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Money and Prices


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Budget 1998-99
Budget 1997-98
Budget 1996-97

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Money & Prices

Fiscal 1997-98 ended with an annual inflation rate of 5.3 per cent (point to point WPI) and an annual 52-week average inflation rate of 4.8 per cent. This decline in inflation from 6.4 per cent (average) in 1996-97 was consistent with increased availability of agricultural goods in the market (lagged supply effect) and lower international prices of imports. The point-to-point annual rate of inflation in the WPI rose during 1998-99 to a peak of 8.8 per cent on September 26. It decelerated thereafter to 4.6 per cent (provisional) on January 30, 1999. The 52-week annual average rate was still about 6.9 per cent. In 1998-99 unexpected supply side effects arising from shortfalls in production of some agricultural commodities were overlaid on the earlier slowdown in aggregate demand. The shortfalls resulted in an unprecedented surge in the price of vegetables, especially onions and potatoes, which overshadowed the price behaviour of other sub sectors.
Despite the steep, though temporary, flare up in the overall inflation rate during 1998-99, the underlying inflation rate remained modest. This is indicated by the subdued trends in wholesale prices of manufacturers (accounting for 57 per cent weight in the WPI) which has risen by only 3.4 per cent between end-March 1998 and, January 30, 1999. Fuel and power prices have actually declined over the same period, with the index dropping from 384.1 at the end of March 1998 to 374.1 by January 30, 1999. This contrasts with a rise of 10.2 per cent in the wholesale price index of primary articles over the same period. The steep fall in the rate of growth of primary goods prices, during the last quarter of 1998-99, is also consistent with the proposition of a smaller step-up in underlying inflation.
The year-on-year monetary (M3) growth at 19.8 per cent as of January 15, 1999 exceeded the corresponding growth in 1997-98 by 2.9 percentage points. It is also higher than the indicative target set by RBI of 15 to 15.5 per cent for 1998-99, which was explicitly based on a projected real GDP growth rate of 6.5 to 7.0 per cent and an assumed inflation rate of 5 to 6 per cent. Thus, prima-facie it could be argued that monetary policy accommodated the rise in inflation. The presence of excess capacity in the economy as well as the competitive pressure from outside has, however, ensured that the underlying inflation did not rise. It is only sub-sectors that are shielded from competition by internal controls or quantitative restrictions on imports that have seen large increase in price. Some studies have estimated that about three-quarters of agricultural commodities remain on the restricted list of imports. It is therefore not surprising that most of the inflationary surge was in these commodities, and that production shortfalls got translated immediately into price rises.
The rate of expansion in reserve money in the current financial year till January 15, 1999 was 10.7 per cent as against 4.1 per cent in the corresponding period of 1997-98. This reflected the sharp increase in the growth of Net RBI credit to the Government (NRCG) in 1998-99. Growth of NRCG accelerated from 2.5 per cent in 1997-98 to 13.4 per cent in 1998-99. This was only partly offset by a fall in the growth of RBI’s net foreign exchange assets to 11.4 per cent in 1998-99 from 13.6 per cent in 1997-98. There was a rising trend in the cut-off yield of both 91-day and 364-day Treasury Bills during 1998, which suggests the possibility of crowding out of private credit in the last quarter of 1998-99, despite comfortable liquidity in the system during the first three quarters.
Private credit growth remained low during 1998-99, reflecting primarily the relatively low effective demand for funds from the corporate sector. Till January 15, 1999 in the current financial year, non-food credit expanded by 6.8 per cent as against 7.1 per cent in the corresponding period of 1997-98. The total flow of funds comprising non-food credit and investment in debt/equity instruments expanded by 9.7 per cent till January 15, 1999 as against 11.5 per cent in the corresponding period of 1997-98. Though nominal interest rates had fallen in 1997-98 relative to 1996-97, the trend seems to have reversed in 1998-99 (as measured by call money and Treasury bill rates). Real interest rates, however, continued to decline gradually. Thus, the slight rise in nominal rates reflected a partial adjustment to the higher inflation rate during 1998-99. With inflation beginning to subside, the downtrend in real rates may be reversed unless nominal rates fall during 1999.
The Monetary and Credit Policy of April 1998 reduced the Bank Rate to 9 per cent. The CRR was reduced to 10 per cent in April 1998 but it was raised to 11 per cent in August 1998 so as to reduce liquidity. This was needed to calm the heightened volatility in the foreign exchange market, following a rise in risk perception of emerging markets (including India) in the immediate aftermath of the Russian economic crisis. To facilitate mobilisation of long term external deposits, the interest rate ceiling on FCNR (B) deposits of one year and above, was raised by 50 basis points and for such deposits below one year and for floating rate deposits, the ceiling was reduced by 25 basis points.
Among the liberalisation measures announced in April 1998 were, (a) interest rates on loans upto Rs. 2 lakh were set so as not to exceed PLR applicable to prime borrowers of over Rs. 2 lakh. (b) All advances against term deposits were set at interest rates equal to or less than PLR, and (c) the minimum maturity period of term deposits was reduced from 30 to 15 days.
 

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