PRESSURE POINTS

MONETARY POLICY MID-TERM REVIEW 2007-08

CREDIT GROWTH

Growth in bank credit moderated after the strong pace in the preceding three years. Non-food credit by scheduled commercial banks (SCBs) moderated to 23.5 per cent (Rs.3,77,759 crore), y-o-y, as on October 12, 2007, from 30.0 per cent (Rs 3,70,226 crore) a year ago.

The deceleration in credit growth coupled with the acceleration in deposits growth led to a reduction in the incremental credit-deposit ratio (y-o-y) of SCBs to 67.0 per cent as on October 12, 2007, from 94.3 per cent a year ago and 110.0 per cent at end-March 2006.

Strong expansion in the sources of funds along with the moderation in credit growth enabled banks to deploy their funds in government and other approved securities, which increased by 22.9 per cent, y-o-y, on October 12, 2007, as compared with 3.2 per cent a year ago.

MONEY SUPPLY

For the purpose of monetary policy formulation, the Annual Policy Statement of April 2007 projected the rate of broad money (M3) growth at around 17.0-17.5 per cent for 2007-08 in consonance with the outlook on economic growth and inflation.

Growth in broad money (M3), year-on-year (y-o-y), was 21.8 per cent (Rs. 6,41,464 crore) on October 12, 2007 as compared with 18.9 per cent (Rs. 4,66,603 crore) a year ago.

On a financial year basis, growth in M3 during 2007-08 (up to October 12, 2007) was 8.2 per cent as compared with 7.7 per cent during the comparable period of the previous year.

Reserve money expanded by 24.4 per cent (14.9 per cent adjusted for the first round impact of the increase in the cash reserve ratio), y-o-y, as on October 19, 2007 as compared with 20.2 per cent a year ago.

INFLATION

Wholesale price indexed (WPI) inflation fell to 3.1 per cent on October 13, 2007, from 4.4 per cent at the end of June 2007 driven by base effect and controlled fuel prices.

Consumer price inflation, in the range of 5.7-7.9 per cent however, remained firm during the second quarter of 2007-08 and continued to be above the WPI inflation, reflecting the impact of higher food prices.

Global commodity prices were also high during the September quarter, led by food and crude oil prices.

Food prices increased further led by wheat and oilseeds, edible oils, reflecting a shortfall in global production, decline in stocks and rising demand for non-food uses.

The Indian basket of price of crude oil, which averaged $57 a barrel in February 2007, increased to $ 75 a barrel in September 2007.

Headline inflation remained compressed due to halt in pass-through of higher international prices to domestic prices since February 2007.

The net foreign institutional investor (FII) inflows stood at $21.2 billion during 2007-08, upto October 19,2007 as against an outflow of $ 933 million a year ago. Foreign direct investments (FDI) inflows were $6.6 billion during April-July 2007, up from $ 3.7 billion ayear ago.

The Reserve Bank of India is estimated to have mopped up close to $ 43 billion through interventions in the forex market to prevent further appreciation of the rupee.

India's forex reserves thus increased by $ 62 billion during 2007-08 to $ 261.1 billion as on October 19, 2007.

FOREX MARKET

Record foreign fund flows lifted the rupee to a new high of 39.43 against the US dollar on Monday, after SEBI clarified the curbs on participatory notes was to control unregulated inflows.

The rupee has appreciated by 10.1 per cent against the US dollar over its level on March 31, 2007.

The commerce ministry has started telling exporters to prepare for the rupee rising to 38 by December.