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On Trade-off and the Impossibility The Trilemma of Exchange Rate Management and Autonomous Monetary Policy under CAC 1.

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Presentation on theme: "On Trade-off and the Impossibility The Trilemma of Exchange Rate Management and Autonomous Monetary Policy under CAC 1."— Presentation transcript:

1 On Trade-off and the Impossibility The Trilemma of Exchange Rate Management and Autonomous Monetary Policy under CAC 1

2 The trilemma CAC ERM 2

3 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

4 4 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 PD Cut in subsidies Cut in public invest ment

5 Forex Inflows and Monetary Sterilization in India (Rs. Crore) Source: GOI, Economic Survey 2007-08 5

6 Financial Year public sector banks private banks foreign banks FY200143.736.733.5 FY200243.140.934.0 FY200342.544.433.9 FY200444.047.434.8. Priority sector lending as percentage of NBCs Source: Basic statistical returns, RBI, various issues. 6

7 Loans to SSI sector in priority sector (in %) 7

8 FY2001FY2002FY2003FY2004 Gross Bank credit Food procurement8.510.17.44.7 Non-food91.589.992.695.3 Priority32.932.731.634.5 Industry-Large34.732.135.132.3 Wholesale trade3.8 3.43.3 Others of which20.121.322.525.2 Housing3.44.25.56.8 Consumer durables1.21.31.1 NBFCs1.71.82.12.2 Individuals against shares0.40.3 Real estate0.40.50.90.7 Personal3.94.44.24.6 Advances against fixed deposits4.34.03.4 Tourism0.20.30.4 Composition of gross banking credit of SCBs (FY2001-FY2004) 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

9 Amount outstanding (Rs bn) As % to retail Impaired credit % Net NPA as a % of net advances Housing loan894.4947.31.91.4 Consumer durables62.563.36.64.0 Creditcard receivables61.673.36.32.4 Other-personal loans871.746.12.61.6 Total1890.41100.02.51.6 % to total22.0 Total Loans and advances8590.92 Retail portfolio of banks 2004-05 Source: RBI Report on trends and progress, of Banks 2004 9

10 % of avera ge assets Mort gages Car loans Two- wheel er Perso nal Top- tier Corpo rate Credit card SME Yield8.09.518.015.06.024.09.5 Intere st cost* 3.5 Lendi ng sprea d 4.56.014.511.52.520.56.0 Profitability of loans (%) Source: As discussed with banks. * The interest rate on cash balances with RBI is 3.5%. 10

11 Profit range (percentages) IndustryServices Above 100014 Between 100- 990 638 Between 50-997257 Between 10-4912311 Between 0-91625549 Between (-).01 to (-) 20 499176 Less than (-) 20363324 Total no of firms25131659 On Profit ranges: Number of industrial units as at end of March 2005 Source: CMIE, Prowess Online data 11

12 2002-32003-42004-5 Total investments 502007351083841 Securities of financial institutions 12463 (24.82) 22053 (30.0) 25836 (30.81) Shares and debenture s * of subsidiaries 12928 (25.75) 15344 (20.87) 19560 (23.32) Industrial securities 21942 (43.02) 30490 (41.47) 29053 (34.65) *Debentures include privately placed debentures with financial institutions. Figures in brackets indicate percentages. Source: Reserve Bank of India Bulletin September 2006 Corporate Investments (Rs Crores) 12

13 Sales range Quick assets* to current liabilities Gross fixed asset formation to total use of funds Net fixed assets to total net assets Rs 50-100 crores51.943.240.0 Rs 100-500 crores53.444.142.2 Rs500-1000 crores 58.541.342.2 > Rs 1000 crores50.438.040.8 Selected Financial Ratios of Public Limited Companies (percentages) 2004-05. Source: Reserve Bank of India Bulletin September 2006 13 *Quick assets comprise of (a) sundry debtors (b) book value of quoted investments and (c) cash and bank balances

14 14 Fiscal deficit,Primary Deficit and Interest Payments: As Percenrage of GDP

15 15 Components of Expenditure under Primary Deficit as Percentages of GDP


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