The Reserve Bank has revised GDP growth estimates for the financial year 2009-10 to 6.0 per cent, broadly in line with its earlier forecasts of 5.8 per cent growth.

The RBI targets for broad money (M3) growth, and inflation at 17 per cent and 4.0 per cent respectively, year-on-year, and year-end inflation at 3.0 per cent for FY10.

Economic activity in India slowed down 2008-09 as compared with over 9.0 per cent growth in the previous three years. RBI said growth decelerated sharply in Q3 following the failure of Lehman Brothers in mid-September 2008 and knock-on effects of the global financial crisis on the Indian economy.

Consequently, the growth rate during the first three quarters (April-December) of 2008-09 slowed down significantly to 6.9 per cent from 9.0 per cent in the corresponding period of the previous year.

RBI, had in April 2008 placed real GDP growth for 2008-09 in the range of 8.0-8.5 per cent.  As the crisis unfolded, economic prospects deteriorated rapidly globally and at home in India, the RBI revised downward its growth projection for India for 2008-09 to 7.5-8.0 per cent, and further down to 7.0 per cent with a downward bias. The downside risks have since materialised and the GDP growth for 2008-09 was projected to turn out to be in the range of 6.5 to 6.7 per cent and now below at 6.0 per cent.

RBI said private consumption and investment demand decelerated during Q3 of 2008-09 while government consumption demand registered a sharp increase, reflecting the partial payout of the Sixth Pay Commission Award and other fiscal stimulus measures. As a result, the share of government consumption demand in GDP increased significantly.  Deceleration in net exports growth in the successive quarters of 2008-09 had an adverse impact on the  overall GDP growth, RBI added.

After registering robust growth during the five year period 2003-08, the performance of the private non-financial corporate sector deteriorated in the first three quarters of 2008-09. Sales growth of companies, which continued to be strong in Q1 and Q2, decelerated sharply in Q3 of 2008-09.

Net profits, which recorded an average annual growth of over 40 per cent during 2003-08, recorded a significantly lower growth in the first quarter of 2008-09. In the second quarter, net profits declined, although gross profits continued to increase, albeit marginally.  In the third quarter, even gross profits declined sharply.

Profit margins were eroded by higher input costs, increased interest outgo, significant drop in non-sales income and losses on foreign currency related transactions. While moderation in internal accruals has an adverse effect on corporate investment, decline in input prices and reduction in borrowing costs may have a favourable impact on profitability going forward, it said.
 
The Industrial Outlook Survey of the Reserve Bank for January-March 2009 indicates a further worsening of perception for the Indian manufacturing sector. The overall business and financial sentiment, which touched a seven-year low in the preceding quarter, slid below the neutral 100 mark, for the first time since the compilation of the index began in 2002.

According to the survey, the demand for working capital finance during January-March 2009 from external sources dropped due to slowdown in business, even as the availability of finance eased. The business confidence surveys conducted by other agencies are also consistent with these findings.

Economic activity in several services sectors has been moderating. Cargo handled at major ports, passengers handled at airports, railway freight traffic and arrival of foreign tourists registered lower/negative growth. Strong rural demand, lagged impact of monetary and fiscal stimuli, softening of domestic input prices, investment demand from brown-field projects and some restructuring initiatives are expected to have a positive impact on industrial production in the months ahead.

While the wholesale price inflation fell to near-zero levels, inflation based on various consumer price indices (CPI) continues to be near double-digit level, mainly reflecting a firm trend in prices of food articles, the RBI noted.

The RBI statement clearly indicates the risks of lower growth rather than higher inflation and the end of scope for further rate cuts.

The RBI said it will continue to use moral suasion to encourage banks to reduce their deposit and lending rates. It also criticised the practice of lending below the prime lending rate.

''Given the political cycle, market and our expectations were for the RBI to wait till after the elections before announcing policy cuts,'' the central bank said.

''A substantial easing of financial conditions, and a dramatic decline in corporate bond spreads suggest to us that growth will recover in the second half of FY10, and that the rate-cutting cycle is nearing its end,'' RBI said.

''The real concern is not at the short end, but at the long end of the rate curve. Although this move by the RBI will provide some temporary relief, we think that structurally, long bond yields will push higher given the large government borrowing requirement.''
 
The finances of the central government in 2008-09 deviated significantly from the budget estimates (BE), leading to a sharp increase in the revenue and fiscal deficits.
 
Because of the fiscal stimulus packages as also additional post-budget items of expenditure, government's borrowing during 2008-09 was substantially above the initial budget estimates. In fact, the actual net borrowing was more than two and half times the initial budget estimate. 

As against the initial estimate of Rs47,044 crore, the state governments raised a net amount of Rs1,03,766 crore during 2008-09. The combined market borrowings of the central and state governments in 2008-09 were nearly two and half times their net borrowings in 2007-08. The weighted average yield of Central Government dated securities issued during 2008-09 was lower at 7.69 per cent as compared with 8.12 per cent in the preceding year. The weighted average maturity of these securities was 13.80 years, which was lower than 14.90 years in 2007-08.