Dr. Y. Venugopal Reddy,
Governor, in a meeting with Chief Executives of major commercial banks today presented
the Annual
Policy Statement for the Year 2007-08. This Statement consists of two
parts: Part I. Annual Statement on Monetary Policy for the Year 2007-08; and Part
II. Annual Statement on Developmental and Regulatory Policies for the Year 2007-08.
Highlights
- Greater
emphasis on price stability and well-anchored inflation expectations while ensuring
a monetary and interest rate environment that supports growth momentum.
- Swift
response with all appropriate measures to all situations impinging on inflation
expectations and the growth momentum
- Renewed
focus on credit quality and orderly financial markets conditions in securing macroeconomic,
in particular, financial stability.
- Bank
Rate, Reverse Repo Rate and Repo Rate kept unchanged.
- Scheduled
banks required to maintain CRR of 6.5 per cent with effect from the fortnight
beginning April 28, 2007.
- GDP
growth projection for 2007-08 at around 8.5 per cent.
- Inflation
to be contained close to 5.0 per cent during 2007-08. Going forward, the resolve
is to condition policy and perceptions for inflation in the range of 4.0-4.5 per
cent over the medium term.
- M3
expansion to be contained at around 17.0-17.5 per cent during 2007-08.
- Deposits
projected to increase by around Rs.4,90,000 crore during 2007-08.
- Adjusted
non-food credit projected to increase by around 24.0-25.0 per cent during 2007-08,
implying a graduated deceleration from the average of 29.8 per cent over 2004-07.
- Appropriate
liquidity to be maintained to meet legitimate credit requirements, consistent
with price and financial stability.
- Ceiling
interest rate on FCNR (B) deposits reduced by 50 basis points to Libor minus 75
basis points.
- Ceiling
interest rate on NR(E)RA deposits reduced by 50 basis points to LIBOR/SWAP rates.
- Average
cut-off yield on 182-day Treasury Bills to be used as a benchmark rate for floating
rate bonds.
- Working
Group to be set up to go into all the relevant issues and suggest measures to
facilitate the development of interest rate futures market.
- Overseas
investment limit (total financial commitments) for Indian companies enhanced to
300 per cent of their net worth.
- Listed
Indian companies limit for portfolio investment abroad in listed overseas companies
enhanced to 35 per cent of net worth.
- Aggregate
ceiling on overseas investment by mutual funds enhanced to US $ 4 billion.
- Prepayment
of external commercial borrowings (ECBs) without prior Reseve Bank approval increased
to US $ 400 million.
- Present
limit for individuals for any permitted current or capital account transaction
increased from US $ 50,000 to US $ 100,000 per financial year in the liberalised
remittance scheme.
- A
Working Group on Currency Futures to be set up to suggest a suitable framework
to operationalise the proposal in line with the current legal and regulatory framework.
- Risk
weight on loans up to Rs.1 lakh against gold and silver ornaments for all categories
of banks reduced to 50 per cent.
- Introduction
of a credit guarantee scheme for distressed farmers.
- Indian
banks permitted to extend credit and non-credit facilities to step-down subsidiaries
within the existing prudential limits and some additional safeguards.
- Banks
and primary dealers permitted to begin transactions in single-entity credit default
swaps.
- Risk
weight on residential housing loans to individuals for loans up to Rs.20 lakh
reduced to 50 per cent as a temporary measure.
- Existing
relaxed prudential norms applicable to Tier I and Tier II urban cooperative banks
extended by one year.
- Ceiling
rate of interest payable by NBFCs (other than RNBCs) on deposits raised by 150
basis points.
Details
Domestic Developments
- The
advance estimates of the Central Statistical Organisation (CSO) placed real GDP
growth at 9.2 per cent for 2006-07, over and above 9.0 per cent in 2005-06.
- The
year-on-year wholesale price index (WPI) inflation was 5.7 per cent in end-March
and 6.1 per cent on April 7, 2007, after moderating from an intra-year peak of
6.7 per cent in end-January 2007, but higher than 4.1 per cent at end-March, 2006.
- The
average price of the Indian basket of international crude oil increased to a peak
of US $ 71.1 per barrel in July 2006, but declined to US $ 53.0 per barrel in
January 2007 before increasing to US $ 64.0 per barrel as on April 20, 2007.
- Money
Supply (M3) growth, on a year-on-year basis, increased by 20.8 per cent (Rs.5,67,372
crore) in 2006-07 as compared with 17.0 per cent (Rs.3,96,881 crore) in 2005-06.
- Reserve
money increased by 23.7 per cent (Rs.1,35,892 crore) during 2006-07, higher than
the increase of 17.2 per cent (Rs.83,922 crore) in the previous year.
- Aggregate
deposits of scheduled commercial banks (SCBs) increased by 23.0 per cent (Rs.4,85,210
crore) during 2006-07 as against 18.1 per cent (Rs.3,23,913 crore) in 2005-06.
- Non-food
credit extended by SCBs increased by 28.0 per cent (Rs.4,10,285 crore) on top
of 31.8 per cent (Rs.3,54,193 crore) in the previous year, exhibiting some moderation
from the sustained growth during 2003-06.
- Incremental
non-food credit-deposit ratio edged down to 84.6 per cent during 2006-07 from
109.3 per cent in the previous year.
- During
2006-07, financial markets shifted from conditions of easy liquidity to occasional
spells of tightness necessitating injection of liquidity through the LAF. The
build-up of cash balances of the Government and shortage of collateral as a consequence
of steady draw-down of excess SLR holdings exacerbated the tightening of liquidity.
- The
total overhang of liquidity under the LAF, the Market Stabilisation Scheme (MSS)
and surplus cash balances of the Central Government taken together increased from
an average of Rs.74,334 crore in March 2006 to Rs.97,449 crore in March 2007.
- Financial
markets experienced generally stable conditions during the greater part of 2006-07,
albeit with some volatility in the second half amidst heightened activity
as volumes increased steadily and interest rates firmed up in all segments, particularly
in the uncollateralised call/notice money market during the last quarter of the
year.
- Scheduled
commercial banks’ appetite for Government paper revived during 2006-07 as their
investment in Government and other approved securities increased by Rs.74,706
crore in contrast to a decline of Rs.22,809 crore in 2005-06.
- Commercial
banks’ holdings of Government and other approved securities declined from 31.4
per cent of the banking system’s net demand and time liabilities (NDTL) in March
2006 to 28.0 per cent in March 2007.
- Interest
rates on deposits of over one year maturity of public sector banks (PSBs) moved
up from 5.75-7.25 per cent in April 2006 to 7.25-9.50 per cent in March 2007.
- The
benchmark prime lending rates (BPLRs) of PSBs and private sector banks increased
from 10.25-11.25 per cent and 11.00-14.00 per cent to a range of 12.25-12.75 per
cent and 12.00-16.50 per cent, respectively, during the same period.
- The
BSE Sensex declined from 11,280 at end-March 2006 to a intra-year trough of 8,929
on June 14, 2006 but thereafter rallied to the peak of 14,652 on February 8, 2007
but subsequently moderated to 13,072 by end-March 2007.
- During
2006-07, the Central Government’s net market borrowing at Rs.1,11,275 crore was
97.7 per cent of the budgeted amount and gross market borrowing of Rs.1,79,373
crore was 98.6 per cent of the budgeted amount.
- The
weighted average yield on primary issuance of the Central Government’s dated securities
rose by 55 basis points to 7.89 per cent in 2006-07 from 7.34 per cent in the
previous year.
- The
Reserve Bank of India (Amendment) Act, 2006 gives discretion to the Reserve Bank
to decide the percentage of scheduled banks’ demand and time liabilities to be
maintained as CRR without any ceiling or floor. Consequent to the amendment, no
interest will be paid on CRR balances so as to enhance the efficacy of the CRR,
as payment of interest attenuates its effectiveness as an instrument of monetary
policy. The revised definition of "repo" and "reverse repo"
provided under the amendment would facilitate transactions of market participants/banks
in these instruments. The amendment also provides the Reserve Bank with the statutory
backing for regulating the money market and also for regulating trading ofover-the-counter
derivatives.
- The
Reserve Bank of India reconstituted the TAC in January 2007 with a view to obtaining
continued benefit of expert opinion from the external experts with a tenure up
to January 31, 2009. The reconstituted TAC has five external members and two members
of the Central Board of the Reserve Bank. The Committee is chaired by the Governor,
with the Deputy Governor in charge of monetary policy as
vice-chairman and
other Deputy Governors as members.
External
Developments - In
US dollar terms, merchandise exports increased by 19.3 per cent during 2006-07
(April-February) as compared with 26.3 per cent in the corresponding period of
the previous year. Imports showed an increase of 27.8 per cent as compared with
32.7 per cent in the corresponding period of the previous year.
- While
the increase in oil imports was lower at 32.6 per cent during 2006-07 (April-February)
as compared with 49.7 per cent in the corresponding period of the previous year,
non-oil import growth at 25.7 per cent was comparable to 26.4 per cent for the
same period.
- India’s
foreign exchange reserves, including valuation changes, recorded an increase of
US $ 25.6 billion during April-December 2006 and rose to reach a level of US $
199.2 billion by end-March 2007.
- The
Indian foreign exchange market witnessed generally orderly conditions during 2006-07
with the exchange rate exhibiting two-way movements. The rupee appreciated by
2.3 per cent against the US dollar and 2.7 per cent against the Japanese yen,
but depreciated by 6.8 per cent against the euro and by 9.0 per cent against the
pound sterling during 2006-07.
Global
Developments - The
world economy expanded strongly in 2006 and achieved a four-year run of sustained
growth that began in 2003.
- According
to the World Economic Outlook of the International Monetary Fund, global real
GDP growth, on a purchasing power parity basis, is expected to decelerate from
5.4 per cent in 2006 to 4.9 per cent in 2007 and 2008.
- International
foodgrains prices, in particular, wheat and maize, scaled record levels in 2006
as global cereal output fell by 2.7 per cent from the previous year.
- globally,
headline inflation has picked up in the wake of increase in commodity prices,
and core inflation has also generally remained firm, which is likely to pose risks
to inflation expectations as international crude prices have started rising again.
- Globally,
financial risks have increased notably emanating from the behaviour of oil prices,
adverse developments in the US housing market, persistence of global imbalances,
large leveraged positions in financial markets, and possible emergence of inflationary
pressures.
- Monetary
policy authorities the world over are vigilant about threats to inflation expectations
and are watchful about the emergence of excessive volatility in asset prices,
underpricing of risks and disorderly conditions in currency markets.
- Some
central banks have recently paused in their policy cycles viz., the US;
the Bank of Canada; Bank Negara Malaysia; and the Banco de Mexico. Some other
central banks have cut back their policy rates in recent months, usually on the
back of earlier strong actions to contain inflation. These include Bank Indonesia
(BI); the Banco Central doBrasil; the Banco Central de Chile and the Bank of Thailand.
The central banks that have tightened their policy rates include the ECB; the
Bank of England, the Bank of Japan; the Reserve Bank of Australia; the Reserve
Bank of New Zealand; the People’s Bank of China; and the Bank of Korea.
Overall
Assessment - While
there is evidence of structural changes underlying the recent Indian growth experience,
there are also indications that the upsurge of demand pressures may contain a
cyclical component. The structural changes include a step up in the investment
rate supported by a sizeable increase in the rate of gross domestic saving, the
growing linkages of the Indian economy with the global economy and the indications
of improvements in productivity in industry and services.
- Among
the cyclical factors, first, robust global GDP growth has been supportive of high
growth in India. Second, the persistence of high growth in bank credit and money
supply, the pick-up in non-oil import growth and the widening of the trade deficit
together indicate pressures on aggregate demand. Third, cyclical forces are also
evident in the steady increase in prices of manufactures, resurgence of pricing
power among corporates, indications of wage pressures in some sectors, strained
capacity utilisation and elevated asset prices.
- A
significant worrisome feature of domestic developments in 2006-07 is the firming
up of inflation, which represents the key downside risk to the evolving macroeconomic
outlook. The recent hardening of international crude prices has heightened the
uncertainty surrounding the inflation outlook.
- A
careful assessment of the manner in which inflation is evolving in India reveals
that primary food articles have contributed significantly to inflation during
2006-07. At the same time, prices of manufactured products account for well above
50 per cent of headline inflation.
- Indian
financial markets have experienced some volatility in the fourth quarter of 2006-07
alongside sizeable swings in liquidity and a hardening of interest rates across
the spectrum. During episodes of tightness, contrasting conditions were often
observed when short-term interest rates had firmed up but long-term rates had
declined in the Government securities market.
- While
capital flows to emerging market economies and, in particular, to Asia in 2006
have reflected the improvement in macroeconomic performance, they were also driven
by a search for yields and a stronger appetite for risk. Consequently, reversals
of capital flows can pose challenges to emerging economies, particularly in the
context of withdrawal of monetary accommodation in developed economies.
- In
the event of demand pressures building up, increases in interest rates may be
advocated to preserve and sustain growth in a non-inflationary manner. Such monetary
policy responses, however, increase the possibility of further capital inflows,
apart from the associated costs for growth and potential risks to financial stability.
Thus, foreign exchange inflows can potentially reduce the efficacy of monetary
policy tightening by expanding liquidity.
Stance
of Monetary Policy for 2007-08 - Real
GDP growth in 2007-08 may be placed at around 8.5 per cent, assuming
no further
escalation in international crude prices and barring domestic or external shocks. - In
view of the lagged and cumulative effects of monetary policy on aggregate demand
and assuming the absence of domestic and external shocks, the policy endeavour
would be to contain inflation close to 5.0 per cent in 2007-08.
Developmental
and Regulatory Policies Interest
Rate Prescriptions - The
interest rate ceiling on FCNR (B) deposits reduced by 50 basis points to Libor
minus 75 basis points with immediate effect.
- The
interest rate ceiling on NR(E)RA deposits reduced by 50 basis points to LIBOR/SWAP
rates with immediate effect.
Financial
Markets - A
‘Non-Competitive Bidding Scheme’ in the auctions of State Development Loans (SDLs)
to be introduced in the financial year 2007-08.
- The
base rate for new floating rate bonds (FRBs) is proposed to be the average implicit
cut-off yield emerging in the last three auctions of 182-day Treasury Bills held
before the coupon reset date.
- The
reporting platforms for corporate bonds have already been established by stock
exchanges as per the Securities and Exchange Board of India (SEBI) guidelines.
The Fixed Income Money Market and Derivatives Association (FIMMDA) is also in
the process of setting up a reporting platform for over-the-counter (OTC) trades
in corporate bonds and providing a consolidated ticker service for reporting all
trades in corporate bonds. Widening of the repo market to include corporate bonds
will be considered after the proposed trading platforms stabilise and robust clearing
and settlement systems (Delivery versus Payment system) are established.
- The
CCIL is being advised to start a trade reporting platform for Rupee Interest Rate
Swaps (IRS).
- A
Working Group is being set up to go into all the relevant issues relating to interest
rate derivatives and to suggest measures to facilitate the development of interest
rate futures market.
- The
overseas investment limit (total financial commitments) for Indian companies investments
in joint ventures (JVs)/ wholly owned subsidiaries (WOS) abroad to be enhanced
from the existing 200 per cent of net worth to 300 per cent of net worth, as per
the last audited balance sheet.
- It
has been decided to introduce a revised reporting framework on overseas investments
for monitoring capital flows.
- The
limit for portfolio investment abroad in listed overseas companies by listed Indian
companies enhanced from 25 per cent of net worth to 35 per cent of net worth.
- The
aggregate ceiling on overseas investment by mutual funds to be increased from
US $ 3 billion to US $ 4 billion.
- Prepayment
of external commercial borrowings (ECBs) up to US $ 400 million to be allowed
as against the existing limit of US $ 300 million by authorised dealer banks without
prior approval of the Reserve Bank, subject to compliance with stipulated minimum
average maturity period as applicable to loans.
- The
present remittance limit of US $ 50,000 to be enhanced to US $ 100,000 per financial
year for any permitted current or capital account transaction or a combination
of both by individuals.
- The
range of hedging tools available to the market participants to be expanded.
- Authorised
dealer Category-I banks to be allowed to permit domestic producers/users to hedge
their price risk on aluminium, copper, lead, nickel and zinc in international
commodity exchanges, based on their underlying economic exposures and to permit
actual users of aviation turbine fuel (ATF) to hedge their economic exposures
in the international commodity exchanges based on their domestic purchases.
- At
present, forward contracts booked by importers and exporters of goods and services
in excess of 50 per cent of the eligible limits have to be on deliverable basis
and cannot be cancelled. This limit is to be enhanced to 75 per cent.
- The
forward contracts entered by residents for hedging overseas direct investments
to be allowed to be cancelled and rebooked.
- Small
and medium enterprises (SMEs) to be permitted to book forward contracts without
underlying exposures or past records of exports and imports through authorised
dealers with whom the SMEs have credit facilities. The SMEs are also to be permitted
to freely cancel and rebook the contracts.
- Resident
individuals to be permitted to book forward contracts without production of underlying
documents up to an annual limit of US $ 100,000 which can be freely cancelled
and rebooked.
- A
Working Group to be set up on Currency Futures to study the international experience
and suggest a suitable framework to operationalise the proposal, in line with
the current legal and regulatory framework.
- In
respect of resident corporates, authorised dealers be allowed to:
- Permit
remittances on account of donations by corporates for specified purposes, subject
to a limit of 1 per cent of their foreign exchange earnings during the previous
three financial years or US $ 5 million, whichever is lower.
- Permit
Indian companies to remit up to US $ 10 million as against the current limit of
US $ 1 million for consultancy services for executing infrastructure projects.
- Allow
remittance of foreign exchange towards reimbursement of pre-incorporation expenses
incurred in India where the remittance does not exceed 5 per cent of the investment
brought into India or US $ 100,000 whichever is higher, on the basis of certification
from statutory auditors.
- Permit
remittances on account of cash calls for the purpose of oil exploration, provided
the operator/ consortium member in India submits documents to the satisfaction
of the authorised dealer.
- Allow
remittances on account of requests from Business Process Outsourcing (BPO) companies
towards payment of the cost of equipment to be installed at overseas sites in
connection with setting up of International Call Centres, subject to specified
terms and conditions.
- Open
foreign currency accounts in India for ship manning/ crew managing agencies that
are rendering services to shipping companies incorporated outside India.
- Remit
winding up proceeds of companies under liquidation, subject to orders issued by
the official liquidator or a court in India or under any scheme framed by the
Government of India and also subject to tax compliance.
- A
uniform period of 6 months for surrender of received/ unspent/ unused foreign
exchange from the date of receipt/ purchase/ acquisition/ date of return of the
resident individual traveller.
- Authorised
dealers to be allowed to open escrow/ special accounts on behalf of non-residents
corporates, subject to specific conditions where such accounts are required to
be opened in terms of the SEBI regulations for open offers/delisting offers/exit
offers and the like.
- The
facility of operation of accounts by power of attorney holder is to be extended
to NRO account holders.
- At
the request of the depositor, authorised dealers to be allowed to permit remittance
of the maturity proceeds of FCNR (B) deposits to third parties outside India,
provided the authorised dealer is satisfied about the bonafides of the
transaction.
Credit
Delivery Mechanisms and Other Banking Services - Revised
guidelines on lending to the priority sector by all SCBs are being issued
shortly.
- The
requirement of "no due" certificate to be dispensed with for small loans
up to Rs.50,000 to small and marginal farmers, share-croppers and the like and
instead, obtain self-declaration from the borrower.
- Proposed
to accept certificates provided by local administration/ panchayati raj
institutions regarding the cultivation of crops in case of loans to landless labourers,
share-croppers and oral lessees.
- The
risk weight on loans up to Rs.1 lakh against gold and silver ornaments to be reduced
to 50 per cent from the existing level of 125 per cent.
- RRBs
to be allowed to take up corporate agency business, without risk participation,
for distribution of all insurance products, including health insurance and animal
insurance.
- A
credit guarantee scheme for distressed farmers to be introduced.
- Proposed
to undertake an evaluation of the progress made in the districts achieved 100
per cent financial inclusion by an independent external agency to draw lessons
for further action in this regard.
- A
Working Group to be constituted for the Union Territory (UT) of Lakshadweep to
recommend measures for enhancing the outreach of banking services in the UT.
- State
Level Bankers’ Committee convenor banks to be advised to set up, on a pilot basis,
a financial literacy-cum-counselling centre in any one district, and based on
the experience gained, to ask the concerned lead banks to set up such centres
in other districts.
- Banks
are urged to scale up IT initiatives for financial inclusion speedily while ensuring
that solutions are highly secure, amenable to audit, and follow widely-accepted
open standards to ensure eventual inter-operability among the different systems.
- An
evaluation of the bank – self help group (SHG) linkage programme to be conducted
through the regional offices of the Reserve Bank with a view to ascertaining the
degree of transparency in maintaining the accounts by the SHGs and their adherence
to well-accepted best practices.
- The
boards of banks are advised to lay down internal principles and procedures so
that usurious interest, processing and other charges are not charged.
- Proposed
to extend the appeal option under the Banking Ombudsman (BO) Scheme, 2006 to decisions
of the BO rejecting complaints relating to matters falling within the grounds
of complaint specified under the Scheme.
- The
Reserve Bank of India Note (Refund) Rules (as amended up to 1980) to be modified
in order to make it easier for the public to obtain the refund value in respect
of mutilated notes.
Prudential
Measures - Indian
banks to be permitted to extend credit and non-credit facilities to step-down
subsidiaries which are wholly owned by the overseas subsidiaries of the Indian
corporates, within the existing prudential limits and some additional safeguards.
- Introduction
of credit derivatives in a calibrated manner. To begin with, banks and primary
dealers to be permitted to begin transacting in single-entity credit default swaps
(CDS).
- Disclosure
of segment reporting under Accounting Standard 17 enhanced to include more categories
of corporate/ wholesale banking, retail banking and other banking business.
- The
risk weight on the residential housing loans to individuals to be reduced from
the existing 75 per cent to 50 per cent as a temporary measure. This dispensation
will be applicable for loans up to Rs.20 lakh and will be reviewed after one year,
keeping in view the default experience and other relevant factors.
Institutional
Developments - The
Indian Financial Network (INFINET) system to be operationalised as a Multi-Protocol
Label Switching (MPLS) network by the Institute for Development and Research in
Banking Technology (IDRBT).
- Centralised
Public Accounts Department (CPAD) System to improve management of Central and
State Governments’ accounting transactions to be extended to cover all the Reserve
Bank offices during the year 2007-08.
- Processing
fees waived for transactions relating to RTGS, ECS, EFT and NEFT up to March 31,
2008.
- Proposed
to prepare comprehensive draft guidelines on minimum eligibility criteria to become
direct members of the clearing houses and to place these guidelines on the Reserve
Bank’s website for comments/feedback by May 31, 2007. The eligibility criteria
will also cover membership in RTGS, NEFT, ECS and INFINET connectivity.
- Annual
review of payment and settlement systems to be introduced with effect from the
year ending March 31, 2007.
- Granting
of branch licenses to be considered to well-managed and financially sound Urban
Co-operative banks (UCBs) in States that have signed Memoranda of Understanding
(MoUs), subject to fulfillment of certain parameters.
- Guidelines
to UCBs on the various options for raising capital to be issued by May 31, 2007.
- The
existing relaxed prudential norms applicable to Tier I and Tier II UCBs to be
extended by one year.
- All
UCBs in Grade I and II with a net worth of Rs.10 crore and registered in a State
that has signed the MoU with the Reserve Bank or under the Multi-State Co-operative
Societies Act to be allowed to undertake insurance business as corporate agents,
without risk participation.
- For
claims payable by DICGC to depositors, it is proposed to treat Joint deposits
held in the names of ‘A & B’ and ‘B & A’ to be two separate accounts eligible
for maximum claim of Rs.1 lakh each.
- The
ceiling on the rate of interest payable by NBFCs (other than RNBCs) on deposits
to be increased by 150 basis points to 12.5 per cent per annum and such interest
would be paid or compounded at rests which should not be shorter than monthly
rests.
- The
Government and the Reserve Bank of India constituted a Committee on Financial
Sector Assessment to undertake a comprehensive self-assessment of the Indian financial
sector using the Handbook brought out by the World Bank and the IMF as the base.
The Committee is expected to lay out a road-map for further reforms in a medium-term
perspective.
- An
Internal Working Group to be constituted to examine the report of the High-Powered
Expert Committee (HPEC) on Making Mumbai an International Financial Centre and
implement the recommendations as appropriate.
G. Raghuraj Deputy General Manager Press
Release : 2006-2007/1454 |