Recent Economic Developments
The Indian economy continued to record robust growth in 2007-08, although marginally lower than the last year. The overall growth momentum, which moderated particularly during the second half of the year, was on account of industry and services, offset partially by recovery in agriculture. On account of increased kharif food grain production, the overall food grain production during 2007-08 was placed at an all-time high of 230.7 million tonnes. Barring sugarcane and jute & mesta, all food grains and non-food grains were estimated to reach an all-time record production during 2007-08.
During 2008-09 so far (up to August 13, 2008), monsoon conditions have been favourable, barring the deficient/scanty rainfall in some regions. The index of industrial production (IIP) recorded year-on-year expansion of 5.2 per cent during April-June 2008 as compared with 10.3 per cent during April-June 2007. The overall deceleration in industry was mainly on account of the manufacturing and electricity sectors. Leading indicators of services sector activity for 2008-09 so far (up to May/June) suggest acceleration in growth in respect of some indicators and deceleration in some others. The First Quarter Review of the Annual Statement on Monetary Policy for 2008-09 placed the real GDP growth at around 8.0 per cent for 2008-09.
Mirroring inflation trends in many advanced as well as emerging economies, various measures of inflation in India also hardened significantly since the beginning 2008, reflecting the impact of some pass-through of higher international crude oil prices to domestic prices and increase in the prices of iron and steel, among others. According to the First Quarter Review of Monetary Policy, the policy endeavour would be to bring down inflation to around 7 per cent by end-March 2009.
Indian financial markets remained largely orderly during 2008-09 so far. The Reserve Bank managed liquidity with a judicious mix of the available tools, viz, open market operations (OMO), including LAF and issuances of securities under MSS and increases in the CRR. Interest rates in the money market remained mostly within the informal corridor set by the reverse repo and repo rates. Interest rates in the collateralised segment of the money market remained below the call rate. In the foreign exchange market, the Indian rupee generally depreciated against major currencies during 2008-09 so far as against the appreciation during 2007-08. During 2008-09 (April to July 2008), yields remained range bound in the first two months but hardened significantly during June–July 2008 due to hardening of inflation and soaring international oil prices. The Indian equity markets recovered somewhat during April-May 2008, but declined thereafter in tandem with the trends in major international equity markets.
The key deficit indicators of the Central and State Governments are budgeted to decline significantly during 2008-09. However, information on Central Government finances for April-June 2008 indicates some stress on Centre's fiscal position, particularly in the revenue account.
India's balance of payments position remained comfortable during 2007-08, notwithstanding a sharp increase in merchandise trade deficit. However, the current account deficit was contained at 1.5 per cent of GDP during the year. Significantly larger net capital inflows over the current account deficit resulted in an accretion of US $ 110.5 billion to the foreign exchange reserves during 2007-08 (US $ 47.6 billion during 2006-07). Trade deficit during April-June 2008-09 was higher by US $ 8.9 billion over April-June 2007-08.
From RBI's Report on Currency and Finance- 2007-08