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Monetary Policy Review: Key extracts

Jul 31, 2007

The salient features of the first quarter review of the Annual Statement on Monetary Policy for the year FY08 by the Reserve Bank of India's (RBI) are:

  1. The Cash Reserve Ratio (CRR) has been raised from 6.5% to 7% with effect from the fortnight beginning August 4, 2007.

  2. The RBI has withdrawn the ceiling of Rs 30 bn on its daily reverse repo market, hoping to stabilise the volatility in the overnight markets

  3. The Reserve Money growth of 29% YoY as compared to 17.2% in July 2006, has been primarily fuelled by an increase in the RBI's holding of net foreign currency assets (Rs 749 bn increase over March 2007) and net RBI credit to the government by Rs 189 bn (compared to a decline of Rs 64 bn in July 2006). That is to say, both monetary as well as fiscal policies have been expansionary.

  4. The main contributors to the foreign exchange inflows in the four months since March 2007 have been External Commercial Borrowings (US$ 8.7 bn as compared to US$ 4.4 bn in 2006), followed by net Foreign Institutional Investors (FIIs) investments (US$ 8.4 bn compared to US$ 2 bn of outflow in 2006), and FDI inflows of US$ 1.6 bn as compared to US$ 0.7 bn in 2006). NRIs have actually taken money out of bank deposits from India.

  5. Economic growth trend seems to be continuing though business optimism index scored lower levels in the first quarter of FY08. Agricultural production will depend on the monsoons that have been 93% of the normal as yet in 29 of the 35 meteorological divisions. However, area sown under kharif crops is lower than what it was a year ago except for cotton and oilseeds.

For more details on the monetary policy review, please do read our detailed analysis that will be up-linked tomorrow.

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