REPORT ON MACROECONOMICS AND BANKING

April 3, 2010

REPORT ON MACROECONOMICS AND BANKING

Table of Contents
No Contents Macroeconomics: Status & Outlook Page 3-7 3-4 5-7 8-10 11-12 13-14 15 16-17

A. B. C. D. E. F. G.

Global Economy India: Macroeconomic Scenario

Indian Banking: Status & Outlook Government Borrowing Programme for FY 2010-11 Union Budget 2010-11 Status of RBIs Exit Policy Financial Stability Report

Strategy, Planning & Economic Intelligence Department

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I. A. Global Economy

Macroeconomic Scenario & Outlook

1. In 2010, World output is expected to rise by 4 percent compared to a contraction of 0.8 percent in 2009. 2. Economic recovery in advanced countries is expected to remain sluggish by past standards. However, growth in 2010 is expected at 2.1% compared to -3.2% in 2009. 3. The challenges to the advanced economies are high unemployment rates, public debt, not fully healed financial systems & weak household balance sheets etc. Tab 1: Growth Forecast for 2010 2008 World Output Advanced Economies US Euro Emerging & Developing Economies China India 3.0 0.5 0.4 0.6 6.1 9.6 7.3 2009 -0.8 -3.2 -2.5 -3.9 2.1 8.7 5.6 2010 (Projections) 3.9 2.1 2.7 1.0 6.0 10.0 7.7

Source: World Economic Outlook, IMF (January 2010) 4. Economic recovery is expected to be vigorous in emerging & developing economies, largely driven by buoyant internal demand (GDP for 2010 : 6.07%; 2009 : 2.1%). 5. Commodity prices are expected to face pressure, though modest, given the aboveaverage inventory levels and substantial spare capacity in many commodity sectors. Accordingly, IMF has projected average price of oil at $76 per barrel in 2010 and $82 in 2011 compared to $62 in 2009. 6. Still low levels of capacity utilization and well anchored inflation expectations are expected to contain inflation pressures in the advanced economies. It is expected to pick up from zero in 2009 to 1 % in 2010. In emerging & developing economies, inflation is expected to edge up 6 % in 2010 due to more limited economic slack and increased capital flows. Strategy, Planning & Economic Intelligence Department Page 3 of 17

Chart 1: Inflation

7. The US Federal Reserve Bank has raised the discount rate on February 18 to 0.75% from 0.50%. Mr. Ben S Bernanke emphasized that this did not mean tightening of the monetary policy. It should be merely seen as normalization of rates rather than a change in the policy. 8. The JP Morgan Global PMI Output Index was recorded at 53.6 in February, which was highest since October 2009. The reading is consistent with global GDP expanding at an annual rate in excess of 2%. This suggests that the global recovery continued in Q1 despite business conditions being affected by adverse weather in many countries. However, growth remains biased towards manufacturing. Furthermore, the global manufacturing new orders-to-inventories ratio fell to a ten-month low in February. This suggests that the rate of growth of global manufacturing output may soon peak if the waning effect of inventory rebuilding is not supplanted by a further strengthening of new orders for investment and consumer goods.

Strategy, Planning & Economic Intelligence Department

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B. India: Macro Economic Scenario

1. GDP: The Indian economy continues to be amongst the fastet growing economy of the world.The growth trend in India is reverting to normal and towards potential growth of 8.5-9.0%. The third quarter (Q3/2010) GDP growth was reported at 6.0%, lower than the second quarter (Q2/FY10) GDP growth of 7.9%. This was mainly due to negative impact of agriculture sector growth. Full year growth estimates for FY 10 is 7.2% (advance estimate of CSO) while RBI pegs it at 7.5%. The lead indicators of industry and services sectors are showing positive change. It is also expected that the economy would be able to sustain this growth momentum in FY 2010-11. Outlook: In view of continued momentum in services and industry sectors and revival in trade figures, RBI has revised upward the FY10 GDP growth rate to 7.5%. We are seeing good numbers in monthly data releases of industry & services sectors, viz. vehicle production and sales, cement and steel production, railway freight loads etc. Chart 2: Trend in Indias GDP growth

2. Agriculture: Unlike earlier projection of 1-2% fall, Agriculture GDP is expected to remain largely unchanged compared to the previous year. CSOs advance estimate for agriculture GDP is a decline of 0.2%. This has been possible due to relatively good prospects of Rabi crops. The crop area under pulses is 5.5 % up over previous year while wheat is marginally up. However as per the second advance estimate of production of major crops grown in the country, food grains production in 2009-10 is expected to decline by 7%. Tab 2: Progress of Rabi Crop Area for major Rabi crops (in lakh hectare) Crop As on 25th As on 25th Mar, % Mar, 2010 2009 Change Wheat Rice Total of cereals Total oilseeds Total Pulses
Source:

278.16 42.44 coarse 65.27 94.69 144.79

275.89 46.69 68.73 100.35 137.23

0.8 -9.1 -5.0 -5.6 5.5 Page 5 of 17

Ministry of Agriculture

Strategy, Planning & Economic Intelligence Department

3. Industry: IIP growth for January 2010 was noted at 16.7%, in line with market estimates. IIP data reports robust growth in capital goods and continued momentum in consumer durables and core infrastructure sectors like mining & electricity. Further, Auto sales numbers for Mar 10 is quite encouraging. Industrial output is likely to have grown by about 16 percent in February, which would be slightly lower than January. The numbers for IIP will be released on April 14. Outlook: IIP is expected to grow in double digit for February and March as well due to low base effect and pick-up in economic activities. IIP growth rate for FY10 is seen at 8.5%+ as compared to 2.8% in 2008-09. 4. External Sector: Exports during February, 2010 were valued at US $16.09 billion recording an impressive growth of 34.8%. Imports during February, 2010 were valued at US $ 25 billion representing a growth of 66%. Exports reported positive growth for fourth consecutive months ending February 2010. However, exports at US $ 153 billion during April-February 2010 are still lower by 11% over the same period in the previous fiscal. Indias imports at US $ 248 billion during April-February 2010 are still lower by 13.5% over the same period in the previous fiscal .It is expected that Indias exports may end well below the US $ 189 billion achieved in FY 2009. 5. Foreign Direct Investment (FDI) grew by 15.4% to US $ 1.72 bn in February 2010 compared to US $ 1.49 in February 2009. Services, computer software, telecom and real estate sectors were the major recipients of FDI in February 2010. However, total FDI during 11 months period of FY 2010 declined to US $ 24.68 bn against US $ 25.39 bn in the same period last year. The commerce & industry ministry has set a target of US $ 50 bn for FY 2012. 6. External Commercial Borrowings (ECB) for the month of February 2010 stands at US $ 219.21 million, out of which US $196.32 is through automatic route and US $ 22.89 million is through approval route. 7. Inflation: Inflation pressures are high in food items and there is visible spread to nonfood items. Headline inflation (WPI) was noted at 9.89% in February 2010 compared to 8.56% for January 2010. WPI inflation is expected to breach the single digit numbers in March 2010. Excluding food items (weight: 26.94%), Core WPI inflation, too, rose to 6.5% in February 2010 indicating the transmission of food inflation into a generalized inflation. The food inflation for the week ended March 20, 2010 stood at 16.35%. CPI (IW)-based inflation is also on high, though it declined to 14.86% in Feb 2010 from 16.2% in January 2010. Tab 3: Indias Inflation Sep-08 Mar-09 Sep-09 12.3 1.2 0.5 14.1 -1.2 -4.2 9.8 8.0 11.6

WPI Core WPI (excl Food) CPI (IW)

Mar-08 7.5 8.1 7.9

Dec-09 8.1 2.9 15.0

Jan 10 8.6 4.5 16.2

Feb 10 9.9 6.5 14.9

Strategy, Planning & Economic Intelligence Department

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Outlook: WPI Inflation at end March is going to be more than 10%. Recent hike in basic and excise duty of petrol and diesel has impacted the price level. Second-order impact of increased economic activities on prices in coming months is likely to impact prices. Hike in Repo rate will clearly signal the market participants that the RBI is now focused on anchoring inflationary expectations. This along with falling Food inflation will help in cooling inflation which is expected to moderate June onwards. 8. Business Confidence: The business confidence in general has been improving, as indicated by various index. HSBC-Markit Purchasing Managers Index (PMI) has been above 50 since Sept-09. The PMI index climbed for the third month and stood at 60.9 in February 2010. A reading above 50 means activity expanded during the month. This signals sharp growth in service sector output - also a pointer of further growth in allsector output, new orders and employment. Chart 3: PMI for India Reflecting improving demand

Source: HSBC

9. Indias March 2010 manufacturing Purchasing Managers Index (PMI) is 57.8 vs. 58.5 in February 2010. PMI for March 2010 is down on weaker output and less new orders. A reading above 50 means activity expanded during the month.

Strategy, Planning & Economic Intelligence Department

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C. Indian Banking: Status & outlook

1. Money Supply & Deposits: As on Mar 12, 2010 money supply (M3) recorded Y-o-Y increase of 17.4% (PY: 19.9%). This is above the RBIs indicative projection of 16.5% for March-10 as announced in 3rd quarter review. Aggregate deposits of Scheduled Commercial Banks (SCBs), as of Mar 12, recorded Y-o-Y increase of 18.1% (PY: 21.0%). This has also exceeded RBIs indicative projection of 17% for Mar-10 as announced in the 3rd quarter review. However, it is expected that March 26 data, to be released on April 7, may be near RBIs projections. 2. Bank Credit: As on Mar 12, SCBs bank credit increased (y-o-y) by 16.0% (PY: 18.2%). Bank credit has shown improvement gradually and is likely to be near the RBIs revised indicative projection of 16% for March 10 as announced in 3rd quarter review.

Tab 4: Trend in Deposit & Credit growth of SCBs Aggregate Deposit FY 09 FY10 SCBs 19.9 17.0

Bank Credit FY 09 FY10 17.5 16.0

Note: Data corresponds to Domestic business only and as of last reporting Friday of March

Outlook: We expect Money supply, aggregate deposits and bank credit of SCBs would be close to RBIs indicative projections as given in the third quarter review of the monetary policy. 3. Investments: SCBs investment in SLR securities increased (y-o-y) by 17.5% as of Mar 12 (PY: 20.1%). The effective SLR percentage maintained (our calculation) is around 30.9% of NDTL, well above the statutory requirement of 25%. 4. Financial Markets: During 2009-10, including in the past two months, financial markets have remained stable. Due to comfortable liquidity, call money rate remained near lower band of LAF corridor before the rate hikes by RBI. Even after hike in repo & reverse repo rates by 25 bps on 19th March 2010, call rate are around 3.8%, very much within the LAF corridor. The appreciation trend of rupee has continued and it has appreciated by 3.7% in the 4th quarter and 10.3% during the financial year, primarily due to increased FII flows in equities and FDI inflows, and due to weakening of dollar. Yield on 10-yr paper has been range-bound as borrowing programme of the government was made non-disruptive by the RBI through injection of liquidity. Even the monetary tightening through increase in CRR by 75 bps and hike in key policy rates by 25 bps has still left surplus liquidity available in the system. Poor credit off-take also helped in smooth progress of borrowing programme. We expect 10-yr benchmark yield to be in the range of 7.85 - 8.15% in the 1st quarter of FY 2010-11.

Strategy, Planning & Economic Intelligence Department

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5. Liquidity: During the financial year 2009-10, liquidity in the Banking system has remained comfortable. The parking in the reverse repo has been quite high on an average basis throughout the year. During the 4th quarter, daily average of parking of surplus fund with the RBI by the Banks has been to the tune of Rs. 70000 crores. However, with the hike in CRR and key policy rates by the RBI, daily average parking of funds under reverse repo has come down to around Rs. 15000 crores. Present market liquidity is low due to advance tax outflows and year-end demand from market participants including banks. By 2nd week of April, market liquidity is expected to be normal. Outlook: Outlook for liquidity is positive, as we see comfortable liquidity in the system at least till 2nd quarter of the fiscal. The first two quarters are lean season for the credit demand. We observe from the data of past 4 years that the quarterly growth in deposits is in the range of 4-6% in Q1 & Q2. Similarly, credit growth has been below 2% in Q1 and in range of 6-7% in Q2. Extrapolating this trend indicates comfortable liquidity up to H1 of current fiscal.

Tab 5: Likely Liquidity Scenario for H1/FY11 Q1/FY11 Q2/FY11 1. 2. 3. 4. 5. 6. 7. 8. Incremental Deposit (+) Less, CRR Impact Less, SLR Impact Incremental Credit (-) Net Funds (+/-) (1-2-3-4) Net liquidity Impact of Borrowing
(See Table 7 in Page 12)

180000 10350 45000 65000 59650 -93500 45000 11150

235000 13515 58750 197000 -34265 -40800 58750 -16315

Assumptions (based on trend of past 4 years) Deposit growth in Q1 @4% & Q2 @5%

Credit growth in Q1 @2% & Q2 @6%

As per borrowing calendar, repayment & coupon payment schedule (Investment into SLR securities treated as part of govt. borrowing)

Of which, borrowing through SLR investment by banks Total Liquidity Impact (+/-) (5+6+7)

Source: RBI, Union Budget, CMIE, EID Analysis

6. Interest Rates: The interest rates on deposits of over 1-year maturity offered by the public sector banks moved from a range of 7.75-8.75% in March 09 to 6.00-7.50% as on Mar 12, 2010. The BPLRs of five major banks is in the range of 11.0-12.0%, unchanged since July 09, but down from 11.5-12.5% at end-March 2009. Outlook: Lending rates are likely to remain unchanged as loan demand is still not very strong in the system, notwithstanding the modest recovery, and any rate cut could only be a strain on Banks margins. As the liquidity is comfortable despite hike in repo & reverse repo rate by 25 bps, banks would be cautious in raising their lending rates Strategy, Planning & Economic Intelligence Department Page 9 of 17

immediately. RBI will be closely monitoring the yields on g-sec so as to carry 63% of the government borrowing programme in first half year in a non-disruptive manner. Further, inflationary pressure is likely to ease from 2nd quarter of FY 2011 onwards. These developments will lead to a possibility where RBI may not raise policy rates by more than 50 bps during 1st half of FY 2011. As far as deposit rates are concerned, we do not see any apparent pressure. 7. Status of RBIs Exit Policy: RBIs most recent move towards exit from accommodative policy was hike in repo & reverse repo rate by 25 bps each w.e.f 19th March 2010, after hike in CRR by 75 bps to 5.75% in the 3rd quarter review of monetary policy. These are the major exit from conventional measures, other being increase in SLR to 25% in October 2009. Prior to this, RBI imposed a rate ceiling on ECB borrowing and closure of FCCB buyback window w.e.f. Jan 2010. In second quarter review of the policy, RBI had withdrawn most of the unconventional measures announced since September 2008 crisis. RBIs next important exit may be through increasing the policy rates, which is highly expected in April 2010 policy. As RBI notes, main policy instruments are all currently at levels that are more consistent with a crisis situation than with a fast-recovering economy. It is, therefore, necessary to carry forward the process of exit further.

Strategy, Planning & Economic Intelligence Department

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D. Government Borrowing Programme for FY 2010-11

The Union Budget 2010-11 has placed the gross market borrowing of the government at Rs. 457000 crore, recording a marginal increase of 1.33% over the previous year. The net borrowing of the government is placed at Rs. 345000 crores in FY 2010-11 lower than Rs. 398411 crores in FY 2009-10. However, increased supply of paper, despite lower net borrowing, is the major concern for the market. Due to unconventional measures during 2009-10 like open market operations (OMO), MSS unwinding and desequestering, net supply of papers and thus net impact on liquidity was much lower than the net market borrowing of the government. Net supply of papers during 2010-11 is Rs.345010 crore, which is 35% more than the previous year. This may cause upward pressure on the 10-yr yield. Tab 6: Fiscal Deficit & Borrowing Programme (Rs crore) 2009-10 Fiscal Deficit of the Centre Gross Market Borrowings Less, Repayments Net Market Borrowings 414041 451,000 52,589 398,411

2010-11 381408 457,143 112,133 345,010

Change -32633 6143 59544 -53401

Less OMO MSS Desequestering MSS Unwinding Net Supply of Papers

57,487 33,000 53,031 254,893

0 0 0 345,010

90,117

As per the borrowing programme for the first half of FY 2011, RBI will sell bonds worth Rs. 287000 crores, thereby completing 63% of the gross borrowing programme. The size of the borrowing program in H1 2010-11 is also lower than the borrowing made during the corresponding period last year. During April September 2009, the actual borrowing was at Rs 295,000 cr. The net borrowing program for H1 2010-11 is lower at Rs 203,000 cr (approx), as compared to Rs 228,000 cr in H1 2009-10. This is largely on account of a higher amount of redemptions slated for first half and also a slightly lower gross borrowing number. The redemptions for first half of 2010-11 stand higher at Rs 83,000 cr as against Rs 66,000 cr seen for the first half of 2009-10. The huge government borrowing programme is a major challenge before the RBI compared to the previous year. Huge govt. borrowing may keep 10-yr yield at elevated level, though we do not see much upside from the present level due to large part of Strategy, Planning & Economic Intelligence Department Page 11 of 17

first half (H1) being lean credit season, accompanied with high potential liquidity in the system and lower liquidity impact of borrowing. If we see the RBIs calendar of first half borrowing and consider redemption of government papers and coupon inflows during Q1 & Q2, overall liquidity in the system appears to remain comfortable up to September 2010. Tab 7: Borrowing Programme & its Liquidity Impact Redemption Coupon Total of papers payments Inflow Q1/FY11 Q2/FY11 1 31609 49745 2 3 (=1+2) 30891 62500 40446 90191 Gross Net Net liquidity Borrowing Borrowing Impact 4 156000 131000 5 (=4-1) 124391 81255 205646 6 (=5-2) 93500 40809 134309

H1/FY11 81354 71337 152691 287000 Note: Coupon payments excludes those on Floating Rate Bonds

The issuance in H1 is concentrated in the below 15 year segment, which accounts for approx 80% of the borrowing program. The 15Y-19Y maturity segment constitutes only 9% (approx) of the total borrowings. The longer tenor securities (above 20Y) constitute approx 11% of borrowing. The government is thus interested in keeping the average maturity of borrowing lower, looking at the huge amount of borrowing slated for the fiscal year. Another purpose for keeping the maturity profile lower could be the anticipated tightening in interest rates, which tends to distort the yield curve at the longer end. The move is expected to bring down the cost of borrowing for the government. The average G-Sec issuance per month for first quarter is around Rs 50,000 cr and for second quarter is around Rs 45,000 cr per month. The lowest issuance in is in September 2010 at Rs 34,000 cr. The highest borrowing is in July at Rs 53,000 cr. As per the budget of July 2009, the first half borrowing was placed at Rs 3,07,000 cr. Out of which Rs 2,95,000 cr was subscribed. For the second half of 2009-10, the borrowing programme was budgeted at Rs 1,23,000 cr. The second half borrowing was Rs 33,000 cr less than scheduled as per the budget. The borrowing programme for second half was conducted in large part as per the calendar issued. In a major development, the second half borrowing saw issuance of a floating rate bond, with 10year maturity, after a gap of more than five years. As regards the balances under G-Sec, it was decided that Rs 33,000 cr would be desequestered over the course of the fiscal year 2009-10. Of this, Rs 28,000 cr worth of securities was de-sequestered on 2 May 2009. The remaining Rs 5,000 cr announced on 12 March 2010 that Rs 5,000 cr worth of securities were de-sequestered on 11 March 2010. Strategy, Planning & Economic Intelligence Department Page 12 of 17

E. Union Budget for 2010-11 The Union Budget 2010-11 has been framed with outlook for the Indian economy in the medium-term. The broader outlook before the govt. as reflected in the budget speech by the Honble Finance Minister is to revert to the high GDP growth rate of 9% and to cross the double digit growth barrier. The thrust of economic growth has been put on the inclusive growth and development of infrastructure in rural areas. The achievement of the double digit barrier is dependent on removing weaknesses in government systems, structures & institutions and removing the bottleneck in the public delivery mechanisms. The Union Budget 2010-11 can be echoed as a growth enabler for the economy. The Honble Finance Minister has broadly sustained the fiscal stimulus and relief measures taken in the last two years. Besides, consumption expenditure has been given a boost through raising the income tax slabs. A calibrated approach towards fiscal consolidation as per recommendations of the Thirteen Finance Commission is investor friendly for the economy and likely to strengthen economys fundamental on this regard. The Finance Minister has laid down a roadmap for containing the fiscal deficit to 4.1% by FY13 while pegging this at 5.5% for the next fiscal. The government has also shown its commitment to the medium term fiscal policy. Not only this, lower government borrowing for the next fiscal also provides impetus for the private investment, doing away with the possibility of crowding out of private investment. These measures are indications of creating and sustaining demand in the economy. The Honble Finance Minister has indicated that it is contemplating of augmenting capital base of the public sector banks through allocation of Rs. 16500 crores to ensure Tier I capital of minimum 8%. The focus area of the budget is to increase the reach of the banks and banking services, access of bank credit to the productive sectors of the economy. The budget document has clearly laid out its objective of rural development and inclusive growth with special thrust on financial inclusion. Towards meeting the objectives of rural developments and creating public assets in the rural sector, budgetary allocation to flagship programmes like NREGA, Bharat Nirman, Indira Away Yojana, Rajiv Awas Yojana has been increased. Towards financial inclusion, the focus in the budget is towards providing banking services to habitations with population above 2002 by 2012, increasing the coverage of banking through license to private banks and NBFCs and extending insurance & other services to the targeted beneficiaries. The infrastructure sector continues to be the key area of the governments focus. The infrastructure sector has been allocated 46% of the plan expenditure, of which 25% is for the development of rural infrastructure. Government has continued with interest subvention given to various groups. The extension of repayment period under debt waiver scheme and interest subvention to Strategy, Planning & Economic Intelligence Department Page 13 of 17

2% to the farmers for timely repayment reflects the concern of the govt. to make the growth more based. Last but not the least, govt. has just partially withdrawn from the fiscal stimulus like increase in excise duty to 10%, while retaining the service tax rate unchanged at 10. The commitment for introduction to GST and Direct Tax Code by April 1, 2011 is a move towards rationalization of the tax structure. Snapshot of Union Budget Sl No. 1 i ii 2 3 4 5 6 7 i ii 8 9 10 11 12 Particulars Revenue Receipts (i+ii) Tax revenue Non-tax revenue Revenue expenditure Revenue deficit (1-2) Capital receipts Capital expenditure Total receipts (1+4) Total expenditure (2+5 = 7.i+7.ii) Plan expenditure Non-plan expenditure Fiscal deficit Primary deficit Revenue deficit as % of GDP Fiscal deficit as % of GDP Primary deficit as % of GDP 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 (Prov.) 305991 347077 434387 541864 544651 614497 224798 81193 384329 78338 192261 113923 498252 498252 132292 365960 125794 -1140 2.4 3.9 0.0 270264 76813 439376 92299 158661 66362 505738 505738 140638 365100 146435 13805 2.5 4.0 0.4 351182 83205 514609 80222 149000 68778 583387 583387 169860 413527 142573 -7699 1.9 3.3 -0.2 439547 102317 594433 52569 170807 118238 712671 712671 205082 507589 126912 -44118 1.1 2.6 -0.9 447726 96925 791697 247046 336818 89772 881469 881469 275450 606019 330114 139629 4.4 6.5 2.5 474218 140279 897232 282735 406341 123606 1020838 1020838 325149 695689 400996 175485 4.6 5.5 2.8

Source: Economic Survey 2009-10 (Fiscal deficit = Total expenditure Revenue receipts capital receipts excluding borrowing & other liabilities); (Primary deficit = Fiscal deficit interest payments).

Strategy, Planning & Economic Intelligence Department

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F. Status of RBIs Exit Policy

Good GDP growth in 2009-10 provided an opportunity to initiate exit strategies. Date of Issue Policy Prescription Present Status 1. Rate Ceiling on NRI Deposits 16-Sep-08 to Rate ceilings FCNR-B deposits increased by 175 bps to Libor Continues 15-Nov-2009 +100 bps; while those on NR (E) RA raised by 175 bps to Libor+175 bps 2. CRR, SLR, REPO & REVERSE REPO RATES 6-Oct-08 to Cash Reserve Ratio (CRR) cut by 400 bps from 9.0% 5.0%, CRR hiked by 75 02-Jan-09 bps (Jan Policy) 1-Nov-08 SLR reduced to 24% of NDTL SLR hiked to 25% 20-Oct-08 to Repo rate cut by 425 bps to 4.75% from 9.0% Increased by 25 21-Apr-09 bps to 5.0% 08-Dec-08 to Reverse repo rate cut by 175 basis points from 5.0% to 3.25% Increased by 25 21-Apr-09 bps to 3.5% 3. Relaxation in ECB Norms 7-Oct-08 MoF expanded definition of infrastructure companies to Continues include mining, exploration and refining cos for ECB purposes 22-Oct-08 RBI relaxed the ECB. Companies can now borrow up to $500 Withdrawn wef million overseas for rupee or foreign currency expenditure Jan 1, 2010 under the Automatic Route. All-in-Cost ceilings dispensed with w.e.f. Jan 2, 2009 15-Nov-08 Allows premature buy back of FCCBs of Indian Companies. 4. Refinance/Special Liquidity Facilities 14-Oct-08 RBI announced 14-day Term Repo Facility for MFs
1-Nov-08

Special refinance facility under Section 17(3B) of RBI Act, 1934 up to 1.0% of bank's NDTL up to a maximum period of 90 days 1-Nov-08 Special term repo facility to SCBs for funding to MFs, NBFCs and HFCs [limit is in terms of relaxation in the statutory liquidity ratio (SLR) up to 1.5% of NDTL] 1-Nov-08 Forex Liquidity Support: forex swap facility to banks for tenor up to three months 15-Nov-08 Increases the eligible limit of the ECR facility for SCBs to 50% from existing 15% norm 5. Provision on Standard Assets & Risk Weights 15-Nov-08 The provisioning requirements for all types of standard assets, except in case of direct advances to agricultural and SME sector, will stand reduced to a uniform level of 0.40% 15-Nov-08 All unrated claims on corporates shall attract a uniform risk weight of 100% as against the risk weight of 150%. Claims secured by commercial real estate shall attract a risk weight of 100% as against the earlier risk weight of 150%. Claims on rated as well as unrated NBFC-ND-SI shall be uniformly risk weighted at 100%. Strategy, Planning & Economic Intelligence Department

Withdrawn wef Oct 27, 2009

Reduced 15% wef 27 Oct 2009 Continues

Continues

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G. First Financial Stability Report Introduction: RBI has released First Financial Stability Report (FSR) to enhance transparency and augment confidence in the financial system. This is also an attempt to institutionalize the implicit focus and make financial stability an integral driver of the policy framework. The report details the prevailing financial system in India and also gives some background on past financial stability initiatives. This report is first in series and in general, the Financial Stability Reports will focus on reviewing the nature, magnitude and implications of risks that have bearing on the macroeconomic environment, financial institutions, markets and infrastructure. It will also assess the resilience of the financial sector through stress tests. It is hoped that FSRs will emerge as one of the key instruments for directing pre-emptive policy responses to incipient risks in the financial system. Observations on banking sector: Healthy, well capitalized and sustainable financial leverage Stress tests indicate that the banking sector is comfortably resilient Robust Credit quality High share of CASA SLR takes care of liquidity and solvency issues. Even if all restructured standard advances were to become NPAs, the stress would not be significant. The Asset Liability Management (ALM) analysis does not indicate any significant mismatches at the current juncture. The financial system is not exposed to the risk of large leverages in Household and Corporate Sectors Concerns for the banking sector: Margins may face pressure due to MTM impact on the investment portfolio Increased provisioning requirement Calculation of interest on savings bank deposits on a daily basis from April 1, 2010. The ALM mismatches due to flow of credit to infrastructure and commercial real estate may require careful monitoring in future on an ongoing basis. Over-reliance on bulk deposits in certain institutions could impact the cost and stability of the deposit base. The liquidity scenario analysis shows some potential risk. Unhedged corporate foreign exchange exposures constitute a potential source of risk. Observations on the other financial market players Non-Banking Financial Sector-Need Careful Monitoring ALM mismatches, credit quality and the interconnected flows between NBFCs and other financial sector entities would need to be closely monitored. Strategy, Planning & Economic Intelligence Department Page 16 of 17

The supervisory regime for the systemically important non-deposit taking NBFCs will need to be strengthened for a more robust assessment of the underlying risks. Financial Conglomerates A monitoring and oversight framework for systemically important financial institutions (called financial conglomerates (FC) in India) is already in place, which needs to be strengthened. The Reserve Bank, in consultation with other sectoral regulators is in the process of implementing an enhanced framework for regulation and supervision of financial conglomerates. Financial Markets & Infrastructure The real challenge in developing financial markets and products in the future would be the de-concentration of risks from the banking system. The process of disintermediation away from banks would have to be genuine There has to be clear, transparent capture of the risks within a prudential framework. Central counterparties are increasingly becoming systemically important market institutions and need to be regulated more firmly for robust risk management systems. Their capital, margining and collateral requirements need to be assessed from a prudential and systemic stability perspective. Legislative initiatives are required to avoid delay in disposal of legal suits particularly in the case of insolvency proceedings. An excessively growing size of noninsured deposits in the banking system could render deposit insurance to be less effective and adversely impact the systemic stability. Data Issues Data gaps need to be overcome in the area of interconnectedness of financial institutions, household indebtedness and a system level database on asset prices in certain segments like the commercial real estate exposure.

Financial stability could encompass monitoring the following elements Excessive volatility in macroeconomic variables, both global and domestic, and market trends such as interest rates, exchange rates and asset prices; Build-up of leverage in financial, corporate and household sector balance sheets; Available systemic buffers within the financial sector, both at the institution and system levels, to withstand potential shocks to the economy; Activities of unregulated nodes in the financial sector which, through their interconnectedness with the formal regulated system, can breed systemic vulnerabilities.

Strategy, Planning & Economic Intelligence Department

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