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October 22, 2001
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External uncertainties can queer the pitch for apex bank

Yashajit Saha

CREDIT
POLICY
Moderate inflation rate, over $45 billion worth of forex reserves, huge deposit mobilisation, adequate liquidity and soft and stable interest rates from the macro-economic backdrop of the Credit Policy.

The areas of concerns are grim industrial outlook, tardy credit offtake, sluggish growth in exports and continuing uncertainties on the external front.

Agricultural outlook good: The south-west monsoon was active during the year and the quantum and distribution of rainfall were satisfactory.

Of the 35 meteorological sub-divisions, 30 sub-divisions against 28 in the last year received excess or normal rainfall. The overall agriculture production is expected to rise by 7.5 per cent in 2001-02 against 5.8 per cent fall recorded in 2000-01.

The buffer stock of foodgrains stood at 61 million tonne at the end of August 2001, which is higher by 48 per cent over the stock level of 40.8 million tonne at the end of August 2000. The stocks of rice at 22.20 million tonne are higher by 63.62 per cent, and those of wheat at 38.71 million tonne by 41.99 per cent.

Industrial outlook grim: The increase in index of industrial production during the first five months averaged at 2.2 per cent as against 5.6 per cent during the corresponding period of last year.

The year-on-year (y-o-y) growth of IIP at the end of August was 1.8 per cent against 5 per cent during the corresponding period last year. Manufacturing sector which accounts for 80 per cent of the index recorded a y-o-y growth rate of two per cent up to July 2000 as compared to 5.5 per cent last year.

Production in consumer goods sector went up by 5.8 per cent, marginally down from 5.9 per cent during the previous year. The capital goods sector registered a fall of 12.3 per cent as against a decline of 3.5 per cent last year.

Inflation rate low: The rate of inflation on a point-to-point basis and measured in terms of wholesale price index as on September 29, 2000 was 3.32 per cent as against 7.77 per cent a year ago. Inflation as measured by rise in consumer price index for the month of August 2001 was 5.2 per cent as compared with 3.99 per cent in August 2000.

Money supply stable: Growth of money supply during the current financial year up to October 5, 2001, was 8.2 per cent against 8.3 per cent observed in the corresponding period last year. On an annual basis, M3 growth was higher at 16.6 per cent than 15.3 per cent observed in the comparable period of the preceding year.

Deposit mobilisation high: Aggregate deposits of scheduled commercial banks in the current financial year thus far increased by Rs 878.95 billion (9.1 per cent) compared with Rs 726.87 billion (8.9 per cent) in the corresponding period last year.

The monetary expansion during 2001-02 so far, however, is well above the expected trajectory (a 14.5 per cent growth in M3 was projected in the April policy statement) .

Reserve money: Up to October 5, 2001, reserve money increased by Rs 55.16 billion (1.8 per cent) against an expansion of Rs 44.27 billion (1.9 per cent) in the comparable period of last year.

Currency in circulation increased by 5.7 per cent against 6.2 per cent in the corresponding period of the last year. On an annual basis, currency expansion was 10.3 per cent against 10.6 per cent in the previous year. There has been a shift in the sources contributing to the reserve money expansion during this year.

During 2000-01, the reserve money expansion was mainly due to increase in net RBI credit to government whereas during this year so far, it has been mainly due to increase in net accretion in the foreign exchange assets.

The RBI credit to commercial sector in the current year so far dipped by Rs 50.92 billion as against a decline of Rs 60.95 billion during the comparable period last year.

Net RBI credit to the government increased only by Rs 38.81 billion against Rs 161.32 billion in the corresponding period of last year. On the components side, bankers' deposits with RBI fell by Rs 67.66 billion as against a decline of Rs 78.71 billion during the corresponding period of last fiscal.

Credit growth tardy: There has been a dip in the bank credit and other flows to the commercial sector from the banking system during the current year.

Scheduled commercial banks' credit expanded by Rs 311.04 billion (6.1 per cent) up to October 5, 2001 against an increase of Rs 422.11 billion (9.7 per cent) in the previous year.

Food credit increased by Rs 102.11 billion (25.56 per cent) against Rs 71.93 billion (21.87 per cent) in the previous year. Non-food bank credit increased by Rs 208.94 billion (4.4 per cent) against an increase of Rs 350.18 billion (7.86 per cent) in the previous year.

Banks' investments in commercial paper, investments in bonds /shares / debentures of PSUs and private corporate sector till October 5, increased by Rs 29.76 billion ( 4.08 per cent) as against Rs 29.19 billion (4.74 per cent) in the previous year.

Total resource flow to the commercial sector including capital issues and borrowings from financial institutions increased by 237.37 billion till October 55 as compared with Rs 381.14 billion in the comparable period previous year.

Though the non-food credit off-take has been slow during the first half of the fiscal, the situation seems to be improving. There has been Rs 104.71 billion of non-food credit off-take during September and Rs 56.57 billion in the first week of October.

Government borrowing on course: The Union budget for 2000-01 placed the net market borrowings of the central government at Rs 773.53 billion and gross borrowings at Rs 1,188.52 billion.

Up to October 6, 2000, the Centre completed net borrowings of Rs 666.49 billion and gross borrowings of Rs 962.50 billion. RBI continued to combine auction issues with acceptance by private placement of dated securities of the government consistent with market conditions.

In the current financial year so far, there is a minor devolvement of Rs 6.79 billion on the RBI. However, the reserve money impact of this remained moderate due to increase in RBI credit to commercial sector and net foreign currency assets.

The commercial banks' investment in government securities this fiscal showed an increase of Rs 436.64 billion against an increase of Rs 255.01 billion in the corresponding period of the previous year.

In the aggregate, banks continued to hold government securities in excess of SLR prescription by a sizeable margin.

Fiscal deficit high: Government of India's fiscal deficit up to August 2001 this year is reported to be significantly higher at Rs 560.79 billion representing a deterioration by 53.86 per cent compared to last year.

This has been contributed by a substantial dip in revenue receipts by 14.79 per cent to Rs 562.09 billion and an increase of 13.01 per cent in expenditure to Rs 1,180.97 billion.

Along with the dismal figures in the first half two other uncertainties also plague the budgetary outlook -- the pace of progress in realising the projected receipts from disinvestments, and the budgetary outgo to meet the 'pump-priming of economy' that the finance minister had hinted at.

Forex assets up: In absence of any sharp increase in oil prices, the foreign currency assets of India had increased by $ 2.698 billion, and forex markets were generally stable till September 11.

The terrorist attack on the US and the following uncertainty in the international political scenario weakened rupee by 1.66 per cent to 48.12/14 on October 8. The rupee, however, has recovered during the next couple of weeks and has been hovering around the 48 mark.

Exports down: The performance on the foreign trade sector has been negative as the exports fell by 2.4 per cent in April-August period against 21 per cent growth recorded during the corresponding period of the last year.

Imports though grew by a lower rate at 2.5 per cent as against 14 per cent last year, trade deficit was $4.616 billion as against $3.674 last year. Net invisible earning, however, recorded a higher inflow this time -- $3.4 billion in the April-August period against 2.623 billion in the comparable period last year.

Foreign investments including foreign direct and institutional investment remained marginally higher at $1.390 billion against $1.197 billion during the corresponding period of the last fiscal.

The relatively stable Indian currency has allowed the RBI to maintain a softer bias on interest rate throughout the fiscal so far, except for supplying dollars to the market via state-run banks.

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