Takeaways from RBI FY09 Annual Report

The real GDP growth moderated to 6.7% during FY09 after an average growth of 8.6% in the preceding 5-years. In the light of sever global financial crisis and the subsequent recession, FY09 growth was commendable. The year Witnessed interesting dichotomy though. The H1 FY09 was characterized by rising inflation due to hardening international commodity and domestic food prices while the second half witnessed a sharp decline in inflation and economic activity impacted by deterioration in the macro environment.

RBI currently faces multiple challenges

RBI is currently grappling with multiple challenges:
1. Subdued GDP growth
2. Emerging risk of Inflation
3. Non-Disruptive management of large government borrowing
4. Sluggish Credit Take off
5. The timing of Withdrawal of Monetary accommodation

Domestic savings and investments have been key drivers of GDP growth

The relatively higher resilience of Indian growth was on account of dominant role of domestic demand and domestic savings. The savings rate has increased from 23.5 in 2001-02 to 34.8% in 2006-07 and further to 37.7% of GDP in 2007-08.The investment rate has increased from 22.8% to 39.1% during 2007-08.

Inflation to come back to haunt

With large base effect coming into play in the first half of the current year, inflation is likely to remain in negative zone before it starts moving in the positive trajectory. In the first quarter review if monetary policy the RBI has raised its inflation target to 5% from previous target of 4%.

Government aims at large borrowings programme without disrupting the interest rate

Management of large government borrowings warranted simultaneous offsetting operations by the RBI in different markets, particularly the money market. The combined net market borrowings are expected to increase 55% yoy during 2009-10 to Rs 5,380 bn.

External Debt rise 2% yoy, Forex reserves decline 19% yoy

The provisional data released by RBI states that the gross total external debt increased by mere 2% yoy to US$229 bn during the FY09 as against 31% yoy increase during FY08.Forex reserves declined 19% yoy to US$252 bn , the sharpest fall since March 1996.

Private and foreign banks going slow

Private and foreign banks which had been growing aggressively in the past moderated their loan growth during FY09. While the system credit grew 17.5% yoy during the year , private banks grew at 11% and foreign banks grew by sheer 4% yoy. The reduction in credit growth for private banks was on account of muted growth in loan book for ICICI Bank( the largest bank in the private sector bank universe).Also , these banks had been going conservative in its lending approach due to rising delinquencies.