Annual Report

Note : To read the chapter of your choice, please click on the links below. You can also read past reports by accessing the archives in the right panel.

()

Date : Aug 29, 2005

I. Economic Review (Part 3 of 3)

Table 1.47: Combined Expenditure of the Centre and States on Social Sector

			(Rupees crore)

	2005-06	2004-05	2004-05	2003-04
	(BE)	(RE)	(BE)

1	2	3	4	5
Expenditure on
Social Sector*	2,60,227	2,38,018	2,23,517	2,06,543
of which:
Social Services	2,00,482	1,82,582	1,71,157	1,53,995
of which:
i) Education	97,152	87,962	83,939	79,833
ii) Medical &
Public Health	45,122	40,509	39,657	34,083

	Per cent to GDP
Expenditure
on Social Sector	7.5	7.7	7.2	7.5
of which:
Social Services	5.8	5.9	5.5	5.6
of which:
i) Education	2.8	2.8	2.7	2.9
ii) Medical &
Public Health	1.3	1.3	1.3	1.2
	Per cent to Total Expenditure
Expenditure
on Social Sector	26.9	26.7	25.8	26.2
of which:
Total Social Services	20.7	20.5	19.8	19.6
of which:
i) Education	10.0	9.9	9.7	10.1
ii) Medical &
Public Health	4.7	4.5	4.6	4.3

* : Expenditure on Social Sector includes expenditure on social services, rural development and food subsidies. Note : Data in respect of the States are provisional and relate to 28 States.

however, remained low over time. Although some improvement was witnessed in 2004-05, social sector expenditure is budgeted to decline to 7.5 per cent of GDP in 2005-06 (Table 1.47).

I.4.42 To conclude, combined finances of the Centre and States envisage a further reduction in key deficit indicators during 2005-06 enabled by buoyancy in tax collections as well as deceleration in expenditure. The Union Budget for 2005-06 seeks to continue with the process of fiscal consolidation while aiming to build the spirit of cooperative fiscal federalism through higher devolution of resources to States. Fiscal policy is premised on tax reforms and expenditure management with emphasis on outcomes than mere outlays. State Budgets for 2005-06 also envisage substantial fiscal correction through containment of non-interest revenue expenditure.

V. FINANCIAL MARKETS

I.5.1 Financial markets operated in an environment of uncertainty worldwide. The upturn in the interest rate cycle, threat of sharp currency movements emanating from large and growing global macroeconomic imbalances and high and volatile international crude oil prices were major sources of risk. Investor appetite for both mature and emerging markets, nevertheless, remained strong but for a brief lull in the second quarter of 2004-05.

I.5.2 Domestic financial markets remained broadly stable during 2004-05 facilitated by the Reserve Bank’s liquidity management. Money markets continued to be guided by the policy reverse repo rate, barring occasional spells of tight liquidity. The foreign exchange market remained orderly despite the ebbing of capital flows during May-October 2004 and the rise in demand for foreign exchange due to higher oil prices. Yields in the Government securities market hardened in consonance with higher credit off-take, a resurgence of inflationary pressures in the first two quarters of the year and the hardening of international interest rates. After a setback in May 2004, the equity markets staged a strong rally in the second half of 2004-05 (Table 1.48).

INTERNATIONAL FINANCIAL MARKETS

I.5.3 Money market rates firmed up in some economies as leading central banks, including the US Federal Reser ve, began to reverse their accommodative monetary policy stance in response to inflationary pressures (Table 1.49). In other countries/areas such as the UK and the Euro area, however, short-term interest rates reversed their rising trend during the first quarter of 2005-06 in the face of a weakening of economic activity.

I.5.4 Gover nment bond yields in advanced economies firmed up during April-August 2004 as inflation began to climb up on account of a spurt in fuel and other key commodity prices. A correction set in after September 2004 as inflationar y expectations eased with the levelling off of commodity price inflation (Chart I.24). A higher demand for gilts was also engendered by expectations that monetary authorities would be restrained from tightening monetary conditions further because of the fragility of the economic recovery in many economies, on the one hand, and the demand for fixed income products from baby boomers approaching retirement, on the other. As a result, the yield curve has been flattening in

Table 1.48: Domestic Financial Markets at a Glance

Month	Call Money			Govt. Securities			Foreign Exchange			Liquidity Management			Equity

	Average	Average		10-year	Turnover	Average	Average	RBI's	Average	MSS	Average	Average	Average	Average	Average
	Daily		Call	Yield@	in Govt.	Daily	Exchange	Net	Forward	Outstanding	Daily	Daily	Daily	BSE	S & P
	Turnover	*Rates (Per cent)**			Securities	Inter-	Rate	Foreign	Premia	(Rupees	Reverse	BSE	NSE	Sensex**	CNX
	(Rupees	(Per cent)			(Rupees	bank	(Rs. per	Currency	3-month	crore)	Repo	Turnover	Turnover		Nifty**
	crore)				crore)#	Turnover	US $)	Sales(-)/	(Per cent)		(LAF)	(Rupees	(Rupees
						(US $	Purchases(+)			Outstanding		crore)	crore)
						million)		(US $			(Rupees
								million)			crore)

1	2		3	4	5	6	7	8	9	10	11	12	13	14	15
2004-05
April	12,916		4.29	5.14	3,00,864	10,302	43.93	7,427	-0.36	22,851	75,006	2,243	5,048	5809	1848
May	10,987		4.30	5.29	1,92,264	8,882	45.25	-220	-1.33	30,701	74,502	2,188	4,710	5205	1640
June	10,973		4.35	5.81	1,75,802	7,847	45.51	-413	0.93	37,812	61,981	1,681	3,859	4824	1506
July	8,632		4.31	6.18	1,30,400	7,756	46.04	-1,180	2.25	46,206	59,594	1,793	4,265	4973	1568
August	11,562		4.41	6.16	1,29,373	5,974	46.34	-876	2.85	51,635	42,692	1,736	3,948	5144	1615
September	17,088		4.45	6.23	1,75,635	7,348	46.09	19	2.20	52,255	31,589	1,800	4,023	5423	1692
October	16,667		4.63	6.89	1,12,709	7,262	45.78	-99	2.87	55,087	10,805	1,730	3,785	5702	1795
November	13,820		5.62	7.18	78,225	9,930	45.13	3,792	2.16	51,872	-5,066	1,786	4,102	5961	1874
December	19,527		5.28	6.57	1,33,447	9,447	43.98	1,393	2.03	53,481	7,570	2,183	5,026	6394	2022
January	16,534		4.72	6.69	1,10,535	9,114	43.75	0	2.50	54,499	18,721	2,310	5,249	6307	1978
February	16,041		4.76	6.45	1,29,917	11,583	43.68	4,974	1.99	60,835	19,895	2,484	4,999	6595	2067
March	15,293		4.72	6.65	87,892	11,286	43.69	6,030	1.82	64,211	29,809	2,706	5,139	6679	2096

2005-06
April	17,213		4.77	7.31	90,040	9,880	43.74	0	1.96	67,087	30,675	1,890	4,136	6379	1987
May	15,269		4.99	6.97	1,17,969	10,083	43.49	0	1.57	69,016	22,754	1,971	3,946	6483	2002
June	20,135		5.10	6.89	2,04,197	10,871	43.58	-107	1.40	71,681	13,916	2,543	4,843	6926	2134
July	20,046		5.02	7.01	1,14,634	n.a.	43.54	n.a.	1.56	68,765	10,754	3,095	6,150	7337	2237
* : Average of daily weighted call money borrowing rates. # : Outright turnover in Central Government dated securities during the month. @ : End-Month. **: Average of daily closing indices. MSS : Market Stabilisation Scheme. LAF :Liquidity Adjustment Facility. BSE : The Stock Exchange, Mumbai. NSE : National Stock Exchange of India Ltd. n.a. : Not available.

advanced countries. In the US, the 10-year Treasury yield at 3.8 per cent reached at a 14-month low in early-June 2005. Japanese 10-year bond yields and

Table 1.49: Short-term Interest Rates

			(Per cent)

Country	July 2005	March 2005	March 2004

1	2	3	4
Advanced Economies
US	3.49	2.90	1.04
UK	4.56	4.95	4.31
Euro Area	2.13	2.15	1.96
Japan	0.02	0.02	0.03
Sweden	1.45	1.97	2.12
Emerging Market Economies
China	2.00	2.25	n.a.
Hong Kong	3.54	2.79	0.17
South Korea	3.49	3.54	3.90
Argentina	6.88	4.56	2.88
Brazil	19.75	19.25	16.02
Malaysia	2.88	2.82	3.00
Philippines	6.75	7.25	9.19
Singapore	2.00	2.06	0.69
Thailand	3.05	2.64	1.31

n.a. : Not available.
Source : The Economist.

Euro area bond yields also dropped to record lows in May and June 2005. Similarly, yield curves in Australia, New Zealand and the UK flattened or inverted.

Table 1.50: Domestic and International Equity Markets in 2004-05

Country/	Index	Percentage	Volatility**
Region		Variation*

1	2	3	4

EMEs	MSCI Emerging Market Index	12.0	10.8
Hong Kong	Hang Seng	6.6	6.2
India	BSE Sensex	16.1	11.2
Indonesia	Jakarta Composite Index	46.8	15.8
Japan	Nikkei 225	-0.4	3.3
Korea	KOSPI	9.7	9.1
Malaysia	KLSE Composite Index	-3.4	4.5
Taiwan	Taiwan Index	-7.9	5.3
Thailand	SET Composite Index	5.3	5.8
UK	FTSE 100	11.6	4.5
US	Dow Jones Industrial Average	1.4	2.7
US	Nasdaq Composite	0.3	4.9

EMEs: Emerging Market Economies. MSCI: Morgan Stanley Capital International Inc. KOSPI: Korean Composite Stock Price Index. KLSE: Kuala Lumpur Stock Exchange. SET: The Stock Exchange of Thailand. * : Point-to-point variation over previous year. ** : Measured as coefficient of variation.

I.5.5 The performance of the equity markets was guided by country-specific factors as well as international factors. Most equity markets gained on the back of positive expectations generated by the global recovery, albeit dampened by higher oil prices. The Indian stock markets outperformed a number of major markets (Table 1.50). Despite some firming up of the risk premia, inter national investor confidence in emerging market economies (EMEs) continued to be strong.

DOMESTIC FINANCIAL MARKETS

Money Market

Call/Notice Money Market

I.5.6 Liquidity in the call/notice money markets remained adequate in 2004-05. Reflecting easy liquidity conditions, average daily call money borrowing rates generally ruled below reverse repo rate levels, but were anchored to the policy rate (Chart I.25).

I.5.7 Call rates remained soft in April 2004 as the seasonal jump in market liquidity was reinforced by the initial liquidity overhang of about Rs.81,000 crore, a bunching of capital flows and the cancellation of a Government bond auction. The Reserve Bank, in fact, held nine auctions under the newly-operationalised

Market Stabilisation Scheme (MSS) (Rs.23,000 crore) to supplement large-scale reverse repo operations in mopping up market liquidity. Although foreign institutional investor (FII) inflows began to dry up with the dip in Asian equity markets by mid-May 2004, the weighted average call rates continued to remain below the reverse repo rate till July 2004. A spike in the call rates in August due to an outflow of funds on account of auction of Central Government securities, redemption pressure on mutual funds and undercovering of reserve maintenance was assuaged by the Reserve Bank by injecting Rs.5,000 crore under the LAF (Appendix Table I.37). With the hike in the Cash Reserve Ratio (CRR) by 25 basis points with effect from September 18, 2004, the daily average turnover in the call/notice money market increased.

I.5.8 Call rates firmed up in early October 2004 with the increase in the CRR by another 25 basis points with effect from October 2, 2004. Liquidity conditions also came under some pressure during the latter part of the month. The hike of 25 basis points in the LAF reverse repo rate effective October 27, 2004 correspondingly raised the floor in the money market. Call rates touched an intra-year peak of 6.30 per cent on November 18, 2004. The Reserve Bank injected liquidity under the LAF repo auctions to comfort market sentiments. The Reserve Bank reintroduced overnight fixed rate reverse repo auctions under the LAF with effect from November 1, 2004 and discontinued 7-day and 14-day reverse repo auctions. Liquidity conditions began to ease by end-November 2004, interrupted by occasional

Table 1.51: Call/Notice Money Market Borrowing Rates - Summary Statistics

		Low				High			Weighted Average

Month	Min (%)	Max (%)	Avg. (%)	CV	Min. (%)	Max (%)	Avg. (%)	CV	Min. (%)	Max (%)	Avg. (%)	CV

1	2	3	4	5	6	7	8	9	10	11	12	13

2003-04	1.00	5.25	3.38	0.18	4.50	12.00	4.89	0.13	3.99	6.21	4.62	0.06
2004-05	0.60	6.50	3.59	0.21	3.50	10.95	5.02	0.14	3.50	6.30	4.65	0.10
April	1.00	3.80	3.09	0.22	4.50	4.55	4.52	0.01	4.01	4.42	4.29	0.02
May	2.00	3.75	3.14	0.17	4.50	7.50	4.61	0.12	4.16	4.67	4.30	0.02
June	2.50	4.00	3.51	0.10	4.50	6.25	4.61	0.07	4.18	4.74	4.35	0.02
July	2.00	3.80	3.41	0.10	4.50	4.80	4.52	0.01	4.13	4.41	4.31	0.01
August	1.50	3.50	3.21	0.17	4.50	10.95	5.19	0.26	3.96	5.20	4.41	0.05
September	2.00	4.00	3.32	0.19	3.50	6.12	4.82	0.11	3.50	4.85	4.45	0.05
October	2.00	4.00	3.49	0.18	4.65	6.10	5.01	0.06	4.32	4.86	4.63	0.03
November	3.50	5.00	4.49	0.11	5.05	7.00	6.06	0.09	4.76	6.30	5.62	0.10
December	2.25	5.00	4.00	0.15	4.85	6.30	5.70	0.09	4.42	6.03	5.28	0.11
January	2.00	4.60	3.64	0.19	4.80	6.00	5.13	0.05	4.20	4.88	4.72	0.03
February	3.00	4.00	3.79	0.07	4.85	5.30	5.22	0.02	4.67	4.81	4.76	0.01
March	0.60	4.00	3.39	0.26	4.80	6.25	5.09	0.06	4.15	5.00	4.72	0.04
2005-06
April	2.00	4.30	3.70	0.10	4.80	6.10	5.06	0.06	4.55	5.01	4.77	0.02
May	3.00	4.00	3.80	0.10	5.05	5.30	5.14	0.01	4.89	5.07	4.99	0.01
June	2.50	4.60	4.14	0.09	5.05	6.50	5.36	0.08	4.95	5.89	5.10	0.08
July	1.00	4.65	4.05	0.24	5.05	6.25	5.58	0.06	3.19	5.60	5.02	0.10

Min. : Minimum. Max: Maximum. Avg.: Average. CV: Coefficient of Variation.

pressures. By March 2005, the weighted average call rates ranged between 4.15-5.00 per cent with some firmness during the latter part of the month on account of balance sheet adjustments, coupled with advance tax outflows. The volatility in call money rates was somewhat higher during 2004-05 than in the preceding year, essentially on account of fluctuations in call rates during November-December 2004 (Table 1.51).

I.5.9 The call money market began the first quarter of 2005-06 under conditions of comfortable liquidity stemming from the overhang in the system. Despite FII outflows in April, the Reserve Bank had to supplement reverse repo operations with sale of Government paper under the MSS to absorb liquidity and balance market conditions. Average daily call money borrowing rates hovered around reverse repo rate levels. With the increase in the fixed reverse repo rate by 25 basis points on April 29, 2005 call rates also edged up by a similar magnitude. Towards the end of June 2005, call rates rose above the reverse repo rate under demand pressures emanating from advance tax payments, scheduled Treasury Bills auctions and a higher oil import bill. The Reserve Bank injected Rs.210 crore and Rs.575 crore under the LAF repo on June 28, 2005 and June 30, 2005, respectively, to assuage the demand pressure. On a net basis, however, on these two days, there was liquidity absorption. Call money rates eased by mid- July 2005 and stood at 5.00 per cent on August 18, 2005.

I.5.10 In recent years, relative shares of the different constituents of the money market have undergone significant changes. Banks’ share of borrowings from call market witnessed a gradual decline over the years till 2003-04, reflecting lower demand for funds in the wake of excess liquidity in the economy and substantial scaling down of CRR prescriptions. Thus, in a scenario of shrinking turnover in the call money market, primary dealers (PDs), whose demand was guided by the volume of market borrowing programme, emerged as the largest borrower as a group in this market. The situation changed during 2004-05 with banks re-emerging as the largest group of borrowers following a pick up in credit and the increase in CRR with effect from September 18, 2004. The truncation in the market borrowing programme of the Central Government reduced the demand from PDs in the call/notice money market (Table 1.52). On the lending side, the share of non-bank entities had declined during 2001-02 and 2002-03 following the commencement of the process of their phasing out from the call/notice market. Their shares, however, increased during 2003-04 in relative terms due to shrinkage in the aggregate turnover of the call market. The share of the banking sector has been rising since September 2004 on account of strong growth in non-food credit.

Table 1.52: Relative Shares in Call/Notice Money Market

					(Per cent)

Year	Borrowing			Lending

	Banks	PDs	Banks	PDs	Non-banks
1	2	3	4	5	6
2000-01	67	33	47	12	41
2001-02	62	38	65	10	25
2002-03	53	47	69	2	29
2003-04	36	64	57	2	41
2004-05	65	35	70	1	29
2005-06*	72	28	90	0	10
* : Up to July 2005.

Repo and CBLO Markets

I.5.11 The gradual phasing out of non-bank participants from the call market, tightening of prudential norms relating to the call exposure of banks and availability of cheaper funds led to increased activity in the repo market (outside the LAF). The monthly average turnover increased by 64.2 per cent to Rs.17,135 crore during 2004-05 and further to Rs.18,103 crore in July 2005. Apart from banks, mutual funds and financial institutions were the main participants in the repo market. The repo rates ranged between 3.70 per cent and 5.58 per cent during the year, barring occasional spikes in November and December 2004.

I.5.12 The collateralised borrowing and lending obligations (CBLO) market continued to expand during 2004-05. By July 2005, 121 members had been admitted in the CCIL’s CBLO segment out of which 56 were active members. The daily average turnover increased from Rs.2,496 crore in April 2004 to Rs.9,625 crore by March 2005 and further to Rs.15,291 crore by July 2005. Initially, only one insurance company and few co-operative banks supplied funds in this market. Currently, mutual funds have emerged as the largest suppliers of funds. On the demand side, apart from banks, PDs have also been participating regularly on account of lower borrowing costs in CBLO vis-à-vis call market.

I.5.13 A distinctive feature of 2004-05 was the growth in the turnover of the CBLO market vis-à-vis the call money market (Chart I.26). A number of players preferred to migrate from the uncollateralised call/notice market to market repo and CBLO segments, essentially on account of cheaper funding costs. In June 2005, however, turnover in the call money market increased on account of increased demand for funds due to tightening of liquidity conditions.

Term Money Market

I.5.14 During 2004-05, the average outstanding volume of transactions in the term money market was Rs.477 crore, down from Rs.519 crore during the previous year (Table 1.53). During 2005-06 (up to July 2005), the average outstanding increased to Rs.614 crore.

Certificates of Deposit

I.5.15 The outstanding amount of certificates of deposit (CDs) issued by scheduled commercial banks increased markedly dur ing 2004-05, reflecting the banks’ requirement of funds in view of sustained increase in credit demand (Chart I.27 and Appendix Table I.38). The typical discount rate (for 3-month maturity) on CDs also increased by about 94 basis points over the year. Issuances of CDs depend not only on overall liquidity conditions but also on bank-specific factors. In this context, select foreign and private sector banks have been

Table 1.53: Activity in Other Money Market Segments

							(Rupees crore)

Month	Average Daily Turnover			Outstanding	Amount	Forward Rate	Commercial
						Agreements/	Bills
	Term Money	Repo Market	Collateralised	Commercial	Certificates of
						Interest Rates	Rediscounted
	Market	(Outside	Borrowing	Paper	Deposit
						Swaps	by Commercial
		the LAF)	and Lending
						(Notional	Banks
			Obligation
						Amount)
			(CBLO)

1	2	3	4	5	6	7	8

2004-05
April	325	15,195	2,496	10,362	4,725	5,76,808	330
May	372	15,932	3,872	11,038	4,860	6,11,595	370
June	274	17,517	4,015	10,950	5,438	6,04,669	85
July	445	19,226	4,508	11,038	5,478	5,90,118	100
August	311	13,561	4,962	11,002	4,480	6,40,173	195
September	487	18,178	6,149	11,371	5,112	8,53,195	375
October	539	15,719	8,466	10,409	4,785	9,25,175	320
November	407	18,560	9,651	10,719	6,118	9,50,151	1,099
December	504	21,922	9,962	13,272	6,103	9,75,135	288
January	514	17,556	7,701	13,092	4,236	10,14,442	316
February	878	17,562	8,952	13,189	9,214	9,46,293	375
March	1,253	14,688	9,625	14,235	12,078	10,62,242	401

2005-06
April	661	12,174	10,369	15,598	16,602	10,76,513	785
May	545	13,688	12,233	17,182	17,689	10,72,684	755
June	534	17,163	12,075	17,797	19,270	10,93,367	n.a.
July	717	18,103	15,291	18,349	20,509 *	12,13,895	n.a.

n.a. : Not available. * : As on July 8, 2005.

raising resources through the issuance of CDs on account of a smaller retail network and cost effectiveness. The steady expansion in issuance of

CDs during 2004-05 was encouraged by factors such as reduction in stamp duty on CDs effective March 1, 2004, no tax deduction at source, no premature closure of deposits under CDs vis-à-vis alternative competing instruments such as fixed deposits and greater opportunity for secondary market trading. Furthermore, mutual funds (MFs) have also turned to CDs after the Securities and Exchange Board of India (SEBI) placed a bar on parking their funds in bank deposits. An encouraging development was that some of the top issuing banks got their CDs rated for better access to the market even when such rating was not mandatory under the extant guidelines.

I.5.16 Balances under CDs recorded a further pickup during 2005-06 (up to July 8, 2005) mainly due to higher issuances by some private sector banks. The higher recourse to CDs was also driven by the reduction in the minimum maturity period to seven days. The typical three-month discount rate on CDs remained broadly stable during the quarter. Total CDs outstanding constituted 5.1 per cent of the aggregate deposits of the issuing banks.

Commercial Paper

I.5.17 The market for commercial paper (CP) continued to remain buoyant during 2004-05 (Chart I.28). In tandem, the discount rate firmed up from a range of 4.70-6.50 per cent during 2003-04 to 5.20-7.25 per cent during 2004-05, with the weighted average discount rate (WADR) moving up from 5.11 per cent to 5.84 per cent. The spread of the WADR between the prime-rated and medium-rated companies declined to 3 basis points during the fortnight ended March 31, 2005 from 73 basis points during the fortnight ended March 31, 2004. The preferred maturity of CP was for periods ranging from ‘61 to 90 days’ and ‘180 days and above’.

I.5.18 In terms of groups of issuers, there has been a decline in the amount of CPs being issued by manufacturing companies over time. Their share in the aggregate amount of CPs raised came down to 31 per cent during 2004-05 from 44 per cent during 2003-04. On the other hand, the share of finance/leasing companies increased to 56 per cent (38 per cent during 2003-04) while FIs accounted for 13 per cent (18 per cent during 2003-04). The decline in CP issuance by manufacturing companies reflected larger internal accruals due to enhanced efficiency in their operations. Introduction of sub-PLR lending has also enabled corporates to raise funds at comparable rates from banks without incurring any additional cost towards

stamp duty, dematerialisation costs or fees for issuing and paying agents (IPAs). Furthermore, easier access to external commercial borrowings (ECBs) also helped top-rated corporates to borrow cheaper funds instead of relying essentially on domestic sources. Larger issuances of CP by finance and leasing companies was par tly on account of the policy-induced phasing out their access to public deposits. Large investment interest by mutual funds on account of the Reserve Bank’s guidelines on non-SLR debt securities by banks and reduction in stamp duty on CP effective March 1, 2004 also boosted CP issuances. Though the CP market is overwhelmingly dominated by first class prime rated issuers (i.e., P1+ and above of CRISIL or its equivalent), their share in issuances of CP declined marginally to 88.2 per cent in 2004-05 from 91.9 per cent during 2002-03. During 2004-05, around 91 per cent of the CP issuances was accounted for by the corporates with net worth of more than Rs.50 crore.

I.5.19 The market for CPs continued to remain strong in 2005-06 (up to end-July 2005) and outstanding CPs increased from Rs.14,235 crore at end-March 2005 to Rs.18,349 crore by end-July 2005 (Appendix Table I.39). Leasing and finance companies accounted for 62.5 per cent of the total CP outstanding in July 2005. The WADR on CPs increased by four basis points to 5.88 per cent on July 31, 2005 over its level on March 31, 2005.

Forward Rate Agreements (FRAs)/Interest Rate Swaps (IRS)

I.5.20 There was a sharp increase in volumes in the FRAs/IRS market during 2004-05. FRAs/IRS transactions rose from 20,413 contracts amounting to Rs.5,76,808 crore in April 2004 to 37,864 contracts for Rs.10,62,242 crore in March 2005. The major participants in this market include select foreign banks, private sector banks and PDs. In a majority of these contracts, the National Stock Exchange (NSE)-Mumbai Inter-bank Offered Rate (MIBOR) and Mumbai Inter-bank Forward Offered Rate (MIFOR) were used as the benchmark rates. The other benchmark rates used included secondary market yields of Government of India securities having a residual maturity of one year and primary cut-off yields on 364-day Treasury Bills. During 2005-06 (up to July 2005), the number of contracts increased further to 45,225 amounting to Rs.12,13,895 crore.

FOREIGN EXCHANGE MARKET

I.5.21 The foreign exchange market remained generally stable during 2004-05. In response to the switches in capital flows during the year, the rupee moved in a relatively wide range of Rs.43.36-Rs.46.46 per US dollar during the year. The rupee appreciated by 2.2 per cent against the US dollar on an annual average basis while it weakened against the euro, the pound sterling and the Japanese yen by 4.5 per cent, 6.3 per cent and 2.6 per cent, respectively, during 2004-05. Reflecting these cross-currency movements, the nominal effective exchange rate (NEER) depreciated by 1.9 per cent during 2004-05 (Chart I.29).

I.5.22 Excess supply in the foreign exchange market in April 2004 drove the forwards into discounts during the month (Chart I.30). The excess supply situation changed by mid-May 2004 because of the turbulence in equity markets leading to outflows on account of FIIs and rising global oil prices. As a result, the rupee depreciated by 4.3 per cent against the US dollar during May-August 2004. The Reserve Bank made net market sales of US $ 2.7 billion during this period (Table 1.54). The two-way movement in the rupee prompted corporates to hedge foreign currency exposures and forwards moved into premia in June 2004. The pressure on the rupee started easing from September 2004 onwards with the revival in FII flows, step-up in trade credits and ECBs by importers. Remittances from exporters and heavy FII inflows continued to provide strength to the rupee against the US dollar in the following months. The weakness of the US dollar against other major currencies led the rupee to appreciate by 6.6 per cent during August-December 2004. Although FII flows slowed down in January 2005, the rupee remained strong against the US dollar during the last quarter of the financial year as the US dollar weakened sharply in the international markets. The Reserve Bank made net market purchases of US $ 16.1 billion during September 2004-March 2005.

I.5.23 During April-May 2005, despite outflows by FIIs and a higher merchandise trade deficit, the rupee firmed up against the US dollar from Rs.43.76 at end-March 2005 to Rs.43.30 per US dollar on May 12, 2005. In subsequent weeks, the Indian rupee depreciated, reaching Rs.43.76 on June 2, 2005 due to strengthening of the US dollar in the international markets. With the revaluation of the Chinese yuan on July 21, 2005, there were appreciation pressures and the rupee stood at Rs.43.58 per US dollar on August 19, 2005. On the whole, the Indian rupee appreciated by 0.4 per cent over its level on March 31, 2005.

Table 1.54: Purchases and Sales of US dollars by the Reserve Bank

					(US $ million)
Month	Purchases(+)	Sales (-)	Net@ (+/-)	Cumulative (during the	Outstanding Net Forward
				financial year)	Sales (-) /Purchases (+)
					(end of month)

1	2	3	4	5	6

2004-05
April	10,759	3,332	(+) 7,427	(+) 7,427	(+) 311
May	3,220	3,440	(-) 220	(+) 7,207	(+) 125
June	970	1,383	(-) 413	(+) 6,793	(+) 115
July	0	1,180	(-) 1,180	(+) 5,614	(+) 115
August	5	881	(-) 876	(+) 4,738	(+) 110
September	143	124	(+) 19	(+) 4,757	(+) 5
October	5	104	(-) 99	(+) 4,658	0
November	3,792	0	(+) 3,792	(+) 8,450	0
December	1,501	108	(+) 1,393	(+) 9,843	0
January	0	0	0	(+) 9,843	0
February	4,974	0	(+) 4,974	(+) 14,817	0
March	6,030	0	(+) 6,030	(+) 20,847	0

2005-06
April	0	0	0	0	0
May	0	0	0	0	0
June	0	107	(-) 107	(-) 107	0

(+) :Implies purchases including purchase leg under swaps and outright forwards. (-) :Implies sales including sale leg under swaps and outright forwards. @ :Includes transactions under India Millennium Deposits (IMDs). Note: This Table is based on value dates.

I.5.24 Spot market conditions kept forward premia low during the first quarter of 2005-06. Forward premia declined in May 2005 in view of the announcement to phase out the Mumbai Inter-bank Forward Offered Rate (MIFOR) as a benchmark for pricing interest rate derivative deals for non-banks.

I.5.25 The turnover in both the merchant and inter-bank segments of the foreign exchange market increased sharply, reflecting the strong growth in merchandise trade, services and capital flows (Appendix Table I.40). While the merchant turnover increased from US $ 54.0 billion in April 2004 to US $ 88.6 billion in March 2005, the inter-bank turnover increased from US $ 195.7 billion to US $ 237.0 billion during the same period (Chart I.31). The ratio of inter-bank to merchant turnover hovered in the range of 2.7-3.6 during the year, indicative of orderly market conditions.

I.5.26 According to the BIS Triennial Survey, the average daily turnover in the international markets rose to US $ 2.4 trillion in 2004 from US $ 1.6 trillion in 2001. India’s share in global foreign exchange turnover has been increasing, although it still remains quite low (Table 1.55).

Table 1.55: Foreign Exchange Market Turnover*


	(US $ billion)
Item	2004	2001	1998
1	2	3	4
Global Turnover	2,408	1,618	1,968
India’s Share in Global Turnover (%)	0.3	0.2	0.1
* : Net of local inter-dealer double counting. Source: Triennial Central Bank Survey, 2004, BIS.

GOVERNMENT SECURITIES MARKET

I.5.27 Yields hardened in the Government securities market reflecting the upturn in the international interest rate cycle, rise in international crude oil prices, domestic monetary policy tightening and edging up of inflation in the first half of 2004-05. The growth of the aggregate volume of transactions (outright as well as repos) in Central and State Government dated securities and Treasury Bills slowed down to 3.2 per cent during 2004-05 from 36.0 per cent during 2003-04 reflecting the reduced appetite for Government securities (Box I.12 and Appendix Table I.42). While the Central Government dated securities constituted 92.0 per cent of the outright transactions, Treasury Bills constituted 7.0 per cent. The share of State Government securities was negligible at 1.0 per cent.

I.5.28 During 2004-05, the yield curve underwent an upward shift. The secondary market yields on the 10-year Government securities moved up by 150 bps between end-March 2004 and end-March 2005 (Chart I.32).

Box I.12

Surplus Bank Liquidity and Yields

Assuming that the loan business has the first charge on banks’ resources after meeting the statutory reserve requirements, the surplus liquidity of commercial banks could, therefore, be computed as the resources available in excess of statutory pre-emptions and credit offtake. Consequently, as the surplus bank liquidity increases, commercial banks’ appetite for Government paper increases leading to a decline in yields and vice versa (Chart A).

The dynamics of surplus liquidity in response to shocks are examined through an unrestricted vector autoregression (VAR) model. Using monthly data for the period April 2000 to March 2005, the VAR model was estimated with four endogenous variables in the following order: secondary market 10-year yield in the Government securities market, seasonally-adjusted wholesale price index (WPI), seasonally-adjusted index of industrial production (IIP) and seasonally-adjusted surplus liquidity of commercial banks. The domestic price of petroleum, oil and lubricants (POL) was also included as an exogenous variable. Impulse response analysis indicates

I.5.29 The yield on 10-year Government paper rose from 5.15 per cent as on March 31, 2004 to 6.73 per cent on August 11, 2004 with the gradual tightening of liquidity conditions following a drying up of capital inflows, a spurt in domestic inflation, strong growth and the reversal of the accommodative monetary policy stance by the US Federal Reserve. The yield, however, retracted to 5.89 per cent by September 3, 2004 reflecting fiscal measures taken by the Government to rein in inflation, a lower than anticipated hike in the MSS ceiling amount, some moderation in global oil prices and a one-time permission by the Reserve Bank to banks to transfer securities to the held-to-maturity (HTM) category. With liquidity conditions tightening again due to an increase in the CRR in September-October 2004 and the hike in the reverse repo rate in October 2004, the 10-year yield edged up and peaked at 7.31 per cent on November 8, 2004. Subsequently, yields fell on cancellation of scheduled auctions, ebbing of international oil prices and easing of liquidity conditions following the revival of capital inflows. The market rallied in February 2005, buoyed by the Standard & Poor’s rating upgrade, lower inflation numbers and news of a decline in the fiscal deficit. During March 2005, however, yields firmed up again on concerns about the higher than expected Government borrowings as announced in the Union Budget, 2005-06. Persistent concerns about international crude oil prices and year-end

balance sheet adjustments hardened the 10-year yield to 6.73 per cent on March 22, 2005 before it finally closed at 6.65 per cent on March 31, 2005 (Chart I.33).

I.5.30 During 2005-06, yields started to harden from the second week of April 2005, reflecting a further rise in international crude oil prices, higher than expected inflation and a hike in the reverse repo rate. The 10-year benchmark yield firmed up to 7.31 per cent on April 30, 2005 from 6.65 per cent on March 31, 2005. Yields softened during the first three weeks of May 2005 with the decline in international crude oil prices and easing of inflation. As crude oil prices renewed their upward climb, the 10-year yield hardened to 7.23 per cent as on July 11, 2005. With the reverse repo rate being left unchanged on July 26, 2005 in the First Quarter Review of the Annual Statement on Monetary Policy, yields softened under comfor table liquidity conditions and stood at 7.08 per cent on August 19, 2005. Thus, yields hardened by 43 basis points between end-March and August 19, 2005.

I.5.31 In line with the Government securities market, the yields on 5-year AAA-rated corporate bonds edged up during 2004-05. The yield spread between 5-year AAA-rated corporate bonds and 5-year Government securities, however, narrowed to 28 basis points at end-July 2005 from 66 basis points at end-March 2004 (Chart I.34).

CREDIT MARKET

I.5.32 Despite a strong pick-up in credit demand, deposit and lending rates of banks remained broadly stable, reflecting appropriate liquidity in the system. Deposit rates, in fact, eased till December 2004 before edging up in March 2005 (Table 1.56). Public sector banks (PSBs) realigned their deposit rates in the tenor of one year and above to 5.25-6.50 per cent by June 2005 from a range of 4.75-7.00 per cent in March 2005.

I.5.33 Benchmark prime lending rates (BPLR) for public sector and foreign banks experienced some softening even while that of private sector banks hardened. Sub-BPLR lending of the banking system (excluding exports, the bulk of which is at sub-BPLR) constituted over 65 per cent of total outstanding advances above Rs.2 lakh.

EQUITY AND DEBT MARKETS

I.5.34 Strong macroeconomic fundamentals kept the capital market buoyant during 2004-05. The primar y segment benefited from the positive sentiment in the secondary market and an upbeat investment climate. Equity issues by corporates through initial public offerings recorded a substantial increase. Pr ivately placed debt issuances by public sector companies dominated the pr imar y market segment. Issuances in international markets by Indian corporates also increased during the year. Stock markets recovered from the setback of May 2004 to touch all-time high levels towards the close of the year. During the most

Table 1.56: Movements in Deposit and Lending Rates

							(Per cent)

Interest Rate		June 2005	March 2005	December 2004	September 2004	June 2004	March 2004

1		2	3	4	5	6	7
1.	Domestic Deposit Rate @
	Public Sector Banks
	Up to 1 year	2.75-6.00	2.75-6.00	3.50-5.00	3.50-5.00	3.50-5.25	3.75-5.25
	More than 1 year and up to 3 years	5.25-6.00	4.75-6.50	4.75-5.50	4.75-5.75	5.00-5.75	5.00-5.75
	More than 3 years	5.50-6.50	5.25-7.00	5.00-5.75	5.25-5.75	5.25-5.75	5.25-6.00
	Private Sector Banks
	Up to 1 year	3.00-6.50	3.00-6.25	3.00-6.00	3.00-6.00	3.00-6.00	5.00-6.50
	More than 1 year and up to 3 years	5.00-7.00	5.25-7.25	5.00-6.75	5.00-6.50	5.00-6.50	5.00-6.50
	More than 3 years	5.75-7.25	5.25-7.00	5.25-6.50	5.25-7.00	5.25-7.00	5.25-7.00
	Foreign Banks
	Up to 1 year	3.00-5.50	3.00-6.25	3.00-5.75	2.75-7.50	2.75-7.50	2.75-7.75
	More than 1 year and up to 3 years	3.50-6.50	3.50-6.50	3.50-7.00	3.25-8.00	3.25-8.00	3.25-8.00
	More than 3 years	4.00-7.00	3.50-7.00	3.50-7.00	3.25-8.00	3.25-8.00	3.25-8.00
2.	Benchmark Prime Lending Rate
	Public Sector Banks	10.25-11.25	10.25-11.25	10.25-11.25	10.25-11.50	10.25-11.50	10.25-11.50
	Private Sector Banks	11.00-13.50	11.00-13.50	10.50-13.50	9.75-13.00	9.75-13.00	10.50-13.00
	Foreign Banks	10.00-14.50	10.00-14.50	10.00-15.00	11.00-14.85	11.00-14.85	11.00-14.85
3.	Actual Lending Rate*
	Public Sector Banks	3.35-16.50	2.75-16.00	3.50-19.50	2.75-16.00	4.25-16.00	4.00-16.00
	Private Sector Banks	3.15-24.94	3.15-22.00	2.62-22.00	3.15-21.48	4.00-22.19	4.50-22.00
	Foreign Banks	4.00-25.00	3.55-23.50	3.00-23.00	2.55-23.00	3.75-23.00	3.75-23.00

*: Interest rate on non-export demand and term loans above Rs.2 lakh excluding lending rates at the extreme five per cent on both sides. @: As on June 10, 2005.

part of the period November 2004-March 2005, the BSE Sensex remained above the 6000-mark. The BSE Sensex reached new highs during July-August 2005, closing at 7,860 on August 17, 2005. The rise in indices was accompanied with a sharp increase in turnover in a market flush with liquidity. The rally in the stock markets was broad-based and spread widely across small and mid-cap companies from various sectors. FIIs evinced keen interest in the Indian capital market.

Primary Market

I.5.35 Resource mobilisation from the primary market through public issues (excluding offers for sale) almost trebled during 2004-05 (Table 1.57). The

Table 1.57: Mobilisation of Resources from the Primary Market

				(Amount in Rupees crore)

Item					2004-05P		2003-04

					No.	Amount	No.	Amount
					of		of
				Issues			Issues

1					2	3	4	5

A.	Prospectus and Rights Issues*
	1. Private Sector (a+b)				54	13,482	38	3,675
						(266.9)		(95.7)
		a)	Financial		11	5,702	4	1,353
		b)	Non-financial		43	7,780	34	2,322
	2. Public Sector (a+b+c)				5	8,410	9	4,176
						(101.4)		(39.7)
		a)	Public Sector Undertakings		–	–	–	–
		b)	Government Companies		1	2,684	1	100
		c)	Banks/Financial Institutions		4	5,726	8	4,076
	3.	Total (1+2)			59	21,892	47	7,851
						(178.8)		(61.3)
		Of which:
			(i) Equity		54	18,024	40	3,427
			(ii) Debt		5	3,868	7	4,424
B.	Private Placement
	1. Private Sector				716	35,144	640	18,760
						(90.5)		( 30.7 )
		a)	Financial		255	20,974	344	12,551
		b)	Non-financial		461	14,770	296	6,209
	2. Public Sector				198	48,308	234	45,141
						(7.0)		(6.8)
		a)	Financial		128	26,128	132	26,461
		b)	Non-financial		70	22,180	102	18,680
	3. Total (1+2)				914	84,052	892	63,901
						(31.5)		(-7.8)
C.	Total (A+B)				970	1,03,718	909	71,091
						(45.9)		(-1.0)

Memo :
Euro Issues						3,353		3,098
						(8.2)		(9.6)
P :Provisional. * : Excluding offers for sale. – : Nil/Negligible. Note: Data in parentheses are percentage variations over the previous year.

average size of a public issue was substantially higher at Rs.371 crore in 2004-05 than Rs.168 crore in 2003-04 and Rs.106 crore during the five-year period 1999-2004. The amounts raised through public issues more than doubled to 0.7 per cent of GDP in 2004-05 from 0.3 per cent in the previous year (Chart I.35).

I.5.36 Non-Government public limited companies (private sector) accounted for 61.6 per cent of resources mobilised by way of public issues during 2004-05 as compared with 46.8 per cent during 2003-04 (Appendix Table I.45 and Chart I.36). Banks and

financial institutions (in both public and private sector) mobilised 52.2 per cent of resources by public issues. Two public sector banks raised equity worth Rs.3,336 crore during 2004-05. The share of the initial public offerings (IPOs) by unlisted companies increased substantially during 2004-05, both in terms of number of issues and amounts raised. Out of 59 public issues, 23 issues were IPOs, constituting 24.4 per cent of the total resource mobilisation. All the IPOs generated enthusiastic investor response. Equity issues constituted 82.3 per cent of the total resource mobilisation through public issues during 2004-05 as compared with 43.7 per cent during the previous year. Out of the 59 public issues during 2004-05, only five were debt issues. The Indian corporate sector has been relying on the private placement route for raising debt alongside tapping the international markets.

I.5.37 During April-June 2005, resource mobilisation through public issues (excluding offers for sale) amounted to Rs.3,884 crore through 25 issues as compared with Rs.3,251 crore through five issues during April-June 2004. The bulk of resources were raised by way of equity issues. Non-Government public limited companies (private sector) accounted for 41.6 per cent of resources mobilised during April-June 2005. Two public sector banks raised equity worth Rs.2,270 crore during April-June 2005.

I.5.38 Mobilisation of resources through private placement underwent a substantial turnaround during 2004-05 (Table 1.57). Public sector entities (both financial and non-financial) continued to dominate the private placement market although their share fell to 57.5 per cent of the total mobilisation from 70.6 per cent in 2003-04. Resources raised by financial intermediaries (both public sector and private sector) accounted for 56.0 per cent of the total mobilisation by private placements during 2004-05 as compared with 61.1 per cent during 2003-04. While all-India

financial institutions, viz., IDBI, IFCI and IIBI, mobilised Rs.4,541 crore through private placements during 2004-05, private and public sector banks mobilised Rs.10,552 crore through private placements. The amount raised by way of private placements increased to 2.7 per cent of GDP during 2004-05 from 2.3 per cent in the previous year.

I.5.39 During 2004-05, resources raised by Indian corporates from the international capital markets increased by 8.2 per cent. These were mainly by way of Global Depository Receipts (GDRs). There was no American Depository Receipt (ADR) issue, while resource mobilisation through Foreign Currency Convertible Bonds (FCCBs) recorded a marginal decline. Most of the issues were by private non-financial companies. IT companies accounted for nearly half of the GDR issues. During April-June 2005, the resources raised through Euro issues by Indian corporates increased sharply by 138.5 per cent to Rs.1,834 crore.

Mutual Funds

I.5.40 Net funds mobilised by mutual funds (net of redemptions) declined by 95.3 per cent during 2004-05 (Table 1.58). The UTI Mutual Fund and public sector mutual funds recorded net outflows during 2004-05 in contrast to net inflows during 2003-04. Net resource mobilisation by private sector mutual funds was also substantially lower than in the previous year. Net assets under management of mutual funds increased by 12.9 per cent during 2004-05.

I.5.41 The bulk of the resources mobilised by mutual funds during 2004-05 were under liquid/ money market and growth/equity-oriented schemes (Table 1.59). Mobilisation under debt schemes, which have traditionally been garnering the largest amount of resources, declined during the year due to a hardening of yields. Equity-oriented schemes

Table 1.58: Resource Mobilisation by Mutual Funds

					(Rupees crore)

Mutual Fund		2004-05			2003-04

	Gross	Net	Net	Gross	Net	Net
	Mobilisation	Mobilisation@	Assets*	Mobilisation	Mobilisation@	Assets*

1	2	3	4	5	6	7
Private Sector Mutual Funds	7,36,463	7,600	1,17,487	5,34,649	42,545	1,07,087
Public Sector Mutual Funds	56,589	-2,677	11,374	31,548	1,667	11,912
UTI Mutual Fund	46,656	-2,722	20,740	23,993	2,597	20,617
Total	8,39,708	2,201	1,49,601	5,90,190	46,809	1,39,616
@: Net of redemptions. * : As at the end of March. Source: Securities and Exchange Board of India.

Table 1.59: Funds Mobilised by Mutual Funds - Type of Schemes

								(Amount in Rupees crore)

Scheme				2004-05					2003-04

		No. of	Gross		Net	Net	No. of	Gross	Net	Net
		Schemes	Mobilisation	Mobilisation@		Assets*	Schemes	Mobilisation	Mobilisation@	Assets*

1		2	3		4	5	6	7	8	9

A. Income/Debt
Oriented Schemes		227	7,98,674	-5,244		1,06,250	197	5,60,972	39,603	1,10,255
(i)	Liquid/Money Market	39	6,38,594	10,348		54,068	36	3,75,646	24,577	41,704
(ii)	Gilt	30	4,361	-1,345		4,576	30	12,387	2,232	6,026
(iii)	Debt (other than assured return)	158	1,55,719	-14,247		47,605	131	1,72,940	12,805	62,524
(iv)	Debt (assured return)	0	0		0	0	0	0	-10	0

B. Growth/Equity Oriented Schemes		188	37,280	7,100		38,484	169	26,695	7,219	25,281
(i)	Equity Linked
	Savings Schemes	37	155		-194	1,727	43	53	-466	1,668
(ii)	Others	151	37,125	7,294		36,757	126	26,642	7,685	23,613
C. Balanced Schemes		35	3,755		345	4,867	37	2,523	-13	4,080
D. Fund of Funds Scheme		12	1,827		59	980	8	1,189	777	816
Total		462	8,41,535	2,260		1,50,581	411	5,91,379	47,587	1,40,431
@ : Net of redemptions. * : As at the end of March. Source: Securities and Exchange Board of India.

attracted higher funds mainly due to attractive returns in a buoyant secondary market. A substantial amount was parked in liquid/money market schemes which accounted for 35.9 per cent of total assets under management, followed by debt-oriented schemes (31.6 per cent). Net assets under equity-oriented schemes increased sharply by 52.2 per cent on account of increase in the market value of the equity portfolio. During April-June 2005, net funds mobilised by mutual funds declined by 32.5 per cent to Rs.14,273 crore mainly due to large redemptions.

All-India Financial Institutions

I.5.42 Financial institutions (FIs) can raise resources from the markets provided that the total outstanding at any time does not exceed 10 times their Net Owned Funds (NOF). Consequent upon IDBI converting itself into a scheduled bank with effect from October 2004, and IFCI and IIBI’s NOF turning negative, the aggregate umbrella limit for raising of resources declined from Rs.23,873 crore on April 2, 2004 to Rs.16,160 crore on March 18, 2005. In the event, the aggregate amount of outstanding resources mobilised by FIs by way of these instruments declined from Rs.6,496 crore (27.2 per cent of limit) on April 2, 2004 to Rs.2,431 crore (15.0 per cent of limit) on March 18, 2005. On an average basis, CP was the most preferred instrument (Rs.2,387 crore), followed by term deposits (Rs.1,305 crore). Besides the erstwhile IDBI, only the EXIM Bank, NHB, IDFC and SIDBI were active in mobilising through these instruments during 2004-05. The aggregate umbrella limit increased to Rs. 17,536 crore on July 8, 2005 and the aggregate amount of outstanding resources raised by these FIs also increased to Rs.3,145 crore (17.9 per cent of limit).

1.5.43 Total resources mobilised by the All-India Financial Institutions (AIFIs), excluding erstwhile IDBI, increased by 16.4 per cent during 2004-05. FIs such as IFCI Ltd. and IIBI Ltd. continued to be barred from mobilising fresh resources on account of their poor financial performance. While the weighted average maturity of the instruments issued shortened, the weighted average cost of funds rose across the FIs (Table 1.60). Financial assistance sanctioned and disbursed by AIFIs declined by 8.6 per cent and 21.1 per cent, respectively (Appendix Table I.46).

Secondary Market

I.5.44 The stock market exhibited sustained buoyancy in the latter half of 2004-05 after a volatile period during April-June 2004. Gaining a speedy recovery from the decline on May 17, 2004, the BSE Sensex gathered momentum to close at its intra-year peak of 6915 on March 8, 2005 (Appendix Table I.47 and Chart I.37). The dramatic drop in the Indian stock markets on May 17, 2004 reflected domestic political uncertainties as well as adverse investor sentiment

					(Amount in Rupees crore)

Institution	Resources Raised		Outstanding		Weighted Average		Weighted Average
			Borrowings		Cost of Funds	(Per cent)	Maturity (years)

	2004-05	2003-04	March 2005	March 2004	2004-05	2003-04	2004-05	2003-04

1	2	3	4	5	6	7	8	9

IIBI	..	176	2,229	2,420	..	8.7	..	18.0
IFCI	..	..	13,385	17,564	..	8.2	..	3.2
TFCI	23	172	421	546	10.4	8.6	4.9	10.0
Exim Bank	5,430	6,881	14,704	12,752	6.6	5.9	4.2	6.7
IDFC	4,253	3,575	6,533	3,975	6.0	5.6	3.7	5.9
SIDBI	2,364	2,972	8,427	10,535	5.9	4.9	1.9	2.8
NABARD	8,843	5,334	23,805	11,883	5.5	5.4	5.0	5.4
NHB	5,172	3,290	14,385	10,569	6.3	5.4	2.6	3.2
Total	26,085	22,401	83,889	70,245

^.. : Not applicable. Note:1. Data on resources raised include: long-term resources mobilised through bonds/debentures; short-term resources mobilised through commercial papers, certificates of deposit, ICDs, term deposits and term money; and foreign currency resources mobilised through bonds. 2. Data are provisional. Source:Respective Financial Institutions (FIs).

in many other emerging market economies. Stock markets in South Korea (-5.1 per cent), Taiwan (-5.1 per cent) and Thailand (-4.6 per cent) also declined on the same day. The concerns arising out of the imposition of the securities transaction tax had a short-lived impact on the markets.

I.5.45 Buoyant conditions resumed in the market during the second half of August 2004 in line with

positive sentiments in world equity markets (Chart I.38). The robust macroeconomic outlook, encouraging investment climate, strong investments by FIIs, policy initiatives relating to foreign direct investment in telecom and construction sectors and impressive financial performance of Indian companies were the main factors that boosted the market sentiment in the second half of the financial year. Consistent growth

Table 1.61 Corporate Financial Performance

								(Growth rates in per cent)

Item			2004-05					2003-04

	2004-05	2003-04	Q4	Q3	Q2	Q1	Q4	Q3	Q2	Q1

1	2	3	4	5	6	7	8	9	10	11

Sales	25.2	15.4	21.0	24.1	23.7	24.8	19.6	20.5	14.6	11.1
Expenditure	24.0	14.7	19.8	24.3	22.4	23.4	17.5	20.7	14.8	11.6
Gross Profit	38.9	26.6	35.3	30.5	35.8	36.0	37.8	25.3	18.2	16.0
Interest Cost	-2.0	-11.5	-5.4	-13.0	2.1	-3.2	-17.1	-16.6	-15.9	-15.5
Profit after Tax	53.8	57.9	51.4	45.5	45.3	51.2	67.2	52.3	54.6	40.6
Memo:
No. of Companies	1,273	2,201	1,301	1,464	1,353	1,255	1,386	1,263	1,213	1,202

Note : 1.Growth rates are percentage change in the level in the period under reference over the corresponding period of the previous year. 2.Data are based on the unaudited /audited abridged results of non-financial non-Government companies except column (3) which are based on the audited balance sheets for 2003-04 .

in corporate profits was a key factor driving markets (Table 1.61). Moderation in domestic inflation and easing of international crude oil prices also contributed to the upsurge.

I.5.46 Stock markets exhibited weakness in April, 2005 reflecting rise in international crude oil prices, slowdown of investment by FIIs and a cautious approach adopted by investors ahead of the announcement of corporate results for the last quarter of 2004-05. Buoyancy returned to the markets in May 2005 with the declaration of satisfactory results by some companies, announcement of fresh reform measures in the banking sector and firm trends in major international markets. The stock market was invigorated in the third week of June 2005 with the settlement of the Reliance family dispute and the revival of the monsoon. The BSE Sensex crossed the 7000-mark during intra-day trading for the first time in its history on June 20, 2005 and closed at an all-time high of 7860 on August 17, 2005. The BSE Sensex registered an increase of around 21 per cent between August 17, 2005 and end-March 2005.

I.5.47 The rally in the stock market during 2004-05 was spread across mid-cap and small-cap companies. The broad-based BSE 500 index increased by 21.9 per cent on a point-to-point basis during 2004-05 as compared with an increase of 16.1 per cent in the BSE Sensex. The major sectoral indices registered gains during 2004-05 in line with the generally upbeat sentiment in the stock market (Chart I.39).

I.5.48 The market capitalisation of the BSE increased by 41.4 per cent during 2004-05 reflecting increase in stock prices as well as listing of new securities (Table 1.62 and Appendix Table I.48). Despite an increase in stock prices, the price-earning (P/E) ratio remained generally attractive due to an increase in corporate earnings. Although the P/E ratio of the BSE Sensex was marginally higher than in other emerging markets, the ratio is much lower than in earlier years. Volatility in the stock market declined substantially during 2004-05 although it remained higher than most of the international stock markets. The number of companies listed in the BSE came down due to mergers and acquisitions and de-listing of companies.

I.5.49 The turnover in major stock exchanges increased with a surge in liquidity. The average daily turnover (BSE and NSE) increased by 3.5 per cent during 2004-05. The increase in turnover in equity derivatives was even stronger at 19.5 per cent

Table 1.62: Indian Equity Markets –Key Indicators

Indicator		BSE		NSE

		2004-05	2003-04	2004-05	2003-04

1		2	3	4	5

1.	BSE Sensex/
	S&P CNX Nifty
	(i) Average	5741	4492	1805	1427
	(ii) End of the year	6493	5591	2036	1772
2.	Coefficient of
	Variation (Per cent)	11.2	23.0	11.3	23.3
3.	Price-Earning Ratio@ 16.6		16.2	14.8	16.1
4.	Price-Book Value Ratio@ 3.3		2.8	3.3	3.1
5.	Yield@ (Per cent
	per annum)	2.0	2.0	2.2	2.1
6.	Number of
	Listed Companies	4,731	5,528	970	909
7.	Turnover
	(Rs. crore)	5,18,717	5,02,620	11,40,071	10,99,535
8.	Market
	Capitalisation
	(Rs. crore)#	16,98,428	12,01,207	15,85,585	11,20,976

@: Annual averages for 30 scrips included in the BSE Sensex and 50 scrips included in the S&P CNX NIfty. #: As at end-March. Source : The Stock Exchange, Mumbai and the National Stock Exchange of India Limited.

(Chart I.40 and Appendix Table I.49). Trading in stock futures accounted for a significant portion of turnover in equity derivatives.

I.5.50 During 2004-05, foreign institutional investors (FIIs) continued to invest heavily in the Indian equity

Table 1.63: Trends in Institutional Investments


			(Rupees crore)

Year	FIIs		Mutual Funds
	Net	Net	Net	Net
	Investment	Investment	Investment	Investment
	in Equity	in Debt	in Equity	in Debt

1	2	3	4	5

2002-03	2,527	60	-2,067	12,604
2003-04	39,959	5,805	1,308	22,701
2004-05	44,123	1,759	448	16,987
Source: Securities and Exchange Board of India.

market. As net buyers in equities during each month, barring May 2004, net equity investments by the FIIs in the Indian equity market increased by 10.4 per cent during 2004-05. FII investment in debt instruments was, however, lower in 2004-05 than in the previous year (Table 1.63). Mutual funds continued to remain net buyers in equities during 2004-05. Their investments in debt were lower in line with a fall in resource mobilisation under debt schemes. During 2005-06 (up to August 11, 2005), FIIs made net investments of Rs.15,451 crore in equity as compared with Rs.6,249 crore in the corresponding period of the previous year. Mutual funds made net investments of Rs.4,087 crore in equity during 2005-06 (up to August 11, 2005) as compared with net sales of Rs.190 crore in the corresponding period of the previous year.

Developments in Wholesale Debt Market Segment of NSE

I.5.51 In the Wholesale Debt Market (WDM) segment of NSE, 3,097 securities were available for trading as on March 31, 2005 as compared with 2,621 securities as on March 31, 2004. The turnover in WDM, however, declined by 32.6 per cent to Rs.8,87,294 crore in 2004-05. Transactions in dated securities accounted for the bulk of trading - 95.7 per cent of the total traded value during 2004-05. Transactions in corporate debt securities accounted for only 2.0 per cent of total traded volume in the WDM segment. Total market capitalisation of the securities available for trading on the WDM segment worked out to Rs.14,61,734 crore as on March 31, 2005.

I.5.52 To conclude, during 2004-05, domestic financial markets remained stable, even as interest rates in various segments edged up. In the foreign exchange market, the rupee appreciated vis-à-vis the US dollar, reflecting excess supply conditions. The stock markets exhibited buoyant conditions reflecting a robust macroeconomic outlook.

VI. EXTERNAL SECTOR

I.6.1 Several significant developments underscored the strength and vibrancy in India’s external sector in 2004-05. First, merchandise export growth exceeded 24 per cent in US dollar terms, extending a phase of high growth that began in 2002-03. Second, there was a massive increase in merchandise imports, driven up by the upsurge in international crude oil prices and a strong resumption of domestic investment demand. As a consequence, the trade deficit increased substantially during 2004-05. Third, notwithstanding strong growth in net invisible receipts – mainly backed by services exports and remittances from Indians employed abroad – the current account slipped into a modest deficit after a continuous span of three years of surpluses. Fourth, private capital, led by portfolio flows in stock exchanges, endorsed the attractiveness of the Indian economy relative to other emerging market economies (EMEs) as an investment destination on account of its strong macroeconomic performance. Fifth, the intermittent surges in portfolio flows were accompanied by sizeable expansion in recourse to debt flows in the form of trade credit – both short and long-term. The favourable sentiment for India in international financial markets was buoyed up by upgrades of the sovereign rating in 2004-05 by Standard & Poor’s Rating Services. Sixth, by March 2005, India had accumulated the fifth largest stock of international reserves in the world, sufficient to finance about 14 months of imports. As a result, India’s international investment position showed a marked improvement. The robust external sector performance facilitated further liberalisation of the exchange and payments system.

INTERNATIONAL DEVELOPMENTS

I.6.2 Global GDP expanded by 5.1 per cent during 2004 - the highest rate of growth since 1976. In advanced economies, growth accelerated to 3.4 per cent in 2004 from 2.0 per cent in 2003, led by the US; in emerging market and developing economies, it accelerated to 7.2 per cent from 6.4 per cent. With GDP growing by 9.5 per cent, driven by strong fixed investment demand and exports, China emerged as the world’s fastest growing economy, underpinning the strength of global growth. The acceleration in global economic activity was accompanied by a doubling of the growth of world trade volumes from 4.9 per cent in 2003 to 9.9 per cent in 2004.

I.6.3 Private capital flows to emerging market and developing countries increased to near 1997 (pre-Asian crisis) levels during 2004, mainly in the form of foreign direct investment (FDI) flows (Table 1.64). Asia

Table 1.64: Net Capital Flows to Emerging Markets and Developing Countries



	(US $ billion)

Item	2004	2003	2002
1	2	3	4

Private Capital Flows	196.6	149.5	75.8
Private Direct Investment	186.4	151.9	144.4
Private Portfolio Investment	28.8	-9.9	-90.0
Other Private Capital Flows	-18.6	7.5	21.4
Official Flows	-58.0	-58.1	8.5

Source: World Economic Outlook, IMF, April 2005.

continued to be a major recipient, led by China. The western Hemisphere also received a significant increase, particularly, Mexico and Brazil, boosted by increased cross-border merger and acquisition activity in the banking and manufacturing sectors.

I.6.4 Abundant liquidity characterised global financial markets in 2004. Monetary authorities in the US, the UK, Canada and New Zealand gradually tightened the key policy rates. Nonetheless, the longer-term government bond yields fell in a number of advanced economies, resulting in a flattening of the yield curve. Financial conditions thus remained accommodative, attributable to the decline of longer-term treasury yields, corporate credit spreads and mortgage rates.

I.6.5 Looking forward, rising interest rates, high oil prices and large global macroeconomic imbalances combined with the waning of the fiscal stimulus that has supported growth in the recent past carry downside risks for world growth in 2005. According to the IMF, a permanent US $ 5 per barrel increase in oil prices is estimated to lower global GDP growth by up to 0.3 percentage points. Macroeconomic imbalances widened further with the US current account deficit estimated at 5.7 per cent of GDP in 2004, matched by current account surpluses in emerging Asia, Japan and the oil producing Middle-East countries. US deficits were financed significantly by Asian central banks, contrary to the traditional predominance of foreign investors in funding the gap. There is a widespread view that an orderly adjustment of global imbalances calls for fiscal consolidation and greater exchange rate flexibility supported by continuing financial sector reforms in Asia and intensified structural reforms to boost growth and domestic demand in the Euro area.

I.6.6 Against this backdrop, global economic growth is projected by the IMF to decelerate to 4.3 per cent in 2005 (Chart I.41). Amongst major economies, growth in the US is expected to be supported by higher investment and consumer demand. In the Euro area,

however, business sentiment remains fragile and consumer demand sluggish, mainly on account of faltering exports and weak domestic demand. In Japan, cautious optimism is gaining ground about revival of consumer demand. Despite the losses suffered by Tsunami-affected countries towards the end of 2004, growth rates in Asian EMEs are likely to remain strong, led by China and India, and aided by various factors including strong domestic demand and liberalisation of textile trade.

BALANCE OF PAYMENTS

I.6.7 After three years beginning in 2001-02, India’s balance of payments recorded the return of a current account deficit in 2004-05. The turnaround was driven by the merchandise trade deficit reaching 5.5 per cent of GDP, but underpinned by an intrinsic link between import intensity and export performance (Table 1.65). Invisible receipts rose by 46.3 per cent, suppor ted by buoyant ser vices expor ts and

Table 1.65: Balance of Payments – Key Indicators

								(US $ million)

Item/Indicator			2004-05 (P)	2003-04	2002-03	2001-02	2000-01	1990-91

1			2	3	4	5	6	7

i)	Trade Balance		-38,130	-15,454	-10,690	-11,574	-12,460	-9,437
ii)	Invisibles, net		31,699	26,015	17,035	14,974	9,794	-243
iii)	Current Account Balance		-6,431	10,561	6,345	3,400	-2,666	-9,680
iv)	Capital Account		32,175	20,542	10,840	8,551	8,840	7,056
v)	Overall Balance #		26,159	31,421	16,985	11,757	5,868	-2,492
vi)	Foreign Exchange Reserves*		-26,159	-31,421	-16,985	-11,757	-5,842	1,278
	[Increase(-)/Decrease(+)]
Indicators (in per cent)
1.	Trade
	i)	Exports/GDP	11.7	10.8	10.6	9.4	9.9	5.8
	ii)	Imports/GDP	17.2	13.3	12.7	11.8	12.7	8.8
	iii)	Export Volume Growth	n.a.	6.0	21.7	3.9	23.9	11.0
2.	Invisibles
	i)	Invisible Receipts/GDP	11.2	8.8	8.2	7.7	7.1	2.4
	ii)	Invisible Payments/GDP	6.6	4.5	4.9	4.6	4.9	2.4
	iii)	Invisibles (Net)/GDP	4.6	4.3	3.3	3.1	2.2	-0.1
3.	Current Account
	i)	Current Receipts@/GDP	22.8	19.5	18.7	17.0	17.0	8.0
	ii)	Current Receipts Growth@	34.6	23.0	17.6	4.5	14.8	6.6
	iii)	Current Receipts@/Current Payments	95.7	109.3	106.6	103.8	96.4	71.5
	iv)	Current Account Balance/GDP	-0.9	1.7	1.2	0.7	-0.6	-3.1
4.	Capital Account
	i)	Foreign Investment/GDP	2.1	2.7	1.2	1.7	1.5	0.0
	ii)	Foreign Investment/Exports	17.9	24.8	11.2	18.2	14.9	0.6
5.	Others
	i)	Debt - GDP Ratio	17.4	17.8	20.3	21.2	22.6	28.7
	ii)	Debt Service Ratio	6.2	16.3	16.4	13.4	16.6	35.3
	iii)	Liability Service Ratio	7.1	17.1	16.1	14.9	18.4	35.6
	iv)	Import Cover of Reserves (in months)	14.3	16.9	14.2	11.5	8.8	2.5
P:Preliminary. #: Includes errors and omissions. @ : Excluding official transfers. *:Excluding valuation changes. n.a. : Not available.

sustained remittances from Indians working overseas. The innate vigour of invisible earnings can be gauged from the fact that, despite a surge in invisible payments of the order of 69.8 per cent, the massive merchandise trade deficit was financed to the extent of 83.1 per cent by the net surplus in the invisible account at US $ 31.7 billion. In the capital account, the surge in imports was manifested in a large recourse to overseas borrowings by Indian banks, trade credits and external commercial borrowings. According to the World Economic Outlook (April 2005), portfolio flows to India accounted for 30.6 per cent of global flows to EMEs and developing countries in 2004. Inflows of FDI also picked up strongly during the year. The cumulative impact of liberalisation in the policy regime was reflected in a noteworthy rise in India’s outward FDI and aid flows, coincident with the jump in invisible payments in the current account. The accretion to reserves, excluding valuation effects, was of the order of US $ 26.2 billion, somewhat lower than in 2003-04.

Merchandise Trade

I.6.8 Both exports and imports recorded sharp growth during 2004-05, reflecting the onset of international competitiveness of the manufacturing sector in an environment of expanding trade integration, a supportive domestic policy framework, sustained recovery in global demand and an increase in international commodity prices. Exports at US $ 79.3 billion during 2004-05 registered a growth of 24.1 per cent, the highest recorded in the last three decades and substantially higher than the annual target of 16 per cent set by the Ministry of Commerce and Industry. Export growth was broad-based across major product groups (Char t I.42). Exports of agricultural and allied products remained subdued, reflecting domestic supply conditions; on the other hand, exports of ores and minerals recorded a substantial jump during 2004-05, mainly on account of iron ore exports to China.

I.6.9 Exports of manufactured products maintained growth momentum (20.0 per cent in 2004-05 as compared with 20.5 per cent recorded in 2003-04) (Appendix Table I.53). Among the key drivers, exports of engineering goods were buoyed up by technology-intensive items like metal, machinery and instruments, transport equipment, electronic goods and iron and steel due to demand picking up in East Asia, China and non-traditional markets like Latin America and Africa. Exports of gems and jewellery continued to record a sharp increase, reflecting the benefits of various promotional measures as well as recovery in

major markets like the US. Exports of petroleum products surged by 90.3 per cent, reflecting the expansion in domestic refining capacity and higher international prices of refined products. India emerged among the top five petroleum refining countries in the world. In the textile segment, exports of domestic raw materials (cotton yarn, fabrics, made-ups) and readymade garments declined while those using synthetic/imported raw materials (manmade yarn, fabrics, made-ups, etc.) recorded a significant increase. World trade in textiles and clothing is geared for a more competitive environment due to the elimination of quota restrictions under the Multi-Fibre Arrangement with effect from January 2005.

I.6.10 In terms of destination, exports were well-diversified with Singapore, China and Belgium being the fastest growing markets during 2004-05, driven by several initiatives under bilateral trade negotiations (Chart I.43). Exports to East Asian countries including Hong Kong, South Korea, Singapore, Malaysia and Thailand also recorded a pick-up in growth. Exports to the OECD countries increased significantly as demand conditions improved.

I.6.11 Imports at US $ 107.1 billion grew by 37.0 per cent in 2004-05 - the highest since 1980-81 - on top of 27.3 per cent in 2003-04 (Appendix Table I.52). Oil imports at US $ 29.8 billion shot up by 45.1 per cent in 2004-05, mainly on account of the surge in international crude oil prices as in volume terms, the growth rate of oil imports slowed to 5.5 per cent in 2004-05 from 10.6 per cent in 2003-04.

I.6.12 Non-oil imports maintained the momentum of growth recorded in the previous year, in tandem with the pick-up in domestic manufacturing activity. Non-oil impor ts, excluding gold and silver, increased by 30.9 per cent during 2004-05. Imports of mainly industrial inputs (non-oil imports net of gold and silver, bulk consumption, manufactured fertilisers and professional instruments) grew by 32.8 per cent during 2004-05 as compared with 29.1 per cent during 2003-04. Imports of capital goods (mainly compr ising metals, machine tools, machinery and electronic goods), in particular, posted a significant growth of 23.5 per cent during 2004-05 on the top of 35.4 per cent growth during 2003-04 (Chart I.44). During 2004-05, imports of gold and silver at US $ 10.8 billion posted a high growth of 57.9 per cent, similar to the increase during 2003-04 (Appendix Table I.54). India has traditionally been a leading destination for global gold trade. The sharp rebound in household demand in an environment of high economic growth and softening of gold prices contributed to growth of gold imports. More recently, the new Foreign Trade Policy 2004-09 has provided various incentives pertaining to duty free import of gold and jewelleries for exporters.

I.6.13 During 2004-05, there was a well-distributed increase in imports across major regions. The sourcing pattern of imports showed a distinct tilt in favour of the Asian countries. China turned out to be the largest source of India’s imports, surpassing the US.

I.6.14 The merchandise trade deficit at US $ 27.8 billion during 2004-05 touched a historic peak with the increase in non-oil imports (US $ 29.8 billion) being the major contributing factor (Appendix Table I.52). The non-oil trade balance, which remained in surplus during 2000-01 to 2003-04, turned into a deficit of US $ 4.8 billion during 2004-05.

I.6.15 The pace of expansion of merchandise trade has enlarged the degree of India’s openness. The ratio of merchandise trade to GDP increased to 28.8 per cent in 2004-05 from 14.6 per cent in 1990-91. India’s share in world exports increased to 0.84 per cent during 2004 from 0.52 per cent in 1990. The changing structure of India’s exports across commodity groups and destinations provides evidence of the underlying shifts in the production structure and rising levels of competitiveness and productivity. The export basket is well-diversified, ranging from products from the low-value addition chain to items with high technology content. The diversification of the export basket has improved since the 1990s. According to the United Nations Conference on Trade and Development (UNCTAD), India is among the top ten exporters in as many as 32 commodities out of 70 leading export items from developing economies. The share of these commodities in aggregate world exports is about 22 per cent. These 32 commodities account for about 60 per cent of India’s total exports.

I.6.16 During 2005-06 (April-July), the underlying pace of merchandise export growth in US dollar terms (21.3 per cent) remained firm, although there was some loss of momentum from a year ago (31.2 per cent). Besides the high base of the previous year, seasonal demand patterns associated with various commodity sectors and the evolving configurations in global demand impacted on export performance in 2005-06 (April-July). Preliminary information indicates that engineering goods led by transport equipments, metals and manufactures, machinery and parts and chemicals were the key drivers of export growth. Among other products, rice, iron ore, marine products, plastic and linoleum, readymade garments and petroleum products showed strong growth. Imports surged in an environment of buoyant economic activity. Imports during April-July 2005 increased by 36.4 per cent (35.2 per cent a year ago), driven by both oil and non-oil imports. The rise in oil imports (32.3 per cent) was propelled by a sharp increase in international crude oil prices as well as a pick-up in volume growth. Non-oil imports (38.1 per cent) maintained high growth during April-July 2005 (28.0 per cent a year ago) in tune with acceleration in industrial activity. Non-oil imports excluding gold and silver witnessed substantial increase at 61.1 per cent during April-May 2005 (17.2 per cent a year ago), led by impor ts of mainly industrial inputs (bulk consumption goods, manufactured fertilisers and professional instruments). Within industrial inputs, capital goods were the key driver posting a growth of 34.3 per cent in April-May 2005 (22.7 per cent a year ago). The robust expansion of imports of capital goods, accompanied by a strong growth of domestic production of capital goods, reflects the substantial build-up in capacity of the industrial sector. The trade

deficit surged 82 per cent to US $ 14.0 billion during April-July 2005 from US $ 7.7 billion during April-July 2004. Increase in non-oil imports was the major factor underlying the expansion in the trade deficit. During April-May 2005, the non-oil trade balance showed a deficit of US $ 2.7 billion as against a marginal surplus of US $ 0.1 billion a year ago.

Invisibles

I.6.17 A sustained rise in net invisible surpluses has moderated the impact of growing trade deficits since the 1990s, eventually driving the current account into surplus during 2001-02 to 2003-04 (Chart I.45).

I.6.18 During 2004-05, the net invisible surplus at 4.6 per cent of GDP was able to finance 83.1 per cent of the trade deficit. Service exports and remittances from Indians working abroad were the key drivers. Gross earnings from invisibles constituted 49.1 per cent of external current receipts in 2004-05, significantly above 29.3 per cent in 1990-91 (Chart I.46).

Services

I.6.19 According to the IMF’s Balance of Payments Statistics Yearbook 2004, India emerged as the 18^thlargest service exporter in the world in 2003, expanding its market share to 1.3 per cent from 0.6 per cent in 1990. Services exports were led by rapid rise in business and professional services, travel and software services (Table 1.66). The compositional shift in favour of software and business services became even more pronounced in 2004-05.

Table 1.66: Structure of India’s Services Exports

Year	Amount	Percentage Share in Total Services Exports
	(US $ million)
		Travel	Transportation	Insurance	G.N.I.E.	Software	Miscellaneous*

1	2	3	4	5	6	7	8

1970-71	292	16.8	49.7	5.5	13.7	0.0	14.4
1980-81	2,804	43.5	16.3	2.3	4.0	0.0	33.9
1990-91	4,551	32.0	21.6	2.4	0.3	0.0	43.7
2000-01	16,268	21.5	12.6	1.7	4.0	39.0	21.3
2003-04	24,949	16.5	13.1	1.7	1.1	48.9	18.7
2004-05	51,326	9.8	9.9	2.0	0.8	33.7	43.9
*: Excluding software services. G.N.I.E. : Government not included elsewhere.

I.6.20 Travel receipts acquired a distinct buoyancy during 2004-05 (Table 1.67). The recent revival in tourist interest in India has resulted in a marginal improvement in India’s share in world tourist earnings to 0.74 per cent in 2003 (ranking 27^th in world tourist earnings) from an average of 0.68 per cent in the late 1990s. Travel payments grew sharply, reflecting the impact of a liberalised exchange and payments regime and expanding business travel. In line with sustained growth in outbound tourist traffic, travel payments increased from US $ 3.5 billion in 2003-04 to US $ 5.5 billion in 2004-05, exceeding travel receipts. During 2004-05, while business travel continued to account for a major share of travel payments (about 60 per cent), there was a rebound in the share of tourist/leisure travel by Indians (21 per cent).

I.6.21 Business and professional services include a host of services such as communication, construction, financial services, software, news agency, royalties, license fee and management services. During 2004-05, the rapid growth in these services was contributed by communication and business services, besides software services. The category ‘business services’ emerged as an important driver of service exports. In recognition of their

Table 1.67: Foreign Tourist Arrivals in India and Outbound Tourist Traffic

Year	Arrivals	Growth	Departure	Growth
	(millions)	Rate (%)	(millions)	Rate (%)

1	2	3	4	5

1992	1.9	11.3	2.2	15.8
2001	2.5	-4.2	4.6	4.5
2002	2.4	-4.0	4.9	6.5
2003	2.8	16.7	5.4	10.2
2004 (P)	3.4	21.4	6.2	14.8

P : Provisional. Source: Ministry of Tourism, Government of India.

growing importance, new reporting arrangements were put in place in 2004-05 wherein a number of new purpose codes were introduced with a view to collect data separately for these services. During 2004-05, two-thirds of total service payments by India were contributed by imports of business and professional services. They included payments for construction, financial, communication and managerial services besides a host of other business services, reflecting the ongoing technological transformation of the economy and modernisation of Indian industry with a focus on technological upgradation.

Software Services and ITES-BPO

I.6.22 Exports of software and IT-Enabled Services recorded a strong growth of 34.4 per cent to reach US $ 17.2 billion in 2004-05 (Table 1.68). Notwithstanding increasing competitive pressures, India remains an attractive source of software exports because of low cost of operations, high quality and skilled manpower. Additionally, a favourable time zone difference helps organisations to run internal operations and render customer service round the clock. India’s software industry has progressively enhanced its market share in global IT spending from 1.5 per cent in 2000-01 to an estimated 2.2 per cent in 2004-05.

Table 1.68: Software and Services Exports of India

		(US $ million)

Year	IT Services	ITES-BPO	Total Software

1	2	3	4 (2+3)

1995-96	754	–	754
2000-01	5,287	930	6,217
2003-04	9,200	3,600	12,800
2004-05	12,000	5,200	17,200

ITES : IT Enabled Services. BPO : Business Process Outsourcing. Source: NASSCOM.

Globally, India ranks second only to Ireland in exports of computer and IT services.

I.6.23 Within the software sector exports, the ITES-BPO industry recorded an even higher growth of 44.4 per cent in 2004-05, driven by increased offshoring by firms in America and Europe. The global market for software and services (including BPO) is projected to grow by 8.6 per cent per annum over 2004-08. With the industry structure undergoing transformation, established software service companies have entered into the ITES-BPO segment encouraged by cross-selling opportunities, critical mass, strong balance sheets and end-to-end service offerings. The structure of software service (including ITES-BPO) exports reveals that financial services including banks, insurance companies and securities firms account for the largest share of Indian software services (37 per cent). This is followed by manufacturing and the telecom sector (13 per cent each). Within the ITES, service lines, customer care and finance have been the fastest growing segments.

Private Transfers

I.6.24 Remittances remained buoyant during 2004-05 on the back of robust global growth, particularly in the US and oil exporting countries, and some improvement in remittance receiving infrastructure domestically. Remittances by Indians working abroad include repatriation of funds for family maintenance and local withdrawals from the non-resident Indian (NRI) deposits. The surge in remittances, par ticularly since the information technology revolution in the 1990s, has placed India as the highest remittance receiving country in the world (Table 1.69).

I.6.25 Remittances to India have emerged as a stable source of inflows with their share hovering around three per cent of GDP since the latter half of the 1990s. Private transfers have exhibited the lowest volatility, after merchandise expor ts, amongst components of current receipts. This stability reflects the increasing use of formal channels for remittance transfers backed by factors such as the institution of a market-determined exchange rate, current account convertibility and increasing availability of speedier and cost effective money transfer arrangements through the banking channels and post offices. While banking channels account for bulk of the inward remittances to India, two schemes, viz., Money Transfer Service Scheme (MTSS) and Rupee Drawing Arrangements (RDA) that provide benefits of easier and speedier operations have assumed significance in expanding the outreach of remittance services to remote locations in the country. During 2004 (January-December), remittances received under RDA and MTSS amounted to US $ 6.1 billion and US $ 1.2 billion, respectively (US $ 5.3 billion and US $ 0.9 billion, respectively, in 2003).

Investment Income

I.6.26 Investment income receipts continued to rise during 2004-05, reflecting mainly the income earned on foreign exchange reserves, a trend that set in since the late 1990s with the build up of foreign exchange reserves. A shift in the level of investment income payments since 2000-01 towards profits and dividends has been primarily on account of inclusion of reinvested ear nings of FDI enterprises as per the revised definition of recording FDI in India.

Table 1.69: Workers’ Remittances: Top Ten Remittance Receiving Countries

				(US $ million)

Country	2003	Country	1996	Country	1991

1	2	3	4	5	6

India	21,579	India	8,453	Portugal	4,517
Mexico	13,266	Mexico	4,224	Egypt	4,054
Spain	4,715	Portugal	3,575	India	3,275
Pakistan	3,963	Turkey	3,542	Turkey	2,819
Morocco	3,614	Egypt	3,107	Mexico	2,414
China	3,343	Greece	2,894	Greece	2,115
Bangladesh	3,180	Spain	2,749	Morocco	1,990
Colombia	3,060	Morocco	2,165	Spain	1,792
Egypt	2,961	Brazil	1,866	Pakistan	1,541
Portugal	2,824	China	1,672	Brazil	1,057
Source: Balance of Payments Statistics Yearbook, IMF.

Current Account

I.6.27 Reflecting the sharp rise in the merchandise trade deficit, the current account turned into a deficit from the second quarter of 2004-05 onwards and for the year as a whole, it was 0.9 per cent of GDP. In a national accounting perspective, the re-emergence of a current account deficit in 2004-05 represents a cessation of a brief period of export of domestic saving and the resumption of the supplemental role of foreign saving in financing higher investment and growth in the economy. This augurs well for the higher growth trajector y envisaged for the Indian economy over the medium-term. Many other EMEs such as China, Malaysia, the Philippines, Thailand, Korea, Indonesia, Argentina and Brazil, however, continued to record significant current account surpluses reflecting the counterpart to the massive current account deficit of the US.

Capital Account

I.6.28 Capital account developments continued to dominate the balance of payments outcome in 2004-05. In the first half of 2004-05, there was a considerable slowdown in foreign investment inflows while NRI deposits recorded outflows. Foreign investment inflows picked up sharply in the second half mainly on account of a revival of FII interest in Indian equities. External commercial borrowings and trade credit rose sharply during the second half of the year.

Foreign Investment

I.6.29 Foreign investment flows moderated during May-July 2004, but bounced back in the second half of the year (Table 1.70). The slowdown in the first half was on account of global uncertainties caused by hardening of crude oil prices and the upturn in the interest rate cycle. The resumption in the net FII inflows to India from August 2004 continued till the end of 2004-05.

I.6.30 FDI into India, including equity capital of unincorporated entities, reinvested earnings and inter-corporate debt transactions between the related entities, was higher in 2004-05 (Chart I.47). The improvement in FDI flows reflected the impact of recent initiatives aimed at creating an enabling environment for FDI and for encouraging infusion of new technologies and management practices. The decision to hike sectoral caps on FDI in telecom from 49 per cent to 74 per cent and in air transport

Table 1.70: Foreign Investment Flows to India



				(US $ million)

Item		2004-05 (P)		2003-04	2002-03

1			2	3	4

A.	Direct Investment (I+II+III)		5,536	4,673	5,035
	I.	Equity (a+b+c+d+e)	3,363	2,387	2,764
		a) Government (SIA/FIPB)	1,062	928	919
		b) RBI	1,259	534	739
		c) NRI	–	–	–
		d) Acquisition of shares*	930	735	916
		e) Equity capital of
		unincorporated bodies	112	190	190
	II.	Re-invested earnings	1,816	1,798	1,833
	III.	Other capital #	357	488	438
B.	Portfolio Investment (a+b+c)		8,909	11,377	979
	a)	GDRs/ADRs	613	459	600
	b)	FIIs @	8,280	10,918	377
	c)	Off-shore funds and others	16	–	2
C.	Total (A+B)		14,445	16,050	6,014
P : Provisional – : Nil/Negligible. * : Relates to acquisition of shares of Indian companies by non - residents under Section 6 of FEMA 1999. # : Data pertain to inter-company debt transactions of FDI entities. @:Data represent net inflow of funds by FIIs. Note: 1. Data on reinvested earnings for 2003-04 and 2004-05 are estimates. 2. Data on foreign investment presented in this table represent inflows into the country and may not tally with the data presented in other tables. They may also differ from data relating to net investment in stock exchanges by FIIs.

services (domestic airlines) from 40 per cent to 49 per cent buoyed investors’ interest in these sectors.

I.6.31 Country-wise details of FDI flows reveal the continued predominance of Mauritius, the US and the Netherlands as major investors in India (Table 1.71). FDI flows from Germany and Japan increased sharply during 2004-05. Sector-wise, FDI flows into India were attracted by the increasing competitiveness of select manufacturing industries and services, particularly business and computer services. At the global level, services have been the key attraction for foreign direct investors, a structural shift indicative of offshoring. In India, the services sector attracted the largest FDI flows - US $ 1.2 billion in 2004-05 (US $ 0.9 billion in 2003-04). FDI flows into the manufacturing sector more than doubled in 2004-05. India has steadily improved its rank in terms of Outward FDI Performance Index (UNCTAD, World Investment Report 2004) and FDI Confidence Index (AT Kearney) over the years, indicating improved investment climate and better growth prospects (Chart I.48).

I.6.32 FII inflows in the Indian equity markets remained buoyant during August-March 2004-05. Between mid-August 2004 and March 2005, the price-earning (P/E) ratio of Indian equity stocks moved up to 13.5 from 11.5 (Table 1.72). As a result, the return on equity declined to 1.8 per cent for Indian stocks from 1.7-3.8 per cent in other major East Asian countries.

I.6.33 FII flows to India broadly follow the trends in developing economies (Chart I.49).

India’s Direct Investment Abroad

I.6.34 An important development in India’s balance of payments since the late 1990s has been the rising prominence of Indian investment abroad through joint ventures and wholly owned subsidiaries. Cumulative

Table 1.71: Foreign Direct Investment to India: Country-wise and Industry-wise*

		(US $ million)

Source/Industry	2004-05 (P)	2003-04	2002-03

1	2	3	4
Total FDI	2,320	1,462	1,658
Country-wise Inflows
Mauritius	820	381	534
USA	469	297	268
UK	84	157	224
Germany	143	69	103
Netherlands	196	197	94
Japan	122	67	66
France	44	34	53
Singapore	64	15	39
Switzerland	64	5	35
South Korea	14	22	15
Others	300	218	227
Industry-wise Inflows
Fisheries	10	2	9
Mining	11	18	9
Manufacturing	924	426	480
Food and Dairy Products	183	64	39
Electricity	14	90	48
Construction	209	172	237
Trade, Hotels & Restaurants	22	67	39
Transport	70	20	12
Financing, Insurance, Real Estate &
Business Services	363	206	223
Computer Services	372	166	297
Educational Services	2	0	1
Research & Scientific Services	5	1	0
Health & Medical Services	25	15	28
Other Services	10	2	18
Others	100	213	218
* : Data in this table exclude FDI inflows by way of acquisition of shares by non-residents under section 6 of FEMA, 1999. P : Provisional.

Table 1.72: Foreign Portfolio Investment Flows

Country		Portfolio Inflows		Price-Earnings
		(US $ billion)		Ratio (Per cent)

	2004	2003	2002	March 2005
1	2	3	4	5
Chile	1.1	2.1	1.0	16.6
Hong Kong	4.6	1.4	-1.1	14.4
India	8.8	8.2	1.1	13.5
Philippines	1.9	0.9	1.6	18.5
South Korea	19.0	22.7	5.4	14.0
Thailand	0.2	0.3	-0.7	9.8
Note :1.Data for the Philippines for calendar year 2004 are up to September. 2.Price-earnings ratio for India pertains to average for 100 scrips included in BSE-100. Source :International Financial Statistics, IMF; and The Stock Exchange, Mumbai.

outward FDI flows crossed US $ 7 billion in 2004-05. Total (equity and loans) investment abroad by Indian companies in 2004-05 stood at US $ 1.5 billion, most of which went to the manufacturing sector. Outward FDI has begun to grow rapidly, particularly through mergers and acquisitions (M&As) (Table 1.73 and Box I.13).

I.6.35 In terms of the outward FDI stock, India is placed 20^th among developing economies. India’s rank had improved to 61 in 2003 (close to China at 58) from 107 in 1999 in the Outward FDI Performance Index computed by UNCTAD.

I.6.36 In recent years, following the convergence towards international best practices, there has been a remarkable improvement in dissemination of FDI

Table 1.73: Cross-Border Mergers and Acquisitions - India

	(US $ million)

Year	Sales	Purchases

1	2	3

1997	1,520	1,287
1998	361	11
1999	1,044	126
2000	1,219	910
2001	1,037	2,195
2002	1,698	270
2003	949	1,362
Source : World Investment Report 2004, UNCTAD.

statistics. The Survey of Implementation of Methodological Standards for Direct Investment (SIMSDI) adopted jointly by the IMF and the OECD is a step in improving the quality of FDI data (Box I.14).

Debt Flows

I.6.37 External assistance flows, net of principal repayments, turned positive in 2004-05 as against a net outflow (on account of pre-payments) in 2003-04. Net resource transfers under external assistance which had remained negative during 1995-2004 also turned positive in 2004-05.

I.6.38 Corporates’ recourse to ECBs was substantially higher in 2004-05, reflecting strong investment demand domestically as well as favourable financing conditions overseas. The narrowing down of spreads on emerging market bonds to historic lows in early 2005 was engendered by excess global liquidity and search for returns. Accordingly, the global investors, particularly pension funds and insurance companies showed a clear preference for investment in EME bonds. Indian corporates raised ECBs mainly for financing import of capital goods, local sourcing of capital goods, investment in new projects, modernisation/expansion of existing units and overseas investment in JVs/WOS (Table 1.74). The weighted average maturity period of ECBs during 2004-05 worked out to seven years.

I.6.39 NRI deposits recorded outflows of US $ 1.3 billion during the first half of 2004-05 reflecting the alignment of interest rates on NRE deposits to global interest rates. These outflows were partly offset in the period from November 2004 onwards following the revision in interest rates on NRE deposits to LIBOR/ SWAP rates of US dollar plus 50 basis points on October 26, 2004 (Table 1.75).

Box I.13

India’s Direct Investment Abroad

The regime for Indian investments overseas has been substantially liberalised in order to provide Indian industry access to new markets and technologies, including research and development, with a view to increasing competitiveness globally and strengthening exports. The acquisition of foreign companies which started off in the IT and related services sector has now spread to other areas (Table A).

Table A: India’s Direct Investment Abroad by Sectors

				(US $ million)

Industry	2004-05	2003-04	2002-03	2001-02	2000-01

1	2	3	4	5	6

Financial Services	6.9	1.4	3.0	4.3	6.3
Manufacturing	1057.8	893.5	1270.8	527.6	169.1
Non-financial
Services	230.1	456.4	403.8	349.8	470.0
Trading	175.5	112.8	82.5	79.3	51.6
Others	76.8	31.5	37.8	20.0	11.3
Total	1547.1	1495.6	1797.9	981.0	708.3

Many large Indian companies in basic industry such as steel, viscose fibre and copper have acquired upstream companies in resource-rich countries such as Canada and Australia with the objective of backward integration. Information technology and pharmaceutical companies have also come forward for investing abroad. While some of them are trying to develop stand-alone local operations, most work as market and market intelligence arms for the parent companies in India. Some domestic telecom companies have bought underground telephone cable networks from foreign companies for integrating their domestic telephone networks in the international network. Public sector oil companies are acquiring equities in exploration, retailing and refinery.

Destination-wise, the United States has attracted the highest level of FDI from India, followed by Russia and Mauritius (Table B). While most of the investment to Russia and Sudan went towards oil exploration, investments to the US have mostly gone into IT and pharmaceuticals. Indian firms have about 440 investments/joint ventures in the UK, mostly technology-oriented. There are more than 1,400 Indian companies operating in Singapore. Of these more than 450 are technology enterprises. More and more Indian companies are getting listed on New York Stock Exchange (NYSE), London Stock Exchange (LSE) and NASDAQ. Increase in FDI outflows has enabled Indian companies to expand and diversify their operations across a wider spectrum of countries for diffusion of technical innovations and managerial expertise.

Table B: Country-wise Approvals Issued between April 1995 and March 2005

				(US $ million)

Country	No. of	Equity	Loan	Guaran-	Total
	approvals			tee
1	2	3	4	5	6

USA	2268	1,762	163	234	2,159
Russia	32	1,757	5	1	1,763
Mauritius	388	682	182	174	1,038
Sudan	5	964	–	–	964
British Virgin
Islands	87	769	19	136	924
UK	633	584	101	92	777
Bermuda	34	503	5	181	689
Hong Kong	126	102	98	345	544

I.6.40 Trade credits rose strongly during the year to accommodate the higher financing requirements arising on account of oil and non-oil imports. The availability of suppliers’ credit for financing of gold imports for a period of one year also contributed to a sharp rise in access to trade credits in the beginning of 2004-05. Although trade credit can be availed of for financing import of capital goods up to three years,

Box I.14

Survey of Implementation of Methodological Standards for Direct Investment

The increasing importance of foreign direct investment (FDI) and its geographic and sectoral diversity has stimulated interest among policy makers, analysts and statisticians. In response, the first Survey of Implementation of Methodological Standards for Direct Investment (SIMSDI) was conducted in 1997 by the IMF and the OECD. A total of 114 countries responded and in 2001, the results were updated for 61 countries (30 OECD member countries and 31 selected non-OECD countries). The Survey was once again undertaken for the year 2003, encompassing a comprehensive study of data sources, collection methods, and dissemination and methodological practices for FDI statistics.

India participated in all the rounds of SIMSDI. India is among the first group of countries who could finalise the metadata for the SIMSDI 2003 within the given time frame and whose metadata has been posted on the IMF’s external website along with 43 other countries. The metadata for India for SIMSDI 2003 has been made available to the public in order to enable a better understanding of the Indian situation and to provide feedback to benchmark national compilation procedures to international best practices.

Table 1.74: ECB* Approvals during 2004-05

(US $ million)

Purpose	Amount

1	2

Import of Capital Goods	3,059
Import of Non-capital Goods	1
Local Sourcing of Capital Goods	1,765
Working Capital	134
On-lending or Sub-lending	1,401
New Projects	2,273
Modernisation/Expansion of Existing Units	2,057
Overseas Investment in JV/WOS	265
Textile/Steel Re-structuring Package	100
Others	435
Total	11,490
* : Includes FCCBs.

the share of the maturity bucket of one to three years is relatively insignificant. A reduction of the time period of trade credit for direct import of gold to 90 days in July 2004 had a moderating impact on gold imports.

I.6.41 Net inflows under banking capital were lower during 2004-05 than in the preceding year, attributable to outflows under NRI deposits. Overseas borrowings of banks remained volatile during the first half but were sizeable during October-December, 2004. Interest rate movements induced utilisation of nostro balances held by banks.

Table 1.75: Balances under NRI Deposit Schemes

				(US $ million)

	Scheme	Outstanding (end-March)		Net Inflows@
		2005P	2004	2004-05P	2003-04
1		2	3	4	5
1.	FCNR(B)	11,490	10,961	530	762
2.	NR(E)RA	21,109	20,559	-99	4,695
3.	NR(NR)RD	271	1,746	-1,500	-1,816
Total		32,870	33,266	-1,069	3,641

P: Provisional. @: All figures are inclusive of accrued interest and valuation changes arising on account of fluctuation in non-dollar currencies against the US dollar. Note : Net inflows in respect of NR(E)RA and NR(NR)RD deposits in columns 4 and 5 may not match with the differences between the outstanding stocks on account of exchange rate fluctuations during the year.

External Assistance Extended by India

I.6.42 India is emerging as an important donor to developing countries. External assistance provided by India rose to US $ 437 million in 2004-05 from US $ 247 million in 2000-01 (Table 1.76). India provides aid mainly in the form of technical cooperation and training. Grants continued to dominate the external aid with a share of about 70 per cent. The major beneficiaries of the assistance during 2004-05 were Bhutan, Sri Lanka, Myanmar, Nepal and the African countries.

Table 1.76: India's Grants and Loans to Foreign Governments

						(US $ million)

Item				2004-05			2000-01
			Grant	Loan	Total	Grant	Loan	Total
1			2	3	4	5	6	7
A.	Plan (External Affairs)		101	62	164	76	44	120
B.	Non-Plan (i+ii+iii)		208	65	273	88	38	127
	i.	External Affairs	194	4	198	81	16	97
		Bangladesh	1	4	5	2	16	18
		Bhutan	70	0	70	44	0	44
		Nepal	15	0	15	14	0	14
		Africa	24	0	24	1	0	1
		Myanmar	1	0	1	4	0	4
		Sri Lanka	3	0	3	2	0	2
		Other Developing Countries	80	0	80	14	0	14
	ii. Finance		14	61	75	7	22	29
		Contribution to U.N.D.P.	5	0	5	5	0	5
		Mauritius	0	8	8	0	2	2
		Myanmar	0	18	18	0	4	4
		Sri Lanka	0	22	22	0	3	3
		Surinam	0	9	9	0	0	0
		Other Countries	3	4	7	2	13	15
		Development Assistance	6	0	6	0	0	0
	iii.Shipping		0	0	0	1	0	1
		Bangladesh	0	0	0	1	0	1
C.	Grand Total (A+B)		310	127	437	165	82	247

Source: Union Budgets, Government of India.

EXTERNAL DEBT

I.6.43 India’s external debt stock increased by US $ 11.6 billion (10.4 per cent during 2004-05) to US $ 123.3 billion at end-March 2005. All components of external debt, except bilateral aid and rupee debt, recorded an increase (Table 1.77). Commercial borrowings increased sharply during the year as access of the corporates to international capital markets improved during the year. Short-term debt, particularly trade credits, also surged on account of financing requirements of the higher import growth. The US dollar continues to dominate the currency composition of India’s external debt stock.

I.6.44 Indicators of external debt sustainability further strengthened during the year. The ratio of external debt to GDP showed a steady improvement, dropping to 17.4 per cent at end-March 2005 from 30.8 per cent at end-March 1995 (Table 1.78). The foreign currency assets of the Reserve Bank provided a cover of around 110 per cent of total external debt outstanding on March 31, 2005. India was the eighth largest debtor country in 2003; however, among the top 20 debtor countries, India had the lowest debt-GDP ratio, next only to China. The ratio of the short-term debt to total external debt was also among the lowest for India and was placed at 6.1 per cent at end-March 2005 as against an average of 15.7 per cent for the developing countries as a group.

Table 1.77: India's External Debt


			(US $ million)

Item	End-March	End-March	Variation during
	2005	2004	2004-05

			Absolute	Per cent

1	2	3	4	5

1. Multilateral	31,763	29,288	2,475	8.5
2. Bilateral	17,222	17,278	-56	-0.3
3. Trade Credit	4,960	4,680	280	6.0
4. External Commercial 26,942		22,101	4,841	21.9
Borrowings
5. NRI Deposits	32,599	31,216	1383	4.4
6. Rupee Debt	2,300	2,721	-421	-15.5
7. Short Term	7,524	4,431	3,093	69.8
8. Total	1,23,310	1,11,715	11,595	10.4

FOREIGN EXCHANGE RESERVES

I.6.45 India’s foreign exchange reserves comprising foreign currency assets, gold, SDRs and the reserve position with the IMF increased by as much as US $ 28.6 billion during 2004-05 and stood at US $ 141.5

Table 1.78: External Debt Service Payments


		(US $ million)

Item		2004-05	2003-04

1		2	3

1.	External Assistance@	2,723	6,895
2.	External Commercial Borrowings*	5,238	10,389
3.	IMF #	0	0
4.	NRI Deposits (Interest Payments)	1,353	1,492
5.	Rupee Debt Service	417	376
6.	Total Debt Servicing	9,731	19,152
7.	Total Current Receipts **	1,57,710	1,17,142
8.	External Debt to GDP Ratio (%)	17.4	17.8
9.	Short Term Debt to Total Debt Ratio (%)	6.1	4.0
10. Short Term Debt to Foreign Exchange
	Reserves Ratio (%)	5.3	3.9
11. Foreign Exchange Reserves to
	External Debt Ratio (%)	114.8	101.1
12. Debt Service Ratio (6/7) (%)		6.2	16.3
13. Interest Payments to
	Current Receipts Ratio (%)	2.3	3.9
14. Debt to Current Receipts Ratio (%)		78.2	95.4
15. Liability Service Ratio (%)		7.1	17.1
@: Inclusive of non-Government loans. : Inclusive of interest component of trade credits. #: Excluding charges on net cumulative allocation. : Excluding official transfers. Note:* 1. Debt Service payments in this table follow accrual method of accounting consistent with balance of payments compilation and may, therefore, vary from those recorded on cash basis. 2. Liability service ratio represents debt service payments and remittances of profits and dividends taken together as a ratio of total current receipts.

billion as on March 31, 2005 (Table 1.79). India turned a creditor to the IMF under the Financial Transactions Plan (FTP) in 2003. During 2004-05, US $ 93.5 million (SDR 61 million) was made available under the FTP to countries like Uruguay, Haiti, Dominican Republic and Sri Lanka.

I.6.46 At end-March 2005, India held the fourth largest stock of international reserve assets among EMEs. In terms of trade-related reserve adequacy indicators, India’s foreign exchange reserves at 14.3 months of imports are higher than other EMEs in Asia. India’s ratio of reserves to short-term debt comfortably satisfies the adequacy criterion vis-àvis comparator countries. In terms of overall external debt and total external liabilities, India’s reserves are broadly adequate. In view of the steady improvement in the external sector and growth prospects, Standard & Poor’s Rating Services raised its long-

Table 1.79: Foreign Exchange Reserves


					(US $ million)

As at end of	Gold	SDR	Foreign Currency	Reserve Position	Total	Use of IMF
March			Assets	in the IMF	(2+3+4+5)	Credit

1	2	3	4	5	6	7
1993	3,380	18	6,434	296	10,128	4,799
1994	4,078	108	15,068	299	19,553	5,040
1995	4,370	7	20,809	331	25,517	4,300
1996	4,561	82	17,044	310	21,997	2,374
1997	4,054	2	22,367	291	26,714	1,313
1998	3,391	1	25,975	283	29,650	664
1999	2,960	8	29,522	663	33,153	287
2000	2,974	4	35,058	658	38,694	26
2001	2,725	2	39,554	616	42,897	0
2002	3,047	10	51,049	610	54,716	0
2003	3,534	4	71,890	672	76,100	0
2004	4,198	2	1,07,448	1,311	1,12,959	0
2005	4,500	5	1,35,571	1,438	1,41,514	0

term foreign currency rating on India by one notch to ‘BB+’ (still one notch below the investment grade) and affirmed its ‘BB+’ long-term local currency and short-term ratings on February 2, 2005.

I.6.47 The objectives of reserve management in India are preservation of the long-term value of the reserves in terms of purchasing power and the need to minimise risk and volatility in returns. Foreign assets are held in major convertible currencies. Investments comprise deposits with other central banks, the Bank for International Settlements (BIS), top-rated foreign commercial banks, securities representing debt of sovereigns and supranational institutions with residual maturity not exceeding 10 years and any other instruments or institutions as approved by the Central Board of the Reserve Bank. Accordingly, the foreign currency assets are invested in multi-currency and multi-market portfolios (Table 1.80).

Table 1.80: Deployment Pattern of Foreign Currency Assets

			(US $ million)

Item		As on March	As on March
		31, 2005	31, 2004

1		2	3

Foreign Currency Assets		1,35,571	1,07,448
(a)	Securities	36,819	35,024
(b)	Deposits with other Central
	Banks and BIS	65,127	45,877
(c)	Deposits with Foreign
	Commercial banks	33,625	26,547

I.6.48 Decisions involving the patter n of investments are driven by the broad parameters of portfolio management with a strong bias for capital preservation and liquidity. The counterparties with whom deals are conducted are subject to a rigorous selection process, taking into account their international reputation and track record, apart from factors such as size, capital, rating, financial position and efficiency of operations. Counter-parties could be banks, subsidiaries of banks or security houses.

I.6.49 The Reserve Bank has two broad portfolios with independent risk parameters, viz., the money market portfolio and the bonds portfolio. The money market portfolio, predominantly guided by transaction and intervention needs, comprises instruments with maturity of less than one year and lower duration and runs a lower market risk in relation to interest rate movements. In contrast, the bonds portfolio consists of long-term holdings of AAA-rated instruments issued by sovereigns and supranationals.

INTERNATIONAL INVESTMENT POSITION

I.6.50 India’s net international investment position, i.e., the stock of external assets net of the stock of external liabilities, improved significantly (Table 1.81). Net external liabilities declined to US $ 48.6 billion by end-March 2004 from US $ 60.6 billion at end-March 2003. International assets grew much faster than international liabilities, attributable to the marked rise in reserve assets. The ratio of India’s

Table 1.81: Cross-Country IIP: Select Indicators (end-December 2003)


						(Per cent)
	As a ratio of GDP		Reserve Assets as a ratio of	As a ratio of Total International Liabilities
			Total International Assets
Country	Foreign Assets	Foreign Liabilities		Direct	Portfolio	Other
				Investment	Investment	Investment

1	2	3	4	5	6	7
India	21.4	29.1	83.1	21.0	23.8	55.3
Hong Kong	756.9	505.2	10.0	48.2	15.8	33.5
Indonesia	26.9	78.0	64.8	6.4	14.3	79.3
Japan	83.8	46.3	18.7	4.5	43.7	51.5
Korea	42.4	56.6	60.5	19.3	49.1	31.4
Philippines	40.3	92.8	52.8	16.6	28.2	55.2
Singapore	492.7	409.5	21.3	45.6	16.1	38.3
Thailand	44.6	82.9	66.1	40.1	24.6	34.7
US	71.5	95.6	2.3	23.2	49.5	27.4
Note : Data for India relate to end-March 2004.

reserve assets to total international assets compares favourably with many EMEs (Table 1.82). Reflecting

Table 1.82: International Investment Position of India

				(US $ million)

Item				End-March

			2004 P	2003 PR	1997 PR

		1	2	3	4
A.	Assets
	1.	Direct Investment Abroad	6,592	5,054	617
	2.	Portfolio Investment	731	709	282
		2.1 Equity securities	396	374	172
		2.2 Debt securities	335	335	110
	3.	Other Investments	15,697	12,878	10,097
		3.1 Trade credits	1,251	1,097	973
		3.2 Loans	1,758	1,412	548
		3.3 Currency and deposits	9,548	7,517	5,287
		3.4 Other assets	3,139	2,853	3,288
	4.	Reserve Assets	112,959	76,100	26,714
Total Foreign Assets			135,979	94,741	37,710
	of which: Banks		11,442	9,158	7,271
B. Liabilities
	1.	Direct Investment in India	38,676	30,827	10,630
	2.	Portfolio Investment	43,856	32,410	18,744
		2.1 Equity securities	33,954	20,089	13,631
		2.2 Debt securities	9,902	12,321	5,113
	3.	Other Investments	102,044	92,146	89,388
		3.1 Trade credits	6,497	4,761	5,698
		3.2 Loans	62,622	61,103	67,743
		3.3 Currency and deposits	32,136	25,569	15,300
		3.4 Other liabilities	789	714	646
Total Foreign Liabilities			184,576	155,383	118,762
of which: Banks			39,109	36,864	18,383
C.	Net Foreign Liabilities (B-A)		48,597	60,642	81,052
	of which: Banks		27,667	27,706	11,112
D.	Net Foreign Liabilities
	to GDP (per cent)		7.7	11.7	21.0
P: Provisional. PR: Partially Revised.

these positive developments, the ratio of net foreign liabilities to GDP for India recorded a steady improvement from 21.0 per cent at end-March 1997 to 7.7 per cent at end-March 2004.

I.6.51 Non-debt liabilities, comprising primarily direct and portfolio investment (equity component), have risen sharply in terms of their share in total international liabilities (Table 1.83).

I.6.52 Growth in net international liabilities of the Indian banking sector decelerated to 15.1 per cent in 2004-05 from 19.8 per cent in 2003-04 (Table 1.84). Country-wise, the US accounted for nearly one-fourth of total international liabilities and assets of Indian banks. While the assets denominated in foreign currency formed 98.1 per cent of total international assets, the proportion of foreign currency denominated liabilities in total international liabilities was lower at 57.9 per cent at end-March 2005.

Table 1.83: Composition of India's International Liabilities

		(Per cent)

Year (end-March)	Debt Liabilities	Non-debt Liabilities

1	2	3

1997	79.0	21.0
1998	76.7	23.3
1999	77.1	23.0
2000	74.5	25.6
2001	72.5	27.5
2002	69.2	30.8
2003	67.2	32.8
2004	60.7	39.3

Table 1.84: International Liabilities and Assets of Banks in India


				(US $ million)

Category/Item		Amount outstanding at end of

	March 2005*		March 2004	March 2003
1		2	3	4

Total International Liabilities		58,161	50,871	42,209
of which:
FCNR(B) Deposits		11,654	10,460	9,261
NRE Rupee Deposits		19,494	17,501	11,184
Foreign Currency Borrowings		10,368	7,743	3,876
Bonds (including RIBs and IMDs)		6,128	6,389	9,281
NR(NR) Rupee Deposits		192	1,690	3,201
ADRs and GDRs		2,819	1,474	807
EEFC Accounts		1,296	1,045	1,028

Total International Assets		30,306	26,680	22,015
of which:
Foreign Currency Loans to Residents		13,337	10,159	7,760
Outstanding Export Bills		5,834	4,750	4,051
NOSTRO Balances		8,016	9,053	7,728

* : Provisional.
RIBs : Resurgent India Bonds. IMDs:India Millennium Deposits. ADRs : American Depository Receipts. GDRs : Global Depository Receipts. EEFC:Exchange Earners' Foreign Currency. Note: All figures are inclusive of accrued interest.

I.6.53 To conclude, there was a sharp turnaround in the current account balance during the year - from a surplus of 1.7 per cent of GDP in 2003-04 to a deficit of 0.9 per cent in 2004-05 - mainly due to a substantial increase in imports, even as export growth and invisibles surplus remained robust. As capital flows were considerably in excess of the current account deficit, the overall balance of payments remained comfortable and the foreign exchange reserves (excluding valuation effects) increased by a substantial US $ 26.2 billion during 2004-05.

Annual Report

Archives