENDIX TABLE 11: SECTORAL DEPLOYMENT OF GROSS BANK CREDIT (Amount in ` crore) Sector Outstanding as on March 27.42.524 107 21.59.5 Non-Banking Financial Companies (NBFCs) 4.947 16.354 4.588 23.720 20. Services of which : 3.3 Advances against Fixed Deposits (Including FCNR(B).26. Gross bank credit data include bills rediscounted with Reserve Bank.74.7 38. 180 .154 14.1 29.479 1.870 21.929 48. NRNR Deposits etc. 2011 2009-10 Absolute 1 I Gross Bank Credit (II + III) II Food Credit III Non-food Credit (1 to 4) 1.7 0.516 43.4 Credit Card Outstanding 4.809 15.4 39.654 10.441 5.01.569 48.128 65.302 44.179 2.0 1. 2.390 6. Agriculture & Allied Activities 2.92. 2010 March 25.27.46.398 1.1 Consumer Durables 4.579 20.86.421 52.88.7 6.5 1.8 22.656 3 30.708 24.46.855 8. Personal Loans of which : 4.133 4 37.007 416.3 12.60.11.2 18.57.1 Housing# 9.156 3.38.1 62.863 18.377 92.098 43.41.9 -0.549 6.3 7.79.00.9 Variation during 2010-11 Absolute 7 6.5 3.047 6.8 4.877 12.271 1.17.2 21.00.5 Education Memo 5. # : Direct as well as indirect housing loan. Medium and Large ) 3. Note : 1.451 7.286 1.825 3.000 28.6 16.789 19.3 Trade 3.9 13.97. Priority Sector of which : 5.0 -2.214 -856 20.1 Transport Operators 3.0 20.6 10.401 1.30.200 Per cent 8 20.333 5 4.62.136 99.58.477 Per cent 6 16.6 10.110 60.6 23.47.849 9.

77.441 2 Amount 3 2010-11 No.215 -30. Private Sector (a+b) a) Financial b) Non-financial Public Sector (a+b) a) Financial b) Non-financial 3.620 24. Private Sector Public Sector 54. Source : Securities and Exchange Board of India.670 2.777 325 32. a+b) Instrument type (i) Equity (ii) Debt Issuer Type (a) IPOs (b) Listed B.06. of Issues 4 Amount 5 2. Public Sector (a+b+c) a) Public Sector Undertakings b) Government Companies c) Banks/Financial Institutions 3.983 17. @ : As at end-Period.128 4.607 25.025 – 4.587 19 1.451 71.834 5. II.568 1.270 1.620 37.665 19.609 10. Bombay Stock exchange.790 8.584 22 85 35.PRIMARYAND SECONDARY (Amount in ` crore) Items 2009-10 No.718 3.658 22 96 41.APPENDIX TABLES APPENDIX TABLE 12: CAPITAL MARKET .: Nil/Negligible.024 1.960 2.92.928 28.33.191 2. of Issues 1 I.466 154 5.830 4. Private Placement 1.998 15. Total (1+2.567 9.439 2.249 4.620 – 17. Euro Issues (ADRs and GDRs) C.975 49.290 35.279 36.026 2.394 13.43.63.585 21 99 13.24.476 1. SECONDARY MARKET BSE Sensex: End-Period Period Average Price Earning Ratio@ Market Capitalisation to GDP Ratio (%) Turnover Cash Segment Derivatives Segment S&PCNX Nifty: End-Period Period Average Price Earning Ratio@ Market Capitalisation to GDP Ratio (%) Turnover Cash Segment Derivatives Segment 17.48.38. i+ii) (i) Equity (ii) Debt D.943 98.853 1.479 326 25.337 877 460 250 212 38 1.528 15.412 2. Prospectus and Rights Issues* 1. Private Sector (a+b) a) Financial b) Non-financial 2. 181 .630 640 218 151 67 2.294 1.488 49 2.985 74.335 20.03.09. .967 77 70 6 64 7 2 – 5 77 77 – 51 26 42 37.221 * : Excluding offers for sale.441 90.696 3. Total (1+2. 2.445 18.561 1. i+ii.153 7.765 37.21.42.053 20.496 12. Mutual fund Mobilsation (net) 1.427 180 21.724 71 68 3 65 3 1 1 1 71 70 1 39 32 18 32.809 234 5.152 -19. National Stock Exchange and various merchant bankers.607 32.78.38.605 21 87 11.16.76. PRIMARY MARKET A.

239 4.896 17.446 4.221 2.510 3.53.72.41.382 1.10.402 41.227 5.316 31.63.272 1.47.792 2.63.944 15.840 1.24.30.77.419 1.657 4.512 80.076 5.826 3.737 1.539 8 3.024 3.10.46.722 2.285 51.851 2.799 2.637 92.746 2.427 31.34.079 1.864 3.870 39.06.89.05.69.932 2.68.990 3.466 16.879 28.02.12.09.69.680 6.78.33.526 9.37.610 3.17.312 2.931 3.244 1.56.354 2.38.084 5.50.62.29.666 42.318 3.755 7.99.30.32.82.14.455 3.740 2.508 2.89.48.511 3.92.62.13.988 8.257 8.22.806 3.95.176 3.43.59.24.44.134 3.876 66.16.02.97.954 4.422 4.710 1.383 3.236 8.55.28.173 3.80.83.01.64.05.568 7.290 1.473 3.17.881 2.31.155 5.409 1.40.924 3.79.389 37.766 3.38.69.21.475 2.84.06.353 20.622 7.72.065 10.486 3.872 1.05.470 1.31.144 2.488 47.70.22.09.29.56.32.103 1.695 69.98.087 5.832 71.250 2.74.00.12.644 4.090 65.573 3.596 2.617 3.307 3.44.497 2.96.137 4.438 1.22.913 5.846 1.844 4.19.832 2.01.498 10.65.463 4.944 3.303 1.04.523 3.384 2.757 6 25.394 3. CCIL and SEBI.75.57.980 18.50.865 1.390 1 2008-09 2009-10 2010-11 2009-10 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 2010-11 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 2011-12 Apr May June 2 35.369 4.076 6.843 4.17.69.836 6.280 19.44.43.72.900 1.55. NSE.275 10.143 3.425 3.04.08. 182 .688 2.39.685 80.909 3 37.516 20.348 1.049 2.67.92.ANNUAL REPORT APPENDIX TABLE 13: TURNOVER IN INDIAN DERIVATIVES MARKET (` Crore) Year/Month Index Futures Equity Derivatives Index Options Stock Futures Stock Options 5 2.876 4.35.22.73.366 4 34.45.88.695 31.43.12.544 6.268 2.247 54.90.262 84.79.591 8.618 5.90.148 2.35.13.54.36.12.05.21.58.24.984 5.522 5.27.946 2.99.365 2.731 79.168 49.69.32.37.14.26.65.994 3.27.66.44.390 1.82.36.20.391 83.597 4.416 3.149 4.214 42.95.087 1.44.73.45.183 1.629 4.56.582 2.516 5.707 36.74.10.95.16.304 7.220 3.76.17.861 3.776 Source : RBI.40.40.72.90.405 76.994 20.48.06.40.680 2.06.69.133 3.17.470 5.119 4.162 3.752 25.343 Currency Derivatives Forward Interest Rate Derivatives Swap Exchange Traded Currency Options Interest Rate and Futures Swap 7 40.54.195 3.943 10.44.65.89.010 3.53.485 4.81.84.830 5.965 8.424 2.313 3.95.872 4.47.267 5.593 4.383 4.549 3.792 3.62.29.047 3.74.511 2.45.408 7.95.43.657 51.46.790 3.01.191 16.02.458 11.89.39.23.354 11.188 2.267 4.486 4.57.273 2.524 1.05.63.28.49.88.799 2.485 43.09.893 4.581 6.387 43.43.46.632 4.326 3.12.472 1.312 3.993 70.813 1.612 2.50.241 82.938 5.757 6.148 1.167 3.11.05.79.934 3.753 3.19.852 3.643 7.34.260 346.84.95.746 38.07.08.247 6.62.470 4.829 4.363 4.758 45.60.82.16.693 98.083 77.12.11.454 41.54.544 1. BSE.68.44.547 73.52.00.02.788 4.63.469 17.570 3.621 9.99.782 2.514 19.326 5.95.689 3.89.398 1.97.510 6.19.222 3.307 9 49.855 51.27.047 2.

20 101.72 113.84 98.32 101.02 92.63 112.Currency Trade-based weights (Base 2004-05=100) REER 1 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 (P) 2010-11 (P) 2009-10 (P) April May June July August September October November December January February March 2010-11 (P) April May June July August September October November December January February March 2011-12 (P) April May June 2 100.96 90.21 89.33 88.99 107.65 101.04 84.59 91.92 91.35 90.51 93.07 92.67 86.02 91. December 2005.89 92.47 91.18 86.76 102. 183 .45 90.66 90.03 92.96 115.75 93.57 100.52 97.53 102.07 118.Currency Trade-based weights (Base 2004-05=100) REER 4 100.43 85.21 112.10 101.52 102.78 117.78 102.28 86.72 94.66 101.03 92.09 104.34 93.71 85.19 117.94 117.80 94.04 NEER 3 100.94 93.59 89.48 P : Provisional.42 87.48 89.28 NEER 5 100.08 117.86 103.00 103.08 94.24 97.66 96.30 99.82 92.63 93. Reserve Bank of India Bulletin.33 107.90 98.20 115.32 91.67 91.34 90.03 92.23 93.97 115.30 90.04 89.95 102.51 98.32 92.70 92.50 91.11 99.48 86.12 98.65 90.51 93.38 92.19 99.50 90.72 116.00 116.52 92.08 89.88 96.62 90.17 104.70 94.87 94.37 101. Note : For detailed methodology of compilation of indices.APPENDIX TABLES APPENDIX TABLE 14: INDICES OF REAL EFFECTIVE EXCHANGE RATE (REER) AND NOMINAL EFFECTIVE EXCHANGE RATE (NEER) OF THE INDIAN RUPEE Year/Month 36 .33 95.10 92.62 91.75 102.04 98.00 103.22 85.54 116.46 94.63 104.71 97.56 87.56 96.35 90.98 111.79 92. see ―Revision of Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER) Indices‖.19 103.37 90.02 90.10 101.35 95.30 112.56 6 .55 94.48 101.29 108.00 105.00 102.46 115.72 92.19 115.74 102.60 89.98 99.78 102.66 92.44 104.67 103.

3 2.2 4.6 3.9 0.1 0. 184 .3 5.6 3.6 -1.4 4.2 3.3 26.9 48. @ : Includes external liabilities of the Centre calculated at historical exchange rate.8 1.1 4.5 0. BE : Budget Estimates.5 4.2 3.9 28.3 7.2 64.6 55. Note : Negative sign (-) indicates surplus in deficit indicators.4 72.5 0.1 5.1 69.0 6.4 5.4 6.0 0.5 20.7 Combined 1990-91 1995-96 2000-01 2007-08 2008-09 2009-10 2010-11 RE 2011-12 BE 5.2 1.2 50.4 2.1 3.6 0.0 1.9 2.5 Revenue Deficit 3 Gross Fiscal Deficit 4 Outstanding Liabilities@ 5 RE: Revised Estimates.8 5.3 25.9 2.8 -0.5 3.4 3.8 61.5 2.4 3.6 71.5 5.5 9.2 9.9 -0.6 3.1 2.6 53.2 0.1 70. * : Data from 2009-10 onwards are provisional and based on budgets of 28 State governments of which five are Vote on Account.2 22.8 64.5 9.7 49.2 3.6 -0.2 2.5 4.2 1.2 6.9 56.ANNUAL REPORT APPENDIX TABLE 15: KEY FISCAL INDICATORS (As per cent to GDP) Year 1 Primary Deficit 2 Centre 1990-91 1995-96 2000-01 2007-08 2008-09 2009-10 2010-11 RE 2011-12 BE 4.1 4.7 2.9 55.8 0.4 4.6 26.6 4.6 States* 1990-91 1995-96 2000-01 2007-08 2008-09 2009-10 2010-11 RE 2011-12 BE 1.9 0.3 63. Source : Budget documents of the Central and State governments.4 7.0 0.6 6.6 1.7 3.7 2.7 6.1 1.3 2.1 8.3 -0.6 2.0 1.9 -0.0 22.0 23.6 56.

APPENDIX TABLES

APPENDIX TABLE 16: BUDGETARY OPERATIONS OF THE STATE GOVERNMENTS
A : Measures of Deficit of State Governments Year Fiscal Deficit Gross 1 1990-91 1995-96 2000-01 2007-08 2008-09 2009-10* P 2010-11* (RE) P 2011-12* (BE) P 2 18,786 30,869 87,922 75,455 1,34,589 1,88,820 2,07,857 1,99,427 Net 3 14,531 26,845 85,576 68,964 1,29,690 1,79,418 1,95,813 1,82,541 Primary Deficit Gross 4 10,131 9,030 36,936 -24,376 31,634 76,013 80,908 59,325 Net 5 8,280 10,791 45,550 -18,230 43,092 81,921 86,029 59,427 (` crore) Net RBI Conventional Revenue Credit# Deficit Deficit 6 420 16 -1,092 1,140 -1,609 186 2,515 .. 7 -72 -2,680 -2,379 -13,410 -8,959 7,372 24,867 -16,136 8 5,309 8,620 55,316 -42,943 -12,672 31,018 22,916 -16,580

As Percentage to GDP at Current Market Prices 1990-91 1995-96 2000-01 2007-08 2008-09 2009-10* P 2010-11* (RE) P 2011-12* (BE) P B : Select Budgetary Variables of State Governments Item 1 1. 2. 3. 4. 5. 6. 7. GFD / Total Expenditure (excluding recoveries) Revenue Deficit / Revenue Expenditure Conventional Deficit / Aggregate Disbursements Revenue Deficit / GFD Non-Developmental Revenue Expenditure / Revenue Receipts Interest Payments/Revenue Receipts Developmental Expenditure / GDP 1990-00 (Average) 2 22.4 9.5 -0.04 36.2 39.8 16.6 10.0 5.7 4.6 5.2 1.7 2009-10 P 3 19.0 3.9 0.01 16.4 39.2 14.7 9.7 6.0 4.7 5.5 1.4 2010-11 P (RE) 4 17.0 2.3 0.6 11.0 37.0 13.1 10.0 6.3 4.7 5.8 1.3 3.30 2.59 4.18 1.51 2.41 2.88 2.64 2.22 2.55 2.25 4.07 1.38 2.32 2.74 2.49 2.03 1.78 0.76 1.76 -0.49 0.57 1.16 1.03 0.66 1.45 0.91 2.17 -0.37 0.77 1.25 1.09 0.66 0.07 0.00 -0.05 0.02 -0.03 0.00 0.03 .. -0.01 -0.22 -0.11 -0.27 -0.16 0.11 0.32 -0.18 0.93 0.72 2.63 -0.86 -0.23 0.47 0.29 -0.18 (Per cent) 2011-12 P (BE) 5 14.7 -1.5 -0.5 -8.3 36.3 12.6 9.7 6.1 4.6 6.0 1.1

of which : Social Sector Expenditure / GDP 8. Non-Developmental Expenditure / GDP 9. States‘ Own Tax Revenue/GDP 10. States‘ Own Non Tax Revenue / GDP

RE: Revised Estimates. BE : Budget Estimates. .. : Not Available. P : Provisional data. GFD : Gross Fiscal Deficit. * : Data from 2009-10 onwards pertain to 28 State Governments of which five are Vote on Account. # : Data pertain to State governments having accounts with the Reserve Bank of India. Note : 1. Negative sign (-) indicates surplus in deficit indicators. 2. The net RBI credit to State governments refers to variations in loans and advances given to them by the RBI net of their incremental deposits with the RBI. Source : Budget Documents of the State Governments and the Reserve Bank Records.

185

ANNUAL REPORT

APPENDIX TABLE 17: INDIA’S EXPORTS AND IMPORTS
( US $ million) Exports of principal commodities Commodity/Group 2007-08 1 I. Primary Products A. B. Agricultural & Allied Products Ores & Minerals 2 27,551.9 18,432.1 9,119.8 102,978.8 3,502.5 21,193.8 37,365.2 19,425.7 19,678.7 508.2 28,363.1 4,010.4 162,904.2 April-March 2008-09 3 25,335.4 17,534.9 7,800.5 123,148.9 3,556.0 22,708.1 47,285.6 20,016.4 27,955.2 301.0 27,547.0 6,768.2 182,799.5 2009-10R 4 26,396.5 17,734.1 8,662.5 115,180.7 3,361.1 22,908.8 38,271.3 19,853.0 28,996.3 224.8 28,192.0 8,982.1 178,751.4 2010-11 P 5 35,358.7 24,696.1 10,662.6 168,098.1 3,789.3 28,979.6 68,784.1 23,312.2 40,790.7 233.1 41,918.0 9,027.3 254,402.1

II. Manufactured Goods A. B. C. D. E. F. Leather & Manufactures Chemicals & Related Products Engineering Goods Textiles & Textile Products Gems & Jewellery Handicrafts

III. Petroleum Products IV. Others Total Exports (I+II+III+IV) Imports of principal commodities I. Bulk Imports A. B. C. Petroleum, Petroleum Products & Related Material Bulk Consumption Goods Other Bulk Items

112,744.7 79,644.5 4,600.3 28,499.9 138,694.4 70,110.5 20,768.3 47,815.7 251,439.2 R : Revised.

138,791.1 93,671.7 4,975.3 40,144.0 160,042.8 71,833.1 31,930.8 56,278.9 298,833.9

125,315.2 87,135.9 9,012.7 29,166.5 163,057.8 65,865.0 31,270.0 65,922.8 288,372.9

150,489.7 106,068.2 8,720.3 35,701.1 202,085.4 71,627.2 49,639.4 80,818.7 352,575.0

II. Non-Bulk Imports A. B. C. Capital Goods Mainly Export Related Items Others

Total Imports (I+II) P : Provisional. Source : DGCI & S.

186

APPENDIX TABLES

APPENDIX TABLE 18: INDIA’S OVERALL BALANCE OF PAYMENTS
` crore Item 1 A. CURRENT ACCOUNT 1 2 3 4 Exports, f.o.b. Imports, c.i.f. Trade Balance Invisibles, Net a) ‗Non-Factor‘ Services of which : Software Services b) Income c) Private Transfers d) Official Transfers 5 Current Account Balance B. CAPITAL ACCOUNT 1 Foreign Investment, Net (a+b) a) Direct Investment of which : i) In India Equity Re-invested Earnings Other Capital ii) Abroad Equity Re-invested Earnings Other Capital b) Portfolio Investment In India Abroad 2 External Assistance, Net Disbursements Amortisation 3 Commercial Borrowings, Net Disbursements Amortisation 4 Short Term Credit, Net 5 Banking Capital of which : NRI Deposits, Net 6 Rupee Debt Service 7 Other Capital, Net @ 8 Total Capital Account C. D. E. F. G. Errors & Omissions Overall Balance [A(5)+B(8)+C] Monetary Movements (F+G) IMF, Net Reserves and Monetary Gold (Increase -, Decrease +) of which : SDR allocation 8,57,960 14,05,412 -5,47,452 4,19,821 2,48,406 2,12,242 -32,923 2,03,209 1,129 -1,27,631 8,62,333 14,23,079 -5,60,746 3,80,120 1,69,843 2,35,161 -38,000 2,47,113 1,164 -1,80,626 11,39,517 17,34,545 -5,95,028 3,92,494 2,17,058 2,68,538 -67,734 2,43,102 68 -2,02,532 189,001 308,521 -119,520 91,605 53,916 46,300 -7,110 44,567 232 -27,915 182,235 300,609 -118,374 79,991 35,726 49,705 -8,040 52,055 250 -38,383 250,468 380,935 -130,467 86,186 47,664 59,001 -14,863 53,368 17 -44,281 2008-09 2 2009-10 PR 3 2010-11 P 4 2008-09 5 US $ million 2009-10 PR 6 2010-11 P 7

22,685 87,734 1,70,819 1,25,621 41,541 3,657 -83,085 -63,889 -4,986 -14,210 -65,049 -64,200 -849 11,558 24,435 12,877 36,530 70,846 34,316 -13,288 -19,205

2,43,641 89,675 1,57,894 1,09,349 41,125 7,420 -68,219 -44,331 -5,143 -18,745 1,53,966 1,53,885 81 13,612 27,863 14,251 13,183 70,371 57,188 34,878 9,844

1,72,154 32,776 1,06,598 62,970 42,937 691 -73,822 -34,946 -4,939 -33,937 1,39,378 1,44,679 -5301 22,480 35,868 13,388 54,336 1,05,152 50,816 50,177 22,025

5,785 19,816 37,672 27,863 9,032 776 -17,855 -13,688 -1,084 -3,083 -14,031 -13,854 -177 2,441 5,232 2,791 7,862 15,223 7,361 -1,985 -3,246

51,167 18,771 33,124 22,907 8,668 1,549 -14,353 -9,314 -1,084 -3,955 32,396 32,376 20 2,893 5,898 3,005 2,808 14,954 12,146 7,558 2,084

37,434 7,142 23,364 13,792 9,424 148 -16,222 -7,674 -1,084 -7,464 30,292 31,471 -1,179 4,941 7,881 2,940 11,927 23,089 11,162 10,991 4,963

20,430 -471 -11,791 26,018 4,498 -97,115 97,115 0 97,115 –

14,254 -452 -62,574 2,52,132 -7,269 64,237 -64,237 0 -64,237 -24,983

14,822 -313 -47,726 2,73,133 -11,152 59,449 -59,449 0 -59,449 –

4,290 -100 -3,990 6,768 1,067 -20,080 20,080 0 20,080 –

2,924 -97 -13,016 53,397 -1573 13,441 -13,441 0 -13,441 -5,160

3,239 -69 -10,440 59,747 -2416 13,050 -13,050 0 -13,050 –

P : Provisional. PR : Partially Revised. @ : Includes delayed export receipts, advance payments against imports, net funds held abroad and advances received pending issue of shares under FDI. Note : 1. Gold and silver brought by returning Indians have been included under imports, with a contra entry in private transfer receipts. 2. Data on exports and imports differ from those given by DGCI&S on account of differences in coverage, valuation and timing.

187

ANNUAL REPORT

APPENDIX TABLE 19: FOREIGN DIRECT INVESTMENT FLOWS TO INDIA: COUNTRY-WISE AND INDUSTRY-WISE
US $ million Source/Industry 1 Total FDI 2006-07 2 9,307 2007-08 3 19,425 2008-09 4 22,697 2009-10 P 5 22,461 2010-11 P 6 14,939

Country-wise Inflows Mauritius Singapore U.S.A Cyprus Japan Netherlands United Kingdom Germany UAE France Switzerland Hong Kong Spain South Korea Luxembourg Others 3,780 582 706 58 80 559 1,809 116 215 100 57 60 62 68 – 1,055 9,518 2,827 950 570 457 601 508 486 226 136 192 106 48 86 15 2,699 10,165 3,360 1,236 1,211 266 682 690 611 234 437 135 155 363 95 23 3,035 9,801 2,218 2,212 1,623 971 804 643 602 373 283 96 137 125 159 40 2,376 5,616 1,540 1,071 571 1,256 1,417 538 163 188 486 133 209 183 136 248 1,184

Sector-wise Inflows Manufacture Construction Financial Services Real Estate Activities Electricity and other Energy Generation, Distribution & Transmission Communication Services Business Services Miscellaneous Services Computer Services Restaurants & Hotels Retail & Wholesale Trade Mining Transport Trading Education, Research & Development Others Note : Includes FDI through SIA/FIPB and RBI routes only. 1,641 967 1,330 431 174 423 2,425 298 824 153 47 42 165 82 43 262 3,726 2,551 3,850 1,336 829 66 1,158 1,901 1,035 280 200 461 816 176 156 884 4,777 2,237 4,430 1,886 669 2,067 643 1,458 1,647 343 294 105 401 400 243 1,097 5,143 3,516 2,206 2,191 1,877 1,852 1,554 888 866 671 536 268 220 198 91 384 4,793 1,599 1,353 444 1,338 1,228 569 509 843 218 391 592 344 156 56 506

188

800 10.451 1 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 2 339 23 280 7 4 34 16 11 50 19 10 20 12 2 6 4 8 6 8 13 74 48 17 13 6 2 25.974 6. 189 .714 29.517 21.807 13.68.97 million).565 8.020 12.287 66.591 26.674 28.924 1.087 286.94.129 6.17.552 13.824 29.704 92.511 -1.5 million) were repurchased by the Central Government on November 13.814 177.626 4.90.374 3.065 11.873 2.259 2.274 42.61.110 48.710 292. US $ 139.153 38.27 tonnes of gold amounting to Rs.013 3.628 265.367 25.59.50.387 81.470 4.67.198 4.85.13 crore (US $ 0.814 274.039 9.328 10.327 7.292 17.688 6.18.53.581 10.897 54.596 22.822 131.666 105.577 9.785 18.912 165.APPENDIX TABLES APPENDIX TABLE 20: INDIA’S FOREIGN EXCHANGE RESERVES End of Month Foreign Exchange Reserves ( `crore) SDRs Gold # Foreign Currency Assets Reserve Total Tranche (2+3+4+5) Position in IMF 5 938 1.993 1.380 1.573 27.574 13.269 2.967 117.368 11. April 1.986 19.76. 1.078 4.278 283.821 1.41.604 10.044 22.98.231 110.426 1.270 8.875 1.91.358 80.353 13.733 7.266 11.793 46.373 258.955 266.84.755 6.975 29.476 4.485 11.894 20.479 28.387 7.254 13 6.686 25.0 million) and 0.597 8.463 -22.4 million during 1992-93.006 4.116 6.701 -4.275 32.736 12.24.69.446 80.164 174.972 2.59.517 6.960 2.070 192.190 5.32.985 265.553 25.40.394 9.223 188. 1.16.752 15.078 4.000 5.571 145.184 168.514 151.447 95.876 55.049 71.482 2.429 188.83.330 10 299 331 310 291 283 663 658 616 610 672 1.022 1.340 277.208 8.050 1.370 4.161 12.251 199.685 249.49.929 2.794 13.417 13.123 111.413 28.22 crore (US $ 376.235 12.470 22.518 3.93.645 11.753 20.820 183.485 9.142 281.313 1.506 28.68.559 12.972 # : Gold has been valued close to international market price.977 3.762 275.449 2.819 40.07.841 16. 3.522 35.40.298 4.659 8.700 7. Effective April 1.25.235 13.904 17.058 39.124 39.391 2.005 58.00. US $ 315.883 7 108 7 82 2 1 8 4 2 10 4 2 5 3 1 1 2 1 2 3 18 11 4 3 1 1 5.890 140.595 2.438 756 764 762 546 469 460 438 432 436 528 467 877 981 1.534 4.367 8. 1997.339 191.194 4.449 9.485.0 million during 1994-95 and US $ 17.974 2.316 309.557 6.333 56.622 162.047 3.556 85.334 304.394 12.783 2.744 2.187 191.500 5.315 5.305 177.258 13.061 12.272 22.023 12.248 5.780 159.470 279.068 20.118 8. Foreign currency assets excludes US $ 250.703 1.158 6 61.401 3 12.054 3. 1998 and October 5.953 8.838 13.02.200 24. On the other hand.52.968 251.842 11.686 1.502 2.054 19.875 5.924 206. 2. 38.077 2.448 135.965 13.40.9 tonnes of gold amounting to Rs. * : Variations over the previous March.747 7. Gold holdings include acquisition of gold worth US $ 191million from the Government during 1991-92.55 crore (US $11.516 22. 2009.52.336 255.046 22.876 166.738 8.44.658 14.202 6.013 Foreign Exchange Reserves (US $ million) SDRs Gold # Total Movement Foreign Reserve Total Foreign in Foreign Currency Tranche (7+8+ 9+10) Exchange Exchange Assets Position Reserves Reserves in IMF (in SDR (in SDR million) million)* 9 15.561 4.130 5.61.816 2.231 267.169 5.368 1.248 1.215 5.231 6.650 11.057 275.507 1.362 247.066 12.890 107.723 312.913 9.128 22. Note : 1. the conversion is at New York closing exchange rate.557 13.352 15.06 tonnes of gold amounting to Rs.787 7.179 213.218 2.725 3. 2.49.870 2.077 12. 1998 respectively for meeting its redemption obligation under the Gold Bond Scheme.47.533 180.544 170.316 18.040 183.197 193.870 297.694 42.518 20.267 8.345 12.890 27.36.100 112.583 254.69.311 1.655 29.180 6.222 8.114 239.784 6.83.978 1.655 6.84.947 11 19.298 93.701 7.02. 43.155 -19.00. 1999.01.973 12.426 254.00. Conversion of foreign currency assets into US dollar was done at exchange rates supplied by the IMF up to March 1999.39.892 6.914 49.572 4 47.289 3.00 million (as also its equivalent in Indian Rupee) invested in foreign currency denominated bonds issued by IIFC (UK) since March 20.306 9.049 12.50.044 1.809 17.224 5.108 155.188 92.230 302.205 41.740 1.959 141.565 4.216 19.093 264.795 2.15.034 43.716 76.412 1.276 15.968 158.121 6. US $ 29.046 1.096 24.569 8 4.603 241.394 76.118 3.818 12 13.27.982 8.554 51.989 12.3 million during 1993-94.548 40.830 75.063 1.30.665 12.157 1.865 12.213 4.790 12.711 14.84.96.728 34.997 26.63.803 186.719 23.340 170.365 1.70.650 33.868 16.9 million during 1995-96.416 2.418 12.23.51.66.37.117 2.300 246.19.553 299.

522 534 2010 PR 3 1.6 21.0 5.390 3.189 4.90.12.610 14.267 58.703 13.981 18.461 43.464 42. Debt Stock .27.859 37. Total Long-term Debt (I to VII) IX.14.918 1.374 0 41.163 83.662 0 30.20.3 6.329 47.185 43.031 6.425 630 1.258 26.425 1.325 1.30.5 17.02.825 25.627 16.214 225 2009 R 5 39.301 11.860 0 6.428 0 19.046 3.601 1.117 2.655 0 5.908 2.570 4.538 35.ANNUAL REPORT APPENDIX TABLE 21: INDIA’S EXTERNAL DEBT (As at end-March) ` crore Item 1 I.492 0 3.2 P : Provisional.075 18.59.128 66.814 0 3.006 24.707 52.656 2.041 16.572 635 1.125 2. iv) External Debt Liabilities of Central Bank and Commercial Banks X.94.597 26.837 651 1.813 69.997 74.262 27. Non-Government borrowing i) Concessional ii) Non-concessional 2009 R 2 2.03.618 113.42.523 1. $ : Includes net investment by 100 per cent FII debt funds.428 104. payable in exports.0 1.915 2.075 0 7.335 3. Commercial Borrowings i) Commercial bank loans ii) Securitized borrowings (including FCCBs) $ iii) Loans/securitised borrowings.990 58. III.81.556 2.396 261.938 6.997 1.860 15.101 31.955 641 5.501 731 0 51.36.593 15.902 64.554 13.658 1. etc.8 20. * : Debt owed to Russia denominated in Rupees and converted at current exchange rates.255 11.167 73.234 6.693 0 2.19.481 12.794 0 35.892 47. Short-term Debt i) Trade Related Credits ii) FII Investment in Govt.3 1.722 1. Rupee Debt * i) Defence ii) Civilian + VIII. Debt Service Ratio (per cent) (for fiscal year) (including debt-servicing on non-civilian credits) 6.18.424 50 II. Government borrowing i) Concessional ii) Non-concessional B.93.953 18.453 7.486 171 208.4 18.181 24.651 69.802 43.886 25.803 1.221 27.036 43.662 74.345 10.585 15.095 1.75.657 1.088 28.584 71.062 64.303 0 26.984 33.169 17.328 2.379 70.587 5.628 1.961 6.018 14.070 2.19.90.7 19.935 825 9.473 3.20.925 91.983 80.090 818 0 47.16.357 103 2011 P 7 48.GDP Ratio (in per cent) 2.352 7.711 12.720 0 22.15.361 162 181.026 0 3. GROSS TOTAL Concessional Debt As percentage of Total Debt Short Term Debt As percentage of Total Debt Memo Items: Debt Indicators : 1.578 26.147 6.19.10.5 4.814 7.867 14.274 0 62.073 5.226 19. NRI & FC(B&O) Deposits (above one-year maturity) i) FCNR(B) ii) NR(E)RA iii) NRO VII.676 22.886 0 5.2 20.720 1.416 731 10.98.469 2.17.8 20.760 6.01.034 0 5.225 0 3.998 0 2.053 305.118 66.153 467 2011 P 4 2. 190 .481 6.169 27.245 3.188 2.79.17.3 4.080 10.280 16.442 1.378 9.794 80.188 73.267 0 2.5 17.0 4.644 3.772 64.878 917 6.18.733 702 6.286 6.773 1.381 1.114 5.228 224. Government borrowing i) Concessional ii) Non-concessional B.6 21.21.771 54.61. R : Revised.264 76.096 1.437 164 240.655 14.034 22.682 15. Multilateral A.800 44. International Monetary Fund IV.3 4. PR : Partially Revised.974 71.891 25.710 771 9.2 1.209 2.314 1.572 0 88.01.034 29.5 4.42.462 5. + : Includes Rupee suppliers‘ credit from end-March 1990 onwards. iv) Self Liquidating Loans VI. Note : Multilateral loans do not include revaluation of IBRD pooled loans and exchange rate adjustment under IDA loans for Pre-1971 credits.13.890 14.065 105 US $ million 2010 PR 6 42.046 54.814 20.707 1.2 20.970 2.498 41.70.674 26.724 25.708 3. T-Bills & other instruments iii) Investment in Treasury Bills by foreign central banks and international institutions etc.313 39.584 0 30.577 18.134 7.0 5.930 16.4 18.16.7 19.66.267 15.31.147 2.693 15. Non-Government borrowing i) Concessional ii) Non-concessional Bilateral A.625 1.965 2.211 23. Trade Credit i) Buyers‘ credit ii) Suppliers‘ credit iii) Export credit component of bilateral credit iv) Export credit for defence purposes V.251 7.308 18.303 1.991 15.

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