The Indian economy, after exhibiting strong growth during the second quarter of 2008- 09, has experienced moderation in the wake of the global economic slowdown. There has been significant slowdown in the capital expenditure. The government estimated that economy would expand at 7.1% in FY 09, the slowest pace in six years and below the previous year's 9%, as the global slowdown cuts back demand and hurts key sectors. The main focus of the government during this period was to tame inflation along side sustaining growth. This fiscal saw two stimulus packages and the third one seems likely to be on its way.
The economy registered strong growth during the second quarter of 2008-09. In the subsequent period, some restraint has since been evident as a consequence of the global economic slowdown. Although agricultural outlook remains satisfactory, industrial growth has decelerated sharply and services sector is slowing. The economic slowdown, during the second quarter vis-à-vis the first quarter of 2008-09, was primarily driven by a moderation of consumption growth and widening of trade deficit, offset partially by an acceleration in investment demand. According to the estimates released by the Central Statistical Organisation (CSO) in November 2008, real GDP growth during the second quarter of 2008-09 was lower at 7.6% as compared with 9.3% in the corresponding period of 2007-08 reflecting deceleration in growth of industry and services. Real GDP growth moderated to 7.8% in the first half of 2008-09 as against 9.3% in the first half of 2007-08. CSO has placed the growth of real GDP originating in agriculture, industry and services at 2.9%, 5% and 9.9%, respectively, during the first-half of 2008-09 as against 4.5%, 9.1% and 10.6% a year ago.
GDP at Factor Cost
The Ministry of Agriculture has set a target for food-grains production for 2008-09 at 233.0 million tonnes. According to the First Advance Estimates, the kharif food-grains production during 2008-09 was placed at 115.3 million tonnes as compared with that of 121.0 million tonnes during the previous year.
Services sector activity during April-October 2008-09 indicated some acceleration in growth in respect of several indicators such as railway revenue earning and freight as compared with the corresponding period of 2007-08. On the other hand, growth decelerated in respect of cargo handled at major ports and other indicators of civil aviation excluding export cargo, commercial vehicles, cement and steel.
The index of industrial production during April-November 2008-09 recorded y-o-y expansion of 3.9% as compared with 9.2% during April-November 2007-08.
The weakness in growth has amplified because of slowdown of industrial activity and weakening of external demand as reflected by decline in exports. Also, assumption of normal agricultural production and services sector activities are likely to further decelerate in the second half of 2008-09.
Index of Industrial Production
Index of Industrial Production (IIP) declined to 2.4% for November 2008 from 5.3% in the corresponding period last year. IIP fell for the first time in negative zone to -0.4 in October 2008.The decline was largely fuelled by mining, manufacturing and electricity sectors to 0.5% against 6.3%, 2.4% against 4.7% and 3.1% against 5.8 respectively in same month last year. The cumulative growth during April-November, 2008-09 over the corresponding period of 2007-08 in the mining, manufacturing & electricity sectors have been 3.4%, 4.0% and 2.9% respectively, which lead to the overall growth in the General Index to 3.9% against 9.2% for the same period. IIP fell into the negative zone for the second time, down to -2% in December 2008.
Inflation, based on the y-o-y changes in wholesale price index (WPI), declined sharply from an intra-year peak of 12.9% on August 2, 2008 to 5.07% as on January 24, 2009. The recent decline in WPI inflation was driven by decline in prices of minerals oil, iron & steel, oilseeds, edible oils, oil cakes and raw cotton. India’s inflation rate as measured by wholesale price index (WPI) stood at 4.39% for the week ended January 31st 2009, as compared to 5.07% for the previous week. The decrease in the WPI based inflation was due to downward movement of manufactured product, primary article and fuel, power, light & lubricants prices. The cut in the fuel price by the government aided the fall in the inflation rate. The government cut retail fuel prices by up to 11% in the last week of January, which was a second reduction in nearly two months.
Commodity prices have declined strikingly around the world, reflecting slump in global demand. The sharp decline in crude oil prices together with the slide in prices of metals, food-grains and cement has influenced inflation expectations in most parts of the world. Keeping in view the global trend in commodity prices and the domestic demand-supply balance, RBI has projected to bring down the WPI based inflation to a range of 4-4.5% in the near term and to 3% in the medium term.
Group wise Inflation (%)
Wholesale Price Index (WPI)
Jan 10, 2009(y-o-y)
Jan 12, 2008(y-o-y)
Consumer Price Indices (CPI)
CPI for Industrial Workers*
CPI for Agricultural Labourers
CPI for Rural Labourers
CPI for Urban Non-Manual Employees*
*CPI is taken during Nov 2007-Nov 2008.
Primary articles inflation, y-o-y, increased mainly because increase in the prices of food articles, especially of wheat, fruits, milk & eggs, fish and meat as well as non-food articles such as oilseeds and raw cotton. The fuel group inflation turned negative. This reflected the reduction in the price of petrol by Rs. 5 per liter and diesel by Rs. 2 per liter effective December 6, 2008, as well as decline in the prices of freely priced petroleum products in the range of 30-65% since August 2008.
Manufactured products inflation, y-o-y, also rose marginally and were mainly driven by rise in the prices of sugar, edible oils/oil cakes, textiles, chemicals, iron and steel and machinery and machine tools. Inflation, based on y-o-y variation in consumer price indices (CPI), increased further during November/December 2008 mainly due to increase in the prices of food, fuel and services. Various measures of consumer price inflation were placed in the range of 10.4-11.1% during November/December 2008 as compared with 7.3-8.8% in June 2008 and 5.1-6.2% in November 2007.
Foreign Exchange Reserves
The foreign exchange reserves plunged by USD 23.4 billion from USD 309.7 billion as at end-March 2008 to USD 286.3 billion by end-September 2008 largely reflecting valuation effects. Excluding valuation effects, the decline was USD 2.5 billion. Between October 2008 and January 16, 2009 foreign exchange reserves declined by USD 34.1 billion to USD 252.2 billion, including valuation effects.
Foreign Exchange Reserves
As on Jan. 30, 2009 In USD million
Variation over End-March 2008
Foreign Currency Assets
Reserve position in the IMF
As on January 30, 2009; total foreign exchange reserves stood at USD 248.61 billion of which foreign currency assets stood at USD 238.89 billion, gold stood USD 8.88billion while SDRs at USD 3 million. The Reserve position in the IMF stood at USD 830 million. The decline in total foreign exchange reserves on January 30, 2009 over end March, 2008 is USD 61.11 billion.
In the foreign exchange market, INR depreciated against major currencies during FY09. The rupee moved in the range of Rs. 39.89 to Rs. 50.53 per USD. The rupee showed a depreciating trend during the second quarter of FY09, which started in the beginning of current financial year. The rupee remained around the level of Rs. 43 per US dollar during third week of May 2008 to second week of August 2008, depreciated thereafter sharply. The decline came mainly in the wake of widening trade deficit, capital outflows and strengthening of US dollar vis-à-vis other major currencies. The INR/USD exchange rate, which was Rs. 39.99 per dollar at end-March 2008, fell to its lowest level at Rs. 50.53 per dollar as on December 02, 2008, before recovering to Rs. 48.60 per dollar as on February 9, 2009. From April 2, 2008 to February 9, 2009; the Rupee depreciated against the US dollar to 21.56% & the Japanese Yen to 36.23%. INR depreciated against the Euro to 0.63%. However, during this period the Rupee appreciated against the Great Britain Pound to 9.55%
INR vs. USD & Euro (April 2, 2008 to February 10, 2009)
MONEY, BANKING AND CAPITAL MARKETS
Monetary and Credit Condition
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. Growth in broad money (M3), year-on-year (Y-o-Y), was 19.6% (Rs. 7, 36,777 crore) on January 2, 2009 lower than 22.6% (Rs. 6, 91,768 crore) a year ago. Aggregate deposits of banks, Y-o-Y expanded 20.2% (Rs. 6, 49,152 crore) on January 2, 2009 as compared with 24.0% (Rs. 6, 21,944 crore) a year ago. The growth in bank credit continued to remain high. Non-food credit by scheduled commercial banks (SCB’s) was 23.9% (Rs. 5, 01,645 crore), Y-o-Y as on January 2, 2009 from 22.0% (Rs. 3, 79,655 crore) a year ago. The intensification of global financial turmoil and its knock-on effect on the domestic financial market, and downturn in headline inflation, necessitated the Reserve Bank to ease its monetary policy since mid-September 2008. Reserve money growth was recorded at 6.6%, y-o-y, as on January 16, 2009 which was much lower than that of 30.6% a year ago. Adjusted for the first round effect of the changes in CRR, reserve money growth was 18.0% as compared with 21.6% a year ago. The overall stance of monetary policy is to reinforce price stability & credit quality and to take every possible measure swiftly whenever required.
Annual Variations in Monetary Aggregates (%)
Annual Variations (y-o-y)
Jan 2, 2009
Jan 4, 2008
Reserve Money (adjusted for CRR changes)
Currency in Circulation
Money Supply (M3)
M3 (Policy Projection)*
* Policy projections are for the financial year as indicated in the Annual Policy Statements of the respective financial years.
Liquidity conditions tightened during second half of 2008-09 as contagion from the US financial crisis spread to Europe and Asia. Many central banks took coordinated actions to infuse liquidity in their jurisdictions. The major challenge for the Reserve Bank has been to infuse liquidity in the system and assure the markets that it will continue to maintain a comfortable liquidity position. Liquidity conditions tightened significantly in India between mid-September and October 2008 emanating from adverse international developments and some domestic factors. This necessitated the Reserve Bank to undertake a series of measures to inject rupee and foreign exchange liquidity from mid-September 2008 onwards.
Actual/Potential Release of Primary Liquidity since mid-September 2008
Cash Reserve Ratio (CRR) Reduction
Term Repo Facility
Increase in Export Credit Refinance
Special Refinance Facility for SCBs (Non-RRB)
Refinance Facility for SIDBI/NHB/EXIM Bank
Liquidity Facility for NBFCs through SPV
Memo: Statutory Liquidity Ratio (SLR) Reduction 40,000
The several measures taken since mid-September 2008 resulted in augmentation of actual/potential liquidity of over Rs. 3,88,000 crore, The cumulative reduction in the CRR by 400 basis points since mid-September 2008 released additional Rs. 1,60,000 crore of primary liquidity. Further, the permanent reduction in SLR by 1.0% of NDTL has made available liquid funds of the order of Rs. 40, 000 crore for the purpose of credit expansion and the term repo facility gives an additional potential liquidity of Rs. 60, 000 crore since mid September 2008. In addition, commercial banks and all-India term lending and refinancing institutions were allowed to lend against and buy back certificates of deposit (CDs) held by mutual funds. Potential liquidity has been made available through various refinance facilities for banks and financial institutions to the tune of Rs. 80, 000 crore, thus liquidity conditions turned around and became comfortable from mid- November 2008.
The overnight call money rate, which generally hovered above the repo rate during September-October 2008, has softened considerably and has moved towards the lower bound of the LAF corridor since early November 2008. Other money market rates such as discount rate of CDs, CPs and CBLO rate softened in tandem with the overnight call money rate.
Indian equity markets witnessed downswings quite in line with trends in major international equity markets. The impact of financial crisis is already in evidence in the currency and equity markets and the phase of capital outflows that have occurred. The Indian financial markets came under pressure from mid-September 2008 reflecting the knock-on effects of the global crises through the monetary, financial and real channels. The pressure on financial markets mounted with the credit spreads widening to record levels and equity prices crashing to historic lows leading to widespread volatility across the market spectrum. The contagion was initially felt in the equity market due to reversal of foreign institutional portfolio flows and finally all the segments of the financial market came under pressure which necessitated the Reserve Bank to undertake several measures to augment domestic and foreign exchange liquidity.
(April 2, 2008 to February 10, 2009)
The BSE Sensex declined significantly from all time high during FY 09. During FY09 (From April 01, 2008 to February 10, 2009) the Sensex touched its highest level of 17,735.70 in intraday trade on May 5, 2008 and lowest level of 7,697.39 in intraday trade on October 27, 2008 with a fluctuation of 130.41% between them. The Sensex closed at 9,647.47 on February 10, 2009 with a P/E of 13.38. During the same period Nifty touched its highest level of 5,298.85 in intraday trade on May 2, 2008 and lowest level of 2,252.75 in intraday trade on October 27, 2008 with a fluctuation of 135.22% between them. The Nifty closed at 2,934.50 on February 10, 2009 with a P/E of 13.93. In derivative segment, the average daily turnover from April, 2008- January, 2009 stands at Rs. 45,383.24 crores & the total turnover for the same period stands at Rs. 92,58,181.43 crores with 53,85,50,114 number of contracts. Whereas, in 2007-08 the average daily turnover stood at Rs. 52,153.30 crores with 1,30,90,477.75 number of contracts.
During the financial year 2008-09 (up-to November 2008), various components of foreign investment in India recorded increased inflows. The inflows under foreign direct investment (FDI) were Rs. 85,700 crore during April-November 2008 as against Rs. 45,098 crore during the corresponding period of the previous year. Net outflows by foreign institutional investors (FIIs) in equity from April, 2008- February 10, 2009 aggregated to Rs. 45,902.50 crores or USD 113.80 billion while the net inflows in debt from April, 2008- February 10, 2009 aggregated to Rs. 8,637.50 crores or USD 21.41 billion. The number of FIIs registered with the SEBI increased from 1,319 at end-March 2008 to 1,623 by February 10, 2009. Net mutual fund inflow (from April, 2008- February 6, 2009) in equity stands at Rs. 6,400.90 crores while net investment in debt for the same period was Rs. 51,510.90 crores. Assets under management till January 2009 stood at Rs. 4.6 lakh crores.
The revenue deficit of the government (net of transactions relating to transfer of the Reserve Bank's stake in the SBI to the Government) stood at 256.2 % of budget estimates for 2008-09 as compared to 97.9% a year ago. GFD during the same period was 132.4% of the budget estimates as compared with 63.8% a, year ago. Gross fiscal deficit (GFD) and revenue deficit were placed higher than a year ago during period April-November 2008 of budget estimates (BE) primarily on account of higher revenue expenditure. Revenue receipts of the central government amounted to 52.2% of the budget estimates (BE) during April-November 2008 as compared with 56.5% in the corresponding period a year ago. Tax revenue rose by 15.10% during period April-November 2008.Tax and non-tax revenue receipts were 50% and 64.10% of the budget estimates during period April-November 2008, respectively, as compared with 54.6% and 65.7% a year ago. On expenditure side, total expenditure was 65.80% of the BE during period April-November 2008 higher than 60.5% a year ago. Revenue expenditure and Capital expenditure were 69.3% and 40.7% respectively of the budget estimates (BE) during April-November 2008.
Balance of payments position during the first half of 2008-09 (April-September) reflected a widening of trade deficit resulting in large current account deficit, and moderation in capital flows. Merchandise trade deficit recorded a sharp increase during April-November 2008 on account of higher crude oil prices for most of the period and loss of momentum in exports since September 2008. The large increase in merchandise trade deficit during April-September 2008 led to a significant increase in the current account deficit over its level during April-September 2007. The widening of trade deficit during April-September 2008 could be attributed to higher import payments reflecting high international commodity prices, particularly crude oil prices. Net surplus under invisibles remained buoyant, led by increase in software exports and private transfers. Net capital inflows reduced sharply and have remained volatile during 2008-09 so far. While foreign direct investment into India increased during April-November 2008, foreign portfolio investments showed substantial outflows.
India’s Balance of Payment (BoP) (In USD Billion)
Current Account Balance
Change in Reserves#
* Including errors and omissions. # On a BoP basis (excluding valuation): (-) indicates increase; (+) indicates decrease.
The surplus in the capital account moderated during April-September 2008 reflecting increased gross capital outflows on the back of global financial turmoil. While the net inward FDI (net direct investment by foreign investors) remained buoyant reflecting relatively strong fundamentals of the Indian economy and continuing liberalization measures to attract FDI, net outward FDI (net direct investment by Indian investors abroad) also remained high during April-September 2008. The gross capital inflows were higher on account of higher FDI inflows and NRI deposits during the period.
The global economic outlook has deteriorated sharply since September 2008 with several countries, notably the US, the UK, the Euro area and Japan experiencing recession. In India too, there is evidence of a slowing down of economic activity. On the macroeconomic front, the downside risks for economic growth emanate from global economic slowdown, deterioration in global financial markets and slowing down in domestic demand. There are less than optimistic sentiments prevailing in the economy, suggesting further moderation in economic activity. According to the Reserve Bank’s Industrial Outlook Survey of manufacturing companies in the private sector, the business expectations indices based on assessment for October-December 2008 and on expectations for January-March 2009 declined by 2.6% and 5.9%, respectively, over the corresponding previous quarters. Indian economy is to grow at 7.1% in FY 09 according to an advance estimate of national income. This is almost 2% points below previous fiscal’s growth of 9% despite two rounds of fiscal stimulus packages announced by the center.
On the positive side factors include expected increase in consumption demand mainly reflecting rise in basic exemption limits and tax slabs, Sixth Pay Commission awards and debt waiver for farmers. WPI inflation has fallen sharply driven by falling international commodity prices especially those of crude oil, steel and selected food items, although, some contribution has also come from the slowing domestic demand. Going forward, the outlook on international commodity prices indicate further softening of domestic prices.