Report on Macroeconomics & Banking 061110

8/7/2019 Report on Macroeconomics & Banking 061110

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REPORT ON MACROECONOMICS & BANKIN

November 6 2010


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Table of Contents

Economic & Banking Indicators Page No.

Executive Summary 3

World Economic Growth (Real GDP) 4-5

Policy Rates in Select Economies 6

India - Economic Growth (Real GDP) 7

Trends in Agriculture Production (Kharif) and Rainfall 8-9

Index of Industrial Production (IIP) 10

Six Core Industries & Vehicle Sales 11

Foreign Trade, Foreign Exchange Reserves, ECB 12

Inflation 13

Outlook for Interest Rate on Deposits of SCBs 14-15

Government Borrowing Programme for FY 2010-11 16-17


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World Economic Growth (Real GDP)________________________________________________________________________

As per the assessment by IMF in its World Economic Outlook for October 2010 , globaleconomic recovery is proceeding broadly as expected, but downside risks remainelevated. Most advanced economies and a few emerging economies still face largeadjustments. Their recoveries are proceeding at a sluggish pace, and high unemploymentposes major social challenges. By contrast, many emerging and developing economies areagain seeing strong growth, because they did not experience major financial excesses justprior to the Great Recession.

Economic recovery continued to strengthen during the first half of 2010. Global activityexpanded at an annual rate of about 5 percentabout percent higher than anticipatedin the July World Economic Outlook (WEO) Update.

Growth in the advanced economies reached only about 3 percent during the first half of2010, a low rate considering that they are emerging from the deepest recession sinceWorld War II.

Real GDP: % y-o-y growth

FY 06 FY 07 FY 08 FY 09 FY 10 FY 11

Advanced Economies

World 5.1 5.2 2.8 -0.6 4.8 4.2

Advanced Economies 3.0 2.7 0.2 -3.2 2.7 2.2

United States 2.8 2.0 0.0 -2.6 2.6 2.3

Euro Area 2.9 2.7 0.5 -4.1 1.7 1.5

Japan 2.0 2.4 -1.2 -5.2 2.8 1.5

Other Advanced Economies # 3.9 4.0 1.7 -1.2 5.4 3.7

BRIC Economies

Brazil4.0 5.7 5.1 -0.2 7.5 4.1

Russia7.7 8.1 5.2 -7.9 4.0 4.3

India9.8 9.3 6.4 5.7 9.7 8.4

China11.6 13.0 9.6 9.1 10.5 9.6

PIIGS Economies of Euro Area

Portugal1.4 1.9 0.0 -2.6 1.1 0.0

Italy2.0 1.0 -1.3 -5.0 1.0 1.0

Ireland 5.7 6.0 -3.0 -7.6 -0.3 2.3

Greece4.5 4.0 2.0 -2.0 -4.0 -2.6

Spain3.9 3.7 0.9 -3.7 -0.3 0.7

Source: World Economic Outlook, IMF, Various Issues. # Excluding US, Euro area economies and Japan.


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The forecast for Global activity is to expand by 4.8% in 2010 and 4.2% in 2011, broadly inline with earlier expectations, and downside risks continue to predominate.

WEO projections are that output of emerging and developing economies will expand atrates of 7.1% and 6.4%, respectively, in 2010 and 2011.

In advanced economies, however, growth is projected at only 2.7% and 2.2%, respectively,with some economies slowing noticeably during the second half of 2010 and the first halfof 2011, followed by a reacceleration of activity.

Risks to the growth forecasts are mainly to the downside. However, the probability of asharp global slowdown, including stagnation or contraction in advanced economies, stillappears low.

IMF has revised the projection real GDP growth rate for Indian economy to grow at 9.7%in 2010, from 9.4% given in July 2010.

_________________________________________________________________________________Revisiting Decoupling

________________________________________________________________________

While assessing the prospects for emerging economies in the aftermath of recent globalfinancial sector crisis, IMF has tested the earlier widely held view that the fortunes ofemerging economies follow those of advanced economies when the United Statessneezes, it has been said that the rest of the world catches cold.

IMF has analyzed the four recessions in advanced economies: 1974-75, 1980-83, 1991-93,2001, closely aligned with U.S. recessions identified by the National Bureau of EconomicResearch (NBER), which were significant downturns at a global level, with the majority ofthe advanced economies experiencing outright recession during the first three episodes.

It has been stressed now that the emerging economies have performed better after recentadvanced economy recessions than after those in the 1970s and 1980s. This fact holdsacross different measures of performance. This is despite the fact that emergingeconomies have also become more highly correlated with advanced economies over time.

One of the explanations given to reconcile this dichotomy is improved domestic policies inemerging economies that have increased their resilience to shocks. It is being stated thatthe improvement in the macroeconomic management may have insulated emergingeconomies from the worst of recent advanced economies recessions.

As per empirical evidence, it is being argued that economies with external balances wereparticularly vulnerable to the recent crisis, and that economies that were particularly

dependent on bank lending instead of foreign investment were susceptible to rapid capitaloutflows.

It has been emphasized that emerging economies are now more flexible and, as such,have been more resilient to foreign shocks. For example, flexible exchange rates helpedto preserve competitiveness and allow trade to bounce back quickly following thedownturn in the early 2000s, and capital inflows have been much less affected in recentepisodes.


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Policy Rates in Select Economies________________________________________________________________________

Most of the Central Banks in the advanced economies are still continuing with easymonetary policy as part of the stimulus package to revive their respective domesticeconomies.

Bank of Japan has decided to implement a comprehensive monetary easing policy, withUncollateralized Overnight Call Rate remaining around 0.0-0.1% with effect from 5thOctober 2010. It has been clarified by the Bank of Japan that The Bank will maintainthe virtually zero interest rate policy until it judges, on the basis of the"understanding of medium- to long-term price stability, that price stability is insight, on condition that no problem will be identified in examining risk factors,including the accumulation of financial imbalances.

Key Policy Rates in Select Economies

Country Benchmark Rate Last Change Date of change

USA Fed Funds Rate 0.0-0.25% -0.75 to -1% 16.12.2008

UK Official Bank Rate 0.50% -0.50% 05.03.2009

Euro Area Main Refinance Operation Rate 1.00% -0.25% 07.05.2009

Japan Uncollateralized Overnight Call Rate 0.0-0.10% -0.10% 05.10.2010

Australia Cash Rate Target 4.50% 0.25% 05.05.2010

New Zealand Official Cash Rate 3.00% 0.25% 29.07.2010

Canada Overnight Rate 0.75% 0.25% 20.07.2010

Switzerland 3M CHF LIBOR Ceiling 0.0-0.75% -0.50% 12.03.2009

India Repo Rate 6.25% 0.25% 02.11.2010

Source: Respective Central Banks


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India - Economic Growth (Real GDP)________________________________________________________________________

Economic Growth: The real GDP growth rate has been on a path to recovery after witnessinga sharp decline to 6.7% in FY 2009 on account of contagion of global financial markets crisis.GDP growth rebounded to 7.4% in FY 10 owing to rebound in industrial performance.

Outlook for GDP growth for FY 2010-11

Advisory Council to PM 8.5%Planning Commission 8.5%+RBI 8.5%IMF (Calendar year) 9.7%

GDP at factor cost at constant 2004-05 prices: % y-o-y growth

FY 06 FY 07 FY 08 FY 09 FY 10 FY 11*

Agriculture & Allied 5.3 3.7 4.7 1.6 0.2 4.0

Industry 9.3 12.8 9.5 3.9 9.3 9.5

Services 11.1 10.2 10.5 9.8 8.5 9.2

GDP 9.5 9.7 9.2 6.7 7.4 8.5

Source: MOSPI; (*UBI Estimates)

Relative Share of Agriculture, Industry & Services Sectors in GDP (%)

FY 06 FY 07 FY 08 FY 09 FY 10 FY 11*

Agriculture & Allied 18.2 17.2 16.4 15.7 14.6 14.0

Industry 27.9 28.7 28.8 28.0 28.5 28.7

Services 53.9 54.2 54.8 56.4 56.9 57.3

GDP 100.0 100.0 100.0 100.0 100.0 100.0

Source: As above

Quarterly GDP at factor cost at constant 2004-05 prices: % y-o-y growth

Q1-FY 10 Q2-FY 10 Q3-FY 10 Q4-FY 10 Q1-FY 11 Q2-FY 11*

Agriculture & Allied 1.9 0.9 -1.8 0.7 2.8 4.4

Industry 4.6 7.8 11.1 13.3 10.3 8.2

Services 7.9 10.7 7.2 8.4 9.7 9.5

GDP 6.0 8.6 6.5 8.6 8.8 8.5

Source: MOSPI; (*UBI Estimates)

Projection for Economic Growth in Q2 of FY 2010-11: We expect the GDP growth rate tobe around 8.5% with a downward bias in the 2ndQuarter of FY 2010-11.


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Trends in Agriculture Production (Kharif) and Rainfall________________________________________________________________________

Trends in production of foodgrains: It is observed that the Kharif production has recorded agood performance over the last year, but overall Kharif production is still below that of thepeak observed in the FY 2008 & FY 2009 for most of the agricultural crops. The deficit Kharifproduction in the last 2 years had its impact on the prices of foodgrains as reflected in theheadline inflation and retail level inflation under Consumer Price Indices. It is expected thatthe better Kharif production, particularly protein rich pulses, will have its impact onmoderating the overall food price inflation to some extent. However, the better agriculturalproduction under Kharif is not sufficient to rein in the current higher level of food priceinflation, which is now more of structural nature as argued by RBI in its Second QuarterReview of Monetary Policy for 2010-11.

FY 06 FY 07 FY 08 FY 09 FY 10 4AE FY 11 1AE

Production of Foodgrains Crops (Million Tonnes)

Rice 78.27 80.17 82.66 84.91 75.91 80.41

8.4 2.4 3.1 2.7 -10.6 5.9

Jowar4.07 3.71 4.11 3.05 2.82 3.22

0.7 -8.8 10.8 -25.8 -7.5 14.2

Bajra 7.68 8.42 9.97 8.89 6.50 8.61

-3.2 9.6 18.4 -10.8 -26.9 32.5

Maize 12.16 11.56 15.11 14.12 12.00 14.06

5.9 -4.9 30.7 -6.6 -15.0 17.2

Ragi 2.35 1.44 2.15 2.04 1.96 1.93

-3.3 -38.7 49.3 -5.1 -3.9 -1.5

Small Millets 0.47 0.48 0.55 0.44 0.35 0.40

-2.1 2.1 14.6 -20 -20.5 14.3

Coarse Cereals 26.73 25.61 31.89 28.54 23.63 28.23

1.4 -4.2 24.5 -10.5 -17.2 19.5

Cereals 105 105.78 114.55 113.45 99.54 108.64

6.5 0.7 8.3 -1 -12.3 9.1

Tur 2.74 2.31 3.08 2.27 2.55 3.27

16.6 -15.7 33.3 -26.3 12.3 28.2

Urad 0.90 0.94 1.12 0.84 0.85 1.08

-5.3 4.4 19.1 -25 1.2 27.1

Moong 0.69 0.84 1.25 0.78 0.44 0.88

-14.8 21.7 48.8 -37.6 -43.6 100.0

Other Kharif Pulses 0.54 0.71 0.95 0.80 0.46 0.76

-11.5 31.5 33.8 -15.8 -42.5 65.2

Total Pulses 4.87 4.80 6.40 4.69 4.30 6.00

3.2 -1.4 33.3 -26.7 -8.3 39.5

Total Foodgrains 109.87 110.57 120.95 118.14 103.84 114.63

6.3 0.6 9.4 -2.3 -12.1 10.4

Source: Department of Agriculture & Cooperation; AE-Advance Estimate


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Trends in production of Commercial Crops: The production of commercial crops has alsoexhibited similar trend like foodgrains production. The production of cotton has achieved itsnew high in the current fiscal.

FY 06 FY 07 FY 08 FY 09 FY 10 4AE FY 11 1AE

Production of Principal Commercial Crops (Lakh Tonnes)

Groundnut

62.98 32.94 73.62 56.17 36.59 56.36

19.7 -47.7 123.5 -23.7 -34.9 54.0

Castorseed 9.91 7.62 10.53 11.71 9.85 9.45

25.0 -23.1 38.2 11.2 -15.9 -4.1

Sesamum 6.41 6.18 7.57 6.40 6.57 6.23

-4.9 -3.6 22.5 -15.5 2.7 -5.2

Nigerseed 1.08 1.21 1.10 1.17 1.01 1.06

-3.6 12.0 -9.1 6.4 6.6 6.2

Sunflower 4.56 3.66 4.63 3.57 2.16 1.56

5.8 -19.7 26.5 -22.9 -39.5 -27.8

Soyabeen 82.74 88.51 109.68 99.05 100.46 98.07

20.3 7.0 23.9 -9.7 1.4 -2.4

Oilseeds 167.68 140.12 207.13 178.08 156.63 172.74

18.5 -16.4 47.8 -14.0 -12.0 10.3

Cotton # 184.99 226.32 258.84 222.76 239.35 335.00

12.6 22.3 14.4 -13.9 7.4 40.0

Jute ## 99.70 103.17 102.21 96.34 107.00 96.86

6.1 3.5 -0.9 -5.7 11.1 -9.5

Mesta ##

8.70 9.56 9.90 7.31 5.91 5.96

-0.3 9.9 3.6 -26.2 -19.2 0.8

Sugarcane 2811.72 3555.20 3481.88 2850.29 2777.50 3249.12

18.6 26.4 -2.1 -18.1 -2.6 17.0

Source: Department of Agriculture & Cooperation; AE-Advance Estimate

# Lakh Bales of 170 kg each; ## Lakh Bales of 180 kg each

Rainfall: India has received 912.8 mm of rainfall during Jun-Sept 2010, which is 2% abovenormal. The region-wise distribution of rainfall during this period is as under:

Region-wise rainfall (mm)

Northwest India 688.2 12% above normal

Central India 1027.9 4% above normal

South peninsula 853.6 18% above normal

East, North East 1775.8 18% below normal

India 912.8 2% above normal

Source: IMD


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Index of Industrial Production (IIP)________________________________________________________________________

Index of Industrial Production: The index of industrial production (IIP) rebounded sharply to10.4% in FY 2010 compared to 2.8% recorded in the previous fiscal. The growth in IIP wasmainly driven by robust performance under manufacturing during FY 2010. Under use-basedclassification, growth in IIP during FY 2010 was mainly driven by robust performance undercapital goods and consumer durables.

Index of Industrial Production - Sectoral: % y-o-y growth

FY 06 FY 07 FY 08 FY 09 FY 10

Mining (104.73) 1.0 5.4 5.1 2.6 9.9Manufacturing (793.58) 9.2 12.5 9.0 2.8 10.9Electricity (101.69) 5.2 7.3 6.4 2.8 6.0

Index of Industrial Production - Use-Based: % y-o-y growth

Basic Goods (355.65) 6.7 10.3 7.0 2.6 7.2Capital Goods (92.57) 15.7 18.2 18.0 7.3 19.3Intermediate Goods (265.14) 2.5 12.0 8.9 -1.9 13.6

Consumer goods (286.64) 12.0 10.1 6.1 4.7 7.3w/w Consumer Durables (53.65) 15.3 9.2 -1.1 4.5 26.2w/w Consumer Non-Durables (232.99) 10.9 10.4 8.5 4.8 1.3

IIP (1000.0) 8.2 11.5 8.5 2.8 10.4Source: MOSPI; Figures in brackets shows the respective weights in IIP

Projection of IIP for September 2010: The monthly growth rate of IIP has shown sharpfluctuations in the last 3-4 months. After recording a growth of 11.3% in May 2010, IIP felldown to 5.8% in June 2010 and rebounded sharply to 13.8% in July 2010. IIP has fell down to5.6% in August 2010, continuing its sharp volatility. Even RBI has raised its concern on thedata of IIP in its mid-quarter review of monetary policy on 16th September 2010 as well as inthe second quarter review of monetary policy on 2nd November 2010. Our projection for IIP

for the month of September 2010 is 8.5%.

Index of Industrial Production - Sectoral: % y-o-y growth

Aug '09 Aug '10 Apr-Aug2009

Apr-Aug2010

(1-Month) (1-Month) (5-Months) (5-Months)

Mining (104.73) 11.0 7.0 8.0 9.4

Manufacturing (793.58) 10.6 5.9 5.6 11.3

Electricity (101.69) 10.6 1.0 6.5 4.3

Index of Industrial Production - Use-Based: % y-o-y growth

Basic Goods (355.65) 7.7 3.7 6.2 5.9Capital Goods (92.57) 9.2 -2.6 3.4 29.0

Intermediate Goods (265.14) 14.4 10.0 9.3 9.8

Consumer goods (286.64) 10.9 6.9 3.6 8.6

w/w Consumer Durables (53.65) 24.7 26.5 18.8 27.0

w/w Consumer Non-Durables (232.99) 6.1 -1.2 -1.1 1.6

IIP (1000.0) 10.6 5.6 5.9 10.6


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Six Core Industries________________________________________________________________________

Six Core Industries: The index of six core industries has recorded a growth of 2.5% inSeptember 2010 compared to 4.3% in the same period over the previous fiscal. It is observedthat except for crude oil & finished carbon steel production, other sectors have recordedslower growth during the month of September 2010 over the same period last year. The indexof six core industries has witnessed lower growth of 4.0% during Apr-Sep 2010 compared to4.5% in the same period last year.

Six Core Industries: % y-o-y growth

Sep '09 Sep '10 Apr-Sep 2009 Apr-Sep 2010

(1-Month) (1-Month) (6-Months) (6-Months)

Crude Oil (4.17) -0.5 12.5 -1.2 10.2

Petroleum Refinery Products (2.0) 3.4 -10.2 -3.6 2.6

Coal (3.2) 6.5 -2.0 11.6 0.4

Electricity (10.17) 7.4 1.3 6.4 4.0

Cement (1.99) 6.5 5.2 12.3 4.7Finished (Carbon) Steel (5.13) 0.8 5.8 1.7 3.9

Six Core Industries (26.7) 2.5 4.3 4.5 4.0

Source: MOSPI; ( Figures in brackets shows the respective weights in IIP)

Vehicle Sales________________________________________________________________________

Vehicle Sales: As per Society of Indian Automobile Manufactures (SIAM), there has beengrowth of 31.06% in overall production during AprilSeptember 2010 over the same period lastyear. The overall automobile exports registered a growth of 43.61% during the same period.

The detailed position of domestic vehicles sales is as under:

Domestic Vehicle Sales: %ge growthType Apr-Jul 2010 Apr-Aug 2010 Apr-Sep 2010

All Passenger Vehicles 33.80% 33.88% 32.91%Passenger Cars 34.60% 34.32% 33.58%Utility Vehicles 23.90% 22.56% 20.69%Multi Purpose Vehicles 44.00% 50.68% 49.32%Commercial Vehicles Segment 49.80% 44.75% 41.59%Medium & Heavy Commercial Vehicles 74.20% 65.91% 61.59%Light Commercial Vehicles 32.90% 29.68% 26.90%Three Wheelers Sales 18.10% 20.15% 19.87%

Passenger Carriers 20.90% 23.84% 24.18%Goods Carriers 7.20% 5.46% 2.54%Two Wheelers 28.30% 27.22% 25.86%Scooters 44.70% 44.45% 44.95%Mopeds 23.90% 24.18% 23.13%Motorcycles 25.60% 24.41% 22.52%


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Foreign Trade, Foreign Exchange Reserves, External Commercial Borrowings________________________________________________________________________

Foreign Trade:Indias exports were recorded at US $18.02 bn in September 2010, registeringa y-o-y growth of 23.2%. Imports were recorded at US $ 27.41 bn in September 2010,registering a y-o-y growth of 26.1 %. Cumulative exports & imports during April-September2010 stood at US $ 103.65 bn & US $ 166.48 bn respectively, recording a y-o-y growth of 28.0%and 29.9% respectively. Trade deficit was recorded at US $ 62.83 bn during April-September2010, compared to US $ 47.18 bn during the same period last year. Rising current accountdeficits is going to be a major concern for the Indian economy in the current fiscal. However,FII inflows have been robust to take care of financing the current account deficit in this fiscalso far.

India's Foreign Trade (US $ mn)

FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 (Apr-Sep)

Exports 103091 126361 163132 185295 176574 103647

(23.4) (22.6) (29.0) (13.6) (-4.7) (28.0)

Imports 149166 185749 251654 303696 278681 166478

(33.8) (24.5) (35.5) (20.7) (-8.2) (29.9)w/w Non-Oil 105233 128790 171940 210029 193208 117763

(37.1) (22.4) (33.5) (22.2) (-8.0) (29.9)

Balance of Trade -46075 -59388 -88522 -118401 -102106 -62831

Source: Ministry of Commerce & Industries, GoI ( Figures in bracket shows % y-o-y growth)

India's Foreign Exchange Reserves* (US $ mn)FY 06 FY 07 FY 08 FY 09 FY 10 29th Oct 2010

Forex Reserves 151622 199179 309723 251985 279057 297956

Import coverage of

forex reserves*

11.6 12.5 14.4 10.3 11.2 N.A.

Source: RBI (* in months)

Foreign Exchange Reserves: The foreign exchange reserves of country have increased by US$ 2.56 bn during the week, to US $ 297.96 bn as of October 29, 2010.

External Commercial Borrowings (ECB):ECB for the month of September 2010 was recordedat US $ 3091 mn, of which US $ 1173 mn is through automatic route and US $ 1918 mn isthrough approval route. The cumulative inflows through ECB during Apr-Sep 2010 stood at US$ 10.65 bn.

External Commercial Borrowings (US $ mn)

Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 FY 11 (Apr-Aug)

Automatic Route 698 459 1778 1113 874 1173 6095

Approval route2120 237 13 52 215 1918 4554

Total 2818 696 1791 1165 1089 3091 10650

Source: RBI


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Inflation________________________________________________________________________

Inflation: The Reserve Bank of India has pegged the projection for headline inflation at 5.5%under the new series with base year of 2004-05. Under the new series, WPI based headlineinflation has been recorded at 8.62% for the month of September 2010 as compared to 8.51%in August 2010. The headline inflation for primary articles declined to 16.62% (y-o-y) for theweek ended 16th October 2010 compared to 18.05% for the previous week. However, theheadline inflation for fuel & power group has marginally increased to 11.25% (y-o-y) for theweek ended 16h October 2010 compared to 11.14% for the previous week.

Wholesale Price Index (WPI in %) - Full Year: Point to Point

FY 07 FY 08 FY 09 FY 10 Sep-10

Primary Articles (20.1) 12.9 9.1 5.3 22.4 17.45

Food Articles (14.3) 12.7 5.8 7.5 21.1 15.71

Non-food Articles (4.3) 13.4 13.3 1.8 19.6 18.20

Fuel, Power, Light & Lubricants (14.9) 0.9 9.2 -4.9 13.8 11.06

Manufactured Products (65.0) 6.5 7.2 1.4 5.2 4.59

All Commodities (100.0) 6.8 7.7 1.5 10.2 8.62

Source: Office of the Economic Advisor, Ministry of Commerce and Industry

Outlook:Going forward, we observe that WPI based inflation is likely to be around 6.1% forDecember 2010 and in the range of 5.0-5.5% for March 2010. Our projection for headlineinflation for the month of October 2010 is 8.4% under the new series.

Cost of Living Index: The retail level inflation has started moderating for the last twomonths with CPI for industrial workers & agricultural labour coming down below the doubledigits.

Consumer Price Index (CPI in %) - Full Year: Point to Point

FY 06 FY 07 FY 08 FY 09 FY 10 Sep-10

Industrial Workers 5.3 6.7 7.9 8.0 14.9 9.82

Urban Non-Manual 5.0 7.6 6.0 9.3 14.9 10.30*

Agricultural Labour 5.3 9.5 7.9 9.5 15.8 9.13

Source: MOSPI, CSO (* For August 2010)

Business Confidence:HSBC India Manufacturing Purchasing Managers Index (PMI) increasedto 57.2 in October 2010 from 55.1 in September 2010, on account of marked increase inpurchasing activity despite higher input price inflation.

(Note: Indias manufacturing PMI has been above 55.0 since January 2010 and above 50.0 since April2009. PMI Index of 50.0 & above indicates expansion in activity.)


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Outlook for Interest Rate on Deposits of SCBs________________________________________________________________________

Money Supply:As on 22nd October 2010, money supply (M3) recorded y-o-y increase of 17.1%(PY: 18.9%) as against RBIs indicative projection for money supply pegged at 17.0% for thecurrent financial year.

Credit & Deposits Growth (%): As on 22

nd

October 2010, aggregate deposits of SCBs recoded ay-o-y growth of 17.3% and bank credit recorded a y-o-y growth of 21.2%. The growth inaggregate deposits and bank credit is in sync with the RBIs indicative projections for March2011.

Investments: As on 22nd October 2010, SCBs investment in SLR securities increased (y-o-y) by10.8% compared to 28.4% in the corresponding period of the last year. It is estimated that theeffective SLR percentage maintained by SCBs is around 28.71% of NDTL, well above thestatutory requirement of 25%.

SCBs Position vis--vis RBIs indicative projections for March 2011

RBIs Indicative

Projection for FY 11

Y-o-Y growth as

on 22nd Oct 2010

Y-T-D growth as on

22nd Oct 2010

Aggregate Deposits 18.0% 17.3 (YoY) 8.5 (YTD)

Bank Credit 20.0% 21.2 (YoY) 7.1 (YTD)

Outlook for Deposits & Credit Growth (%): RBIs indicative projection for deposits & creditgrowth is pegged at 18.0% and 20.0% respectively for the current financial year. We expectthat SCBs will achieve the RBIs indicative projection for deposits growth whereas creditgrowth is likely to surpass the RBIs indicative projection for the current financial year.

Outlook for interest rate on deposits (1 year & above): Our view is that there is pressureon deposits rate of the banks in the remaining part of current financial year, particularly inthe 3rd quarter, based on the following underlying reasons:

Negative real interest rate on deposits: The real interest rate on deposits is stillnegative. We have taken the interest rate on deposits of 1 year & above to less than 3years of more than 10 larger public sector banks. It is observed that interest rate ondeposits for 1 year to less than 3 year is in the range of 7.0-8.0% for deposits upto lessthan Rs. 1 crore. The interest rate on deposits of 1 year & above to less than 3 years isin the range of 6.0-8.0% for deposits of Rs. 1 crore & above. If we compare with theseinterest rates on deposits with WPI inflation of 8.62% for September 2010, we observethat real interest rate on deposits is negative. The situation is even worse if we compare

the interest rate on retail deposits with retail level of inflation measured by differentindices of Consumer Price Index (CPI). The CPI for industrial workers has been recordedat 9.82% in September 2010.

Tight liquidity conditions: Liquidity has been mainly under injection mode since end-May 2010, on account 3G spectrum and Broadband Wireless Access (BWA) auctions andadvance tax outflows. Liquidity has been in very tight conditions since announcement ofmid-quarter review of monetary policy by RBO on 16th September 2010. Since then,liquidity is deficit to tune of daily average of Rs. 62000 crore. The underlying reasons


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are governments cash balances with RBI, concentration of market borrowing programmefor the government in the second half of FY 11 in the 3rd quarter, higher credit growththan deposits growth, demand for funds in market etc. Currently, liquidity has beenoutside the desirable limit of +/- 1% of NDTL.

Deposits & Credit growth (%): The credit growth has been higher than the depositsgrowth on y-o-y basis for all the reporting Fridays in the current financial year so far.The spread between credit & deposits growth was 387 bps as on 22nd October 2010.

Share of demand deposits & time deposits in aggregate deposits: The share of demanddeposits in aggregate deposits of SCBs has increased from 13.30% as of 9th April 2010 to13.66% as of 22nd October 2010, whereas the share of time deposits in aggregatedeposits of SCBs has declined from 86.70% as of 9th April 2010 to 86.34% as of 22ndOctober 2010. This shows preference of the banks to mobilize more of CASA depositsthan time deposits in the current financial year so far.

Yield on Government Securities: The yield on 1 year G-Sec and 3 year G-Sec has beenaround 6.85% and 7.30% respectively as of end-October 2010. The spread between yieldson G-Sec of comparable maturity with interest rate on deposits is thin. The interest rateon PPF, EPF is 8.0% and 9.5% respectively.

Shorter-term deposits rate: The interest rate on deposits for tenor 7 days to less than 1year for deposits upto Rs. 1 crore is 2.50-6.75% whereas interest rate on deposits fordeposits 1 crore is 2.50-7.10% as of October 2010. It is important to note here thatinterest rate on deposits shorter tenor maturity buckets is far below the reverse reporate of 5.25%.

RBIs policy measures: RBI has raised the repo & reverse repo rates by 125 bps & 175bps respectively in the current financial year so far. RBI has also minimized the repocorridor from 150 bps at the beginning of the current financial year to 100 bps presentlyto reduce the volatility in short term rates. The RBIs normalization of policy rates has

also put upward pressure on deposits rates.

Outlook for inflation and liquidity: The Reserve Bank of India in its second quarterreview of monetary policy has projected the headline inflation under new series at 5.5%for end-March 2011. This shows that the pressure on interest rate on deposits is less inthe 4th quarter on the ground of real interest rate. Besides, we also observe thatliquidity conditions would be one of comfortable in the 4th quarter compared to verytight liquidity conditions in the 3rd quarter (as given in the outlook for liquidity in ourprevious report). Hence, the pressure on deposits is concentrated in the 3rd quarter ofthe current fiscal.

Concluding Remarks: Our observation is that there is more pressure on shorter tenor

(less than 1 year) deposits rates than the longer tenor deposit rates. We expect that theinterest rate on deposits of SCBs particularly for the tenor of 1 year & above will seeupward movement by 50-100 bps in the remaining part of the current fiscal. We may seesome special deposits schemes by the Banks, particularly for long tenor maturitybuckets/special buckets/number of days, offering higher rate of interest.


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Government Borrowing Programme for FY 2010-11________________________________________________________________________

Gross market borrowing programme of the govt. was earlier placed at Rs. 457000 crore inFY 2010-11 whereas the net borrowing of the government was placed at Rs. 345000 croresin FY 2010-11. However, gross market borrowing programme of the government has beenreduced by Rs. 10000 crore in the current fiscal to Rs. 447000 crore.

The reduction in gross market borrowing programme of the government is mainly onaccount of collection of Rs. 106336 crore through auction of 3G spectrums & BroadbandWireless Access (BWA), as against the estimated budget of around Rs. 35000 crore,thereby providing surplus non-tax revenue of around Rs. 71000 crore. Taking intoconsideration the additional demand for grants of Rs. 55000 crore from the surplus non-tax revenue, market borrowing programme has been reduced by Rs. 10000 crore in thecurrent fiscal.

SlNo.

Borrowing Programme (Rs crore) 2009-10 2010-11 Change (y-o-y)

1 Fiscal Deficit of the Centre 414041 381408 -32633

2 Gross Market Borrowings 451,000 447,143 -3,8573 Less, Repayments of maturing G-Secs 52,589 112,133 59,544

4 Net Market Borrowings (2-3) 398,411 335,010 -63,401

Less,

5 OMO 57,487 0

6 MSS Desequestering 33,000 0

7 MSS Unwinding 53,031 0

8 Net Supply of Papers (4-5-6-7) 254,893 335,010 80,117

As against the borrowing programme of Rs. 287000 crore, the actual borrowing wasreduced to Rs. 284000 crore in H1 of FY 2010-11. The borrowing programme for H2 of FY11 has been reduced by Rs. 7000 crores to Rs. 163000 crore.

The market borrowing programme is mainly into the 3rd quarter of the current fiscal andonly 33% of the market borrowing to take place in the 4th quarter of the current fiscal.

Taking into consideration the RBIs calendar of second half borrowing, redemption ofgovernment papers and coupon inflows during Q3 & Q4, overall liquidity in the system islikely to be under strain in the 3rd quarter and improve in the 4th quarter of the currentfiscal.

The market borrowing programme is around Rs. 44000 crore in October 2010, Rs. 33000crore each in the month of November 2010, December 2010 and January 2011 and Rs.20000 crore in February 2011. There are no actions scheduled in the month of March 2011.

As on 4th November 2010, RBI has completed 75.8% of the revised market borrowingprogramme of the government.


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Disclaimer________________________________________________________________________

The views expressed are of the economists preparing this report and not necessarilyof the Bank. The objective of the report is to provide information on economy andbanking and not meant to serve as the basis for taking decisions based onprojections/outlook for various macroeconomic indicators. The information contained

in the document is extracted from different public sources. Union Bank of India doesnot guarantee the accuracy, adequacy or completeness of any information as the allthe all the information has been taken from various sources believed to be correct.We are not responsible for any factual error for whatsoever reasons. Other usualdisclaimers apply.

Report on Macroeconomics & Banking 061110

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