The Reserve Bank of India (RBI) on Monday (29 October 2007) released the document Macroeconomic and Monetary Developments: Mid-Term Review 2007-08 which serves as a backdrop to the mid-term review of the Annual Policy Statement for 2007-08 to be announced on Tuesday (30 October 2007).The Indian economy continued to maintain strong growth momentum during the first quarter of 2007-08, underpinned by sustained performances of the manufacturing and services sectors.
The cumulative rainfall was 5% above normal in the South-West monsoon season 2007 (June-September) compared with 1% below normal in the corresponding period of the previous year. The area coverage of kharif crops increased with reported sown area of 104.7% of the normal in 2007-08 (on 12 October 2007) - about 3.1% higher than the previous year.
In the foreign exchange market, the Indian rupee generally appreciated vis-a-vis all major currencies (US dollar, Euro, Pound sterling and Japanese yen). It stood at Rs 39.21 against the US dollar in the last week of October 2007. Net inflows by foreign institutional investment (FIIs) amounted to US $21.2 billion in 2007-08 (up to October 19, 2007) compared with outflows of US $ 933 million in the corresponding period of 2006-07. Foreign direct investments (FDI) inflows were US $ 6.6 billion in April-July 2007 as against US $ 3.7 billion in April-July 2006.
Growth in broad money (M3) touched was 21.8% (Rs 641464 crore) on 12 October 2007 compared with 18.9% (Rs 466603 crore) a year ago. However, it is way above the target of 17.5%.
As a result of the constant monetary tightening, growth in bank credit moderated after the strong pace in the preceding three years. Non-food credit by scheduled commercial banks (SCBs) moderated to 23.5% (Rs 377759 crore) on 12 October 2007 from 30% (Rs 370226 crore) a year ago.
Base metals as well as grains and edible oils are trading higher as the dollar denominated assets gained ground with the dollar slumping to all time lows of 1.4471 against the Euro. The US dollar has weakened a great deal since the US FOMC cut its benchmark interest rates on 18 September, making the commodities denominated in dollar more expensive. This, along with the latest spurt in the crude oil prices threats to amplify the inflationary pressures at the global levels in near term.
In light of the mixed cues from the various macro economic indicators, with healthy GDP growth and easing inflation alongwith the appreciating rupee hitting 11 year highs poses a challenge to the monetary authorities to manage the whole scenario. Consequently, the exports have been getting affected and the deluge of the capital inflows in the country, which has been pushing up the barometer equity indices to all time highs in the last few days may keep the rupee under pressure to appreciate further from hereon. Thus, the RBI may stress on the need to curb the inflows in near term , while ensuring that the momentum of the current growth is not lost.
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