ANNUAL POLICY STATEMENT FOR 2006-2007

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Annual Policy Statement for the year 2006-07
The credit policy forecast the GDP growth rate at 7.5 to 8 percent for the fiscal year 2006-07 and estimates the inflation between 5-5.5 percent .The bank rate and repo rate has been kept unchanged at 6 percent and 6.5 percent respectively. But it has raised the provisioning requirements for loans against shares and home loans above Rs 20 lakh as well as personal loans from 0.4% to 1%. For commercial real estate loans not only the provisioning is upped to 1%, but also will attract a risk weight of 150% up from 125%.

The highlights of the Credit Policy are:
» GDP growth projection for 2006-07 at 7.5-8.0 per cent.
» Bank Rate, Reverse Repo Rate, Repo Rate and Cash Reserve Ratio kept unchanged.
i. Bank Rate kept unchanged at 6.0 per cent.
ii. Reverse Repo Rate and Repo Rate kept unchanged at 5.5 per cent and 6.5 per cent, respectively.
iii. Cash reserve ratio (CRR) kept unchanged at 5.0 per cent.
» Inflation to be contained within 5.0-5.5 per cent during 2006-07.
» M3 projected to expand by around 15.0 per cent for 2006-07. In normal circumstances, the policy preference would be for maintaining a lower order of money supply growth in 2006-07.
» Deposits projected to grow by around Rs.3, 30,000 crore for 2006-07.
» Focus on credit quality and financial market conditions for maintaining macroeconomic, in particular, financial stability.
» Monetary and interest rate environment enabling growth momentum consistent with price stability.
» Ceiling interest rate on non-resident (external) rupee deposits raised to US dollar LIBOR/SWAP plus 100 basis points.
» Ceiling interest rate on export credit in foreign currency raised to LIBOR plus 100 basis points.
» Provisioning for standard advances raised to 1.0 per cent for personal loans, capital market exposures, residential housing beyond Rs.20 lakh and commercial real estate loans.
» Risk weight on exposures to commercial real estate raised to 150 per cent.
» Barring the emergence of any adverse and unexpected developments in various sectors of the economy and keeping in view the current assessment of the economy including the outlook for inflation, the overall stance of monetary policy at this juncture will be:
• to ensure a monetary and interest rate environment that enables continuation of the growth momentum consistent with price stability while being in readiness to act in a timely and prompt manner on any signs of evolving circumstances impinging on inflation expectations.
• to focus on credit quality and financial market conditions to support export and investment demand in the economy for maintaining macroeconomic, in particular, financial stability.
• to respond swiftly to evolving global developments.
Domestic Developments
» The upward revision of real GDP growth to 7.5-8.0 per cent in the Third Quarter Review of January 24, 2006 turned out to be in alignment with the advance estimate of the Central Statistical Organization at 8.1 per cent for 2005-06, up from 7.5 per cent in the previous year.
» Inflation, measured by variations in the wholesale price index (WPI) on a year-on-year basis, was 4.0 per cent at end-March 2006 and
3.5 per cent as on April 1, 2006 after receding from a peak of 6.0 per cent on April 23, 2005.
» The average price of the Indian basket of international crude varieties (comprising Brent and Dubai Fateh) ruled at around US $ 60.1 per barrel in January-March, 2006 higher by 30.2 per cent than a year ago.
» After excluding the end-March effect, the year-on-year M3 growth was 16.2 per cent (Rs.3, 77,238 crore) in 2005-06 (March 31, 2006 over April 1, 2005) as compared with 12.1 per cent (Rs.2, 42,260 crore), net of conversion, in the previous year.
» Excluding the end-March effect, the year-on-year increase in aggregate deposits during 2005-06 (March 31, 2006 over April 1, 2005) was 16.9 per cent (Rs.3,02,534 crore) as against an increase of 12.8 per cent (Rs.1,92,269 crore), net of conversion, in the previous year.
» Excluding the end-March build-up, the year-on-year increase in non-food bank credit during 2005-06 (over April 1, 2005) was 30.8 per cent (Rs.3, 42,493 crore) on top of 27.5 per cent (Rs.2, 21,602 crore), net of conversion, a year ago.
» Financial markets remained generally stable during 2005-06 although interest rates firmed up in all segments and the uncollateralised overnight call market experienced persistent tightness during the last quarter of the year.
» A noteworthy and desirable development during the year was the substantial migration of money market activity from the uncollateralised call money segment to the collateralised market repo and collateralised borrowing and lending obligations (CBLO) markets.
» The total overhang of liquidity as reflected in outstandings under the Liquidity Adjustment Facility (LAF), the Market Stabilisation Scheme (MSS) and surplus cash balances of the Central Government taken together declined from an average of Rs.1,14,192 crore in March 2005 to Rs.74,334 crore in March 2006.
» During 2005-06, the Central Government’s net market borrowings at Rs.95,370 crore were 86.5 per cent of the budgeted amount of Rs.1,10,291 crore and gross market borrowings of Rs.1,58,000 crore were 88.5 per cent of the budgeted amount of Rs.1,78,487 crore.
External Developments
» In US dollar terms, merchandise exports increased by 24.7 per cent during 2005-06 as compared with 26.4 per cent in the previous year. Imports showed an increase of 31.5 per cent as compared with 36.4 per cent in the previous year.
» While the increase in oil imports was higher at 46.8 per cent as compared with 45.2 per cent in the previous year, non-oil imports showed an increase of 25.6 per cent as compared with 33.3 per cent in the previous year.
» India’s foreign exchange reserves increased by US $ 10.1 billion from US $ 141.5 billion at end-March 2005 to US $ 151.6 billion by end-March 2006.
» The foreign exchange market remained orderly in 2005-06 with the exchange rate exhibiting two-way movements. During 2005-06, the rupee depreciated by 1.9 per cent against the US dollar but appreciated by 4.4 per cent against the euro, by 5.5 per cent against the pound sterling and by 7.5 per cent against Japanese yen.
Overall Assessment
» Macroeconomic and financial conditions have evolved as stronger than expected. Inflation has been contained well within the projected range as reflected in the relative stability of long-term interest rates. There are indications of improvement in the fiscal situation and the return to the path of correction set by the Fiscal Responsibility and Budget Management Rules. Global growth has also exhibited considerable resilience.
» Downside risks to the economic outlook internationally continue in the form high and volatile oil prices, geo-political tensions and supply shocks, elevated asset prices, global imbalances and tightening of monetary policy globally. In the domestic economy, non-food credit growth, deposit growth and money supply growth were higher than the projections. Asset prices have registered a substantial increase. Ensuring credit quality and increasing the pace of investment in infrastructure is important.
 
Annual Policy Statement for the year 2006-07
The credit policy forecast the GDP growth rate at 7.5 to 8 percent for the fiscal year 2006-07 and estimates the inflation between 5-5.5 percent .The bank rate and repo rate has been kept unchanged at 6 percent and 6.5 percent respectively. But it has raised the provisioning requirements for loans against shares and home loans above Rs 20 lakh as well as personal loans from 0.4% to 1%. For commercial real estate loans not only the provisioning is upped to 1%, but also will attract a risk weight of 150% up from 125%.

The highlights of the Credit Policy are:
» GDP growth projection for 2006-07 at 7.5-8.0 per cent.
» Bank Rate, Reverse Repo Rate, Repo Rate and Cash Reserve Ratio kept unchanged.
i. Bank Rate kept unchanged at 6.0 per cent.
ii. Reverse Repo Rate and Repo Rate kept unchanged at 5.5 per cent and 6.5 per cent, respectively.
iii. Cash reserve ratio (CRR) kept unchanged at 5.0 per cent.
» Inflation to be contained within 5.0-5.5 per cent during 2006-07.
» M3 projected to expand by around 15.0 per cent for 2006-07. In normal circumstances, the policy preference would be for maintaining a lower order of money supply growth in 2006-07.
» Deposits projected to grow by around Rs.3, 30,000 crore for 2006-07.
» Focus on credit quality and financial market conditions for maintaining macroeconomic, in particular, financial stability.
» Monetary and interest rate environment enabling growth momentum consistent with price stability.
» Ceiling interest rate on non-resident (external) rupee deposits raised to US dollar LIBOR/SWAP plus 100 basis points.
» Ceiling interest rate on export credit in foreign currency raised to LIBOR plus 100 basis points.
» Provisioning for standard advances raised to 1.0 per cent for personal loans, capital market exposures, residential housing beyond Rs.20 lakh and commercial real estate loans.
» Risk weight on exposures to commercial real estate raised to 150 per cent.
» Barring the emergence of any adverse and unexpected developments in various sectors of the economy and keeping in view the current assessment of the economy including the outlook for inflation, the overall stance of monetary policy at this juncture will be:
• to ensure a monetary and interest rate environment that enables continuation of the growth momentum consistent with price stability while being in readiness to act in a timely and prompt manner on any signs of evolving circumstances impinging on inflation expectations.
• to focus on credit quality and financial market conditions to support export and investment demand in the economy for maintaining macroeconomic, in particular, financial stability.
• to respond swiftly to evolving global developments.
Domestic Developments
» The upward revision of real GDP growth to 7.5-8.0 per cent in the Third Quarter Review of January 24, 2006 turned out to be in alignment with the advance estimate of the Central Statistical Organization at 8.1 per cent for 2005-06, up from 7.5 per cent in the previous year.
» Inflation, measured by variations in the wholesale price index (WPI) on a year-on-year basis, was 4.0 per cent at end-March 2006 and
3.5 per cent as on April 1, 2006 after receding from a peak of 6.0 per cent on April 23, 2005.
» The average price of the Indian basket of international crude varieties (comprising Brent and Dubai Fateh) ruled at around US $ 60.1 per barrel in January-March, 2006 higher by 30.2 per cent than a year ago.
» After excluding the end-March effect, the year-on-year M3 growth was 16.2 per cent (Rs.3, 77,238 crore) in 2005-06 (March 31, 2006 over April 1, 2005) as compared with 12.1 per cent (Rs.2, 42,260 crore), net of conversion, in the previous year.
» Excluding the end-March effect, the year-on-year increase in aggregate deposits during 2005-06 (March 31, 2006 over April 1, 2005) was 16.9 per cent (Rs.3,02,534 crore) as against an increase of 12.8 per cent (Rs.1,92,269 crore), net of conversion, in the previous year.
» Excluding the end-March build-up, the year-on-year increase in non-food bank credit during 2005-06 (over April 1, 2005) was 30.8 per cent (Rs.3, 42,493 crore) on top of 27.5 per cent (Rs.2, 21,602 crore), net of conversion, a year ago.
» Financial markets remained generally stable during 2005-06 although interest rates firmed up in all segments and the uncollateralised overnight call market experienced persistent tightness during the last quarter of the year.
» A noteworthy and desirable development during the year was the substantial migration of money market activity from the uncollateralised call money segment to the collateralised market repo and collateralised borrowing and lending obligations (CBLO) markets.
» The total overhang of liquidity as reflected in outstandings under the Liquidity Adjustment Facility (LAF), the Market Stabilisation Scheme (MSS) and surplus cash balances of the Central Government taken together declined from an average of Rs.1,14,192 crore in March 2005 to Rs.74,334 crore in March 2006.
» During 2005-06, the Central Government’s net market borrowings at Rs.95,370 crore were 86.5 per cent of the budgeted amount of Rs.1,10,291 crore and gross market borrowings of Rs.1,58,000 crore were 88.5 per cent of the budgeted amount of Rs.1,78,487 crore.
External Developments
» In US dollar terms, merchandise exports increased by 24.7 per cent during 2005-06 as compared with 26.4 per cent in the previous year. Imports showed an increase of 31.5 per cent as compared with 36.4 per cent in the previous year.
» While the increase in oil imports was higher at 46.8 per cent as compared with 45.2 per cent in the previous year, non-oil imports showed an increase of 25.6 per cent as compared with 33.3 per cent in the previous year.
» India’s foreign exchange reserves increased by US $ 10.1 billion from US $ 141.5 billion at end-March 2005 to US $ 151.6 billion by end-March 2006.
» The foreign exchange market remained orderly in 2005-06 with the exchange rate exhibiting two-way movements. During 2005-06, the rupee depreciated by 1.9 per cent against the US dollar but appreciated by 4.4 per cent against the euro, by 5.5 per cent against the pound sterling and by 7.5 per cent against Japanese yen.
Overall Assessment
» Macroeconomic and financial conditions have evolved as stronger than expected. Inflation has been contained well within the projected range as reflected in the relative stability of long-term interest rates. There are indications of improvement in the fiscal situation and the return to the path of correction set by the Fiscal Responsibility and Budget Management Rules. Global growth has also exhibited considerable resilience.
» Downside risks to the economic outlook internationally continue in the form high and volatile oil prices, geo-political tensions and supply shocks, elevated asset prices, global imbalances and tightening of monetary policy globally. In the domestic economy, non-food credit growth, deposit growth and money supply growth were higher than the projections. Asset prices have registered a substantial increase. Ensuring credit quality and increasing the pace of investment in infrastructure is important.

Hey ramesh, many thanks for your contribution on the Annual Policy Statement for the year 2006-07. Well, i am also going to upload a document on the mentioned subject for the year 2016-17. So guys download and check my presentation.
 

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