On
Trade-off and the Impossibility
The “Trilemma” of Exchange Rate
Management and Autonomous Monetary
Policy under CAC
1
The trilemma
CAC
ERM
2
Some Definitions
Fiscal Deficit = Total Expenditure – Total Receipts =
[Revenue Expenditure +Capital Expenditure] = [interest
payments +subsidies + defence expenditure
+ Capital Expenditure] – Total Receipts
Primary Deficit = Fiscal Deficit – interest payments
= [subsidies + defence expenditure + Capital
Expenditure]
– Total Receipts
3
CAC
Capital Imports
ER
Appreciation
Reserve Accumulation
Rise in Mo
Rise in
M3
Rise in
prices
OMO
Interest
payment
s
Rise in
FD
Cut in
subsidies
Cut in
PD
Cut in
public
invest
4
ment
•
Forex Inflows and Monetary Sterilization in India (Rs. Crore)
Source: GOI, Economic Survey 2007-08
5
. Priority sector lending as percentage of NBCs
Financial public
Year
sector
banks
FY2001 43.7
private
banks
foreign
banks
36.7
33.5
FY2002
43.1
40.9
34.0
FY2003
42.5
44.4
33.9
FY2004
44.0
47.4
34.8
Source: Basic statistical returns, RBI, various issues.
6
Loans to SSI sector in priority sector (in %)
Source: Basic statistical returns, RBI, various issues.
7
Composition of gross banking credit of SCBs (FY2001-FY2004)
FY2001
FY2002
FY2003
FY2004
Gross Bank credit
Food procurement
Non-food
Priority
Industry-Large
Wholesale trade
Others of which
Housing
Consumer durables
NBFCs
Individuals against shares
Real estate
Personal
8.5
91.5
32.9
34.7
3.8
20.1
3.4
1.2
1.7
0.4
0.4
3.9
10.1
89.9
32.7
32.1
3.8
21.3
4.2
1.3
1.8
0.3
0.5
4.4
7.4
92.6
31.6
35.1
3.4
22.5
5.5
1.1
2.1
0.3
0.9
4.2
4.7
95.3
34.5
32.3
3.3
25.2
6.8
1.1
2.2
0.3
0.7
4.6
Advances against fixed deposits
Tourism
4.3
0.2
4.0
0.3
3.4
0.4
3.4
0.4
Source: RBI Report on Trends & Progress of Banking in India, various issues.
Note: Only the important items have been listed under others.
Source: RBI Report on Trends & Progress of Banking in India, various issues.
8
Retail portfolio of banks 2004-05
Amount
outstanding
(Rs bn)
Housing loan
894.49
Consumer durables 62.56
Creditcard
receivables
61.67
Other-personal
loans
871.7
Total
1890.41
% to total
22.0
Total Loans and
advances
8590.92
As % to
retail
47.3
3.3
Impaired
credit %
1.9
6.6
Net NPA as a
% of net
advances
1.4
4.0
3.3
6.3
2.4
46.1
100.0
2.6
2.5
1.6
1.6
Source: RBI Report on trends and progress, of Banks 2004
9
Profitability of loans (%)
% of
avera
ge
assets
Yield
Intere
st
cost*
Lendi
ng
sprea
d
Mort Car
Two- Perso Topgages loans wheel nal
tier
er
Corpo
rate
8.0
9.5
18.0 15.0 6.0
3.5
3.5
3.5
3.5
3.5
Credit SME
card
24.0
3.5
9.5
3.5
4.5
20.5
6.0
6.0
14.5
11.5
2.5
Source: As discussed with banks.
*
The interest rate on cash balances with RBI is 3.5%.
10
On Profit ranges:
Number of industrial units as at end of March 2005
Profit range
(percentages)
Above 1000
Between 100990
Between 50-99
Industry
Services
1
6
4
38
7
257
12
311
Between 0-9
1625
549
Between (-).01
to (-) 20
Less than (-) 20
499
176
363
324
Total no of firms
2513
1659
Between 10-49
Source: CMIE, Prowess
Online data
11
Corporate Investments (Rs Crores)
2002-3
Total
2003-4
2004-5
50200
73510
83841
12463
22053
25836
(24.82)
(30.0)
(30.81)
and
12928
15344
19560
debenture
(25.75)
(20.87)
(23.32)
21942
30490
29053
(43.02)
(41.47)
(34.65)
investments
Securities of
financial
institutions
Shares
s*
of
subsidiaries
Industrial
securities
*Debentures include privately placed debentures with financial institutions.
Figures in brackets indicate percentages.
Source: Reserve Bank of India Bulletin September 2006
12
Selected Financial Ratios of Public Limited Companies
(percentages) 2004-05
.
Sales range
Quick assets* to Gross fixed asset Net
current liabilities
formation
fixed assets
to to total net assets
total use of funds
Rs 50-100 crores
51.9
43.2
40.0
Rs 100-500 crores
53.4
44.1
42.2
Rs500-1000
58.5
41.3
42.2
50.4
38.0
40.8
crores
> Rs 1000 crores
*Quick assets comprise of (a) sundry debtors (b) book value of quoted
investments and (c) cash and bank balances
Source: Reserve Bank of India Bulletin September 2006
13
7
Fiscal deficit,Primary Deficit and Interest Payments:
As Percenrage of GDP
6
5
4
3
Fiscal Deficit
2
Primamry Deficit
interest
1
0
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
-1
14
Components of Expenditure
under Primary Deficit as
Percentages of GDP
4.5
4
3.5
3
2.5
subsidies
2
defence
1.5
capital expenditure
1
0.5
0
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
15