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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

6 Financial Year public sector banks private banks foreign banks FY FY FY FY 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 procurement Non-food Priority Industry-Large Wholesale trade Others of which Housing Consumer durables NBFCs Individuals against shares Real estate Personal Advances against fixed deposits Tourism 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 loan Consumer durables Creditcard receivables Other-personal loans Total % to total22.0 Total Loans and advances Retail portfolio of banks Source: RBI Report on trends and progress, of Banks

10 % of avera ge assets Mort gages Car loans Two- wheel er Perso nal Top- tier Corpo rate Credit card SME Yield Intere st cost* 3.5 Lendi ng sprea d 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 Between Between Between Between Between (-).01 to (-) Less than (-) Total no of firms On Profit ranges: Number of industrial units as at end of March 2005 Source: CMIE, Prowess Online data 11

12 Total investments Securities of financial institutions (24.82) (30.0) (30.81) Shares and debenture s * of subsidiaries (25.75) (20.87) (23.32) Industrial securities (43.02) (41.47) (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 crores Rs crores Rs crores > Rs 1000 crores Selected Financial Ratios of Public Limited Companies (percentages) Source: Reserve Bank of India Bulletin September *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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