IV.1 Monetary and  liquidity aggregates that expanded at a strong pace during the first half of 2008-09 showed some moderation during the third quarter reflecting the decline in capital flows and consequent  foreign  exchange intervention by the Reserve Bank. Decline in net foreign exchange assets with the Reserve Bank during 2008-09 so far has also resulted in the moderation of expansion of base money. Expansion in bank credit to the commercial sector during 2008-09 so far has remained high. In response to the unfolding global financial market turmoil and its knock-on effect on the domestic financial market, and downturn in headline inflation, the Reserve Bank has taken a number of measures of  monetary easing since mid-September 2008. The aim of these measures was to augment domestic and foreign exchange liquidity and to enable banks to continue to lend for productive purposes while maintaining credit quality so as to sustain the growth momentum.

Monetary Survey

IV.2 Broad money (M₃)  growth, on a year-on-year (y-o-y) basis, was placed at 19.6 per cent as on January 2, 2009, which was lower than 22.6 per cent a year ago, reflecting moderation in expansion in time deposits. Expansion in the residency-based new monetary aggregate (NM₃) - which does  not directly reckon non-resident foreign currency deposits such as FCNR(B) deposits – was lower at 19.4 per cent as on January 2, 2009 than 22.7 per cent a year ago. Similarly growth in liquidity aggregate,  L₁, at end-December 2008 was lower at 19.0 per cent than 22.5 per cent a year ago (Table 29 and Chart 10).

IV.3 Deterioration in global financial conditions since September 2008 resulted in drying up of capital inflows. In response to the consequent pressure on the domestic money and foreign exchange markets, the Reserve Bank augmented rupee and dollar liquidity and strengthened the credit delivery mechanisms for sustaining the growth momentum. Accordingly, inter alia, the cash reserve ratio (CRR) has been reduced by a cumulative 4.0 percentage points to 5.0 per cent of net demand and time liabilities (NDTL) since October 11, 2008. This measure released primary liquidity into the system of the order of Rs.1,60,000 crore. The statutory liquidity ratio (SLR) was reduced by one percentage point, from 25 per cent of NDTL to 24 per cent along with relaxation in the SLR maintenance for term repo facility by 1.5 per cent of NDTL. A special refinance facility was also introduced for SCBs (excluding regional rural banks) with the limit of 1.0 per cent of each bank’s NDTL as on October 24, 2008 at the LAF repo rate up to a maximum period of 90 days (with flexibility to draw and repay during this period). This facility would be available till June 30, 2009. In addition, since  October 2008, the Reserve Bank has reduced the repo rate from 9.0 per cent to 5.5 per cent and the reverse repo rate from 6.0 per cent to 4.0 per cent.

IV.4 The growth in broad money (M₃) mainly reflected a continued strong increase in time deposits during 2008-09 so far although with some moderations. Growth in time deposits (y-o-y) as on January 2, 2009 was 22.4 per cent as compared with 25.6 per cent a year ago. This could be attributed, inter alia, to higher interest rates on bank deposits relative to postal deposits and extension of tax benefits under Section 80C for bank deposits. During 2007-08, accretion to postal deposits decelerated significantly up to November 2007 and beginning December 2007, there were net outflows from small savings schemes. This trend continued up to November 2008, the latest period for which data are available (Chart 11). Currency with the public that grew by 16.2 per cent (y-o-y) as on January 2, 2009 as compared with 15.1 per cent a year ago was the other major component in the expansion of broad money.

IV.5 On a financial year basis, growth in  during 2008-09 (up to January 2, M₃ 2009) was 12.1 per cent as compared with 13.2 per cent during the corresponding period of the previous year (Table 30).

IV.6 On the sources side, bank credit to commercial sector remained the driver of broad money (M3) while expansion in  net foreign exchange assets of the banking sector moderated to a large extent. Bank credit to the commercial sector increased by 22.7 per cent (y-o-y) as on January 2, 2009 as compared with 20.0 per cent a year ago. Non-food credit growth (y-o-y) of scheduled commercial banks (SCBs) picked up during 2008-09, on the backdrop of sizeable rise in credit to petroleum sector due to the funding requirements of oil companies and substitution of funds raised by corporates from non-banking to banking sources. It peaked during October-November 2008 but moderated somewhat thereafter. Non-food credit by SCBs expanded by 23.9 per cent, y-o-y, as on January 2, 2009, which was higher than 22.0 per cent a year ago. The higher expansion in credit relative to the expansion in deposit resulted in an increase in the incremental credit-deposit ratio (y-o-y) of SCBs to 81.4 per cent as on January 2, 2009 from 63.1 per cent a year ago (Chart 12). Net foreign exchange assets of the banking sector expanded by 13.2 per cent (y-o-y) as on January 2, 2009 much lower than 32.1 per cent a year ago.

IV.7 Credit flow from scheduled commercial banks recorded a high growth of 24.0 per cent (y-o-y) as on January 2, 2009 as compared with 21.4 per cent a year ago. The expansion in credit during 2008-09 so far was mainly on account of public sector banks, while credit growth decelerated in respect of private and foreign banks (Table 31).

IV.8 Disaggregated data on sectoral deployment of gross bank credit available up to December 19, 2008 showed that about 48.2 per cent of incremental non-food credit (y-o-y) was absorbed by industry as compared with 44.0 per cent in the corresponding period of the previous year. The expansion of incremental non-food credit to industry during this period was led by infrastructure, petroleum, iron & steel, chemicals & chemical products, textiles, engineering, construction and vehicles industries. The infrastructure sector alone accounted for 28.0 per cent of the incremental credit to industry as compared with 29.7 per cent in the corresponding period of the previous year. Credit to petroleum and fertiliser industries grew by 101.8 per cent (y-o-y) by December 2008 as compared with a growth of 11.8 per cent in the corresponding period of the previous year. Also, the share of incremental credit to petroleum and fertiliser industries increased to 19.9 per cent of the total incremental non-food credit in December 2008 from 3.1 per cent a year ago. The total non-food credit excluding credit to petroleum and fertiliser industries also recorded a high growth of 22.9 per cent as compared with 22.1 per cent in the previous year. The agricultural sector absorbed around 10.9 per cent of the incremental non-food bank credit expansion as compared with 10.7 per cent in the corresponding period of the previous year. Personal loans accounted for nearly 14.7 per cent of incremental non-food credit; within personal loans, the share of incremental housing loans was at 30.4 per cent. The outstanding credit under credit card receivables witnessed a sharp increase. Growth in loans to commercial real estate remained high in recent months (Table 32). In order to facilitate bank lending, several counter-cyclical measures taken earlier were reviewed in view of the prevailing macroeconomic, monetary and credit conditions, and measures were announced on November 15, 2008 to strengthen credit delivery while maintaining credit quality. Accordingly, the provisioning requirements for all types of standard assets (except in case of direct advances to agricultural and SME sector which was retained at 0.25 per cent, as hitherto) and risk weights on banks’ exposures to certain sectors were revised downwards.

IV.9 Apart from banks, commercial sector mobilises resources from a variety of other sources such as issuances through capital markets, commercial paper, non-banking financial companies (NBFCs), financial institutions, external commercial borrowings, issuances of American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs) and foreign direct investment. During 2008-09, so far, flow of resources from other sources to the commercial sector declined reflecting subdued conditions in the domestic capital markets and deceleration of funds flow from external sources. On the other hand, increase in bank credit during 2008-09, so far, has been significantly higher, partly reflecting increased credit demand of corporates emanating from deceleration in credit flow from other sources. Overall, total flow of resources to the commercial sector during 2008-09, so far, has been somewhat lower than that in the comparable period of 2007-08 (Table 33).

IV.10 Scheduled commercial banks’ investment in SLR securities expanded by 19.2 per cent (y-o-y) on January 2, 2009 as compared with 25.8 per cent a year ago (Table 34). Commercial banks’ holdings of such securities as on January 2, 2009 at 28.9 per cent of their net demand and time liabilities (NDTL) were higher than 27.8 per cent at end-March 2008 but lower than 29.3 per cent a year ago (Chart 13). Excess SLR investments of SCBs increased to Rs.1,95,112 crore as on January 2, 2009 from Rs. 98,033 crore at end-March  2008; excess investments in SLR securities were placed at Rs.1,41,684 crore a year ago. Adjusted for LAF collateral securities on an outstanding basis, SCB’s holding of SLR securities amounted to Rs.10,74,924 crore or 27.1 per cent of NDTL on January 2, 2009 implying an excess of Rs.1,21,792 crore or 3.1 per cent of NDTL over the prescribed SLR of 24 per cent of NDTL.

Reserve Money Survey

IV.11 Reserve money growth at 6.6 per cent, y-o-y, as on January 16, 2009 was lower than that of 30.6 per cent a year ago. Intra-year movements in reserve money largely reflected the Reserve Bank’s market operations and movements in bankers’ deposits with the Reserve Bank in the wake of changes in the CRR and large expansion in demand and time liabilities. In the wake of inflationary pressures during the first half of 2008-09, monetary policy was tightened, partly reflected in the hike of CRR by 150 basis points to 9.0 per cent during April-August 2008-09. Subsequently, intensification of global financial turmoil and its knock-on impact on the domestic financial market, and downturn in headline inflation, necessitated the Reserve Bank to ease its monetary policy since mid-September 2008. The CRR was reduced by 400 basis points to 5.0 per cent since October 11, 2008. Adjusted for the first round effect of the changes in CRR, reserve money growth (y-o-y) as on January 16, 2009 was 18.0 per cent as compared with 21.6 per cent a year ago (Chart 14).

IV.12 The changes in CRR have also affected the money multiplier, i.e., the ratio between broad money and reserve money. Accordingly, the money multiplier, which had declined from 4.7 at end-March 2007 to 4.3 at end-March 2008 in the wake of CRR hikes, increased to 5.2 as on January 2, 2009, reflecting subsequent lowering of CRR (Chart 15).

IV.13 During the financial year 2008-09 (up to January 16, 2009), reserve money decreased by 3.8 per cent as against an increase of 18.2 per cent in the corresponding period of the previous year (Table 35). On the sources side, net Reserve Bank’s credit to the Centre increased by Rs. 86,141 crore as against a decrease of Rs. 1,57,815 crore during the corresponding period of the previous year. The Reserve Bank’s foreign currency assets (adjusted for revaluation) declined by Rs.99,701 crore as against an increase of Rs.3,11,941 crore during the corresponding period of the previous year (Chart 16). Adjusted for the first round impact of the changes in CRR (up to January 16, 2009), reserve money expanded by 5.6 per cent as compared with 12.1 per cent during the corresponding period f the previous year.

IV.14 Movements in the Reserve Bank’s net credit to the Central Government during 2008-09, so far, (up to January 16, 2009) largely reflected the liquidity management operations by the Reserve Bank and changes in Central Government deposits with the Reserve Bank. The Centre’s surplus cash balances with the Reserve Bank declined (Rs.76,586 crore). Furthermore, the Centre resorted to WMA/ OD facilities (Rs.9,263 crore). The unwinding of MSS securities led to a decline in Central Government deposits (Rs.54,742 crore) with the Reserve Bank and, therefore further increased net Reserve Bank credit to Centre. Net open market purchases under OMO/special market operations (SMO) led to higher holding of Central Government securities/ bonds (Rs. 33,521 crore) by the Reserve Bank. In view of the global financial crisis and its possible impact on Indian financial market, the Reserve Bank has taken various measures to augment rupee and dollar liquidity. Consequently, liquidity condition that remained tight during the first half of 2008-09, eased from mid-November 2008 and LAF, on average, shifted to absorption mode. The Reserve Bank’s holding of government securities (up to January 16, 2009) declined on account of an increase in absorption under LAF (Rs.82,145 crore). Reflecting these developments, the Reserve Bank’s net credit to the Centre increased during 2008-09 so far (up to January 16, 2009) as against a decline during the corresponding period of the previous year.