Liquidity conditions have eased during 2012-13, as a result of calibrated and pre-emptive
measures, which include OMO purchases and reduction in both the SLR and the CRR. The
Reserve Bank also front loaded a reduction in its repo rate by 50 basis points in April 2012.
However, with inflation remaining high, it has kept the policy rate unchanged since then. While
the reserve money growth decelerated and broad money growth remained steady in Q2 of
2012-13, the aggregate deposit and non-food credit growth have been below the indicative
trajectory. Going forward, the secondary impact of the CRR cut, appropriate liquidity conditions
and seasonal pick-up in credit demand are expected to influence the monetary aggregates, while
the trajectory of the monetary cycle will be shaped by evolving growth-inflation dynamics.
Reserve Bank injects liquidity to support
credit flow, while calibrating monetary
policy on growth-inflation dynamics
IV.1 The Reserve Bank has calibrated
monetary policy in line with evolving growth-inflation
dynamics. Without fundamentally
changing its policy stance that has primarily
sought to contain inflation and inflation
expectations over the past two years, it has been
ensuring that liquidity conditions do not tighten
excessively. As a result of the infusion of
liquidity through CRR cuts of 125 bps in Q4 of
2011-12 and again by 25 bps in September 2012
(Table IV.1), coupled with over `800 billion of
liquidity infusion through outright open market
purchases during 2012-13 so far, liquidity
conditions have remained easier in 2012-13 as
compared with 2011-12. Besides, the Reserve
Bank lowered the Statutory Liquidity Ratio
(SLR) by 100 bps with effect from August 11,
2012 – a measure that was expected to support
private credit. It also front-loaded a 50 bps
policy rate cut in April, in anticipation of
measures supportive of fiscal consolidation that
have been partly taken in September 2012
(Chart IV.1).
IV.2 Active liquidity management through
CRR, OMO and SLR has kept liquidity largely
in line with the policy objective that factored in
the persistence of inflation at a substantially
higher than the Reserve Bank’s comfort level as well as the need to ensure that supply of credit
is not a constraining factor for productive needs.
Table IV.1: Movements in Key
Policy Variables |
(Per cent) |
Effective |
Repo Rate |
Cash Reserve
Ratio |
Statutory
Liquidity
Ratio |
1 |
2 |
3 |
4 |
May 3, 2011 |
7.25 (+0.50) |
6.00 |
24.0 |
June 16, 2011 |
7.50 (+0.25) |
6.00 |
24.0 |
July 26, 2011 |
8.00 (+0.50) |
6.00 |
24.0 |
September 16, 2011 |
8.25 (+0.25) |
6.00 |
24.0 |
October 25, 2011 |
8.50 (+0.25) |
6.00 |
24.0 |
January 28, 2012 |
8.50 |
5.50 (-0.50) |
24.0 |
March 10, 2012 |
8.50 |
4.75 (-0.75) |
24.0 |
April 17, 2012 |
8.00 (-0.50) |
4.75 |
24.0 |
August 11, 2012 |
8.00 |
4.75 |
23.0 (-1.00) |
September 22, 2012 |
8.00 |
4.50 (-0.25) |
23.0 |
Note : 1. Repo indicates injection of liquidity.
2. Figures in parentheses indicate change in the key
rates in percentage points. |
Conditions transit back to a phase of
comfortable liquidity
IV.3 Since 2011-12, the liquidity conditions
can be broadly divided into three distinct phases.
After remaining within the Reserve Bank’s
comfort zone during the first phase from April
2011 to October 2011, the liquidity deficit
crossed the one per cent of NDTL level
(Chart IV.2). This large liquidity deficit was
mainly caused by forex intervention and
increased divergence between credit and deposit
growth. The deficit conditions were further aggravated by frictional factors like the build-up
of government cash balances with the Reserve
Bank that persisted longer than anticipated and
the increase in currency in circulation.
|
IV.4 The Reserve Bank had to actively manage
liquidity to provide greater liquidity cushion to
the financial system, while at the same time
guarding against the risk of resurgence of
inflationary pressure. Consequently, liquidity
conditions eased significantly in Q1 of 2012-13
and the extent of the deficit mostly returned to
the Reserve Bank’s comfort level from July
2012, marking the onset of the third phase.
Three major factors that contributed to this
turnaround in Q2 of 2012-13 were the injection
of liquidity by way of open market operations
(OMOs), decline in currency in circulation and
a decline in government cash balances with the Reserve Bank. The increased use of the export
credit refinance facility by banks after the
increase in its limit announced in the Mid-
Quarter review of June 2012 and the one per
cent reduction in the SLR announced on July
31, 2012 also helped in improving liquidity
conditions.
|
IV.5 Liquidity conditions improved
significantly in July 2012 compared with June
2012, with average daily net liquidity injection
under LAF declining to around `480 billion,
which further declined marginally in August
2012. The first half of September saw a
significant decline in liquidity injection, mainly
on account of a decline in the government’s cash
balances. Anticipating possible pressure on
liquidity in the subsequent period on account of
advance tax payment, seasonal pickup in the
credit demand and transitional pressure arising
from the currency demand during the festive
season, the Reserve Bank, in September 2012
reduced the CRR by 25 basis points, which
resulted in around `170 billion of primary
liquidity injection into the banking system. With
advance tax outflows from the banking system,
the average daily net liquidity injection
increased to more than `700 billion in the
second half of September 2012, which was less
than the quarterly spikes generally associated
with advance tax collections. There was no
auction purchase under outright open market
operation (OMO) in Q2 of 2012-13, although
there were purchases of government securities
through the NDS-OM trading platform.
IV.6 The liquidity deficit eased in the first
week of October 2012, but it has increased once
again from the second week of the month. With
less than usual front loading by the banks, the
spike was mainly on account of banks’ demand
for reserve requirements coupled with the rise
in government’s surplus with the Reserve Bank.
The average daily net liquidity injection under
the LAF was around `580 billion during
October 1-24, 2012.
|
IV.7 Overall, the liquidity stress in the banking
system declined in Q2 of 2012-13. This was
evident from the lower recourse to the marginal
standing facility (MSF) by banks during this
period. Despite the advance tax outflows and
the increase in borrowing limit under MSF from
April 2012, the SCBs did not avail of MSF in
September 2012. Moreover, the monthly
average call rate, which hovered between the
repo rate and the MSF rate during November
2011-July 2012, declined subsequently and has
mostly hovered below the repo rate since August
2012. Further, there was a sharp decline in
volatility in the call rate in this financial year so
far, as measured by the standard deviation of
the rate movements in a month (Chart IV.3).
IV.8 In general, the calibrated liquidity
management of the Reserve Bank (Chart IV.4) has addressed three crucial contemporaneous
challenges, which include facilitating credit
flows, ensuring smooth policy transmission and
smoothing operational rate. Appropriate
liquidity management provided a liquidity
cushion to facilitate credit flows to the productive
sectors of the economy. It, on the other hand,
ensured that the drawls under the Liquidity
Adjustment Facility (LAF) broadly remained
within the indicative target of (+/–) 1 per cent
of NDTL, thereby facilitating monetary policy
transmission; and finally, the decline in volatility
in the money market rate captured the central
banks’ tendency to smooth operational interest
rate in line with an optimal monetary policy
framework.
Reserve money decelerated in Q2 of
2012-13
IV.9 There was marked deceleration in reserve
money during Q2 of 2012-13. On the component
side, while the currency in circulation growth
(y-o-y) decelerated, the growth in banker’s
deposit (y-o-y) with the Reserve Bank declined
and remained negative in the financial year so
far. This decline in bankers’ deposits mainly
reflects the reduction in impounded liquidity
and, thus, the easing of liquidity conditions as
envisaged by the 150 basis point CRR reductions
since January 2012. The CRR adjusted reserve
money (y-o-y) growth remained relatively
stable and hovered around 12.5 in the financial
year so far, although it remained below the 16.5
per cent level recorded during the comparable
period in 2011-12 (Chart IV.5 and Table IV.2).
Broad money grew steadily in Q2 of 2012-
13 but remained below the indicative
trajectory
IV.10 During this financial year so far, the
money supply (y-o-y) growth hovered around
13.6 per cent. While the deceleration in reserve
money contributed to the lower broad money
growth, the countervailing increase in the
money multiplier, especially in Q2 of 2012-13,
has contributed to steadying the monetary expansion. In Q2 of 2012-13, the increase in
money multiplier has been driven by reductions
in the currency-deposit ratio and the aggregate
deposit to bankers’ deposit ratio. With a CRR
cut effective from the fortnight beginning
September 22, 2012, there was a further
reduction in the banker’s deposit to aggregate
deposit ratio, which lead to an increase in the
money multiplier (Chart IV.6).
Aggregate deposit and credit growth
decelerated
IV.11 On the component side, the year-on-year
aggregate deposit growth has decelerated. It mainly reflected the underlying trend in time
deposits, which constitute around 90 per cent
of the aggregate deposit. The moderation in the
net financial saving rate of the household sector
during 2011-12 partially reflected the slower
growth in households’ holding of bank deposits.
Moreover, low real interest rates in time
deposits and relatively high rate of returns in
alternate assets (e.g., gold) might explain some
part of the deceleration in time deposits (Chart
IV.7). The sharp decline in aggregate deposits
at end-Q2 could be due to the decline in deposit
rates announced by various banks from
September 7, 2012 as well as the advance tax outflow from the banking system. Following
the seasonal pattern, the currency with the
public also declined in Q2 of 2012-13.
Table IV.2: Monetary Indicators |
Item |
Outstanding
Amount
(` billion)
October 05, 2012 |
FY variations
(per cent) |
Y-o-Y Variations
(per cent) |
2011-12 |
2012-13 |
October
07, 2011 |
October
05, 2012 |
1 |
2 |
3 |
4 |
5 |
6 |
Reserve Money (M0)* |
14,627.4 |
0.9 |
2.5 |
18.4 |
5.3 |
Reserve Money (Adjusted)* |
|
0.9 |
3.5 |
18.7 |
12.4 |
Broad Money (M3) |
79,118.8 |
7.4 |
7.5 |
16.6 |
13.3 |
Main Components of M3 |
|
|
|
|
|
Currency with the Public |
10,545.0 |
4.2 |
2.7 |
13.9 |
11.0 |
Aggregate Deposits |
68,554.8 |
7.9 |
8.3 |
17.1 |
13.7 |
of which: Demand Deposits |
6,926.5 |
–9.1 |
–1.7 |
–2.8 |
5.4 |
Time Deposits |
61,628.2 |
10.4 |
9.6 |
20.1 |
14.7 |
Main Sources of M3 |
|
|
|
|
|
Net Bank Credit to Govt. |
25,795.8 |
9.5 |
8.9 |
23.7 |
18.8 |
Bank Credit to Commercial Sector |
51,696.0 |
5.6 |
4.2 |
19.4 |
15.6 |
Net Foreign Assets of the Banking Sector |
15,462.2 |
11.0 |
0.2 |
14.9 |
0.0 |
Note: 1. Data are provisional.
2. *: Data pertain to October 19, 2012. |
|
IV.12 Non-food credit growth, which had
generally increased during Q1 of 2012-13, has
decelerated in Q2. This has been mainly due to
the slack investment demand and slowdown in
the credit-intensive manufacturing sector. The
increased risk perception of banks could also
have played a role in the low bank credit
disbursement. Despite the positive wedge
between the y-o-y growth in credit and
aggregate deposit, the wedge between the two
narrowed in Q2 compared to Q1 of 2012-13.
The decline in the divergence between these
growth rates helped contain one of the structural
factors causing deficit liquidity in the banking
system during Q2 of 2012-13 (Chart IV.8).
|
|
IV.13 There was a deceleration in credit growth
(y-o-y) for all SCBs at end-September 2012. At
the bank-group level, the deceleration was
particularly sharp for the public sector banks
(PSBs). As PSBs are the largest lenders in terms
of outstanding credit, deceleration in their credit
growth pulls down the overall credit expansion
of all SCBs taken together. The credit growth
of the foreign banks registered an even sharper
deceleration. Private sector banks, which
registered strong credit growth in the comparable
period last year, continued to witness a robust
credit growth (Table IV.3).
IV.14 The deceleration in the credit growth
reflected the slack investment demand, slowing
economic activity and more importantly,
deteriorating credit quality, especially in the
case of PSBs. The ratio of gross non-performing
assets (NPAs) to gross advances and the net
NPA to net advances that had increased
significantly during 2011-12, rose further in Q1
of 2012-13 across the bank groups (Table IV.4).
The increases in these ratios were maximum
for the PSBs, which account for the major part
of the bank advances. The slippage ratio that
indicates the fresh NPAs increased across the
sectors signalling additional stress in the
banking sector. Restructuring of standard assets
also increased significantly for PSBs during Q1
of 2012-13. Deterioration in the assets quality
and in the macroeconomic conditions resulted in added risk aversion in the banking sector.
This led to a portfolio switch from credit
creation to investments in G-secs on the back
of large government market borrowing. The
SCBs were holding around 28 per cent of their
NDTL in SLR investments at end-September
2012.
Table IV.3: Credit Flow from Scheduled Commercial Banks |
Item |
Outstanding
As on Oct. 05,2012*
Amount (` billion) |
Variation (y-on-y) |
As on Oct. 07, 2011 |
As on Oct. 05, 2012* |
Amount |
Per cent |
Amount |
Per cent |
1 |
2 |
3 |
4 |
5 |
6 |
1. Public Sector Banks* |
34,994.5 |
4,695.7 |
18.3 |
4,616.0 |
15.2 |
2. Foreign Banks |
2,351.4 |
459.0 |
26.2 |
137.1 |
6.2 |
3. Private Sector Banks |
9,490.4 |
1,456.4 |
22.7 |
1,622.7 |
20.6 |
4. All Scheduled Comm. Banks@ |
48,093.9 |
6,766.1 |
19.5 |
6,597.2 |
15.9 |
*Excluding RRBs in public sector banks. @ Includes RRBs. |
|
IV.15 An analysis of sectoral deployment of
credit based on data from select banks (which
cover 95 per cent of total non-food credit
extended by all SCBs) for September 2012
reveals that the non-food bank credit growth
(y-o-y) to industries, services and personal loans
decelerated compared with the previous year.
The year-on-year bank credit growth to industry
at 15.6 per cent in September 2012 decelerated
considerably, from 22.9 per cent in September
2011. Deceleration in credit growth to industry
was observed in all the major sub-sectors,
barring chemical and chemical products, cement and cement products, and paper and paper
products.
Non-bank domestic sources dominated
flow of resources to the commercial sector
IV.16 The total flow of financial resources to
the commercial sector during 2012-13 (up to
October 5, 2012) has marginally declined when
compared to the corresponding period in the
previous year. Though the decline in flow has
been accounted for by both bank and non-bank
sources, the flow from non-banks has remained
an important source of financing to the
commercial sector (Table IV.5). Among the
non-bank sources, funds from domestic sources
have witnessed an increase this financial year
so far, mainly due to the higher issuance of
commercial papers and increase in net credit by
housing finance companies (HFCs). Foreign
sources of funding (up to September 2012),
however, declined compared with the previous year, mainly on account of a decline in external
commercial borrowings/ FCCBs and decline in
foreign direct investment in India.
Table IV.4: Bank Group-wise NPA Ratios |
Bank Group |
March 2012 |
June 2012 |
Gross
NPAs to
Gross
Advan ces
(%) |
Net
NPAs
to Net
Adva nces
(%) |
Slipp age
Ratio # |
Restru ctured
Standard
Asset to
Gross
Adva nces
(%) |
CRAR
(%) |
Gross
NPAs to
Gross
Adva nces
(%) |
Net NPAs
to Net
Adva nces
(%) |
Slipp age
Ratio # |
Restru ctured
Standard
Asset to
Gross
Advan ces
(%) |
CRAR
(%) |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
Public Sector Banks |
3.17 |
1.47 |
2.95 |
5.74 |
13.23 |
3.57 |
1.75 |
3.49 |
6.67 |
12.78 |
Foreign Banks |
2.68 |
0.61 |
2.35 |
0.10 |
16.74 |
2.90 |
0.83 |
2.43 |
0.08 |
15.72 |
New Private Sector Banks |
2.18 |
0.44 |
1.17 |
1.06 |
16.66 |
2.19 |
0.45 |
1.31 |
1.06 |
16.11 |
Old Private Sector Banks |
1.80 |
0.59 |
0.01 |
3.42 |
14.12 |
1.92 |
0.61 |
0.02 |
3.83 |
13.82 |
All Banks * |
2.94 |
1.24 |
2.60 |
4.69 |
14.24 |
3.25 |
1.45 |
3.04 |
5.37 |
13.74 |
Source: Latest updated OSMOS database. * Includes LABs.
# Based on the data collected from banks for special analysis. Jun-12 figures of slippage ratio are annualised. |
Table IV.5: Flow of Financial Resources to the Commercial Sector |
(` billion) |
Item |
April-March |
April 1 to Oct. 5 |
2010-11 |
2011-12 |
2011-12 |
2012-13 |
1 |
2 |
3 |
4 |
5 |
A. Adjusted Non-food Bank Credit (NFC) |
7,110 |
6,764 |
2,296 |
2,138 |
i) Non-Food Credit |
6,815 |
6,525 |
2,086 |
1,871 |
of which: petroleum and fertiliser credit |
-243 |
171 |
16 |
-94 ^ |
ii) Non-SLR Investment by SCBs |
295 |
239 |
210 |
268 |
B. Flow from Non-banks (B1+B2) |
5,341 |
5,717 |
2,714 |
2,586 |
B1. Domestic Sources |
3,011 |
3,413 |
1,066 |
1,351 |
1. Public issues by non-financial entities |
285 |
45 |
40 |
63 |
2. Gross private placements by non-financial entities |
674 |
558 |
- |
- |
3. Net issuance of CPs subscribed to by non-banks |
68 |
100 |
705 |
894 + |
4. Net credit by housing finance companies |
428 |
530 |
111 |
182 * |
5. Total gross accommodation by the four RBI regulated AIFIs - NABARD, NHB, SIDBI & EXIM Bank |
400 |
469 |
86 |
71 & |
6. Systemically important non-deposit taking NBFCs (net of bank credit) |
795 |
1291P |
- |
- |
7. LIC's gross investment in corporate debt, infrastructure and social sector |
361 |
419 |
125 |
141 ^ |
B2. Foreign Sources |
2,330 |
2,304 |
1,648 |
1,235 |
1. External Commercial Borrowings / FCCBs |
555 |
421 |
351 |
217 & |
2. ADR/GDR Issues excluding banks and financial institutions |
92 |
27 |
13 |
9 ^ |
3. Short-term credit from abroad |
502 |
306 |
137 |
291 # |
4. Foreign Direct Investment to India |
1,181 |
1,550 |
1,147 |
718 ^ |
C. Total Flow of Resources (A+B) |
12,451 |
12,481 |
5,010 |
4,724 |
Memo Item: |
|
|
|
|
Net resource mobilisation by Mutual Funds through Debt (non-Gilt) Schemes |
-367 |
-185 |
34 |
500 & |
P : Provisional. &: Up to end September 2012. ^: Up to August 2012. #: Up to June 2012.
+: September 24, 2012. *: Up to July 2012. -: Not Available. |
Monetary and liquidity conditions evolving
with growth-inflation dynamics
IV.17 The movement of operational target
(weighted average call rate) that tracks the
policy rate has evolved in line with output and
inflation gaps (Chart IV.9). Though the monetary
policy was tightened due to large inflation gap,
the economic slowdown could be attributed to
several other factors apart from monetary
tightening (see Chapter I). Despite appropriate
liquidity conditions prevailing over most of Q2
2012-13, the deceleration in non-food credit growth partly suggests exogenous or nonmonetary
factors like slack global demand and
increased risk aversion.
|