Date : 25 Oct 2005

RBI Governor announces Mid-term Review of Annual Policy Statement for the year 2005-06

Highlights

Domestic Developments

* Based on the current assessment of a pick-up in agricultural output and in the momentum in other sectors, GDP growth projection for 2005-06 revised to 7.0-7.5 per cent from the earlier projection of around 7.0 per cent.

* Annual inflation, as measured by point-to-point variations in wholesale price index, receded from 6.0 per cent in April 2005 to 4.6 per cent in October 2005.

* Inflation in the range of 5.0-5.5 per cent as projected. Forward looking policy response is necessary to realise growth momentum and potential for higher growth without adding to inflation expectations.

* Money supply (M3) may turn out to be somewhat higher than the earlier projection of 14.5 per cent for the full year. Aggregate deposit growth also expected to be higher than earlier projection.

* Year-on-year adjusted non-food credit is expected to increase significantly higher than 19.0 per cent projected earlier.

* Financial markets have remained stable and orderly, although interest rates have firmed up in almost all segments. The yield curve has steepened. Significant increase in CBLO volumes.

* Total liquidity sterilised in the form of MSS, LAF and surplus balances of Central Government increased from an average of about Rs.1,14,192 crore in March 2005 to Rs.1,20,076 crore in October 2005.

* The market borrowing programme of the Central Government has so far remained consistent with the projections set out in the Union Budget for 2005-06.

External Developments

* Exports in US dollar terms in the first half of 2005-06 increased by 20.5 per cent compared with 30.8 per cent in the corresponding period in the previous year. Imports rose by 33.1 per cent as against an increase of 37.3 per cent in the corresponding period last year. Hardening of international crude oil prices and import demand emanating from a pick-up in domestic industrial activity contributed to the import growth observed.

* Foreign exchange reserves stood at US$ 143.4 billion as on October 14, 2005, increasing from US$ 141.5 billion as at end-March 2005.

* Evolving developments in the balance of payments warrant careful monitoring in view of oil prices and continued strong investment demand.

* Foreign exchange market witnessed orderly conditions in the first half of 2005-06. The exchange rate of the rupee depreciated by 3.0 per cent to US dollar by October 21, 2005, from Rs.43.75 per US dollar at end-March 2005 to Rs.45.09 per US dollar. However, it appreciated by 4.2 per cent against the Euro, by 2.5 per cent against the Pound sterling and by 4.5 per cent against the Japanese yen during the period

Global Developments

* Global economic activity remained robust but slackened moderately in the second quarter of 2005; Likely growth of 4.3 per cent in 2005 from 5.1 per cent in 2004.

* Rise in oil prices has triggered inflationary pressures globally, remaining the single largest risk to the global economy.