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REPORT ON MACROECONOMICS & BANKING

November 6, 2010
Table of Contents

Economic & Banking Indicators Page No.

Executive Summary 3

World Economic Growth (Real GDP) 4-5

Policy Rates in Select Economies 6

India - Economic Growth (Real GDP) 7

Trends in Agriculture Production (Kharif) and Rainfall 8-9

Index of Industrial Production (IIP) 10

Six Core Industries & Vehicle Sales 11

Foreign Trade, Foreign Exchange Reserves, ECB 12

Inflation 13

Outlook for Interest Rate on Deposits of SCBs 14-15

Government Borrowing Programme for FY 2010-11 16-17


Executive Summary
________________________________________________________________________

Headline inflation under the new series (with base year of 2004-05) to be around 6.1% for
December 2010 and to be in the range of 5.0-5.50% for end-March 2011. WPI inflation is
projected to be 8.4% for October 2010.

Policy rates have been normalized by the Reserve Bank of India and we do not see hike of
in key policy rates (repo & reverse rep rates) in the remaining part of the current fiscal.

Liquidity conditions are likely to witness transition from one of very tight in the 3rd
quarter to one of comfortable liquidity conditions in the 4th quarter of this fiscal. There
is pressure on deposits rates in the 3rd quarter on account of tightening in liquidity
conditions. The interest rate on deposits for the maturity bucket of 1 year & above is
likely to see upward movement by 50-100 bps in the remaining part of the current fiscal.

Real interest rate on deposits likely to be positive in the 4th quarter of this fiscal.

Government borrowing programme is mainly concentrated in the 3rd quarter, leaving


enough headroom for demand for credit in the 4th quarter of this fiscal.

Monsoon is 2% above normal till June-September 2010 and Kharif productions are
encouraging in this year.

Appreciation of rupee and rising current deficits going to be major concern for the policy
makers in this fiscal. However, strong capital inflows currently enough to finance current
account deficit.

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World Economic Growth (Real GDP)
________________________________________________________________________

As per the assessment by IMF in its ‘World Economic Outlook’ for October 2010, global
economic recovery is proceeding broadly as expected, but downside risks remain
elevated. Most advanced economies and a few emerging economies still face large
adjustments. Their recoveries are proceeding at a sluggish pace, and high unemployment
poses major social challenges. By contrast, many emerging and developing economies are
again seeing strong growth, because they did not experience major financial excesses just
prior to the Great Recession.

Economic recovery continued to strengthen during the first half of 2010. Global activity
expanded at an annual rate of about 5¼ percent–about ½ percent higher than anticipated
in the July World Economic Outlook (WEO) Update.

Growth in the advanced economies reached only about 3½ percent during the first half of
2010, a low rate considering that they are emerging from the deepest recession since
World War II.

Real GDP: % y-o-y growth


FY 06 FY 07 FY 08 FY 09 FY 10 FY 11
Advanced Economies
World 5.1 5.2 2.8 -0.6 4.8 4.2
Advanced Economies 3.0 2.7 0.2 -3.2 2.7 2.2
United States 2.8 2.0 0.0 -2.6 2.6 2.3
Euro Area 2.9 2.7 0.5 -4.1 1.7 1.5
Japan 2.0 2.4 -1.2 -5.2 2.8 1.5
Other Advanced Economies # 3.9 4.0 1.7 -1.2 5.4 3.7
BRIC Economies

Brazil 4.0 5.7 5.1 -0.2 7.5 4.1

Russia 7.7 8.1 5.2 -7.9 4.0 4.3

India 9.8 9.3 6.4 5.7 9.7 8.4

China 11.6 13.0 9.6 9.1 10.5 9.6


PIIGS Economies of Euro Area

Portugal 1.4 1.9 0.0 -2.6 1.1 0.0


Italy 2.0 1.0 -1.3 -5.0 1.0 1.0

Ireland 5.7 6.0 -3.0 -7.6 -0.3 2.3


Greece 4.5 4.0 2.0 -2.0 -4.0 -2.6
Spain 3.9 3.7 0.9 -3.7 -0.3 0.7
Source: World Economic Outlook, IMF, Various Issues. # Excluding US, Euro area economies and Japan.

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The forecast for Global activity is to expand by 4.8% in 2010 and 4.2% in 2011, broadly in
line with earlier expectations, and downside risks continue to predominate.

WEO projections are that output of emerging and developing economies will expand at
rates of 7.1% and 6.4%, respectively, in 2010 and 2011.

In advanced economies, however, growth is projected at only 2.7% and 2.2%, respectively,
with some economies slowing noticeably during the second half of 2010 and the first half
of 2011, followed by a reacceleration of activity.

Risks to the growth forecasts are mainly to the downside. However, the probability of a
sharp global slowdown, including stagnation or contraction in advanced economies, still
appears low.

IMF has revised the projection real GDP growth rate for Indian economy to grow at 9.7%
in 2010, from 9.4% given in July 2010.

_________________________________________________________________________________
Revisiting Decoupling
________________________________________________________________________

While assessing the prospects for emerging economies in the aftermath of recent global
financial sector crisis, IMF has tested the earlier widely held view that the fortunes of
emerging economies follow those of advanced economies – when the United States
sneezes, it has been said that the rest of the world catches cold.

IMF has analyzed the four recessions in advanced economies: 1974-75, 1980-83, 1991-93,
2001, closely aligned with U.S. recessions identified by the National Bureau of Economic
Research (NBER), which were significant downturns at a global level, with the majority of
the advanced economies experiencing outright recession during the first three episodes.

It has been stressed now that the emerging economies have performed better after recent
advanced economy recessions than after those in the 1970s and 1980s. This fact holds
across different measures of performance. This is despite the fact that emerging
economies have also become more highly correlated with advanced economies over time.

One of the explanations given to reconcile this dichotomy is improved domestic policies in
emerging economies that have increased their resilience to shocks. It is being stated that
the improvement in the macroeconomic management may have insulated emerging
economies from the worst of recent advanced economies recessions.

As per empirical evidence, it is being argued that economies with external balances were
particularly vulnerable to the recent crisis, and that economies that were particularly
dependent on bank lending instead of foreign investment were susceptible to rapid capital
outflows.

It has been emphasized that emerging economies are now more flexible and, as such,
have been more resilient to foreign shocks. For example, flexible exchange rates helped
to preserve competitiveness and allow trade to bounce back quickly following the
downturn in the early 2000s, and capital inflows have been much less affected in recent
episodes.

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Policy Rates in Select Economies
________________________________________________________________________

Most of the Central Banks in the advanced economies are still continuing with easy
monetary policy as part of the stimulus package to revive their respective domestic
economies.

Bank of Japan has decided to implement a comprehensive monetary easing policy, with
Uncollateralized Overnight Call Rate remaining around 0.0-0.1% with effect from 5th
October 2010. It has been clarified by the Bank of Japan that ‘The Bank will maintain
the virtually zero interest rate policy until it judges, on the basis of the
"understanding of medium- to long-term price stability”, that price stability is in
sight, on condition that no problem will be identified in examining risk factors,
including the accumulation of financial imbalances.’

Key Policy Rates in Select Economies

Country Benchmark Rate Last Change Date of change

USA Fed Funds Rate 0.0-0.25% -0.75 to -1% 16.12.2008

UK Official Bank Rate 0.50% -0.50% 05.03.2009

Euro Area Main Refinance Operation Rate 1.00% -0.25% 07.05.2009

Japan Uncollateralized Overnight Call Rate 0.0-0.10% -0.10% 05.10.2010

Australia Cash Rate Target 4.50% 0.25% 05.05.2010

New Zealand Official Cash Rate 3.00% 0.25% 29.07.2010

Canada Overnight Rate 0.75% 0.25% 20.07.2010

Switzerland 3M CHF LIBOR Ceiling 0.0-0.75% -0.50% 12.03.2009

India Repo Rate 6.25% 0.25% 02.11.2010

Source: Respective Central Banks

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India - Economic Growth (Real GDP)
________________________________________________________________________

Economic Growth: The real GDP growth rate has been on a path to recovery after witnessing
a sharp decline to 6.7% in FY 2009 on account of contagion of global financial markets crisis.
GDP growth rebounded to 7.4% in FY 10 owing to rebound in industrial performance.

Outlook for GDP growth for FY 2010-11

Advisory Council to PM – 8.5%


Planning Commission – 8.5%+
RBI – 8.5%
IMF (Calendar year) – 9.7%

GDP at factor cost at constant 2004-05 prices: % y-o-y growth


FY 06 FY 07 FY 08 FY 09 FY 10 FY 11*
Agriculture & Allied 5.3 3.7 4.7 1.6 0.2 4.0
Industry 9.3 12.8 9.5 3.9 9.3 9.5
Services 11.1 10.2 10.5 9.8 8.5 9.2
GDP 9.5 9.7 9.2 6.7 7.4 8.5
Source: MOSPI; (*UBI Estimates)

Relative Share of Agriculture, Industry & Services Sectors in GDP (%)


FY 06 FY 07 FY 08 FY 09 FY 10 FY 11*
Agriculture & Allied 18.2 17.2 16.4 15.7 14.6 14.0
Industry 27.9 28.7 28.8 28.0 28.5 28.7
Services 53.9 54.2 54.8 56.4 56.9 57.3
GDP 100.0 100.0 100.0 100.0 100.0 100.0
Source: As above

Quarterly GDP at factor cost at constant 2004-05 prices: % y-o-y growth


Q1-FY 10 Q2-FY 10 Q3-FY 10 Q4-FY 10 Q1-FY 11 Q2-FY 11*
Agriculture & Allied 1.9 0.9 -1.8 0.7 2.8 4.4
Industry 4.6 7.8 11.1 13.3 10.3 8.2
Services 7.9 10.7 7.2 8.4 9.7 9.5
GDP 6.0 8.6 6.5 8.6 8.8 8.5
Source: MOSPI; (*UBI Estimates)

Projection for Economic Growth in Q2 of FY 2010-11: We expect the GDP growth rate to
be around 8.5% with a downward bias in the 2nd Quarter of FY 2010-11.

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Trends in Agriculture Production (Kharif) and Rainfall
________________________________________________________________________

Trends in production of foodgrains: It is observed that the Kharif production has recorded a
good performance over the last year, but overall Kharif production is still below that of the
peak observed in the FY 2008 & FY 2009 for most of the agricultural crops. The deficit Kharif
production in the last 2 years had its impact on the prices of foodgrains as reflected in the
headline inflation and retail level inflation under Consumer Price Indices. It is expected that
the better Kharif production, particularly protein rich pulses, will have its impact on
moderating the overall food price inflation to some extent. However, the better agricultural
production under Kharif is not sufficient to rein in the current higher level of food price
inflation, which is now more of structural nature as argued by RBI in its Second Quarter
Review of Monetary Policy for 2010-11.

FY 06 FY 07 FY 08 FY 09 FY 10 4AE FY 11 1AE
Production of Foodgrains Crops (Million Tonnes)
Rice 78.27 80.17 82.66 84.91 75.91 80.41
8.4 2.4 3.1 2.7 -10.6 5.9
Jowar 4.07 3.71 4.11 3.05 2.82 3.22
0.7 -8.8 10.8 -25.8 -7.5 14.2
Bajra 7.68 8.42 9.97 8.89 6.50 8.61
-3.2 9.6 18.4 -10.8 -26.9 32.5
Maize 12.16 11.56 15.11 14.12 12.00 14.06
5.9 -4.9 30.7 -6.6 -15.0 17.2
Ragi 2.35 1.44 2.15 2.04 1.96 1.93
-3.3 -38.7 49.3 -5.1 -3.9 -1.5
Small Millets 0.47 0.48 0.55 0.44 0.35 0.40
-2.1 2.1 14.6 -20 -20.5 14.3
Coarse Cereals 26.73 25.61 31.89 28.54 23.63 28.23
1.4 -4.2 24.5 -10.5 -17.2 19.5
Cereals 105 105.78 114.55 113.45 99.54 108.64
6.5 0.7 8.3 -1 -12.3 9.1
Tur 2.74 2.31 3.08 2.27 2.55 3.27
16.6 -15.7 33.3 -26.3 12.3 28.2
Urad 0.90 0.94 1.12 0.84 0.85 1.08
-5.3 4.4 19.1 -25 1.2 27.1
Moong 0.69 0.84 1.25 0.78 0.44 0.88
-14.8 21.7 48.8 -37.6 -43.6 100.0
Other Kharif Pulses 0.54 0.71 0.95 0.80 0.46 0.76
-11.5 31.5 33.8 -15.8 -42.5 65.2
Total Pulses 4.87 4.80 6.40 4.69 4.30 6.00
3.2 -1.4 33.3 -26.7 -8.3 39.5
Total Foodgrains 109.87 110.57 120.95 118.14 103.84 114.63
6.3 0.6 9.4 -2.3 -12.1 10.4
Source: Department of Agriculture & Cooperation; AE-Advance Estimate

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Trends in production of Commercial Crops: The production of commercial crops has also
exhibited similar trend like foodgrains production. The production of cotton has achieved its
new high in the current fiscal.

FY 06 FY 07 FY 08 FY 09 FY 10 4AE FY 11 1AE
Production of Principal Commercial Crops (Lakh Tonnes)
Groundnut 62.98 32.94 73.62 56.17 36.59 56.36
19.7 -47.7 123.5 -23.7 -34.9 54.0
Castorseed 9.91 7.62 10.53 11.71 9.85 9.45
25.0 -23.1 38.2 11.2 -15.9 -4.1
Sesamum 6.41 6.18 7.57 6.40 6.57 6.23
-4.9 -3.6 22.5 -15.5 2.7 -5.2
Nigerseed 1.08 1.21 1.10 1.17 1.01 1.06
-3.6 12.0 -9.1 6.4 6.6 6.2
Sunflower 4.56 3.66 4.63 3.57 2.16 1.56
5.8 -19.7 26.5 -22.9 -39.5 -27.8
Soyabeen 82.74 88.51 109.68 99.05 100.46 98.07
20.3 7.0 23.9 -9.7 1.4 -2.4
Oilseeds 167.68 140.12 207.13 178.08 156.63 172.74
18.5 -16.4 47.8 -14.0 -12.0 10.3
Cotton # 184.99 226.32 258.84 222.76 239.35 335.00
12.6 22.3 14.4 -13.9 7.4 40.0
Jute ## 99.70 103.17 102.21 96.34 107.00 96.86
6.1 3.5 -0.9 -5.7 11.1 -9.5
Mesta ## 8.70 9.56 9.90 7.31 5.91 5.96
-0.3 9.9 3.6 -26.2 -19.2 0.8
Sugarcane 2811.72 3555.20 3481.88 2850.29 2777.50 3249.12
18.6 26.4 -2.1 -18.1 -2.6 17.0
Source: Department of Agriculture & Cooperation; AE-Advance Estimate
# Lakh Bales of 170 kg each; ## Lakh Bales of 180 kg each

Rainfall: India has received 912.8 mm of rainfall during Jun-Sept 2010, which is 2% above
normal. The region-wise distribution of rainfall during this period is as under:

Region-wise rainfall (mm)


Northwest India 688.2 12% above normal
Central India 1027.9 4% above normal
South peninsula 853.6 18% above normal
East, North East 1775.8 18% below normal
India 912.8 2% above normal
Source: IMD

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Index of Industrial Production (IIP)
________________________________________________________________________

Index of Industrial Production: The index of industrial production (IIP) rebounded sharply to
10.4% in FY 2010 compared to 2.8% recorded in the previous fiscal. The growth in IIP was
mainly driven by robust performance under manufacturing during FY 2010. Under use-based
classification, growth in IIP during FY 2010 was mainly driven by robust performance under
capital goods and consumer durables.

Index of Industrial Production - Sectoral: % y-o-y growth


FY 06 FY 07 FY 08 FY 09 FY 10
Mining (104.73) 1.0 5.4 5.1 2.6 9.9
Manufacturing (793.58) 9.2 12.5 9.0 2.8 10.9
Electricity (101.69) 5.2 7.3 6.4 2.8 6.0
Index of Industrial Production - Use-Based: % y-o-y growth
Basic Goods (355.65) 6.7 10.3 7.0 2.6 7.2
Capital Goods (92.57) 15.7 18.2 18.0 7.3 19.3
Intermediate Goods (265.14) 2.5 12.0 8.9 -1.9 13.6
Consumer goods (286.64) 12.0 10.1 6.1 4.7 7.3
w/w Consumer Durables (53.65) 15.3 9.2 -1.1 4.5 26.2
w/w Consumer Non-Durables (232.99) 10.9 10.4 8.5 4.8 1.3
IIP (1000.0) 8.2 11.5 8.5 2.8 10.4
Source: MOSPI; Figures in brackets shows the respective weights in IIP

Projection of IIP for September 2010: The monthly growth rate of IIP has shown sharp
fluctuations in the last 3-4 months. After recording a growth of 11.3% in May 2010, IIP fell
down to 5.8% in June 2010 and rebounded sharply to 13.8% in July 2010. IIP has fell down to
5.6% in August 2010, continuing its sharp volatility. Even RBI has raised its concern on the
data of IIP in its mid-quarter review of monetary policy on 16th September 2010 as well as in
the second quarter review of monetary policy on 2nd November 2010. Our projection for IIP
for the month of September 2010 is 8.5%.

Index of Industrial Production - Sectoral: % y-o-y growth


Aug '09 Aug '10 Apr-Aug Apr-Aug
2009 2010
(1-Month) (1-Month) (5-Months) (5-Months)
Mining (104.73) 11.0 7.0 8.0 9.4
Manufacturing (793.58) 10.6 5.9 5.6 11.3
Electricity (101.69) 10.6 1.0 6.5 4.3
Index of Industrial Production - Use-Based: % y-o-y growth
Basic Goods (355.65) 7.7 3.7 6.2 5.9
Capital Goods (92.57) 9.2 -2.6 3.4 29.0
Intermediate Goods (265.14) 14.4 10.0 9.3 9.8
Consumer goods (286.64) 10.9 6.9 3.6 8.6
w/w Consumer Durables (53.65) 24.7 26.5 18.8 27.0
w/w Consumer Non-Durables (232.99) 6.1 -1.2 -1.1 1.6
IIP (1000.0) 10.6 5.6 5.9 10.6

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Six Core Industries
________________________________________________________________________

Six Core Industries: The index of six core industries has recorded a growth of 2.5% in
September 2010 compared to 4.3% in the same period over the previous fiscal. It is observed
that except for crude oil & finished carbon steel production, other sectors have recorded
slower growth during the month of September 2010 over the same period last year. The index
of six core industries has witnessed lower growth of 4.0% during Apr-Sep 2010 compared to
4.5% in the same period last year.

Six Core Industries: % y-o-y growth


Sep '09 Sep '10 Apr-Sep 2009 Apr-Sep 2010
(1-Month) (1-Month) (6-Months) (6-Months)
Crude Oil (4.17) -0.5 12.5 -1.2 10.2
Petroleum Refinery Products (2.0) 3.4 -10.2 -3.6 2.6
Coal (3.2) 6.5 -2.0 11.6 0.4
Electricity (10.17) 7.4 1.3 6.4 4.0
Cement (1.99) 6.5 5.2 12.3 4.7
Finished (Carbon) Steel (5.13) 0.8 5.8 1.7 3.9
Six Core Industries (26.7) 2.5 4.3 4.5 4.0
Source: MOSPI; ( Figures in brackets shows the respective weights in IIP)

Vehicle Sales
________________________________________________________________________

Vehicle Sales: As per Society of Indian Automobile Manufactures (SIAM), there has been
growth of 31.06% in overall production during April–September 2010 over the same period last
year. The overall automobile exports registered a growth of 43.61% during the same period.
The detailed position of domestic vehicles sales is as under:

Domestic Vehicle Sales: %ge growth


Type Apr-Jul 2010 Apr-Aug 2010 Apr-Sep 2010
All Passenger Vehicles 33.80% 33.88% 32.91%
Passenger Cars 34.60% 34.32% 33.58%
Utility Vehicles 23.90% 22.56% 20.69%
Multi Purpose Vehicles 44.00% 50.68% 49.32%
Commercial Vehicles Segment 49.80% 44.75% 41.59%
Medium & Heavy Commercial Vehicles 74.20% 65.91% 61.59%
Light Commercial Vehicles 32.90% 29.68% 26.90%
Three Wheelers Sales 18.10% 20.15% 19.87%
Passenger Carriers 20.90% 23.84% 24.18%
Goods Carriers 7.20% 5.46% 2.54%
Two Wheelers 28.30% 27.22% 25.86%
Scooters 44.70% 44.45% 44.95%
Mopeds 23.90% 24.18% 23.13%
Motorcycles 25.60% 24.41% 22.52%

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Foreign Trade, Foreign Exchange Reserves, External Commercial Borrowings
________________________________________________________________________

Foreign Trade: India’s exports were recorded at US $18.02 bn in September 2010, registering
a y-o-y growth of 23.2%. Imports were recorded at US $ 27.41 bn in September 2010,
registering a y-o-y growth of 26.1 %. Cumulative exports & imports during April-September
2010 stood at US $ 103.65 bn & US $ 166.48 bn respectively, recording a y-o-y growth of 28.0%
and 29.9% respectively. Trade deficit was recorded at US $ 62.83 bn during April-September
2010, compared to US $ 47.18 bn during the same period last year. Rising current account
deficits is going to be a major concern for the Indian economy in the current fiscal. However,
FII inflows have been robust to take care of financing the current account deficit in this fiscal
so far.

India's Foreign Trade (US $ mn)


FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 (Apr-Sep)
Exports 103091 126361 163132 185295 176574 103647
(23.4) (22.6) (29.0) (13.6) (-4.7) (28.0)
Imports 149166 185749 251654 303696 278681 166478
(33.8) (24.5) (35.5) (20.7) (-8.2) (29.9)
w/w Non-Oil 105233 128790 171940 210029 193208 117763
(37.1) (22.4) (33.5) (22.2) (-8.0) (29.9)
Balance of Trade -46075 -59388 -88522 -118401 -102106 -62831
Source: Ministry of Commerce & Industries, GoI ( Figures in bracket shows % y-o-y growth)

India's Foreign Exchange Reserves* (US $ mn)


FY 06 FY 07 FY 08 FY 09 FY 10 29th Oct 2010
Forex Reserves 151622 199179 309723 251985 279057 297956
Import coverage of 11.6 12.5 14.4 10.3 11.2 N.A.
forex reserves*
Source: RBI (* in months)

Foreign Exchange Reserves: The foreign exchange reserves of country have increased by US
$ 2.56 bn during the week, to US $ 297.96 bn as of October 29, 2010.

External Commercial Borrowings (ECB): ECB for the month of September 2010 was recorded
at US $ 3091 mn, of which US $ 1173 mn is through automatic route and US $ 1918 mn is
through approval route. The cumulative inflows through ECB during Apr-Sep 2010 stood at US
$ 10.65 bn.

External Commercial Borrowings (US $ mn)


Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 FY 11 (Apr-Aug)

Automatic Route 698 459 1778 1113 874 1173 6095


2120 237 13 52 215 1918 4554
Approval route
2818 696 1791 1165 1089 3091 10650
Total
Source: RBI

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Inflation
________________________________________________________________________

Inflation: The Reserve Bank of India has pegged the projection for headline inflation at 5.5%
under the new series with base year of 2004-05. Under the new series, WPI based headline
inflation has been recorded at 8.62% for the month of September 2010 as compared to 8.51%
in August 2010. The headline inflation for primary articles declined to 16.62% (y-o-y) for the
week ended 16th October 2010 compared to 18.05% for the previous week. However, the
headline inflation for fuel & power group has marginally increased to 11.25% (y-o-y) for the
week ended 16h October 2010 compared to 11.14% for the previous week.

Wholesale Price Index (WPI in %) - Full Year: Point to Point


FY 07 FY 08 FY 09 FY 10 Sep-10

Primary Articles (20.1) 12.9 9.1 5.3 22.4 17.45

Food Articles (14.3) 12.7 5.8 7.5 21.1 15.71

Non-food Articles (4.3) 13.4 13.3 1.8 19.6 18.20

Fuel, Power, Light & Lubricants (14.9) 0.9 9.2 -4.9 13.8 11.06

Manufactured Products (65.0) 6.5 7.2 1.4 5.2 4.59

All Commodities (100.0) 6.8 7.7 1.5 10.2 8.62


Source: Office of the Economic Advisor, Ministry of Commerce and Industry

Outlook: Going forward, we observe that WPI based inflation is likely to be around 6.1% for
December 2010 and in the range of 5.0-5.5% for March 2010. Our projection for headline
inflation for the month of October 2010 is 8.4% under the new series.

Cost of Living Index: The retail level inflation has started moderating for the last two
months with CPI for industrial workers & agricultural labour coming down below the double
digits.

Consumer Price Index (CPI in %) - Full Year: Point to Point


FY 06 FY 07 FY 08 FY 09 FY 10 Sep-10

Industrial Workers 5.3 6.7 7.9 8.0 14.9 9.82


Urban Non-Manual 5.0 7.6 6.0 9.3 14.9 10.30*
Agricultural Labour 5.3 9.5 7.9 9.5 15.8 9.13
Source: MOSPI, CSO (* For August 2010)

Business Confidence: HSBC India Manufacturing Purchasing Managers’ Index (PMI) increased
to 57.2 in October 2010 from 55.1 in September 2010, on account of marked increase in
purchasing activity despite higher input price inflation.

(Note: India’s manufacturing PMI has been above 55.0 since January 2010 and above 50.0 since April
2009. PMI Index of 50.0 & above indicates expansion in activity.)

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Outlook for Interest Rate on Deposits of SCBs
________________________________________________________________________

Money Supply: As on 22nd October 2010, money supply (M3) recorded y-o-y increase of 17.1%
(PY: 18.9%) as against RBI’s indicative projection for money supply pegged at 17.0% for the
current financial year.

Credit & Deposits Growth (%): As on 22nd October 2010, aggregate deposits of SCBs recoded a
y-o-y growth of 17.3% and bank credit recorded a y-o-y growth of 21.2%. The growth in
aggregate deposits and bank credit is in sync with the RBI’s indicative projections for March
2011.

Investments: As on 22nd October 2010, SCBs’ investment in SLR securities increased (y-o-y) by
10.8% compared to 28.4% in the corresponding period of the last year. It is estimated that the
effective SLR percentage maintained by SCBs is around 28.71% of NDTL, well above the
statutory requirement of 25%.

SCB’s Position vis-à-vis RBI’s indicative projections for March 2011


RBI’s Indicative Y-o-Y growth as Y-T-D growth as on
nd
Projection for FY 11 on 22 Oct 2010 22nd Oct 2010
Aggregate Deposits 18.0% 17.3 (YoY) 8.5 (YTD)
Bank Credit 20.0% 21.2 (YoY) 7.1 (YTD)

Outlook for Deposits & Credit Growth (%): RBI’s indicative projection for deposits & credit
growth is pegged at 18.0% and 20.0% respectively for the current financial year. We expect
that SCBs will achieve the RBI’s indicative projection for deposits growth whereas credit
growth is likely to surpass the RBI’s indicative projection for the current financial year.

Outlook for interest rate on deposits (1 year & above): Our view is that there is pressure
on deposits rate of the banks in the remaining part of current financial year, particularly in
the 3rd quarter, based on the following underlying reasons:

Negative real interest rate on deposits: The real interest rate on deposits is still
negative. We have taken the interest rate on deposits of 1 year & above to less than 3
years of more than 10 larger public sector banks. It is observed that interest rate on
deposits for 1 year to less than 3 year is in the range of 7.0-8.0% for deposits upto less
than Rs. 1 crore. The interest rate on deposits of 1 year & above to less than 3 years is
in the range of 6.0-8.0% for deposits of Rs. 1 crore & above. If we compare with these
interest rates on deposits with WPI inflation of 8.62% for September 2010, we observe
that real interest rate on deposits is negative. The situation is even worse if we compare
the interest rate on retail deposits with retail level of inflation measured by different
indices of Consumer Price Index (CPI). The CPI for industrial workers has been recorded
at 9.82% in September 2010.

Tight liquidity conditions: Liquidity has been mainly under injection mode since end-
May 2010, on account 3G spectrum and Broadband Wireless Access (BWA) auctions and
advance tax outflows. Liquidity has been in very tight conditions since announcement of
mid-quarter review of monetary policy by RBO on 16th September 2010. Since then,
liquidity is deficit to tune of daily average of Rs. 62000 crore. The underlying reasons
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are governments cash balances with RBI, concentration of market borrowing programme
for the government in the second half of FY 11 in the 3rd quarter, higher credit growth
than deposits growth, demand for funds in market etc. Currently, liquidity has been
outside the desirable limit of +/- 1% of NDTL.

Deposits & Credit growth (%): The credit growth has been higher than the deposits
growth on y-o-y basis for all the reporting Fridays in the current financial year so far.
The spread between credit & deposits growth was 387 bps as on 22nd October 2010.

Share of demand deposits & time deposits in aggregate deposits: The share of demand
deposits in aggregate deposits of SCBs has increased from 13.30% as of 9th April 2010 to
13.66% as of 22nd October 2010, whereas the share of time deposits in aggregate
deposits of SCBs has declined from 86.70% as of 9th April 2010 to 86.34% as of 22nd
October 2010. This shows preference of the banks to mobilize more of CASA deposits
than time deposits in the current financial year so far.

Yield on Government Securities: The yield on 1 year G-Sec and 3 year G-Sec has been
around 6.85% and 7.30% respectively as of end-October 2010. The spread between yields
on G-Sec of comparable maturity with interest rate on deposits is thin. The interest rate
on PPF, EPF is 8.0% and 9.5% respectively.

Shorter-term deposits rate: The interest rate on deposits for tenor 7 days to less than 1
year for deposits upto Rs. 1 crore is 2.50-6.75% whereas interest rate on deposits for
deposits 1 crore is 2.50-7.10% as of October 2010. It is important to note here that
interest rate on deposits shorter tenor maturity buckets is far below the reverse repo
rate of 5.25%.

RBI’s policy measures: RBI has raised the repo & reverse repo rates by 125 bps & 175
bps respectively in the current financial year so far. RBI has also minimized the repo
corridor from 150 bps at the beginning of the current financial year to 100 bps presently
to reduce the volatility in short term rates. The RBI’s normalization of policy rates has
also put upward pressure on deposits rates.

Outlook for inflation and liquidity: The Reserve Bank of India in its second quarter
review of monetary policy has projected the headline inflation under new series at 5.5%
for end-March 2011. This shows that the pressure on interest rate on deposits is less in
the 4th quarter on the ground of real interest rate. Besides, we also observe that
liquidity conditions would be one of comfortable in the 4th quarter compared to very
tight liquidity conditions in the 3rd quarter (as given in the outlook for liquidity in our
previous report). Hence, the pressure on deposits is concentrated in the 3rd quarter of
the current fiscal.

Concluding Remarks: Our observation is that there is more pressure on shorter tenor
(less than 1 year) deposits rates than the longer tenor deposit rates. We expect that the
interest rate on deposits of SCBs particularly for the tenor of 1 year & above will see
upward movement by 50-100 bps in the remaining part of the current fiscal. We may see
some special deposits schemes by the Banks, particularly for long tenor maturity
buckets/special buckets/number of days, offering higher rate of interest.

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Government Borrowing Programme for FY 2010-11
________________________________________________________________________

Gross market borrowing programme of the govt. was earlier placed at Rs. 457000 crore in
FY 2010-11 whereas the net borrowing of the government was placed at Rs. 345000 crores
in FY 2010-11. However, gross market borrowing programme of the government has been
reduced by Rs. 10000 crore in the current fiscal to Rs. 447000 crore.

The reduction in gross market borrowing programme of the government is mainly on


account of collection of Rs. 106336 crore through auction of 3G spectrums & Broadband
Wireless Access (BWA), as against the estimated budget of around Rs. 35000 crore,
thereby providing surplus non-tax revenue of around Rs. 71000 crore. Taking into
consideration the additional demand for grants of Rs. 55000 crore from the surplus non-
tax revenue, market borrowing programme has been reduced by Rs. 10000 crore in the
current fiscal.

Sl Borrowing Programme (Rs crore) 2009-10 2010-11 Change (y-o-y)


No.
1 Fiscal Deficit of the Centre 414041 381408 -32633
2 Gross Market Borrowings 451,000 447,143 -3,857
3 Less, Repayments of maturing G-Secs 52,589 112,133 59,544
4 Net Market Borrowings (2-3) 398,411 335,010 -63,401
Less,
5 OMO 57,487 0
6 MSS Desequestering 33,000 0
7 MSS Unwinding 53,031 0
8 Net Supply of Papers (4-5-6-7) 254,893 335,010 80,117

As against the borrowing programme of Rs. 287000 crore, the actual borrowing was
reduced to Rs. 284000 crore in H1 of FY 2010-11. The borrowing programme for H2 of FY
11 has been reduced by Rs. 7000 crores to Rs. 163000 crore.

The market borrowing programme is mainly into the 3rd quarter of the current fiscal and
only 33% of the market borrowing to take place in the 4th quarter of the current fiscal.

Taking into consideration the RBI’s calendar of second half borrowing, redemption of
government papers and coupon inflows during Q3 & Q4, overall liquidity in the system is
likely to be under strain in the 3rd quarter and improve in the 4th quarter of the current
fiscal.

The market borrowing programme is around Rs. 44000 crore in October 2010, Rs. 33000
crore each in the month of November 2010, December 2010 and January 2011 and Rs.
20000 crore in February 2011. There are no actions scheduled in the month of March 2011.

As on 4th November 2010, RBI has completed 75.8% of the revised market borrowing
programme of the government.

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Disclaimer
________________________________________________________________________

The views expressed are of the economists preparing this report and not necessarily
of the Bank. The objective of the report is to provide information on economy and
banking and not meant to serve as the basis for taking decisions based on
projections/outlook for various macroeconomic indicators. The information contained
in the document is extracted from different public sources. Union Bank of India does
not guarantee the accuracy, adequacy or completeness of any information as the all
the all the information has been taken from various sources believed to be correct.
We are not responsible for any factual error for whatsoever reasons. Other usual
disclaimers apply.

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