With moderation in headline inflation, the Reserve Bank eased the repo rate by 25 basis points
in May 2013 on top of a 100 bps rate cut during 2012-13. During Q1 of 2013-14, liquidity
conditions improved considerably and broad money growth broadly remained in line with
the indicative trajectory. Credit growth decelerated with the slack in economic activity and
deterioration in asset quality. The Reserve Bank took a slew of measures during July 2013 with
a view to alter monetary and liquidity conditions and thereby to restore stability in the forex
market. Going forward, the monetary policy will be conditioned by the need to maintain stable
macro-economic environment by moving towards attaining external and internal balance and
to support growth, while anchoring inflation expectations.
The Reserve Bank undertakes monetary
policy measures to curb forex volatility
IV.1 The stance of the Reserve Bank’s
monetary policy for 2013-14 has been shaped
to address risks to growth and guard against
re-emergence of inflation while maintaining
overall macro-financial stability. On the back
of empirical evidence that inflation below
threshold level is conducive to sustained
growth, the Reserve Bank has emphasised low
and stable inflation in promoting growth over
the long term. In 2012-13, after frontloading a 50 bps policy rate reduction, the Reserve
Bank strived to address sluggish credit growth
and tight liquidity conditions with a series of
calibrated measures that included cuts in the
CRR and SLR and `1.5 trillion in outright
OMO purchases, besides large accommodation
provided through LAF repos. With headline
inflation moderating, the Reserve Bank
reduced the repo rate by 25 bps in May 2013,
over and above the 50 bps reduction in Q4 of
2012-13. With capital outflows, wide current
account deficit and high consumer price
inflation the Reserve Bank kept the repo rate unchanged in the mid-quarter review of the
monetary policy, 2013-14 (Table IV.1)
subsequently, in order to restore stability in the
forex market, the Reserve Bank has taken
several measures since mid-July 2013, which,
include: (i) hike in Marginal Standing Facility
rate/Bank Rate; (ii) restriction on banks’ access
to funds under LAF repo; (iii) OMO sales; (iv)
maintenance of minimum daily CRR balances
by SCBs at 99 per cent of the requirement; (v)
capping of PDs’ access to LAF at 100 per cent
of their individual net owned funds; and (vi)
restrictions on gold import.
Table IV.1: Movements in Key Policy Variables |
(per cent) |
Effective since |
Reverse Repo Rate |
Repo Rate |
Marginal Standing
Facility@ |
Cash Reserve
Ratio* |
Statutory Liquidity
Ratio* |
1 |
2 |
3 |
4 |
5 |
6 |
May 03, 2011 |
6.25 (+0.50) |
7.25 (+0.50) |
8.25 (+0.50) |
6.00 |
24 |
June 16, 2011 |
6.50 (+0.25) |
7.50 (+0.25) |
8.50 (+0.25) |
6.00 |
24 |
July 26, 2011 |
7.00 (+0.50) |
8.00 (+0.50) |
9.00 (+0.50) |
6.00 |
24 |
September 16, 2011 |
7.25 (+0.25) |
8.25 (+0.25) |
9.25 (+0.25) |
6.00 |
24 |
October 25, 2011 |
7.50 (+0.25) |
8.50 (+0.25) |
9.50 (+0.25) |
6.00 |
24 |
January 28, 2012 |
7.50 |
8.50 |
9.50 |
5.50 (-0.50) |
24 |
March 10, 2012 |
7.50 |
8.50 |
9.50 |
4.75 (-0.75) |
24 |
April 17, 2012 |
7.00 (-0.50) |
8.00 (-0.50) |
9.00 (-0.50) |
4.75 |
24 |
August 11, 2012 |
7.00 |
8.00 |
9.00 |
4.75 |
23 (-1.00) |
September 22, 2012 |
7.00 |
8.00 |
9.00 |
4.50
(-0.25) |
23 |
November 03, 2012 |
7.00 |
8.00 |
9.00 |
4.25
(-0.25) |
23 |
January 29, 2013 |
6.75 (-0.25) |
7.75 (-0.25) |
8.75 (-0.25) |
4.25 |
23 |
February 09, 2013 |
6.75 |
7.75 |
8.75 |
4.00
(-0.25) |
23 |
March 19, 2013 |
6.50 (-0.25) |
7.50 (-0.25) |
8.50 (-0.25) |
4.00 |
23 |
May 03, 2013 |
6.25 (-0.25) |
7.25 (-0.25) |
8.25 (-0.25) |
4.00 |
23 |
July 15, 2013 |
6.25 |
7.25 |
10.25 (+2.00) |
4.00 |
23 |
*: Per cent of net demand and time liabilities.
@: With effect from Feb 13, 2012 Bank Rate was aligned to MSF rate.
Note: Figures in parentheses indicate changes in percentage points. |
IV.2 Cumulatively, there has been a 125 bps
reduction in the policy rate since the start of
2012-13. The transmission of monetary easing
enabled the Weighted Average Lending Rates
(WALR) based on all borrowal accounts to
decline by 41 bps during 2012-13 (Table IV.2).
The modal deposit rate and the modal base rate
of the banks declined by 11 bps and 50 bps,
respectively. More recent data suggest that the
WALR of fresh rupee loans sanctioned by
reporting banks declined considerably during
April-June 2013. The softening of rates on fresh loans were visible in the commercial vehicle
segment and housing loans under both personal
and commercial segments.
IV.3 During Q1 of 2013-14, with the
increase in the government’s spending, liquidity
conditions eased. Moreover, the Reserve Bank
conducted two OMO purchase auctions during
the first quarter, injecting liquidity to the tune
of `165 billion. An increase in the currency in
circulation and in banks’ excess balances
maintained with the Reserve Bank led to the
withdrawal of liquidity from the banking
system during the quarter (Chart IV.1(a)
and (b)).
Liquidity conditions eased in Q1 of
2013-14
IV.4 Liquidity condition improved in April
2013, which was followed by a marginal
increase in the liquidity deficit during May
2013 mainly on account of an increase in the
currency in circulation. Liquidity conditions
again improved in June 2013, with the
liquidity deficit staying within the Reserve
Bank’s comfort zone of (–1) per cent of NDTL, despite quarter-end advance tax
outflows from the banking system. Banks’
recourse to liquidity from the Reserve Bank’s
LAF window also moderated as credit growth
decelerated. Consequently, the incremental
credit-deposit ratio has declined in Q1 of
2013-14 and the gap between deposit and
credit has closed (Chart IV.2).
Table IV.2: Deposit and Lending Rates of Banks |
(Per cent) |
Items |
Mar-12 |
Jun-12 |
Sep-12 |
Dec-12 |
Mar-13 |
June-13 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
1. Domestic Deposit Rate (1-3 year tenor) |
|
|
|
|
|
|
i) Public Sector Banks |
9.00-9.75 |
8.75-9.50 |
8.50-9.30 |
8.50-9.10 |
8.75-9.10 |
8.00-9.10 |
ii) Private Sector Banks |
8.00-10.50 |
8.00-10.00 |
8.00-9.75 |
8.00-9.75 |
8.00-9.65 |
8.50-9.50 |
iii) Foreign banks |
3.50-9.75 |
3.50-9.75 |
3.50-9.75 |
3.50-9.75 |
3.50-9.60 |
3.60-9.88 |
Modal Deposit Rate of SCBs (all tenors) |
7.42 |
7.40 |
7.29 |
7.33 |
7.31 |
7.26 |
2. Base Rate |
|
|
|
|
|
|
i) Public Sector Banks |
10.00-10.75 |
10.00-10.50 |
9.75-10.50 |
9.75-10.50 |
9.70-10.25 |
9.70-10.25 |
ii) Private Sector Banks |
10.00-11.25 |
9.75-11.25 |
9.75-11.25 |
9.70-11.25 |
9.70-11.25 |
9.60-11.25 |
iii) Foreign Banks |
7.38-11.85 |
7.38-11.85 |
7.25-11.75 |
7.20-11.75 |
7.20-14.50 |
7.20-14.00 |
Modal Base Rate of SCBs |
10.75 |
10.50 |
10.50 |
10.50 |
10.25 |
10.25 |
3. Weighted Average Lending Rate (WALR)* |
|
|
|
|
|
|
i) Public Sector Banks |
12.65 |
12.36 |
12.29 |
12.19 |
12.14 |
12.06 |
ii) Private Sector Banks |
12.31 |
12.42 |
12.32 |
12.14 |
12.13 |
12.01 |
iii) Foreign Banks |
11.86 |
12.00 |
11.64 |
11.51 |
12.10 |
12.24 |
WALR of SCBs |
12.54 |
12.35 |
12.26 |
12.14 |
12.13 |
12.07 |
*: Based on Loan outstanding as on end-quarter.
Note: Data on WALR are provisional. |
IV.5 Reflecting the comfortable liquidity
conditions in Q1 of 2013-14, SCBs took
recourse to MSF on only four occasions during
the quarter and borrowed around `20 billion.
IV.6 However, global financial market
developments following the signalling on likely
tapering of QE in the US brought new risks to
the fore, prompting monetary policy to
recalibrate towards addressing them. The Fed signals triggered outflows of portfolio
investment, particularly from the debt segment.
This has led to significant depreciation of the
rupee since end-May 2013.
IV.7 In face of rupee volatility the Reserve
Bank announced measures on July 15, 2013 to
restore stability to the foreign exchange market
that had effects on the inter-bank liquidity. The
MSF rate was re-calibrated at 300 basis points
above the policy repo rate under the LAF.
Further, the overall allocation of funds under
LAF was capped at 1.0 per cent of the Net
Demand and Time Liabilities (NDTL) of the
banking system, with the cap reckoned at `750
billion. The Reserve Bank also conducted open
market sales of G-secs withdrawing liquidity
to the tune of `25 billion on July 18, 2013.
IV.8 While the above set of measures had a
restraining effect on volatility with a
concomitant stabilising effect on the exchange
rate, based on a review of these measures, and
an assessment of the liquidity and overall
market conditions going forward, it was
decided on July 23, 2013 to modify the liquidity
tightening measures. The modified norms have
set the overall limit for access to LAF by each
individual bank at 0.5 per cent of its own NDTL
outstanding as on the last Friday of the second
preceding fortnight effective from July 24,
2013. Moreover, effective from the first day of
the fortnight beginning from July 27, 2013
banks will be required to maintain a minimum
daily CRR balance of 99 per cent of the average
fortnightly requirement.
Reserve money adjusted for CRR changes
grew at a reasonable pace
IV.9 During Q1 of 2013-14, y-o-y growth
of reserve money picked up and was at 7.0 per
cent compared with 5.6 per cent in Q1 of the
previous financial year. Growth in currency in
circulation decelerated, reflecting the impact
of the economic slowdown. Bankers’ deposits
with the Reserve Bank, after having a negative
y-o-y growth for 2012-13 mainly because of
CRR cuts, recorded a low but positive y-o-y
growth in Q1 of 2013-14. The reserve money,
adjusted for the CRR changes, recorded a y-o-y
growth at 10.2 per cent in Q1 of 2013-14
(Chart IV.3).
IV.10 On the sources side, the path of reserve
money was influenced by both developments
in the net domestic asset (NDA) and net foreign
assets (NFA). In Q1, the Reserve Bank’s net
credit to the Centre increased because of the
decline in the government’s cash balances.
However, this increase was matched by a
decline in the LAF, which partially offset
reserve money growth. The NFA, adjusted for
revaluation, recorded a marginal decline over
the quarter. On the components side, the
expansion was matched by an increase in
currency in circulation and in bankers’ deposits.
Broad money growth remained broadly in
line with indicative trajectory
IV.11 The y-o-y M3 growth at 12.8 per cent
was broadly in line with the indicative
trajectory of 13.0 per cent for the 2013-14
(Chart IV.4). On the components side, a
deceleration was observed in both the currency
with the public and aggregate deposits. On the
sources side, there was a marked deceleration
in bank credit to the commercial sector as well
as net bank credit to the government.
IV.12 The aggregate deposit growth, which
generally decelerated during 2012-13 on
account of near-zero real interest rates,
continued to decelerate in Q1 of 2013-14 even
with the increase in WPI-adjusted real interest
rates on deposits. During Q1 of 2013-14, the modal deposit rate of banks declined marginally
by 5 bps, following a reduction in the repo rate
and easing of liquidity conditions. The large
increase in import of gold during Q1 of 2013-
14 could indicate that some part of household
savings was channelised to purchase the yellow
metal, taking advantage of its lower prices.
Time deposits, the largest component of
aggregate deposits, decelerated further in Q1
of 2013-14 compared with the previous year
(Table IV.3 and Chart IV.5).
IV.13 Despite a comfortable liquidity
situation and a marginal decline in WALR
during Q1 of 2013-14, SCBs’ non-food credit growth remained below the Reserve Bank’s
indicative trajectory. On the demand side, the
deceleration in domestic growth adversely
affected the demand for credit in India. The
deterioration in credit quality, on the other
hand, impeded the supply of domestic credit
(Table IV.4). The deceleration was observed
across all bank groups, being high for PSBs
and private sector banks, which jointly account
for above 90 per cent of the SCB credit.
Risk aversion impacting credit, as asset
quality concerns persist
IV.14 Besides sluggish demand, a major
factor that could have led to the low credit growth of public sector banks (PSBs) over the past quarters relates to deterioration in their
asset quality. Asset quality indicators of the
banking sector, which had suffered significantly
during 2011-12, worsened in 2012-13. Although
data indicate worsening asset quality across
bank groups during 2012-13, it continued to be
led by public sector banks (PSBs), which
account for the major portion of bank advances
(Table IV.5) Deterioration in both asset quality
and in macroeconomic conditions resulted in
risk aversion in the banking sector.
Table IV.3: Monetary Indicators |
Item |
Outstanding
Amount
(` billion)
12-July-13 |
FY variations
(per cent) |
Y-o-Y variations
(per cent) |
2012-13 |
2013-14 |
13-July-12 |
12-July-13 |
1 |
2 |
3 |
4 |
5 |
6 |
Reserve Money (M0)* |
15,364.3 |
3.8 |
1.4 |
9.6 |
3.8 |
Reserve Money (Adjusted)* |
|
3.6 |
1.3 |
15.7 |
7.1 |
Broad Money (M3) |
87,567.9 |
5.4 |
4.5 |
14.8 |
12.8 |
Main Components of M3 |
|
|
|
|
|
Currency with the Public |
11,801.6 |
5.4 |
3.1 |
13.2 |
9.5 |
Aggregate Deposits |
75,661.3 |
5.4 |
4.6 |
15.0 |
13.3 |
of which: Demand Deposits |
7,392.1 |
-6.0 |
-1.0 |
7.1 |
10.6 |
Time Deposits |
68,269.1 |
6.8 |
5.2 |
15.9 |
13.6 |
Main Sources of M3 |
|
|
|
|
|
Net Bank Credit to Government |
29,737.5 |
8.1 |
9.8 |
20.0 |
16.0 |
Bank Credit to Commercial Sector |
58,003.5 |
2.9 |
2.4 |
18.0 |
13.7 |
Net Foreign Assets of the Banking Sector |
17,236.8 |
4.7 |
5.3 |
14.7 |
6.6 |
Note: 1. Data are provisional.
2. *: Data for Reserve Money pertain to July 19, 2013. |
Sectoral deployment of credit indicates
deceleration across most sectors
IV.15 An analysis of the sectoral deployment
of credit based on data from select banks (which
cover 95 per cent of total non-food credit
extended by all SCBs) for June 2013 reveals
that deceleration in credit growth was observed in all major sectors (viz., agriculture, industry
and services), except for personal loans. The
y-o-y bank credit growth to industry moderated
to 14.1 per cent in June 2013 from 20.7 per cent
in June 2012. Deceleration in credit growth to
industry was observed in all the major subsectors,
barring food processing, textiles,
leather & leather products, cement & cement
products and infrastructure. Credit growth to
industry excluding infrastructure was much
lower, at 11.7 per cent in June 2013 compared
with 22.4 per cent a year ago.
IV.16 During 2013-14 so far (up to July 12,
2013), the estimated total flow of financial
resources from banks and non-banks, including
external sources, to the commercial sector was
slightly higher compared with the same period
last year. Despite a decline in non-SLR
investments by banks the flow of resources from banks was marginally higher due to
increase in non-food credit by SCBs. Flow of
resources from foreign sources was higher due
to external commercial borrowings / FCCBs
and higher foreign direct investment to India.
The domestic non-bank sources declined on
account of decrease in net issuance of CPs
subscribed by non-banks, total gross
accommodation by four Reserve Bank regulated
AIFIs and net-investment by LIC (Table IV.6).
Table IV.4: Credit Flow from Scheduled Commercial Banks (in ` billion) |
Item |
As on July
12, 2013
Outstanding
Amount |
Variation (y-o-y) |
As on July 13, 2012 |
As on July 12, 2013 |
Bank Credit |
Amount |
Amount |
Per cent |
Amount |
Per cent |
1 |
2 |
3 |
4 |
5 |
6 |
1 Public Sector Banks* |
39,175.8 |
4,900.6 |
16.5 |
4,581.7 |
13.2 |
2 Foreign Banks |
2,794.1 |
406.5 |
19.9 |
344.3 |
14.1 |
3 Private Sector Banks |
10,546.5 |
1,607.1 |
21.6 |
1,508.9 |
16.7 |
4 All Scheduled Com. Banks@ |
53,983.8 |
7,115.9 |
17.7 |
6,724.0 |
14.2 |
*: Excluding RRBs in public sector banks.
@: Including RRBs.
Note: Data as on July 12 , 2013 are provisional. |
Table IV.5: Bank Group Wise Asset Quality Indicators |
|
End March |
All Banks |
Foreign Banks |
New Private
Sector Banks |
Old Private
Sector Banks |
Public Sector Banks |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
Gross NPAs to Gross Advances (%) |
Mar-12 |
2.9 |
2.7 |
2.2 |
1.8 |
3.2 |
|
Dec-12 |
3.7 |
2.9 |
2.0 |
2.2 |
4.2 |
|
Mar-13 |
3.4 |
3.0 |
1.9 |
1.9 |
3.8 |
Net NPAs to Net Advances (%) |
Mar-12 |
1.2 |
0.6 |
0.4 |
0.6 |
1.5 |
|
Dec-12 |
1.7 |
1.0 |
0.5 |
0.9 |
2.1 |
|
Mar-13 |
1.5 |
1.0 |
0.3 |
0.6 |
1.8 |
Restructured Std. Asset to Gross Advances (%) |
Mar-12 |
4.7 |
0.1 |
1.1 |
3.5 |
5.7 |
|
Dec-12 |
5.9 |
0.2 |
1.1 |
4.1 |
7.4 |
|
Mar-13 |
5.7 |
0.1 |
1.2 |
3.8 |
7.1 |
CRAR |
Mar-12 |
14.2 |
16.8 |
16.7 |
14.1 |
13.2 |
|
Dec-12 |
13.5 |
17.2 |
17.1 |
13.4 |
12.0 |
|
Mar-13 |
13.8 |
17.5 |
17.5 |
13.7 |
12.4 |
Slippage Ratio (%) |
Mar-12 |
2.6 |
2.3 |
1.2 |
1.1 |
2.9 |
|
Dec-12 |
2.9 |
1.9 |
1.4 |
1.5 |
3.3 |
|
Mar-13 |
2.8 |
1.6 |
1.2 |
1.4 |
3.2 |
Table IV.6: Resource Flow to the Commercial Sector |
(` billion) |
|
April-March |
April 1 to July 12 |
2011-12 |
2012-13 |
2012-13 |
2013-14 |
1 |
2 |
3 |
4 |
5 |
A. Adjusted Non-Food Bank Credit (NFC) |
6,773 |
6,849 |
1,030 |
1,093 |
i) Non-Food Credit |
6,527 |
6,335 |
927 |
1,207 |
of which: petroleum and fertiliser credit |
116 |
141 |
-84 |
-114 & |
ii) Non-SLR Investment by SCBs |
246 |
514 |
104 |
-113 |
B. Flow from Non-Banks (B1+B2) |
5,383 |
7,335 |
1,502 |
1,517 |
B1. Domestic Sources |
3,079 |
4,212 |
1,267 |
1,134 |
1. Public issues by non-financial entities |
145 |
119 |
5 |
9 & |
2. Gross private placements by non-financial entities |
558 |
1,038 P |
- |
- |
3. Net issuance of CPs subscribed to by non-banks |
36 |
52 |
744 |
658 |
4. Net Credit by housing finance companies |
539 |
859 |
60 |
87 & |
5. Total gross accommodation by 4 RBI-regulated AIFIs: NABARD, NHB, SIDBI & EXIM Bank |
469 |
515 |
36 |
-32 * |
6. Systemically important non-deposit taking NBFCs (net of bank credit) |
912 |
1,188 |
360 |
405 & |
7. LIC's net investment in corporate debt, infrastructure and social sector |
419 |
441 |
62 |
7 & |
B2. Foreign Sources |
2,304 |
3,123 |
235 |
383 |
1. External Commercial Borrowings/FCCBs |
421 |
466 |
14 |
88 & |
2. ADR/GDR Issues, excluding banks and financial institutions |
27 |
10 |
0 |
0 & |
3. Short-term credit from abroad |
306 |
1,177 |
- |
- |
4. Foreign Direct Investment to India |
1,550 |
1,470 |
221 |
295 & |
C. Total Flow of Resources (A+B) |
12,156 |
14,184 |
2,532 |
2,610 |
Memo: |
|
|
|
|
Net resource mobilisation by Mutual Funds through Debt (non-Gilt) Schemes |
-185 |
830 |
195 |
411 & |
Note: *: Up to June 2013 &: Upto May 2013
-: Not Available
P : Provisional |
Monetary policy to aim at stable macro-financial conditions
IV.17 The Reserve Bank, through its monetary
policy, has been aiming to achieve a low and
stable inflation environment that is conducive
to growth. In this endeavour, during 2012-13
the Reserve Bank reduced the repo rate by 100
bps and injected liquidity through CRR and
SLR cuts as also through OMOs. In continuation
of its stance, the Reserve Bank in May 2013
reduced the repo rate by 25 bps and injected
liquidity through OMOs during the first quarter of 2013-14. The transmission of the rate easing
lowered nominal lending rates significantly in
2012-13. However, global currency market
movements in June-July 2013 have prompted
a re-calibration of monetary policy. Going
forward, the Reserve Bank will endeavour to
actively manage liquidity to reinforce monetary
transmission that is consistent with the growth-inflation balance and macro-financial stability.
It will also endeavour to maintain stable
conditions by moving towards attaining
external and internal balance. |