Monetary and liquidity conditions were tightened through exceptional liquidity measures in
order to contain exchange market pressures and dampen volatility in the forex market. The MSF
rate which was raised by 200 bps in July 2013, became the effective policy rate. With the ebbing
of exchange market pressures, these measures are being rolled back in a calibrated manner.
Notwithstanding the tightening, significant primary liquidity injection was done through LAF,
MSF and OMO, besides increase in recourse to standing re-finance facilities. Money supply
growth has been largely in line with the indicative trajectory. Credit growth has accelerated
since mid-July, partly due to the substitution of costlier money market sources of finance by
corporates with bank credit. Going forward, with the normalisation of exceptional monetary
measures under way, incremental calibration will be shaped by changes in the growth-inflation
balance, keeping macroeconomic stability in consideration.
The Reserve Bank tightened liquidity
during Q2 of 2013-14, raising rupee
funding costs to curb forex volatility
IV.1 Faced with a sharp depreciation of the
rupee consequent on the sudden surge in
capital outflows following indications of
tapering of the US Fed’s quantitative easing
programme, the Reserve Bank hiked shortterm
interest rates and compressed domestic
money market liquidity as a first line of
defence. The measures taken included a 200
basis points (bps) hike in the marginal standing
facility (MSF) rate to 10.25 per cent; a cap on
daily LAF borrowing to 0.5 per cent of NDTL
of respective banks as against the earlier
practice of unlimited access against excess
SLR holdings; and a hike in the minimum daily cash reserve ratio (CRR) requirement to 99 per
cent from 70 per cent of the requirement.
Weekly auctions of cash management bills
(CMBs) were also conducted to drain out the
liquidity. These measures moved up the call
rate to the MSF rate, making the latter the
effective policy rate in line with policy intent
(Chart IV.1a).
IV.2 With tighter liquidity, the average daily
liquidity injection under LAF (including MSF)
increased from `526 billion in July 2013 to
`1,131 billion in September 2013. The increase
in government cash balances with the Reserve
Bank and advance tax outflows also contributed
towards the tightening of liquidity in September
2013. The liquidity tightening measures shifted
the entire yield curve upwards with inversion
visible at the short-end in line with the policy objective. It also led to a sizeable increase in
corporate bond yields and commercial paper
(CP) discount rates. In order to prevent
liquidity conditions from becoming too tight,
which would have excessively impacted
financing conditions, the Reserve Bank
undertook two OMO purchase auctions in
August 2013 injecting primary liquidity of
`125 billion (Chart IV.1b). Additional liquidity
of `247 billion was also injected on a temporary
basis by providing two-day funds to banks
through the MSF on Saturday (September 14,
2013) to counter the effect of advance tax
outflows.
Exceptional liquidity measures being
rolled back in a calibrated manner as
exchange rate pressures ease
IV.3 Taking into account the easing of the
exchange rate pressures since September 2013
and evolving macroeconomic conditions, the
Reserve Bank in its Mid-Quarter Monetary
Policy Review (September 20, 2013) moved
towards normalising monetary measures. In
order to reduce the costs of funds, it reduced the
MSF rate by 75 bps to 9.5 per cent. The
minimum daily CRR balance maintained by the
banks was reduced to 95 per cent of the
requirement from 99 per cent to provide banks
with the flexibility to better manage their
liquidity situation. However, considering
inflation risks, the repo rate was increased by
25 bps to 7.5 per cent. The Reserve Bank also
signalled its intention to normalise the conduct and operations of monetary policy and to revert
to the LAF repo rate as the operational policy
interest rate.
IV.4 As stable financial market conditions
persisted, the MSF rate was further lowered by
50 bps to 9.0 per cent with effect from October
7, 2013. In continuation of the Reserve Bank’s
assurance on adequate liquidity, an OMO
purchase auction was conducted on October 7,
2013 injecting liquidity of around `100 billion.
As an additional liquidity enhancing measure
and for developing the term money market, the
Reserve Bank introduced weekly variable rate
term repos of 7-day and 14-day tenors for an
amount equivalent to 0.25 per cent of the NDTL
of the banking system. As a result, total access
to funds from the Reserve Bank augmented to
1.25 per cent of NDTL (i.e., about ` 1 trillion)
consisting of 0.5 per cent of NDTL under the
overnight repo, about 0.5 per cent of NDTL
under export credit re-finance (ECR) facility
and 0.25 per cent of NDTL under term repo.
The banks can also meet any further demand
for liquidity through MSF. The first round of
7-day term repo was conducted on October 11,
2013 (`190 billion) followed by 14-day term
repo on October 18, 2013 (`195 billion). As a
result of these measures, the liquidity situation
eased in October 2013.
Reserve money growth boosted by primary
liquidity injection
IV.5 Reserve money growth picked up in
recent months to 8 per cent y-o-y as at mid-
October, while the same adjusted for CRR changes was around 10 per cent. Liquidity
injections through LAF, MSF and OMOs have
aided the increase in Reserve Bank’s net credit
to the central government. Though net foreign
assets (adjusted for revaluation) on the sources
side registered a decline during the year, it was
more than offset by the increase in the Reserve
Bank’s net credit to the centre (Chart IV.2).
Broad money growth is in line with
trajectory
IV.6 Money supply growth hovered around
12.5 per cent y-o-y during H1 of 2012-13,
broadly in line with the indicative trajectory of
13 per cent for 2013-14, and is currently at 13.2
per cent (October 4, 2013). Currency expansion
that had been lower in H1 of 2013-14 has picked up in October reflecting festive demand (Chart
IV.3a). On the sources side, bank credit to the
commercial sector has picked-up since middle
of Q2 (Table IV.1). Consequently, the wedge
between the growth in bank credit and aggregate
deposit of scheduled commercial banks (SCBs)
widened to about 4 percentage points at the end
of Q2 (Chart IV.3b).
Credit off-take accelerates with greater
recourse to bank finance by corporates
IV.7 Non-food credit growth increased from
14.0 per cent y-o-y on July 12, 2013 to 17.9 per
cent on October 4, 2013, markedlyhigher than
the indicative trajectory of 15 per cent. In part,
this trend was supported by corporate firms
substituting their market borrowings, especially through CPs, by bank borrowings (Table IV.2).
This substitution occurred as money market
rates, including discount rates on CPs firmed up
and primary market conditions remained
subdued.
Table IV.1: Monetary Indicators |
Item |
Outstanding amount
(` billion) 04-Oct-13 |
FY variations
(per cent) |
Y-o-Y variations
(per cent) |
2012-13 |
2013-14 |
05-Oct-12 |
04-Oct-13 |
1 |
2 |
3 |
4 |
5 |
6 |
Reserve Money (M0) |
15,793.3 |
2.5 |
4.3 |
5.3 |
8.0 |
Reserve Money (Adjusted) |
|
3.6 |
4.0 |
12.4 |
9.9 |
Broad Money (M3) |
89,748.7 |
7.7 |
7.1 |
13.6 |
13.2 |
Main Components of M3 |
|
|
|
|
|
Currency with the Public |
11,602.9 |
3.1 |
1.4 |
11.1 |
10.1 |
Aggregate Deposits |
78,108.7 |
8.4 |
8.0 |
14.0 |
13.7 |
of which: Demand Deposits |
7,605.0 |
-2.5 |
1.8 |
5.5 |
9.7 |
Time Deposits |
70,503.7 |
9.8 |
8.7 |
15.0 |
14.1 |
Main Sources of M3 |
|
|
|
|
|
Net Bank Credit to Government |
29,518.3 |
9.0 |
9.0 |
19.0 |
14.2 |
Bank Credit to Commercial Sector |
60,468.6 |
4.8 |
6.7 |
16.2 |
16.4 |
Net Foreign Assets of the Banking Sector |
16,936.9 |
-0.2 |
3.5 |
-0.4 |
9.9 |
Note: 1. Data are provisional.
2. Data for reserve money pertain to October 18, 2013. |
Table IV.2: Banking sources dominate resource flow to the commercial sector |
(` billion) |
|
April-March |
April 1 - October 4 |
2011-12 |
2012-13 |
2012-13 |
2013-14 |
1 |
2 |
3 |
4 |
5 |
A. Adjusted Non-Food Bank Credit (NFC) |
6,773 |
6,849 |
2,177 |
3,905 |
i) Non-food credit |
6,527 |
6,335 |
1,919 |
4,036 |
of which: petroleum and fertiliser credit |
116 |
141 |
-88 |
-111 $ |
ii) Non-SLR investment by SCBs |
246 |
514 |
257 |
-131 |
B. Flow from Non-Banks (B1+B2) |
5,383 |
7,335 |
3,267 |
2,365 |
B1. Domestic Sources |
3,079 |
4,212 |
2,289 |
1,440 |
1. Public issues by non-financial entities |
145 |
119 |
63 |
32 ^ |
2. Gross private placements by non-financial entities |
558 |
1,038 |
268 |
305 * |
3. Net issuance of CPs subscribed to by non-banks |
36 |
52 |
898 |
147 & |
4. Net Credit by housing finance companies |
539 |
859 |
230 |
267 $ |
5. Total gross accommodation by 4 RBI-regulated AIFIs – NABARD, NHB, SIDBI & EXIM Bank |
469 |
515 |
71 |
116 ^ |
6. Systemically important non-deposit taking NBFCs (net of bank credit) |
912 |
1,188 |
618 |
484 # |
7. LIC's net investment in corporate debt, infrastructure and social sector |
419 |
441 |
141 |
89 $ |
B2. Foreign Sources |
2,304 |
3,123 |
978 |
925 |
1. External commercial borrowings/FCCBs |
421 |
466 |
88 |
181 ^ |
2. ADR/GDR issues, excluding banks and financial institutions |
27 |
10 |
10 |
1 ^ |
3. Short-term credit from abroad |
306 |
1,177 |
291 |
137 * |
4. Foreign direct investment to India |
1,550 |
1,470 |
589 |
606 $ |
C. Total Flow of Resources (A+B) |
12,156 |
14,184 |
5,443 |
6,270 |
Memo: Net resource mobilisation by mutual funds through debt (non-gilt) schemes |
-185 |
830 |
500 |
230^ |
$: Up to August 2013 ^:Up to September 2013 *: Up to June 2013 &: Up to mid-September 2013 #: Up to July 2013 |
IV.8 Given the lacklustre domestic
environment, banks need to ensure better credit
management practices when extending loans,
keeping a careful watch on their asset quality.
The Reserve Bank’s initiative to collate large
common exposures across banks and make
available the credit registry data is expected to
help mitigate this problem.
Credit growth broad-based, uptick across
sectors
IV.9 Data on sector-wise deployment of
gross non-food bank credit of select SCBs
indicate a build-up in credit to industries,
services and also personal loan category
(especially, housing) (Chart IV.4a). Overall
industrial credit growth (y-o-y) was at 17.6 per cent in end-September 2013, with sectors such
as basic metals, chemicals, infrastructure,
cement, gems and jewellery, wood and food
processing registering an above industryaverage
growth (Chart IV.4b).
IV.10 With the Reserve Bank increasing the
cost of borrowing under MSF, even while
restricting the availability of accom-modation
under the LAF repo, the modal deposit rate
increased by 20 bps (q-o-q) during Q2 (Table
IV.3). This rise was mainly with respect to short-term aturities of up to 180 days reflecting the tightening of liquidity conditions. Although the
modal base rate remained unchanged at 10.25
per cent during Q2, the weighted average
lending rate (WALR) on the outstanding bank
loans increased marginally by 4 bps (q-o-q) to
12.15 per cent in August 2013. The WALR on
fresh rupee loans sanctioned by banks increased
sharply by 42 bps to 12.04 per cent in August
2013 from 11.62 per cent in June 2013.
Normalisation of exceptional measures
underway, changes ahead will be
conditioned by high inflation and low
growth challenges
IV.11 The exceptional liquidity and monetary
policy measures taken in the face of
unprecedented exchange rate pressures were
partially rolled back in the Mid-Quarter
Monetary Policy Review on September 20 and
further on October 7, 2013. Both these moves
have lowered the effective policy rate by 125
bps. The Reserve Bank has also ensured sufficient liquidity in the system through LAF,
MSF and OMO over a period of time in line
with its assurances. Consequently, base money
growth has picked up. Credit growth has also
accelerated. With the process of normalisation
of monetary measures making headway,
monetary policy ahead would depend on how
growth-inflation dynamics evolve. Liquidity
conditions will have to be maintained at an
appropriate level keeping in view the persistence
in CPI inflation as also the slack growth
conditions.
Table IV.3: Deposit and lending rates of banks registered an increase in Q2 of 2013-14 |
(Per cent) |
Items |
Mar-12 |
Jun-12 |
Sep-12 |
Dec-12 |
Mar-13 |
Jun-13 |
Sep-13# |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
1. Domestic Deposit Rate (1-3 year tenor) |
i) Public Sector Banks |
9.00-9.75 |
8.75-9.50 |
8.50-9.30 |
8.50-9.10 |
8.75-9.10 |
8.00-9.10 |
8.00-9.50 |
ii) Private Sector Banks |
8.00-10.50 |
8.00-10.00 |
8.00-9.75 |
8.00-9.75 |
8.00-9.65 |
8.50-9.50 |
8.50-10.00 |
iii) Foreign Banks |
3.50-9.75 |
3.50-9.75 |
3.50-9.75 |
3.50-9.75 |
3.50-9.60 |
3.60-9.88 |
3.50-11.00 |
Modal Deposit Rate of SCBs (all tenors) |
7.42 |
7.40 |
7.29 |
7.33 |
7.31 |
7.26 |
7.46 |
2. Base Rate |
i) Public Sector Banks |
10.00-10.75 |
10.00-10.50 |
9.75-10.50 |
9.75-10.50 |
9.70-10.25 |
9.70-10.25 |
9.80-10.25 |
ii) Private Sector Banks |
10.00-11.25 |
9.75-11.25 |
9.75-11.25 |
9.70-11.25 |
9.70-11.25 |
9.60-11.25 |
9.80-11.50 |
iii) Foreign Banks |
7.38-11.85 |
7.38-11.85 |
7.25-11.75 |
7.20-11.75 |
7.20-14.50 |
7.20-14.00 |
6.70-14.00 |
Modal Base Rate of SCBs |
10.75 |
10.50 |
10.50 |
10.50 |
10.25 |
10.25 |
10.25 |
3. Weighted Average Lending Rate (WALR)* |
i) Public Sector Banks |
12.70 |
12.41 |
12.34 |
12.23 |
12.18 |
12.10 |
12.10 |
ii) Private Sector Banks |
12.31 |
12.42 |
12.32 |
12.14 |
12.13 |
12.10 |
12.17 |
iii) Foreign Banks |
11.86 |
12.00 |
11.64 |
11.51 |
12.10 |
12.24 |
12.66 |
WALR of SCBs |
12.58 |
12.39 |
12.30 |
12.18 |
12.16 |
12.11 |
12.15 |
#: Data on WALR pertain to August 2013.
*: Based on loan outstanding as at end-quarter.
Note: Data on WALR are provisional. |
|