REPORT ON MACROECONOMICS AND BANKING

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Oct 28, 2013 (3 years and 9 months ago)

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Strategy, Planning & Economic Intelligence Department Page 2 of 17





REPORT ON
MACROECONOMICS AND BANKING

Table of Contents

No

Contents


Page


Macroeconomics: Status & Outlook


3
-
7

A.

-

Global Economy


3
-
4

B.

-

India: Macroeconomic Scenario


5
-
7

C.

Indian Banking: Status & Outlook


8
-
10

D.

Government Borrowing Programme for FY 2010
-
11


11
-
12

E.

Union Budget 2010
-
11


13
-
14

F
.

Status of RBI’s Exit Policy


15

G.

Financial Stability Report


1
6
-
17





Strategy, Planning & Economic Intelligence Department Page 3 of 17



I. Macroeconomic Scenario & Outlook



A. Global Economy


1. In 2010, World output is expected to rise by 4 percent compared to a contraction of
0.8 percent in 2009.
2. Economic recovery in advanced countries is expected to remain sluggish by past
standards. However, growth in 2010 is expected at 2.1% compared to -3.2% in 2009.

3. The challenges to the advanced economies are high unemployment rates, public debt,
not fully healed financial systems & weak household balance sheets etc.

Tab 1: Growth Forecast for 2010

2008

2009

2010

(Projections)
World Output


3.0

-
0.8

3.9

Advanced Economies


0.5

-
3.2

2.1

US


0.4

-
2.5

2.7

Euro


0.6

-
3.9

1.0

Emerging & Developing Economies


6.1

2.1

6.0

China


9.6

8.7

10.0

India


7.3

5.6

7.7

Source: World Economic Outlook, IMF (January 2010)

4. Economic recovery is expected to be vigorous in emerging & developing economies,
largely driven by buoyant internal demand (GDP for 2010 : 6.07%; 2009 : 2.1%).

5. Commodity prices are expected to face pressure, though modest, given the above-
average inventory levels and substantial spare capacity in many commodity sectors.
Accordingly, IMF has projected average price of oil at $76 per barrel in 2010 and $82 in
2011 compared to $62 in 2009.
6. Still low levels of capacity utilization and well anchored inflation expectations are
expected to contain inflation pressures in the advanced economies. It is expected to
pick up from zero in 2009 to 1¼ % in 2010. In emerging & developing economies,
inflation is expected to edge up 6¼ % in 2010 due to more limited economic slack and
increased capital flows.

Strategy, Planning & Economic Intelligence Department Page 4 of 17



Chart 1: Inflation

7. The US Federal Reserve Bank has raised the discount rate on February 18 to 0.75%
from 0.50%. Mr. Ben S Bernanke emphasized that this did not mean tightening of the
monetary policy. It should be merely seen as ‘normalization’ of rates rather than a
change in the policy.
8. The JP Morgan Global PMI Output Index was recorded at 53.6 in February, which was
highest since October 2009. The reading is consistent with global GDP expanding at an
annual rate in excess of 2%. This suggests that the global recovery continued in Q1
despite business conditions being affected by adverse weather in many countries.
However, growth remains biased towards manufacturing. Furthermore, the global
manufacturing new orders-to-inventories ratio fell to a ten-month low in February.
This suggests that the rate of growth of global manufacturing output may soon peak if
the waning effect of inventory rebuilding is not supplanted by a further strengthening
of new orders for investment and consumer goods.


Strategy, Planning & Economic Intelligence Department Page 5 of 17



B. India: Macro Economic Scenario


1.
GDP:
The Indian economy continues to be amongst the fastet growing economy of the
world.The growth trend in India is reverting to normal and towards ‘potential growth’
of 8.5-9.0%. The third quarter (Q3/2010) GDP growth was reported at 6.0%, lower than
the second quarter (Q2/FY10) GDP growth of 7.9%. This was mainly due to negative
impact of agriculture sector growth. Full year growth estimates for FY 10 is 7.2%
(advance estimate of CSO) while RBI pegs it at 7.5%. The lead indicators of industry and
services sectors are showing positive change. It is also expected that the economy
would be able to sustain this growth momentum in FY 2010-11.

Outlook:
In view of continued momentum in services and industry sectors and revival in
trade figures, RBI has revised upward the FY10 GDP growth rate to 7.5%. We are seeing
good numbers in monthly data releases of industry & services sectors, viz. vehicle
production and sales, cement and steel production, railway freight loads etc.
Chart 2: Trend in India’s GDP growth

2.
Agriculture:
Unlike earlier projection of 1-2% fall, Agriculture GDP is expected to
remain largely unchanged compared to the previous year. CSO’s advance estimate for
agriculture GDP is a decline of 0.2%. This has been possible due to relatively good
prospects of Rabi crops. The crop area under pulses is 5.5 % up over previous year while
wheat is marginally up. However as per the second advance estimate of production of
major crops grown in the country, food grains production in 2009-10 is expected to
decline by 7%.
Tab 2: Progress of Rabi

Crop Area for major Rabi crops

(in lakh hectare)

Crop

As on 25
th

Mar, 2010
As on 25
th

Mar,
2009
%
Change
Wheat

278.16

275.89

0.8

Rice

42.44

46.69

-
9.1

Total of coarse
cereals
65.27

68.73

-
5.0

Total oilseeds

94.69

100.35

-
5.6

Total Pulses

144.79

137.23

5.5

Source:

Ministry of Agriculture


Strategy, Planning & Economic Intelligence Department Page 6 of 17



3.
Industry:
IIP growth for January 2010 was noted at 16.7%, in line with market
estimates. IIP data reports robust growth in capital goods and continued momentum in
consumer durables and core infrastructure sectors like mining & electricity. Further,
Auto sales numbers for Mar 10 is quite encouraging. Industrial output is likely to have
grown by about 16 percent in February, which would be slightly lower than January.
The numbers for IIP will be released on April 14.

Outlook:
IIP is expected to grow in double digit for February and March as well due to
low base effect and pick-up in economic activities. IIP growth rate for FY10 is seen at
8.5%+ as compared to 2.8% in 2008-09.

4.
External Sector:
Exports during February, 2010 were valued at US $16.09 billion
recording an impressive growth of 34.8%. Imports during February, 2010 were valued at
US $ 25 billion representing a growth of 66%. Exports reported positive growth for
fourth consecutive months ending February 2010. However, exports at US $ 153 billion
during April-February 2010 are still lower by 11% over the same period in the previous
fiscal. India’s imports at US $ 248 billion during April-February 2010 are still lower by
13.5% over the same period in the previous fiscal .It is expected that India’s exports
may end well below the US $ 189 billion achieved in FY 2009.

5.
Foreign Direct Investment (FDI)
grew by 15.4% to US $ 1.72 bn in February 2010
compared to US $ 1.49 in February 2009. Services, computer software, telecom and
real estate sectors were the major recipients of FDI in February 2010. However, total
FDI during 11 months period of FY 2010 declined to US $ 24.68 bn against US $ 25.39 bn
in the same period last year. The commerce & industry ministry has set a target of US $
50 bn for FY 2012.

6. External Commercial Borrowings (ECB)
for the month of February 2010 stands at US $
219.21 million, out of which US $196.32 is through automatic route and US $ 22.89
million is through approval route.


7.
Inflation:
Inflation pressures are high in food items and there is visible spread to non-
food items. Headline inflation (WPI) was noted at 9.89% in February 2010 compared to
8.56% for January 2010. WPI inflation is expected to breach the single digit numbers in
March 2010. Excluding food items (weight: 26.94%), Core WPI inflation, too, rose to
6.5% in February 2010 indicating the transmission of food inflation into a generalized
inflation. The food inflation for the week ended March 20, 2010 stood at 16.35%. CPI
(IW)-based inflation is also on high, though it declined to 14.86% in Feb 2010 from
16.2% in January 2010.
Tab 3: India’s Inflation


Mar
-
08

Sep
-
08

Mar
-
09

Sep
-
09

Dec
-
09

Jan 10

Feb 10

WPI

7.5

12.3

1.2

0.5

8.1

8.6

9.9

Core WPI (excl
Food)

8.1

14.1

-
1.2

-
4.2

2.9

4.5

6.5

CPI (IW)

7.9

9.8

8.0

11.6

15.0

16.2

14.9




Strategy, Planning & Economic Intelligence Department Page 7 of 17



Outlook:
WPI Inflation at end March is going to be more than 10%. Recent hike in basic
and excise duty of petrol and diesel has impacted the price level. Second-order impact
of increased economic activities on prices in coming months is likely to impact prices.
Hike in Repo rate will clearly signal the market participants that the RBI is now focused
on anchoring inflationary expectations. This along with falling Food inflation will help
in cooling inflation which is expected to moderate June onwards.


8.
Business Confidence:
The business confidence in general has been improving, as
indicated by various index. HSBC-Markit Purchasing Managers’ Index (PMI) has been
above 50 since Sept-09. The PMI index climbed for the third month and stood at 60.9 in
February 2010. A reading above 50 means activity expanded during the month. This
signals sharp growth in service sector output - also a pointer of further growth in all-
sector output, new orders and employment.
Chart 3: PMI for India – Reflecting improving demand


Source: HSBC

9. India’s March 2010 manufacturing Purchasing Managers’ Index (PMI) is 57.8 vs. 58.5 in
February 2010. PMI for March 2010 is down on weaker output and less new orders. A
reading above 50 means activity expanded during the month.

Strategy, Planning & Economic Intelligence Department Page 8 of 17




C. Indian Banking: Status & outlook


1. Money Supply & Deposits: As on Mar 12, 2010 money supply (M
3
) recorded Y-o-Y
increase of 17.4% (PY: 19.9%). This is above the RBI’s indicative projection of 16.5% for
March-10 as announced in 3
rd
quarter review. Aggregate deposits of Scheduled
Commercial Banks (SCBs), as of Mar 12, recorded Y-o-Y increase of 18.1% (PY: 21.0%).
This has also exceeded RBI’s indicative projection of 17% for Mar-10 as announced in
the 3
rd
quarter review. However, it is expected that March 26 data, to be released on
April 7, may be near RBI’s projections.
2. Bank Credit: As on Mar 12, SCBs’ bank credit increased (y-o-y) by 16.0% (PY: 18.2%).
Bank credit has shown improvement gradually and is likely to be near the RBI’s revised
indicative projection of 16% for March 10 as announced in 3
rd
quarter review.

Tab 4: Trend in Deposit & Credit growth of SCBs

Aggrega
te Deposit

Bank Credit


FY 09

FY10

FY 09

FY10

SCBs


19.9

17.0

17.5

16.0

Note: Data corresponds to Domestic business only and as of last reporting Friday of March


Outlook: We expect Money supply, aggregate deposits and bank credit of SCBs would
be close to RBI’s indicative projections as given in the third quarter review of the
monetary policy.

3. Investments: SCBs’ investment in SLR securities increased (y-o-y) by 17.5% as of
Mar 12 (PY: 20.1%). The effective SLR percentage maintained (our calculation) is
around 30.9% of NDTL, well above the statutory requirement of 25%.

4. Financial Markets: During 2009-10, including in the past two months, financial
markets have remained stable. Due to comfortable liquidity, call money rate remained
near lower band of LAF corridor before the rate hikes by RBI. Even after hike in repo &
reverse repo rates by 25 bps on 19
th
March 2010, call rate are around 3.8%, very much
within the LAF corridor. The appreciation trend of rupee has continued and it has
appreciated by 3.7% in the 4
th
quarter and 10.3% during the financial year, primarily
due to increased FII flows in equities and FDI inflows, and due to weakening of dollar.
Yield on 10-yr paper has been range-bound as borrowing programme of the
government was made non-disruptive by the RBI through injection of liquidity. Even
the monetary tightening through increase in CRR by 75 bps and hike in key policy rates
by 25 bps has still left surplus liquidity available in the system. Poor credit off-take
also helped in smooth progress of borrowing programme. We expect 10-yr benchmark
yield to be in the range of 7.85 - 8.15% in the 1
st
quarter of FY 2010-11.


Strategy, Planning & Economic Intelligence Department Page 9 of 17



5. Liquidity: During the financial year 2009-10, liquidity in the Banking system has
remained comfortable. The parking in the reverse repo has been quite high on an
average basis throughout the year. During the 4
th
quarter, daily average of parking of
surplus fund with the RBI by the Banks has been to the tune of Rs. 70000 crores.
However, with the hike in CRR and key policy rates by the RBI, daily average parking
of funds under reverse repo has come down to around Rs. 15000 crores. Present
market liquidity is low due to advance tax outflows and year-end demand from market
participants including banks. By 2
nd
week of April, market liquidity is expected to be
normal.
Outlook:
Outlook for liquidity is positive, as we see comfortable liquidity in the
system at least till 2
nd
quarter of the fiscal. The first two quarters are lean season for
the credit demand. We observe from the data of past 4 years that the quarterly
growth in deposits is in the range of 4-6% in Q1 & Q2. Similarly, credit growth has been
below 2% in Q1 and in range of 6-7% in Q2. Extrapolating this trend indicates
comfortable liquidity up to H1 of current fiscal.

Tab 5: Likely Liquidity Scenario for H1/FY11



Q1/FY11

Q2/FY11

Assumptions

(based on trend of past 4 years)
1.

Incremental Deposit

(+)


180000

235000

Deposit growth in Q1 @4% & Q2
@5%
2.

Less, CRR

Impact

103
50

13515


3
.

Less,
SLR Impact

4
5000

58750


4
.

Incremental Credit

(
-
)


65000

197000

Credit growth in Q1 @2% & Q2 @6%

5
.

Net Funds (+/
-
)

(1-2-3-4)
59650

-
34265


6
.

Ne
t liquidity Impact of
Borrowing
(See Table – 7 in Page 12)
-
93500

-
40800

As per borrowing calendar,
repayment & coupon payment
schedule
7.

Of which, borrowing through
SLR investment by banks
45000

58750


8
.


Total Liquidity Impact (+/
-
)

(5+6+7)
111
5
0

-
16315

(Investment into SLR securities
treated as part of govt. borrowing)

Source: RBI, Union Budget, CMIE, EID Analysis

6. Interest Rates: The interest rates on deposits of over 1-year maturity offered by the
public sector banks moved from a range of 7.75-8.75% in March 09 to 6.00-7.50% as on
Mar 12, 2010. The BPLRs of five major banks is in the range of 11.0-12.0%, unchanged
since July 09, but down from 11.5-12.5% at end-March 2009.

Outlook:
Lending rates are likely to remain unchanged as loan demand is still not very
strong in the system, notwithstanding the modest recovery, and any rate cut could
only be a strain on Bank’s margins. As the liquidity is comfortable despite hike in repo
& reverse repo rate by 25 bps, banks would be cautious in raising their lending rates

Strategy, Planning & Economic Intelligence Department Page 10 of 17



immediately. RBI will be closely monitoring the yields on g-sec so as to carry 63% of
the government borrowing programme in first half year in a non-disruptive manner.
Further, inflationary pressure is likely to ease from 2
nd
quarter of FY 2011 onwards.
These developments will lead to a possibility where RBI may not raise policy rates by
more than 50 bps during 1
st
half of FY 2011. As far as deposit rates are concerned, we
do not see any apparent pressure.
7. Status of RBI’s Exit Policy: RBI’s most recent move towards exit from accommodative
policy was hike in repo & reverse repo rate by 25 bps each w.e.f 19
th
March 2010, after
hike in CRR by 75 bps to 5.75% in the 3
rd
quarter review of monetary policy. These are
the major exit from conventional measures, other being increase in SLR to 25% in
October 2009. Prior to this, RBI imposed a rate ceiling on ECB borrowing and closure of
FCCB buyback window w.e.f. Jan 2010. In second quarter review of the policy, RBI had
withdrawn most of the unconventional measures announced since September 2008
crisis. RBI’s next important exit may be through increasing the policy rates, which is
highly expected in April 2010 policy. As RBI notes, “… main policy instruments are all
currently at levels that are more consistent with a crisis situation than with a
fast-recovering economy. It is, therefore, necessary to carry forward the process
of exit further.

Strategy, Planning & Economic Intelligence Department Page 11 of 17



D.

Government Borrowing Programme for FY 2010-11


￿ The Union Budget 2010-11 has placed the gross market borrowing of the government
at Rs. 457000 crore, recording a marginal increase of 1.33% over the previous year.
The net borrowing of the government is placed at Rs. 345000 crores in FY 2010-11
lower than Rs. 398411 crores in FY 2009-10.
￿ However, increased supply of paper, despite lower net borrowing, is the major
concern for the market. Due to unconventional measures during 2009-10 like open
market operations (OMO), MSS unwinding and desequestering, net supply of papers and
thus net impact on liquidity was much lower than the net market borrowing of the
government. Net supply of papers during 2010-11 is Rs.345010 crore, which is 35%
more than the previous year. This may cause upward pressure on the 10-yr yield.

Tab 6: Fiscal Deficit & Borrowing Programme

(Rs crore)

2009
-
10

2010
-
11

Change

Fiscal Deficit of the Centre

414041

381408

-
32633

Gross Market Borrowings

451,000

457,143

6143

Less, R
epayments

52,589

112,133

59544

Net Market Borrowings

398,411

345,010

-
53401






Less OMO

57,487

0


MSS Desequestering

33,000

0


MSS Unwinding

53,031

0


Net Supply of Papers

254,893

345,010

90,117



￿ As per the borrowing programme for the first half of FY 2011, RBI will sell bonds worth
Rs. 287000 crores, thereby completing 63% of the gross borrowing programme. The
size of the borrowing program in H1 2010-11 is also lower than the borrowing made
during the corresponding period last year. During April – September 2009, the actual
borrowing was at Rs 295,000 cr. The net borrowing program for H1 2010-11 is lower at
Rs 203,000 cr (approx), as compared to Rs 228,000 cr in H1 2009-10. This is largely
on account of a higher amount of redemptions slated for first half and also a slightly
lower gross borrowing number. The redemptions for first half of 2010-11 stand higher
at Rs 83,000 cr as against Rs 66,000 cr seen for the first half of 2009-10.

￿ The huge government borrowing programme is a major challenge before the RBI
compared to the previous year. Huge govt. borrowing may keep 10-yr yield at elevated
level, though we do not see much upside from the present level due to large part of

Strategy, Planning & Economic Intelligence Department Page 12 of 17



first half (H1) being lean credit season, accompanied with high potential liquidity in
the system and lower liquidity impact of borrowing.

￿ If we see the RBI’s calendar of first half borrowing and consider redemption of
government papers and coupon inflows during Q1 & Q2, overall liquidity in the system
appears to remain comfortable up to September 2010.
Tab 7: Borrowing Programme & its Liquidity Impact



Redemption

of papers
Coupon

payments

Total
Inflow
Gross
Borrowing

Net
Borrowing

Net liquidity
Impact


1 2 3 (=1+2)

4 5 (=4-1)
6 (=5-2)
Q1
/FY11


31609

30891

62500

156000

124391

93500

Q2
/FY11


49745

40446

90191

131000

81255

40809

H1
/FY11

81354

71337

152691

287000

205646

134309

Note: Coupon payments excludes those on Floating Rate Bonds

￿ The issuance in H1 is concentrated in the below 15 year segment, which accounts for
approx 80% of the borrowing program. The 15Y-19Y maturity segment constitutes only
9% (approx) of the total borrowings. The longer tenor securities (above 20Y) constitute
approx 11% of borrowing.
￿ The government is thus interested in keeping the average maturity of borrowing lower,
looking at the huge amount of borrowing slated for the fiscal year. Another purpose
for keeping the maturity profile lower could be the anticipated tightening in interest
rates, which tends to distort the yield curve at the longer end. The move is expected
to bring down the cost of borrowing for the government.

￿ The average G-Sec issuance per month for first quarter is around Rs 50,000 cr and for
second quarter is around Rs 45,000 cr per month. The lowest issuance in is in
September 2010 at Rs 34,000 cr. The highest borrowing is in July at Rs 53,000 cr.

￿
As per the budget of July 2009, the first half borrowing was placed at Rs 3,07,000 cr.
Out of which Rs 2,95,000 cr was subscribed.
For the second half of 2009-10, the
borrowing programme was budgeted at Rs 1,23,000 cr. The second half borrowing was
Rs 33,000 cr less than scheduled as per the budget. The borrowing programme for
second half was conducted in large part as per the calendar issued. In a major
development, the second half borrowing saw issuance of a floating rate bond, with 10-
year maturity, after a gap of more than five years.

￿
As regards the balances under G-Sec, it was decided that Rs 33,000 cr would be de-
sequestered over

the course of the fiscal year 2009-10. Of this, Rs 28,000 cr worth of
securities was de-sequestered on 2 May 2009. The remaining Rs 5,000 cr announced on
12 March 2010 that Rs 5,000 cr worth of securities were de-sequestered on 11 March

2010.


Strategy, Planning & Economic Intelligence Department Page 13 of 17



E.

Union Budget for 2010-11


￿ The Union Budget 2010-11 has been framed with outlook for the Indian economy in the
medium-term. The broader outlook before the govt. as reflected in the budget speech
by the Hon’ble Finance Minister is to revert to the high GDP growth rate of 9% and to
cross the ‘double digit growth barrier’. The thrust of economic growth has been put on
the inclusive growth and development of infrastructure in rural areas. The
achievement of the double digit barrier is dependent on removing weaknesses in
government systems, structures & institutions and removing the bottleneck in the
public delivery mechanisms.
￿ The Union Budget 2010-11 can be echoed as a growth enabler for the economy. The
Hon’ble Finance Minister has broadly sustained the fiscal stimulus and relief measures
taken in the last two years. Besides, consumption expenditure has been given a boost
through raising the income tax slabs. A calibrated approach towards fiscal
consolidation as per recommendations of the Thirteen Finance Commission is investor
friendly for the economy and likely to strengthen economy’s fundamental on this
regard. The Finance Minister has laid down a roadmap for containing the fiscal deficit
to 4.1% by FY13 while pegging this at 5.5% for the next fiscal. The government has also
shown its commitment to the medium term fiscal policy. Not only this, lower
government borrowing for the next fiscal also provides impetus for the private
investment, doing away with the possibility of crowding out of private investment.
These measures are indications of creating and sustaining demand in the economy.

￿ The Hon’ble Finance Minister has indicated that it is contemplating of augmenting
capital base of the public sector banks through allocation of Rs. 16500 crores to ensure
Tier I capital of minimum 8%. The focus area of the budget is to increase the reach of
the banks and banking services, access of bank credit to the productive sectors of the
economy.
￿ The budget document has clearly laid out its objective of rural development and
inclusive growth with special thrust on financial inclusion. Towards meeting the
objectives of rural developments and creating public assets in the rural sector,
budgetary allocation to flagship programmes like NREGA, Bharat Nirman, Indira Away
Yojana, Rajiv Awas Yojana has been increased. Towards financial inclusion, the focus
in the budget is towards providing banking services to habitations with population
above 2002 by 2012, increasing the coverage of banking through license to private
banks and NBFCs and extending insurance & other services to the targeted
beneficiaries.
￿ The infrastructure sector continues to be the key area of the government’s focus. The
infrastructure sector has been allocated 46% of the plan expenditure, of which 25% is
for the development of rural infrastructure.
￿ Government has continued with interest subvention given to various groups. The
extension of repayment period under debt waiver scheme and interest subvention to

Strategy, Planning & Economic Intelligence Department Page 14 of 17



2% to the farmers for timely repayment reflects the concern of the govt. to make the
growth more based.
￿ Last but not the least, govt. has just partially withdrawn from the fiscal stimulus like
increase in excise duty to 10%, while retaining the service tax rate unchanged at 10.
The commitment for introduction to GST and Direct Tax Code by April 1, 2011 is a
move towards rationalization of the tax structure.
Snapshot of Union Budget


Sl
No.
Particulars

2004
-
05

2005
-
06

2006
-
07

2007
-
08

2008
-
09

(Prov.)
2009
-
10

1

Revenue Receipts (i+ii)

305991

347077

434387

541864

544651

614497

i

Tax revenue

224798

270264

351182

439
547

447726

474218

ii

Non
-
tax revenue

81193

76813

83205

102317

96925

140279

2

Revenue expenditure

384329

439376

514609

594433

791697

897232

3

Revenue deficit (1
-
2)

78338

92299

80222

52569

247046

282735

4

Capital receipts

192261

158661

149000

170807

3368
18

406341

5

Capital expenditure

113923

66362

68778

118238

89772

123606

6

Total receipts (1+4)

498252

505738

583387

712671

881469

1020838

7

Total expenditure (2+5 = 7.i+7.ii)

498252

505738

583387

712671

881469

1020838

i

Plan expenditure

132292

140638

16
9860

205082

275450

325149

ii

Non
-
plan expenditure

365960

365100

413527

507589

606019

695689

8

Fiscal deficit

125794

146435

142573

126912

330114

400996

9

Primary deficit

-
1140

13805

-
7699

-
44118

139629

175485

10

Revenue deficit as % of GDP

2.4

2.5

1.9

1
.1

4.4

4.6

11

Fiscal deficit as % of GDP

3.9

4.0

3.3

2.6

6.5

5.5

12

Primary deficit as % of GDP

0.0

0.4

-
0.2

-
0.9

2.5

2.8

Source: Economic Survey 2009-10
(Fiscal deficit = Total expenditure – Revenue receipts – capital receipts excluding borrowing & other
liabilities); (Primary deficit = Fiscal deficit – interest payments).

Strategy, Planning & Economic Intelligence Department Page 15 of 17



F. Status of RBI’s Exit Policy

Good GDP growth in 2009-10 provided an opportunity to initiate exit strategies.
Date of Issue

Policy Prescription

Present Status

1.

Rate Ceiling on NRI D
eposits

16
-
Sep
-
08 to
15-Nov-2009

Rate ceilings FCNR
-
B deposits increased by 175 bps to Libor
+100 bps; while those on NR (E) RA raised by 175 bps to
Libor+175 bps

Continues

2.

CRR, SLR, REPO & REVERSE REPO RATES

6
-
Oct
-
08 to

02-Jan-09

Cash Reserve Ratio
(CRR) cut
by 400 bps from 9.0% 5.0%,

CRR hiked by 75
bps (Jan Policy)
1
-
Nov
-
08

SLR
reduced to 24% of NDTL

SLR hiked to 25%

20
-
Oct
-
08 to

21-Apr-09
Repo rate cut by 425 bps to 4.75% from 9.0%

Increased by 25
bps to 5.0%

08
-
Dec
-
08 to
21-Apr-09
Reverse r
epo rate cut by 175 basis points


from 5.0% to 3.25%

Increased by 25
bps to 3.5%

3.

Relaxation in ECB Norms

7
-
Oct
-
08


MoF
expanded definition of infrastructure companies to
include mining, exploration and refining cos for ECB purposes

Continues

22
-
Oct
-
08

R
BI relaxed the ECB. Companies can now borrow up to $500
million overseas for rupee or foreign currency expenditure
under the Automatic Route.
All-in-Cost ceilings dispensed with w.e.f. Jan 2, 2009
Withdrawn wef
Jan 1, 2010
15
-
Nov
-
08

Allows premature bu
y back of FCCBs of Indian Companies.

4.

Refinance/Special Liquidity Facilities

14
-
Oct
-
08


RBI
announced 14
-
day Term Repo Facility for MFs



Withdrawn wef
Oct 27, 2009
1
-
Nov
-
08

Special refinance facility under Section 17(3B) of RBI Act, 1934
up to 1.0% of bank's NDTL up to a maximum period of 90 days
1
-
Nov
-
08

Special term repo facility to SCBs for funding to MFs, NBFCs
and HFCs [limit is in terms of relaxation in the statutory
liquidity ratio (SLR) up to 1.5% of NDTL]
1
-
Nov
-
08

Forex Liquidity Suppor
t: forex swap facility to banks for

tenor up to three months
15
-
Nov
-
08

Increases the eligible limit of the ECR facility for SCBs to 50%
from existing 15% norm
Reduced 15% wef
27 Oct 2009
5.

Provision on Standard Assets & Risk Weights

15
-
Nov
-
08

The provisi
oning requirements for all types of standard assets,
except in case of direct advances to agricultural and SME
sector, will stand reduced to a uniform level of 0.40%
Continues

15
-
Nov
-
08

All unrated claims on corporates shall attract a uniform risk
weight of 100% as against the risk weight of 150%. Claims
secured by commercial real estate shall attract a risk weight
of 100% as against the earlier risk weight of 150%. Claims on
rated as well as unrated NBFC-ND-SI shall be uniformly risk
weighted at 100%.
Continues


Strategy, Planning & Economic Intelligence Department Page 16 of 17



G.

First Financial Stability Report


Introduction:
RBI has released First Financial Stability Report (FSR) to enhance transparency
and augment confidence in the financial system. This is also an attempt to institutionalize the
implicit focus and make financial stability an integral driver of the policy framework. The
report details the prevailing financial system in India and also gives some background on past
financial stability initiatives. This report is first in series and in general, the Financial Stability
Reports will focus on reviewing the nature, magnitude and implications of risks that have
bearing on the macroeconomic environment, financial institutions, markets and
infrastructure. It will also assess the resilience of the financial sector through stress tests. It
is hoped that FSRs will emerge as one of the key instruments for directing pre-emptive policy
responses to incipient risks in the financial system.

Observations on banking sector:

￿ Healthy, well capitalized and sustainable financial leverage
￿ Stress tests indicate that the banking sector is comfortably resilient
￿ Robust Credit quality
￿ High share of CASA
￿ SLR takes care of liquidity and solvency issues.
￿ Even if all restructured standard advances were to become NPAs, the stress would not
be significant.
￿ The Asset Liability Management (ALM) analysis does not indicate any significant
mismatches at the current juncture.
￿ The financial system is not exposed to the risk of large leverages in Household and
Corporate Sectors

Concerns for the banking sector:
￿ Margins may face pressure due to
￿ MTM impact on the investment portfolio
￿ Increased provisioning requirement
￿ Calculation of interest on savings bank deposits on a daily basis from April 1, 2010.
￿ The ALM mismatches due to flow of credit to infrastructure and commercial real estate
may require careful monitoring in future on an ongoing basis.
￿ Over-reliance on bulk deposits in certain institutions could impact the cost and stability of
the deposit base.
￿ The liquidity scenario analysis shows some potential risk.
￿ Unhedged corporate foreign exchange exposures constitute a potential source of risk.

Observations on the other financial market players

Non-Banking Financial Sector-Need Careful Monitoring


￿ ALM mismatches, credit quality and the interconnected flows between NBFCs and
other financial sector entities would need to be closely monitored.

Strategy, Planning & Economic Intelligence Department Page 17 of 17



￿ The supervisory regime for the systemically important non-deposit taking NBFCs will
need to be strengthened for a more robust assessment of the underlying risks.

Financial Conglomerates


￿ A monitoring and oversight framework for systemically important financial institutions
(called financial conglomerates (FC) in India) is already in place, which needs to be
strengthened. The Reserve Bank, in consultation with other sectoral regulators is in
the process of implementing an enhanced framework for regulation and supervision of
financial conglomerates.
Financial Markets & Infrastructure


￿ The real challenge in developing financial markets and products in the future would be
the de-concentration of risks from the banking system.
￿ The process of disintermediation away from banks would have to be genuine
￿ There has to be clear, transparent capture of the risks within a prudential framework.
￿ Central counterparties are increasingly becoming systemically important market
institutions and need to be regulated more firmly for robust risk management systems.
Their capital, margining and collateral requirements need to be assessed from a
prudential and systemic stability perspective.
￿ Legislative initiatives are required to avoid delay in disposal of legal suits particularly
in the case of insolvency proceedings.
￿ An excessively growing size of noninsured deposits in the banking system could render
deposit insurance to be less effective and adversely impact the systemic stability.

Data Issues

￿ Data gaps need to be overcome in the area of interconnectedness of financial
institutions, household indebtedness and a system level database on asset prices in
certain segments like the commercial real estate exposure.

Financial stability could encompass monitoring the following elements

￿ Excessive volatility in macroeconomic variables, both global and domestic, and
market trends such as interest rates, exchange rates and asset prices;
￿ Build-up of leverage in financial, corporate and household sector balance sheets;
￿ Available systemic buffers within the financial sector, both at the institution and
system levels, to withstand potential shocks to the economy;
￿ Activities of unregulated nodes in the financial sector which, through their
interconnectedness with the formal regulated system, can breed systemic
vulnerabilities.