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 ReceiptsPrimary Deficit = Fiscal Deficit – interest payments = [subsidies + defence expenditure + Capital Expenditure] – Total Receipts
3
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 investment
• Forex Inflows and Monetary Sterilization in India (Rs. Crore)
Source: GOI, Economic Survey 2007-08
5
Financial Year
public sector banks
private banks
foreign banks
FY2001 43.7 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
. Priority sector lending as percentage of NBCs
Source: Basic statistical returns, RBI, various issues.
6
Source: Basic statistical returns, RBI, various issues.
Loans to SSI sector in priority sector (in %)
7
FY2001 FY2002 FY2003 FY2004Gross Bank creditFood procurement 8.5 10.1 7.4 4.7Non-food 91.5 89.9 92.6 95.3Priority 32.9 32.7 31.6 34.5Industry-Large 34.7 32.1 35.1 32.3Wholesale trade 3.8 3.8 3.4 3.3Others of which 20.1 21.3 22.5 25.2Housing 3.4 4.2 5.5 6.8Consumer durables 1.2 1.3 1.1 1.1NBFCs 1.7 1.8 2.1 2.2Individuals against shares 0.4 0.3 0.3 0.3Real estate 0.4 0.5 0.9 0.7Personal 3.9 4.4 4.2 4.6
Advances against fixed deposits 4.3 4.0 3.4 3.4Tourism 0.2 0.3 0.4 0.4
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
Amount outstanding(Rs bn)
As % to retail
Impaired credit %
Net NPA as a % of net advances
Housing loan 894.49 47.3 1.9 1.4Consumer durables 62.56 3.3 6.6 4.0Creditcard receivables 61.67 3.3 6.3 2.4Other-personal loans 871.7 46.1 2.6 1.6Total 1890.41 100.0 2.5 1.6% to total 22.0Total Loans and advances 8590.92
Retail portfolio of banks 2004-05
Source: RBI Report on trends and progress, of Banks 2004
9
% of average assets
Mortgages
Car loans
Two-wheeler
Personal
Top-tierCorporate
Credit card
SME
Yield 8.0 9.5 18.0 15.0 6.0 24.0 9.5Interest cost*
3.5 3.5 3.5 3.5 3.5 3.5 3.5
Lending spread
4.5 6.0 14.5 11.5 2.5 20.5 6.0
Profitability of loans (%)
Source: As discussed with banks.*The interest rate on cash balances with RBI is 3.5%.
10
Profit range (percentages)
Industry Services
Above 1000 1 4Between 100-990
6 38
Between 50-99 7 257
Between 10-49 12 311
Between 0-9 1625 549
Between (-).01 to (-) 20
499 176
Less than (-) 20 363 324
Total no of firms
2513 1659
On Profit ranges: Number of industrial units as at end of March 2005
Source: CMIE, Prowess Online data
11
2002-3 2003-4 2004-5
Total
investments
50200 73510 83841
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
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 crores 51.9 43.2 40.0
Rs 100-500 crores 53.4 44.1 42.2
Rs500-1000
crores
58.5 41.3 42.2
> Rs 1000 crores 50.4 38.0 40.8
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
Fiscal deficit,Primary Deficit and Interest Payments: As Percenrage of GDP
15
Components of Expenditure under Primary Deficit as Percentages of GDP
Top Related