Macro Economic Overview of the Mid Term

Review of Annual Policy by RBI, 2008-09

INSTITUTE OF PETROLEUM MANAGEMENT, GANDHINAGAR

Submitted to: Prof Rasananda Panda

Date of Submission: 26.10.2008

Submitted by: Joydeep Mukherjee

Roll No: 20081020

Macro economic measures identified in the Credit Policy Statement
issued by Reserve Bank of India (24 Oct, 2008):-

Gross Domestic Product (GDP):

The GDP at the present scenario hovers around 7.9% whereas in the previous year
it was at a staggering 9.2%. Taking this into account, the GDP growth forecast has
been revised to a rate of 7.5-8%.

Inflation:

On the basis of Wholesale Price Index:

Inflation which is hovering around 11% at present is expected to be controlled to

7% around within March, `09. In the medium term the target is to decrease
inflation to 5%, keeping in mind the global rate of around 3%.

On the basis of Consumer Price Index:

This has also shown a stark increase from 7.3% to 9% within a year.

Money Supply Rate:

The money supply rate has lowered to a value of 20.3% from 21.9% in the earlier
year. Further moderation is expected to lower it to 17% according to the Annual
Policy Statement of April, 2008.

Foreign Exchange Reserves:

The foreign exchange reserves was depleted by US$ 35.8 billion, and stood at US$
273.9 billion.

Foreign Exchange Rate:

There was an 18.9% depreciation of rupee with respect to US Dollar, 0.4%

depreciation with respect to Euro, 1.1% depreciation with respect to Pound
Sterling and 19.1% depreciation with respect to Japanese Yen.
Understanding of the Business Environment:-
The Mid Term Review is been set at a point of time, when the international
money markets are being severely disrupted. The “sub-prime” crisis in US has
greatly challenged the business environment of the world. Governments across
the world have started taking measures in an aggressive, radical and
unconventional manner to restore calm and confidence in the markets. Central
Banks and Financial Institutions also have been going through uncertain waters;
with investments around the globe being at all time low. Freezing of inter-bank
markets in US and Europe have forced massive liquidity injection facilities from
central banks. Reduction of policy rates, recapitalization of troubled private banks
and guaranteeing of all deposits in the banking system by governments has been
implemented to check the spiraling downward trend of the economy. The
concern lies in the fact that inspite of the measures implemented the evolution of
the economic condition is highly uncertain. The slowdown of the economic
activity of the advanced nations has begun to affect the macroeconomic
conditions of the emerging nations. This is due to the fact that in today’s open
economy, emerging nations is reliant on exports and on international finance
markets for external financing needs. The weakening of the US economy ( real
GDP has come down to 2.8% from 3.8% in 2007) and volatility in energy, food and
commodity prices have contributed significantly in spreading the effects of the
financial crisis in emerging economies. High inflation levels are also a threat to
global economic prospects.

India’s financial sector has also had some indirect knock-on effects, though
indicators such as Capital adequacy, Ratio of non-performing assets and Return
on assets for commercial banks do not indicate any impending emergency.
The supply conditions in the Indian economy have shown resilience in wake of
deteriorating global macroeconomic and financial environment. Aggregate
demand conditions continue to be mainly investment driven, and has become
broad based in the second quarter.
In the rural environment, Public sector banks, Regional Rural Banks (RRB) and
Rural Cooperative Banks has been instructed by RBI to provide interest rate
subvention of 2%/annum to farmers in respect of short term production credit
upto Rs 3 lakhs. The apex bank also has taken an initiative in providing liquidity in
a tune of a sum of Rs. 25,000 crore under Agricultural Debt Waver schemes to
scheduled banks and NABARD (National Bank for Agriculture and Rural
Development).
There was an increase of 29.4% (Rs. 591,935 crores) on year-on-year basis in the
credits extended by the Scheduled Commercial Banks (SCB). The overall deposits
recorded in SCBs also increased by 21.6%, on year-on-year basis till 10 October,
2008. The year-on-year growth in total resource flow from SCBs to the
commercial sector also improved to 28.9% over and above the growth of 21.9% in
the previous year.
With respect to the daily average price of the Indian basket of crude oil, it
increased from US$ 99.4 to US$ 141.5 and later decreased dramatically to US$
74.4. Keeping in view such volatility in prices, the domestic oil companies were
permitted by RBI to hedge their freight risk with overseas exchanges/ Over the
Counter (OTC) finance.
Both imports and exports of the nation have increased in percentage term in
between April-August, 2008. In US Dollar terms, exports improved by 35.3%
whereas imports also increased by 38% than the corresponding period of the
previous year.
The equity market though has taken a beating, with the market turning bearish
and reaching levels last seen in 2005! Especially in the secondary markets, the
stocks have been volatile with large two way movements in response to largely
movements in the global equity markets. The value of the rupee has also
depreciated significantly with respect to the US Dollar.
The GDP of the country have been revised down to 7.5-8% by the apex bank in
the light of the uncertain economic outlook. The projected inflation has also been
set to 7% by end March `09.
In case of Indian economy, the resolution of the crisis of this magnitude and
complexity demands going for unconventional and swift action policy as well as
close coordination with the government.
Measures taken by RBI to curb the economic slowdown:-

Responding to the gradual stress being developed in the economy, RBI decided to
infuse confidence by releasing huge amounts of money in the system. This was
done by cutting down the Cash Reserve Ratio (CRR), decreasing the Bank rate,
controlling the Repo and the Reverse repo rates. RBI has ensured that the
monetary and interest rate environment optimally balances the objectives of
financial stability, price stability, inflation expectations and growth. The central
bank has decided to continue with the policy of active demand management of
liquidity through instruments like open market operations (OMO), market
stabilization schemes (MSS) and Liquidity Adjustment Facility (LAF) to maintain
orderly financial conditions. RBI has also started taking interest to emphasize on
credit quality and credit delivery for employment intensive sectors, while
pursuing financial inclusion. Due to the uncertain and unsettled global economic
situation and its impact on the domestic economy and financial markets in
particular, RBI is continuously monitoring the situation to respond swiftly and
effectively to newer developments.

The recent adjustments made in monetary policies are:

a) The Bank Rate has been kept unchanged at 6%.

b) The Repo Rate under the Liquidity Adjustment Facility kept unchanged at
8%.
c) The Reverse repo Rate under Liquidity Adjustment Facility kept unchanged
at 6%.
d) RBI retains the right to conduct repo/reverse repo auctions at variable
rates.
e) The Cash Reserve Ratio kept unchanged at 6.5%

India has been definitely affected by the global economic crisis, but the apex bank
has responded timely and instantly to lessen the impact and oversee that the
growth rate is maintained. Thus, this Mid Term Review echoes the sentiment of
the new governor, Mr D Subbarao, who states that, “Learn from the economic
crisis but do not stop reforms.”