Monetary Policy: RBI Governor Dr Bimal Jalan''s speech

Our Banking Bureau
29 April 2003

Mumbai: Below is the statement by Dr Bimal Jalan, governor, Reserve Bank of India, on the Monetary and Credit Policy for the year 2003-04:

I. Review of Macroeconomic and Monetary Developments during 2002-03 Domestic Developments 3. The Central Statistical Organisation (CSO) recently released the latest estimates of national income for the year 2001-02. According to these estimates, the growth rate of real GDP in 2001-02 at 5.6 per cent was marginally higher than envisaged earlier, i.e. 5.4 per cent. This was mainly due to an upward revision in growth rates of the manufacturing, trade, transport and communication sectors. Growth rate of the services sector was revised upwards from 6.2 per cent to 6.5 per cent and that of industrial sector from 2.9 per cent to 3.2 per cent. However, the growth rate of agriculture and allied activities remained steady at 5.7 per cent.

4. For the year 2002-03, the mid-term Review of Monetary and Credit Policy released on October 29, 2002 had projected the GDP growth in the range of 5.0 to 5.5 per cent taking into account available data on the performance of the South-West monsoon. The advance estimates for 2002-03 released by the CSO in January 2003 has placed GDP growth at 4.4 per cent, which reflects an estimated decline in the output from agriculture and allied activities by as much as 3.1 per cent. The earlier projection in the Reserve Bank's mid-term Review of October 2002 was based on a much lower decline of 1.5 per cent in agricultural output. The overall growth performance of the industrial sector, as per CSO advance estimates, at 5.8 per cent is, however, much higher than that of 3.2 per cent in the previous year. The services sector is estimated to grow by 7.1 per cent as against 6.5 per cent in the earlier year, mainly on account of higher growth in construction, domestic trade and transport sectors. The CSO has also placed the growth of financing, real estate and business services sector at 6.5 per cent for 2002-03 as compared with 4.5 per cent in 2001-02.

5. The annual rate of inflation as measured by variations in the wholesale price index (WPI), on a point-to-point basis, remained below 4.0 per cent up to mid-January 2003 and rose thereafter to 6.2 per cent by end-March 2003 mainly on account of increase in prices of non-food articles and mineral oils. During 2002-03, the prices of manufactured products (weight: 63.7 per cent) registered an increase of 4.8 per cent compared with no increase in prices in the previous year. Prices of primary articles (weight: 22.0 per cent) showed an increase of 5.9 per cent as against an increase of 3.9 per cent in the previous year. Similarly, there was a higher increase of 10.8 per cent in "fuel, power, light and lubricants" group (weight: 14.2 per cent) as against an increase of 3.9 per cent a year ago. Besides fuel items, the steep increase in prices of oilseeds, sugarcane and cotton have been major items in the overall price rise in 2002-03. In the WPI basket, while some items are affected by drought conditions, others have sharply responded to external supply shocks. The weight of such items, where prices have increased very sharply, works out to 15.4 per cent. Excluding the price increases due to such items (mineral oils, oilseeds, edible oils, oil cakes and fibres) from the basket, the inflation rate works out to 2.7 per cent on a point-to-point basis at the end of March 2003 as compared with 1.5 per cent last year.

6. The annual rate of inflation in 2002-03 as measured by the increase in WPI, on an average basis, for the year as a whole was, however, lower than that in the previous year: 3.3 per cent as against 3.6 per cent a year ago. On an average basis, the annual change in consumer price index for industrial workers (up to February 2003) was identical to the previous year at 4.1 per cent.

7. Monetary and credit aggregates for the year 2002-03 reflected the impact of mergers that took place in the banking industry. During 2002-03, the growth in money supply (M3) was 15.0 per cent (Rs.2,24,576 crore) as against 14.2 per cent (Rs.1,86,782 crore) a year ago. However, net of mergers, M3 increased by 12.1 per cent (Rs.1,81,984 crore) which was well within the projected trajectory. Among the components, growth in aggregate deposits of scheduled commercial banks (SCBs) at 12.2 per cent net of mergers (16.1 per cent with mergers), was lower than that of 14.6 per cent in the previous year. The expansion in currency with the public was lower at 12.5 per cent (Rs.30,263 crore) as against 15.2 per cent (Rs.31,849 crore) in the previous year.