Monetary policy in this financial year so far has sought to balance the growth–inflation
dynamics through a combination of measured steps for liquidity easing and policy rate cut.
While reserve money growth adjusted for CRR has maintained reasonable pace during Q3,
broad money growth remained below the indicative trajectory. Aggregate deposit growth
lagged behind credit growth, even as credit expansion remains moderate due to slack in activity
and deterioration in the asset quality of banks. Despite considerable primary liquidity infusion
by the Reserve Bank through CRR cuts and open market purchases of government securities,
liquidity conditions tightened in Q3 of 2012-13. This was mainly because of an increase in
government cash balances with the Reserve Bank. Going forward, contingent on further
moderation in inflation, monetary policy could increasingly shift focus and respond to growth,
giving due cognizance to the evolving macro-financial factors.
Tightening cycle gradually impacted
inflation
IV.1 During the current financial year,
growth has slowed markedly, even as inflation
remained above the Reserve Bank’s comfort
level. Monetary Policy has responded to this
evolving growth-inflation dynamics through
calibrated easing. After lowering the cash
reserve ratio (CRR) by 125 basis points (bps)
during Q4 of 2011-12, the Reserve Bank
frontloaded a reduction in its repo rate by 50
bps in April 2012. Even as elevated inflation
and the twin deficits have severely restricted the space for further easing of the policy rate
since April 2012, subsequent measures were
directed towards ensuring adequate liquidity
to facilitate a turnaround in credit deployment
to productive sectors for supporting growth.
As part of liquidity management measures,
the CRR was reduced in two stages by a
further 50 bps in a pre-emptive manner to
ease monetary and liquidity conditions.
Also, the statutory liquidity ratio (SLR) of
scheduled commercial banks (SCBs) was
reduced to improve the credit conditions
facing the private sector (Table IV.1).
Table IV.1:Movements in Key Policy Variables |
(Per cent) |
Effective since |
Reverse Repo Rate |
Repo Rate |
Cash Reserve Ratio* |
Statutory Liquidity Ratio* |
1 |
2 |
3 |
4 |
5 |
May 3, 2011 |
6.25 (+0.50) |
7.25 (+0.50) |
6.00 |
24 |
June 16, 2011 |
6.50 (+0.25) |
7.50 (+0.25) |
6.00 |
24 |
July 26, 2011 |
7.00 (+0.50) |
8.00 (+0.50) |
6.00 |
24 |
September 16, 2011 |
7.25 (+0.25) |
8.25 (+0.25) |
6.00 |
24 |
October 25, 2011 |
7.50 (+0.25) |
8.50 (+0.25) |
6.00 |
24 |
January 28, 2012 |
7.50 |
8.50 |
5.50 (-0.50) |
24 |
February 13, 2012 |
7.50 |
8.50 |
5.50 |
24 |
March 10, 2012 |
7.50 |
8.50 |
4.75 (-0.75) |
24 |
April 17, 2012 |
7.00 (-0.50) |
8.00 (-0.50) |
4.75 |
24 |
June 18, 2012 |
7.00 |
8.00 |
4.75 |
24 |
August 11, 2012 |
7.00 |
8.00 |
4.75 |
23 (-1.00) |
September 22, 2012 |
7.00 |
8.00 |
4.50 (-0.25) |
23 |
November 3, 2012 |
7.00 |
8.00 |
4.25 (-0.25) |
23 |
Figures in parentheses indicate changes in policy rates/ratios.
* : Per cent of Net Demand and Time Liabilities. |
IV.2 Furthermore, apart from supplying
liquidity through daily liquidity adjustment
facility (LAF), the Reserve Bank made active
use of the auctions under outright open market
operations (OMOs) and injected primary
liquidity of about `1.1 trillion coupled with
liquidity injection of around `229 billion
through anonymous trading platform (NDSOM)
in 2012-13 so far. The judicious use of
the two sets of instruments, i.e., keeping the
policy rate unchanged since April and proactive
liquidity easing measures conferred
dual benefits that were evident as inflation
gradually declined from its peak and credit
off-take showed signs of improvements
during most of November and December
2012. Inflation, however, continues to
remain above the Reserve Bank’s comfort
level (Chart IV.1).
Reserve Bank takes measures to combat
tight liquidity conditions
IV.3 Liquidity conditions since April 2012
can be broadly classified into three phases.
The financial year started with the spillover of
the tight liquidity condition from the previous
year, which was beyond the Reserve Bank’s
comfort zone. The deficit was managed
through a combination of primary liquidity
injection through OMOs and LAF as well as
an enhancement of the export credit refinance
limit. The second phase commenced in July
2012 when, consequent upon these policy measures, the liquidity deficit declined and
returned to the Reserve Bank’s comfort level
and remained mostly there until the beginning of
November 2012. To pre-empt any prospective
tightening of liquidity conditions arising out of
frictional factors such as advance tax outflows,
festive season currency demand and increase
in the wedge between the growth rates of credit
and deposit, the Reserve Bank reduced the
CRR by 25 bps in September 2012 in addition
to the 100 bps SLR cut effective from August
2012 (Table IV.1). Since November 2012, the
inter-bank market has witnessed a tightening
of liquidity conditions mainly due to the buildup
of government cash balances and rise in
currency in circulation with the liquidity deficit
crossing the Reserve Bank’s comfort level of
(-1) per cent of net demand and time liabilities
(NDTL) (Chart IV.2).
IV.4 To address the tightness, the Reserve
Bank, after considering the prevailing
macroeconomic situation, again reduced the
CRR of scheduled banks by 25 basis points
to 4.25 per cent of their NDTL effective
November 3, 2012. Consequently, about `175
billion of primary liquidity was injected into
the banking system. Liquidity deficit worsened
due to an unprecedented increase in currency
demand during the first half of November
2012. The quarterly advance tax outflows in
December 2012 further increased the liquidity
deficit (Chart IV.3).
IV.5 Given the significant squeeze on
liquidity creation and large build-up of
government cash balances, the Reserve Bank
resumed open market purchase auctions of
government securities on December 4, 2012
after a gap of nearly five months. The Reserve
Bank injected primary liquidity through open
market purchases to the tune of `391 billion
during the month in addition to the liquidity
injection through its LAF operations averaging
about `1.2 trillion during the month.
IV.6 In January 2013, with an increase in
government spending, the recourse to LAF
declined compared with the previous month.
However, it continues to mostly remain higher
than the Reserve Bank’s comfort level. The
Reserve Bank remains committed to actively
manage the liquidity conditions. Despite the large liquidity shortage since November
2012, there has been only one instance of
recourse to Marginal Standing Facility (MSF)
during November-December 2012. The call
rate generally hovered around the repo rate,
without significant spike, indicating the depth
and resilience of the inter-bank market. This
reflects the favourable effect of the new
monetary policy operating procedure.
Reserve money adjusted for CRR expanded
at reasonable pace in Q3 of 2012-13
IV.7 Reserve money growth generally
decelerated during Q3 of 2012-13, despite
large injection of primary liquidity by the
Reserve Bank through OMO and LAF (Chart
IV.4). On the sources side, high government
cash balances since end-September dampened
the increase in the net Reserve Bank credit to the centre (Chart IV.3). On the components
side, the decline in bankers’ deposits with
the Reserve Bank due to CRR cuts eroded
the effect of the increasing trend in the
currency in circulation that was observed
during the quarter. The quantum of reserve
money, adjusted for the first-round impact
of the CRR cuts, however, increased during
the quarter compared to a decline in previous
quarter. The release of impounded liquidity
through CRR cuts was expected to stimulate
credit creation and positively impact the
broad money growth through the multiplier
mechanism.
Table IV.2: Monetary Indicators |
Item |
Outstanding Amount (` billion)
January 11, 2013 |
FY variations
(per cent) |
Y-o-y variations
(per cent) |
2011-12 |
2012-13 |
Jan 13, 2012 |
Jan 11, 2013 |
1 |
2 |
3 |
4 |
5 |
6 |
Reserve Money (M0)* |
14,795.4 |
5.4 |
3.7 |
12.7 |
2.0 |
Reserve Money (Adjusted)* |
|
5.5 |
5.9 |
12.9 |
10.0 |
Broad Money (M3) |
81,115.7 |
10.5 |
10.2 |
15.7 |
12.9 |
Main Components of M3 |
|
|
|
|
|
Currency with the Public |
11,097.7 |
9.6 |
8.2 |
12.1 |
11.0 |
Aggregate Deposits |
70,003.5 |
10.6 |
10.6 |
16.3 |
13.2 |
of which: Demand Deposits |
6,886.1 |
–6.5 |
–2.3 |
4.9 |
1.9 |
Time Deposits |
63,117.4 |
13.2 |
12.2 |
17.9 |
14.6 |
Main Sources of M3 |
|
|
|
|
|
Net Bank Credit to Govt. |
26,529.4 |
14.6 |
11.9 |
24.5 |
16.7 |
Bank Credit to Commercial Sector |
54,282.0 |
10.3 |
9.4 |
16.7 |
16.1 |
Net Foreign Assets of the Banking Sector |
16,293.4 |
9.5 |
5.5 |
12.0 |
6.8 |
Note: Data are provisional.
* : Data pertain to January 18, 2013. |
Broad money growth remains below
indicative trajectory
IV.8 Broad money growth decelerated in Q3
and fell below the indicative trajectory of the
Reserve Bank, mainly due to deceleration in the
growth of aggregate deposits (Table IV.2). On
the sources side, both the global and domestic
macroeconomic situation had some dampening
impact on credit growth, which also muted the
multiplier expansion that was expected to boost
broad money growth (Chart IV.5).
IV.9 Data on sectoral deployment of credit
from select 47 banks accounting for about 95 per cent of the total non-food credit deployed
by all the SCBs generally indicated a decrease
in y-o-y growth in industrial credit as well as
credit to the services sector in December 2012
compared with corresponding period previous
year, and also compared with September 2012
(Chart IV.5b).
Increased wedge between credit and
deposit growth remains a concern
IV.10 In 2012-13, the lack of commensurate
growth in aggregate deposit to fund the credit
growth has given rise to an asset-liability
gap, which is also indicated by the increase
in the credit-deposit ratio (Chart IV.6).
The deceleration in the term deposits, which
constitutes the major component of aggregate
deposit, could be largely attributed to the low
and declining real interest rates on time deposits.
Moreover, with an increase in the wedge between credit and deposit growth, banks are
likely to tap the inter-bank market to fund this
gap. With already tight liquidity conditions,
the widening wedge poses a concern as it is
likely to worsen the tight liquidity condition.
Risk aversion impacting credit as asset
quality concerns accentuate
IV.11 Besides sluggish demand, a major
factor that could have led to the low credit
growth of the PSBs over the past quarters is
the deterioration in their asset quality (Table
IV.3). Asset quality indicators of the banking
sector, which had deteriorated significantly
during 2011-12, have further deteriorated
in the financial year so far (Table IV.4). The
worsening asset quality during Q2 of 2012-13
continued to be led by public sector banks,
which account for the major portion of bank
advances. Deterioration in asset quality and in macroeconomic conditions resulted in
increased risk aversion in the banking sector.
This, in turn, led to a portfolio switch from
credit creation to investment in SLR securities
on the back of large government market
borrowings (Chart IV.7).
Table IV.3: Credit Flow from Scheduled Commercial Banks |
(` billion) |
Bank Credit |
As on Jan 11, 2013*
Outstanding
Amount |
Variation (Y-o-y) |
As on Jan 13, 2012 |
As on Jan 11, 2013* |
Amount |
Percent |
Amount |
Percent |
1 |
2 |
3 |
4 |
5 |
6 |
1. Public Sector Banks* |
36,624.8 |
4,462.6 |
16.2 |
4,630.8 |
14.5 |
2. Foreign Banks |
2,536.0 |
364.2 |
19.1 |
260.4 |
11.4 |
3. Private Sector Banks |
9,928.6 |
1,148.0 |
16.8 |
1,930.5 |
24.1 |
4. All Scheduled Commercial Banks@ |
50,427.9 |
6,139.2 |
16.5 |
7,081.1 |
16.3 |
*: Excluding RRBs in public sector banks.
@: Including RRBs.
Note: Data as on Jan 11, 2013 are provisional. |
Table IV.4: Bank Group-wise NPA Ratios |
Bank Group |
Jun-12 |
Sep-12 |
Gross
NPAs
to
Gross
Adva
nces
(%) |
Net
NPAs
to Net
Adva
nces
(%) |
Slipp
age
Ratio # |
Restru
ctured
Standard
Asset to
Gross
Adva
nces
(%) |
CRAR
(%) |
Gross
NPAs
to Gross
Adva
nces
(%) |
Net
NPAs
to Net
Adva
nces
(%) |
Slipp
age
Ratio # |
Restru
ctured
Stan
dard
Asset to
Gross
Adva
nces
(%) |
CRAR
(%) |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
Public Sector Banks |
3.57 |
1.75 |
3.49 |
6.67 |
12.78 |
4.02 |
2.02 |
2.89 |
7.34 |
12.33 |
Foreign Banks |
2.90 |
0.83 |
2.43 |
0.08 |
15.72 |
2.90 |
0.76 |
1.38 |
0.16 |
17.07 |
New Private Sector Banks |
2.19 |
0.45 |
1.31 |
1.06 |
16.11 |
2.1 |
0.45 |
1.12 |
1.05 |
16.34 |
Old Private Sector Banks |
1.92 |
0.61 |
0.02 |
3.83 |
13.82 |
2.16 |
0.81 |
1.61 |
3.85 |
13.78 |
All Banks * |
3.25 |
1.45 |
3.04 |
5.37 |
13.74 |
3.59 |
1.66 |
2.50 |
5.86 |
13.60 |
Source: Latest updated OSMOS database. * Includes LABs.
# Based on the data collected from banks for special analysis. Sep-12 figures of slippage ratio are annualised. |
Lagged monetary policy transmission
to lending rate also indicates structural
rigidities in the credit market
IV.12 Taking a cue from the reduction in the
policy rate (repo rate) by 50 bps in April 2012
and the subsequent reduction in the SLR by
100 bps in August 2012 and the CRR by 175
bps during January-November 2012, several
banks have reduced their deposit and base
rates during 2012-13 (up to January 15, 2013).
Accordingly, the modal deposit rate and modal
base rate of banks declined during the financial year so far. Though the impact of these policy measures is still unfolding, available data suggest that the transmission of the policy rate to deposit and lending rates of banks is relatively less pronounced than money market rates, reflecting the presence of structural rigidities in the credit market.
Non-bank domestic sources augmented
flow of resources to the commercial
sector
IV.13 The total flow of financial resources to
the commercial sector for the financial year
so far (up to January 11, 2013) was higher
compared with the corresponding period of
the previous year (Table IV.5). The increase in
flow has been accounted for by both bank and
non-bank sources, though the latter played a
dominant role. Among the domestic sources,
non-food credit and non-SLR investment
by SCBs, net issuance of commercial paper,
net credit by housing finance companies,
systemically important non-deposit taking
NBFCs, witnessed large increase compared to
corresponding period previous year. Foreign
sources of funding (up to December 2012),
also recorded marginal increase compared
with the previous year, mainly on account
of a higher external commercial borrowings/
foreign currency convertible bonds and shortterm
credit from abroad. However, FDI, which
is considered to be the most stable source of capital inflows, witnessed a decline during the
period.
Table IV.5: Resource Flow to the Commercial Sector |
(` billion) |
|
April-March |
April 1 to Jan 11 |
2009-10 |
2010-11 |
2011-12 |
2011-12 |
2012-13 |
1 |
2 |
3 |
4 |
5 |
6 |
A. Adjusted Non-Food Bank Credit (NFC) |
4,786 |
7,110 |
6,764 |
3,953 |
4,397 |
i) Non-Food Credit |
4,670 |
6,815 |
6,525 |
3,705 |
4,058 |
of which: petroleum and fertiliser credit |
100 |
-243 |
171 |
7 |
0 ^ |
ii) Non-SLR Investment by SCBs |
117 |
295 |
239 |
248 |
338 |
B. Flow from Non-banks (B1+B2) |
5,850 |
5,341 |
5,338 |
4,154 |
5,232 |
B1. Domestic Sources |
3,652 |
3,011 |
3,034 |
1,913 |
2,951 |
1. Public issues by non-financial entities |
320 |
285 |
45 |
40 |
103 * |
2. Gross private placements by non-financial entities |
1,420 |
674 |
558 |
328 |
442 P+ |
3. Net issuance of CPs subscribed to by non-banks |
261 |
68 |
100 |
393 |
778 * |
4. Net Credit by housing finance companies |
285 |
428 |
530 |
248 |
387 ^ |
5. Total gross accommodation by 4 RBI regulated AIFIs - NABARD, NHB, SIDBI & EXIM Bank |
338 |
400 |
469 |
215 |
184 * |
6. Systemically important non-deposit taking NBFCs (net of bank credit) |
607 |
795 |
912 |
480 |
716 + |
7. LIC’s net investment in corporate debt, infrastructure and Social Sector |
422 |
361 |
419 |
210 |
341 * |
B2. Foreign Sources |
2,198 |
2,330 |
2,304 |
2,241 |
2,281 |
1. External Commercial Borrowings / FCCB |
120 |
555 |
421 |
309 |
406 * |
2. ADR/GDR Issues excluding banks and financial institutions |
151 |
92 |
27 |
26 |
10 ^ |
3. Short-term Credit from abroad |
349 |
502 |
306 |
269 |
519 + |
4. Foreign Direct Investment to India |
1,578 |
1,181 |
1,550 |
1,637 |
1,346 ^ |
C. Total Flow of Resources (A+B) |
10,636 |
12,451 |
12,102 |
8,107 |
9,629 |
Memo: |
|
|
|
|
|
Net resource mobilisation by Mutual Funds through Debt
(non-Gilt) Schemes |
966 |
-367 |
-185 |
-54 |
699 * |
Note: ^: Up to November 30, 2012. + : Up to September 30, 2012. * : Up to December 2012. P: Provisional. |
Monetary conditions may evolve with
shifting growth-inflation dynamics
IV.14 Since January 2012, monetary policy
has sought to balance the growth–inflation
dynamics through a combination of liquidity
easing measures and policy rate cut. It has
reduced the CRR and the SLR and infused
primary liquidity through open market
purchases. After front-loading a 50 bps repo
rate cut in April 2012, the Reserve Bank has maintained a pause on policy rate so far because
of inflation remaining above its comfort
level and the lack of requisite adjustments to
fiscal and current account imbalances. Going
forward, if inflation continues to trend down,
monetary policy could increasingly shift focus
and respond to growth moderation. However,
the exact policy path would be contingent
upon the evolving dynamics of inflation and
growth, the trajectory of monetary and credit
aggregates and other macroeconomic and
financial parameters.
|