Foreign
exchange reserves slumped $5.46 billion, recording the largest dip in
the current financial year 2008-09, to $300 billion during the week
ended August 2008. As per the latest data released by RBI in its weekly
statistical supplement the foreign currency assets with the RBI have
dropped by $ 5.45 billion, while value of gold and SDR in reserves
remained unchanged during the week, and reserves with IMF felled by $ 8
million. Forex reserves have dropped $ 9.7 billion in 2008-09 up to 01
August 2008, while they were $ 71 billion higher on y-o-y basis. The
country's forex reserve has shrinked by over USD 10.5 billion in the
last two months and fell in the fourth consecutive week on sustained
dollar selling by the Central Bank to rein in the value of the rupee.
After
several years of buying dollars in the forex markets the RBI has now
started selling dollars. Until now the strong portfolio inflows has
fueled dollar mop-up by the RBI. However the things have changed in
recent past as the oil importer demand for dollars, has gone up sharply
forcing the RBI to be net sellers of the greenback.
Foreign
currency assets expressed in dollar terms include the effect of
appreciation or depreciation of non-US currencies. A forex dealer
attributed the decline in the reserves to depreciation in the euro and
pound, leading to a revaluation effect.
Deposit?s mobilization by SCB?s
An
aggregate deposit outstanding as on 01 August 2008, comprising time and
demand deposits, with Scheduled Commercial Bank in India increased
20.9% to Rs 33,49,390 crore on y-o-y basis, as compared with the growth
of 24.4% recorded in the previous year.
Demand Deposits of the
SCBs increased 13.69% to Rs 462720 crore, but plunged 11.75% in 2008-09
over 2007-08, mainly on the account of higher deposit rate provided on
term deposits. Demand deposits have taken a large hit at the start of
fiscal year due higher interest rate expectation by savers
corresponding to the anticipated monetary tightening by RBI to rein in
inflation. Time deposits with the SCBs galloped 22.17% to Rs 2886670
crore on y-o-y basis against 24.56% growth recorded in last year. Term
deposits grew at an accelerated rate of 8.01% in 2008-09 up to 01
August 2008 compared with the growth of 7.25% attained during the same
period in the previous fiscal.
Demand Deposits had a share of
13.82% in aggregate deposits, which has declined from 16.19% as on 28
March 2008; accordingly the share of Time Deposits in total deposits
has accelerated to 86.18% from 83.81% on 28 March 2008. Such a shift in
the deposit combination is likely to raise the cost?s of funds for
banks and would take toll on NIM, as they have to pay almost 2-3 times
higher interest rates on time deposits compared to demand deposits.
Bank Credit
Credit
provided by the SCB?s, comprising food credit and non-food credit, to
the commercial sector in India expanded 25.8% to Rs 2427592 crore on
y-o-y basis, as on 01 August 2008, fairly higher compared to 23.3%
growth recorded year back. Credit availability swelled 2.8% in 2008-09
up to 01 August 2008 compared with the decrease of 0.1% corresponding
period last year.
Despite RBI?s continuous efforts to cut
demand the credit growth is swelling on the back of huge working
capital demand from cash-strapped oil marketing companies.
Infrastructure and small businesses also continue to seek credit from
banks and financial institutions.
Since April, RBI has hiked the
repo rate ? the rate at which banks borrow from RBI ?to 9% and the cash
reserve ratio (CRR) ? the amount of money out of the deposits that
banks have to keep with RBI ?to 9%. The non-food credit accounting for
98.17% of the total bank credit as on August 01, 2008 surged at an
accelerated rate 26.23% to Rs 2383243 crore on y-o-y basis, compared
with 23.54% growth clocked last year. Growth in non-food credit in
2008-09 up to 01 August 2008 has decelerated to 2.84% from 5.83% growth
achieved in 2007-08. The supply of food credit surged 7.32% to Rs 44348
crore as on 01 August 2008 against a 6.43% growth recorded last year.
Unlike
credit, the deposit flow has shown signs of moderation. It saw 20.9%
annual growth till early August 2008 against a 24.4% rise in the same
period last year. The credit-deposit ratio for the banking sector has
slumped to 72.48% as on 01 August from 73.62% on 20 June 2008. This was
due to decline in bank credit during last few week, as monetary
tightening by the RBI to contain inflation has raised the cost of
funds, making the banks more cautious and to go slow on lending to
protect against the risk of rising default rates. Any deceleration in
the credit provided by SCBs not only impairs the credit deposit ratio
but also have a detrimental impact on the overall economic growth.
Investments of the Scheduled Commercial Banks (SCBs)
Investment
made by SCBs, for the purpose of maintaining SLR requirement, witnessed
moderation in growth to 3.2% in financial year 2008-09 up to 01 August
2008 compared with the growth of 9.6% attained in corresponding period
last year. This was mainly due to deceleration in the mobilization of
deposits, in particular the demand deposits by SCBs as well as
accelerated credit offtake in 2008-09 over 2007-08. As a result of it
investment-deposit ratio for the banking sector has plunged to 29.93%
as on August 01, 2008, from 31.77% on April 25, 2008.
SCBs
investment increased 15.6% to Rs 1002447 crore as on` August 01, 2008
on y-o-y basis, compared with an increase of 12.5% year back.
Money supply
The
monetary tightening measures undertaken by the central bank also have
had their impact, as the money supply growth has declined, for the
first time this fiscal, to below 20%. The slowdown in reserves pile-up
has also saw decline in money supply, to an extent. This is because,
whenever the central bank sells dollars, it simultaneously impounds
rupee funds from the system.
As a result of the monetary
tightening, the annual growth in money supply year-on-year (Y-o-Y) has,
for the first time in the recent months, has slipped below 20%. As per
the latest RBI data, the Y-o-Y growth in money supply slipped to 19.6%
as on August 1, from a high of close to 23% a few months ago. The total
stock of money in the system amounted to Rs 41,79, 900 crore as on 1
August, up Rs 32,479 crore over the previous fortnight?s levels.
Outlook
The
monetary tightening measures have played their role in shriveling the
money supply in the economy but the measures have failed to trim growth
in inflation, which has zoomed above 12% to an annual growth of 12.44%
for the week ended 1 August 2008.
However if the inflation
growth remains unabated then further monetary tightening measures can
be expected. Also though the growth in money supply has moved below
20%, it is still above the RBI?s comfort zone. So to rein in money
supply growth and to curb inflation RBI may resort to further action of
tightening monetary policy.
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