PRESSURE POINTS

MONETARY POLICY 2008-09

Food prices
Food prices firmed up in the second half of 2007-08 led by wheat, rice and edible oil, reflecting the surging demand "� for consumption as food and as biofuels.

While the international prices of commodities like wheat shot up nearly 121 per cent, many countries have imposed export controls and initiated measures to check further price rise.

For rice, the rise is estimated at 76 per cent during a 12-month period ended March 2008, while in case of oil seeds, increase in prices during the last one year was close to 79 per cent.

Though the price variation in India has been much lower with price of oilseeds rising 18.7 per cent, rice b y 8.2 per cent and wheat by 5.1 per cent, the expectation is that supply side pressures would continue with year-ending global stocks at historical lows.

 

Metals & industrial commodities
Metal prices soared nearly 20 per cent in 2007-08 and this came on the back of an 11 per cent rise in the previous year. The rise in the index was mainly on account of a steep rise in iron and steel prices, which reflected the increase globally.

Besides, there is pressure in the form of higher energy, iron ore and freight charges. Higher input costs is only making life tougher for user industries -- many of which have been hit by higher interest rates "� as margins are under severe pressure.

The strong demand from the construction sector has seen cement companies operate at nearly 93 per cent capacity during April-February 2007-08 resulting in prices flaring up and accusations of cartelisation.

Oil
The government is trying to meet its "social obligations" by ensuring that there is only a marginal increase in the price of petrol and diesel, and no rise in kerosene and cooking gas prices. But industry has had to bear the burden of higher aviation turbine fuel, naphtha and furnace oil prices.

Despite the prospects of slower consumption growth, crude petroleum prices are expected to remain high. So, the household budget may get away with a minor dent in an election year, the industry may have to bear the burden.

And, with the government making sure that the oil companies bear a part of the subsidy, their bottom lines are set to be affected, along with the Centre's fiscal health.

Money Supply
Broad money (M3) growth, on a year-on-year (y-o-y) basis, was at 20.7 per cent as at end-March 2008 lower than 21.5 per cent a year ago, reflecting some deceleration in time deposits.

Broad money growth, nevertheless, was strong with expansion in aggregate deposits, y-o-y, remaining higher than the projected aggregates of Rs 4,90,000 crore for 2007-08 as projected in the annual policy statement April 2007.

The primary source of monetary expansion continued to be the accretion to net foreign exchange assets, while bank credit to the commercial sector moderated. Despite the various monetary steps being taken by the central bank the higher than projected growth in money supply has been acting as a catalyst to rising inflation.

Bank credit
Expansion in the bank credit to the commercial sector moderated during 2007-08 and remained within the Reserve Bank's policy projection in April 2007, after a strong pace of credit expansion for three consecutive years.

Non-food credit by scheduled commercial banks (SCBs) expanded by 22.3 per cent, y-o-y, as at end-March 2008 as compared with 28.5 per cent a year ago.

The deceleration in credit growth relative to the acceleration in deposit growth led to a decline in the incremental credit-deposit ratio, y-o-y, of SCBs to 71.9 per cent as at end-March 2008 from 84.3 per cent a year ago

Foreign Investment flows
The foreign investment flows in April-2007-February 2008 were $ 25.5 billion, much higher than $ 19.6 billion in same period of 2006-07.

With this, the net capital flows were substantially higher than the current account deficit. The overall balance of payments posted a surplus of US $ 67.2 billion in April-December 2007, way above surplus of US $ 16.2 billion in April-December 2006.

The higher portfolio investments has also been challenge to the economy as Reserve Bank of India had to mop of excess flows to contain the pressure on rupee value and surge in money supply which could stoke inflation.