Final Project on Recession on Nse Raju

8/6/2019 Final Project on Recession on Nse Raju

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A

PROJECT REPORT

ON

IMPACT OF RECESSION ON BANKING SECTOR IN NSE

MARKET

SUBMITTED TO

Institute of Professional Education & Research, Bhopal

SESSION (2010 2011)

GUIDED BY: - SUBMITTED BY:-

Prof. DR. Atul Singhai Raju Yadav


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ACKNOWLEDGEMENT

If words are considered to be sign of gratitude then let these wordsconvey the very same.

I am highly indebted to Prof. Atul singhai who has provide me with thenecessary information and also for the support and his valuablesuggestions and comments on bringing out this report in the best way

possible.

I feel great pleasure to cordial thanks to all faculty members of management department of IPER who sincerely supported me with thevaluable insights into the completion of this project and I am thankful tothat power that always inspire me to take right step in the journey of

success in my life.


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INDEX

S.N0 CONTENTS

1. INTRODUCTION About the nse Banking sector in NSE Recession Causes of recessions Effects of recessions Bank listed in nse Introduction to recession Definition of recession Causes & effects of recession Attributes of recession

3. RESEARCH METHODOLOGY Objective Database for the current study:-

Type of research Research process Limitations of project Sample & sampling technique Data collection

5. DATA REPRESENTATION

6. DATA ANALYSIS Stock market and recessions :-


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Global recession Monetary policy Government's fiscal Rbi's policy stance Monitory policy during recession

Changing Stance Of Monetary Policy In India Analysis of banking sector Ratio Interpretation

7. FINDINDS

8. RECOMMENDATIONS

9. CONCLUSION

10. BIBLIOGRAPHY


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INRODUCTION


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INTRODUCTION

NATIONAL STOCK EXCHANGEAbout The OrganisationThe National Stock Exchange of India Limited has genesis in the report of the High Powered

Study Group on Establishment of New Stock Exchanges. It recommended promotion of a NationalStock Exchange by financial institutions (FIs) to provide access to investors from all across thecountry on an equal footing. Based on the recommendations, NSE was promoted by leadingFinancial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country.The National Stock Exchange (NSE) operates a nation-wide, electronic market, offering trading inCapital Market, Derivatives Market and Currency Derivatives segments including equities,equities based derivatives, Currency futures and options, equity based ETFs, Gold ETF and RetailGovernment Securities. Today NSE network stretches to more than 1,500 locations in the countryand supports more than 2, 30,000 terminals.With more than 10 asset classes in offering, NSE has taken many initiatives to strengthen thesecurities industry and provides several new products like Mini Nifty, Long Dated Options andMutual Fund Service System. Responding to market needs, NSE has introduced services likeDMA, FIX capabilities, co-location facility and mobile trading to cater to the evolving need of themarket and various categories of market participants.

NSE has made its global presence felt with cross-listing arrangements, including licenseagreements covering benchmark indexes for U.S. and Indian equities with CME Group and hasalso signed a Memorandum of Understanding (MOU) with Singapore Exchange (SGX) tocooperate in the development of a market for India-linked products and services to be listed onSGX. The two exchanges also will look into a bilateral securities trading link to enable investorsin one country to seamlessly trade on the other countrys exchange.

NSE is committed to operate a market ecosystem which is transparent and at the same time offershigh levels of safety, integrity and corporate governance, providing ever growing trading &

investment opportunities for investors.

NSE Milestones:-

November 1992 Incorporation

April 1993 Recognition as a stock exchange

May 1993 Formulation of business plan

June 1994 Wholesale Debt Market segment goes live

November 1994 Capital Market (Equities) segment goes liveMarch 1995 Establishment of Investor Grievance Cell

April 1995 Establishment of NSCCL , the first Clearing Corporation

June 1995 Introduction of centralised insurance cover for all tradingmembers
http://www.nseindia.com/content/debt/debt_introduction.htmhttp://www.nseindia.com/content/equities/eq_introduction.htmhttp://www.nseindia.com/content/us/us_nsccl.htmhttp://www.nseindia.com/content/equities/eq_introduction.htmhttp://www.nseindia.com/content/us/us_nsccl.htmhttp://www.nseindia.com/content/debt/debt_introduction.htm


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July 1995 Establishment of Investor Protection Fund

October 1995 Became largest stock exchange in the country

April 1996 Commencement of clearing and settlement by NSCCL

April 1996 Launch of S&P CNX Nifty

June 1996 Establishment of Settlement Guarantee Fund

November 1996 Setting up of National Securities Depository Limited , firstdepository in India, co-promoted by NSE

November 1996 Best IT Usage award by Computer Society of India

December 1996 Commencement of trading/settlement in dematerialisedsecurities

December 1996 Dataquest award for Top IT User

December 1996 Launch of CNX Nifty Junior

February 1997 Regional clearing facility goes live

November 1997 Best IT Usage award by Computer Society of India

May 1998 Promotion of joint venture, India Index Services & Products Limited (IISL)

May 1998 Launch of NSE's Web-site: www.nse.co.in

July 1998 Launch of NSE's Certification Programme in Financial Market

August 1998 CYBER CORPORATE OF THE YEAR 1998 award

February 1999 Launch of Automated Lending and Borrowing Mechanism

April 1999 CHIP Web Award by CHIP magazine

October 1999 Setting up of NSE.IT

January 2000 Launch of NSE Research Initiative

February 2000 Commencement of Internet Trading

June 2000 Commencement of Derivatives Trading ( Index Futures )

September 2000 Launch of 'Zero Coupon Yield Curve'

November 2000 Launch of Broker Plaza by Dotex International, a joint venture between NSE.IT Ltd. and i-flex Solutions Ltd.

December 2000 Commencement of WAP trading
http://www.nseindia.com/content/indices/ind_nifty.htmhttp://www.nseindia.com/content/us/us_nsdl.htmhttp://www.nseindia.com/content/indices/ind_jrnifty.htmhttp://www.nseindia.com/content/indices/ind_iisl.htmhttp://www.nseindia.com/content/indices/ind_iisl.htmhttp://www.nseindia.com/content/ncfm/ncfm_introduction.htmhttp://www.nseindia.com/content/ncfm/ncfm_introduction.htmhttp://www.nseindia.com/content/us/us_nseit.htmhttp://www.nseindia.com/content/research/res_introduction.htmhttp://www.nseindia.com/content/equities/eq_internet.htmhttp://www.nseindia.com/content/fo/fo_niftyfutures.htmhttp://www.nseindia.com/content/debt/debt_zcyc.htmhttp://www.nseindia.com/content/equities/eq_wap.htmhttp://www.nseindia.com/content/indices/ind_nifty.htmhttp://www.nseindia.com/content/us/us_nsdl.htmhttp://www.nseindia.com/content/indices/ind_jrnifty.htmhttp://www.nseindia.com/content/indices/ind_iisl.htmhttp://www.nseindia.com/content/indices/ind_iisl.htmhttp://www.nseindia.com/content/ncfm/ncfm_introduction.htmhttp://www.nseindia.com/content/ncfm/ncfm_introduction.htmhttp://www.nseindia.com/content/us/us_nseit.htmhttp://www.nseindia.com/content/research/res_introduction.htmhttp://www.nseindia.com/content/equities/eq_internet.htmhttp://www.nseindia.com/content/fo/fo_niftyfutures.htmhttp://www.nseindia.com/content/debt/debt_zcyc.htmhttp://www.nseindia.com/content/equities/eq_wap.htm


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June 2001 Commencement of trading in Index Options

July 2001 Commencement of trading in Options on Individual Securities

November 2001 Commencement of trading in Futures on Individual Securities

December 2001 Launch of NSE VaR for Government Securities

January 2002 Launch of Exchange Traded Funds (ETFs)

May 2002 NSE wins the Wharton-Infosys Business TransformationAward in the Organization-wide Transformation category

October 2002 Launch of NSE Government Securities Index

January 2003 Commencement of trading in Retail Debt Market

June 2003 Launch of Interest Rate Futures

August 2003 Launch of Futures & options in CNXIT Index

June 2004 Launch of STP InteroperabilityAugust 2004 Launch of NSEs electronic interface for listed companies

March 2005 India Innovation Award by EMPI Business School, NewDelhi

June 2005 Launch of Futures & options in BANK Nifty Index

December 2006 'Derivative Exchange of the Year', by Asia Risk magazine

January 2007 Launch of NSE CNBC TV 18 media centre

March 2007 NSE, CRISIL announce launch of IndiaBondWatch.com June 2007 NSE launches derivatives on Nifty Junior & CNX 100

October 2007 NSE launches derivatives on Nifty Midcap 50

January 2008 Introduction of Mini Nifty derivative contracts on 1st January2008

March 2008 Introduction of long term option contracts on S&P CNX Nifty Index

April 2008 Launch of India VIX

April 2008 Launch of Securities Lending & Borrowing Scheme

August 2008 Launch of Currency Derivatives

August 2009 Launch of Interest Rate Futures

November 2009 Launch of Mutual Fund Service System
http://www.nseindia.com/content/fo/fo_niftyoptions.htmhttp://www.nseindia.com/content/fo/fo_stockoptions.htmhttp://www.nseindia.com/content/fo/fo_stockfutures.htmhttp://www.nseindia.com/content/debt/debt_var.htmhttp://www.nseindia.com/content/products/prod_etfs.htmhttp://www.nseindia.com/content/debt/debt_gsecindex.htmhttp://www.nseindia.com/content/rdm/rdm_introduction.htmhttp://www.nseindia.com/content/fo/fo_interestrate.htmhttp://www.nseindia.com/content/fo/fo_products.htmhttp://www.nseindia.com/content/press/prs_attn_eii.htmhttp://www.nseindia.com/content/fo/fo_products.htmhttp://www.nseindia.com/content/press/prs_asiarisk.htmhttp://www.nseindia.com/content/press/prs_attn_nsecnn.htmhttp://www.nseindia.com/content/press/prs_ibw.htmhttp://www.nseindia.com/content/press/prs_fo_indices1.htmhttp://www.nseindia.com/content/press/prs_fo_indices2.htmhttp://www.nseindia.com/content/press/prs_long_term_contracts.htmhttp://www.nseindia.com/content/press/prs_long_term_contracts.htmhttp://www.nseindia.com/content/press/prs_vix.htmhttp://www.nseindia.com/content/slbs/slbs_introduction.htmhttp://www.nseindia.com/content/us/us_milestones.htmhttp://www.nseindia.com/content/us/us_milestones.htmhttp://www.nseindia.com/content/fo/fo_niftyoptions.htmhttp://www.nseindia.com/content/fo/fo_stockoptions.htmhttp://www.nseindia.com/content/fo/fo_stockfutures.htmhttp://www.nseindia.com/content/debt/debt_var.htmhttp://www.nseindia.com/content/products/prod_etfs.htmhttp://www.nseindia.com/content/debt/debt_gsecindex.htmhttp://www.nseindia.com/content/rdm/rdm_introduction.htmhttp://www.nseindia.com/content/fo/fo_interestrate.htmhttp://www.nseindia.com/content/fo/fo_products.htmhttp://www.nseindia.com/content/press/prs_attn_eii.htmhttp://www.nseindia.com/content/fo/fo_products.htmhttp://www.nseindia.com/content/press/prs_asiarisk.htmhttp://www.nseindia.com/content/press/prs_attn_nsecnn.htmhttp://www.nseindia.com/content/press/prs_ibw.htmhttp://www.nseindia.com/content/press/prs_fo_indices1.htmhttp://www.nseindia.com/content/press/prs_fo_indices2.htmhttp://www.nseindia.com/content/press/prs_long_term_contracts.htmhttp://www.nseindia.com/content/press/prs_long_term_contracts.htmhttp://www.nseindia.com/content/press/prs_vix.htmhttp://www.nseindia.com/content/slbs/slbs_introduction.htmhttp://www.nseindia.com/content/us/us_milestones.htmhttp://www.nseindia.com/content/us/us_milestones.htm


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December 2009 Commencement of settlement of corporate bonds

February 2010 Launch of Currency Futures on additional currency pairs

March 2010 NSE- CME Group & NSE - SGX product cross listing agreement

April 2010Financial Derivative Exchange of the Year Award' by Asian Banker

July 19, 2010 Commencement of trading of S&P CNX Nifty Futures onCME

July 19, 2010 Real Time dissemination of India VIX.

July 28, 2010 LOI signed with London Stock Exchange Group

October 12, 2010 Introduction of Call auction in Pre-open session

October 28, 2010 Introduction of European Style Stock Options

October 29, 2010 Introduction of Currency Options on USD INR

November 9, 2010 Launch of mobile trading for all investors

December 29,2010 NSCCL Rated CCR AAA for third consecutive year

January 05, 2011 NSE receives Financial Inclusion Award

SelectionCriteria:-

Selection of the index set is based on the following criteria:

1. Company's market capitalisation rank in the universe should be less than 500.

2. Company's turnover rank in the universe should be less than 500

3. Company's trading frequency should be at least 90% in the last six months.

4. Company should have a positive networth.

5. A company which comes out with a IPO will be eligible for inclusion in the index, if it

fulfills the normal eligiblity criteria for the index for a 3 month period instead of a 6 month period.

BANK LISTED IN NSE:-
http://www.nseindia.com/content/press/PR_NSE_CME.pdfhttp://www.nseindia.com/content/press/PR_NSE_CME.pdfhttp://www.nseindia.com/content/press/pr_260410.pdfhttp://www.nseindia.com/content/press/pr_260410.pdfhttp://www.nseindia.com/content/us/prs_financial_inclusion.pdfhttp://www.nseindia.com/content/press/PR_NSE_CME.pdfhttp://www.nseindia.com/content/press/PR_NSE_CME.pdfhttp://www.nseindia.com/content/press/pr_260410.pdfhttp://www.nseindia.com/content/press/pr_260410.pdfhttp://www.nseindia.com/content/us/prs_financial_inclusion.pdf


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1. Axis Bank Ltd2. Bank of Baroda,3. Bank of India,4. Canara Bank,5. HDFC Bank Ltd.,6. ICICI Bank Ltd.,

7. IDBI Bank Ltd.,8. Kotak Mahindra Bank Ltd.,9. Oriental Bank of Commerce,10.Punjab National Bank,11. State Bank of India,12.Union Bank of India.

BANKING SECTOR Banking in India originated in the last decades of the 18th century. The first banks were The

General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both

are now defunct. The oldest bank in existence in India is the State Bank of India, which originated

in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. Thiswas one of the three presidency banks, the other two being the Bank of Bombay and the Bank of

Madras, all three of which were established under charters from the British East India Company.

For many years the Presidency banks acted as quasi-central banks, as did their successors. The

three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence,

became the State Bank of India.


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BANKING SECTOR IN NSE:-

The Indian banking Industry has been undergoing major changes, reflecting a number of

underlying developments. Advancement in communication and infromation technology has

facilitated growth in internet-banking, ATM Network, Electronic transfer of funds and quick

dissemination of infromation. Structural reforms in the banking sector have improved the health of

the banking sector. The reforms recently introduced include the enactment of the Securitization

Act to step up loan recoveries, establishment of asset reconstruction companies, initiatives on

improving recoveries from Non-performing Assets (NPAs) and change in the basis of income

recognition has raised transparency and efficiency in the banking system. Spurt in treasury income

and improvement in loan recoveries has helped Indian Banks to record better profitability. In order

to have a good benchmark of the Indian banking sector, India Index Service and Product Limited

(IISL) has developed the CNX Bank Index. CNX Bank Index is an index comprised of the most

liquid and large capitalized Indian Banking stocks. It provides investoRs and market

intermediaries with a benchmark that captures the capital market performance of Indian Banks.

The index will have 12 stocks from the banking sector which trade on the National Stock

Exchange. The average total traded value for the last six months of CNX Bank Index stocks is

approximately 95.85% of the traded value of the banking sector. CNX Bank Index stocks

represent about 86.06% of the total market capitalization of the banking sector as on January 30,

2009. The average total traded value for the last six months of all the CNX Bank Index

constituents is approximately 14.86% of the traded value of all stocks on the NSE. CNX Bank

Index constituents represent about 8.63% of the total market capitalization on January 30, 2009.

Recession

RECESSIONS ARE the result of reduction in the demand of products in the global market.Recession can also be associated with falling prices known as deflation due to lack of demand of

products. Again, it could be the result of inflation or a combination of increasing prices andstagnant economic growth in the west.

Recession in the West, especially the United States, is a very bad news for our country. Our companies in India have most outsourcing deals from the US. Even our exports to US haveincreased over the years. Exports for January have declined by 22 per cent. There is a decline inthe employment market due to the recession in the West. There has been a significant drop in thenew hiring which is a cause of great concern for us. Some companies have laid off their employees and there have been cut in promotions, compensation and perks of the employees.Companies in the private sector and government sector are hesitant to take up new projects. Andthey are working on existing projects only. Projections indicate that up to one crore persons could


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1. Those that have been able to save their funds.2. Those who have not invested in fly-by-night companies.3. Those who remain clam till the storm passes.

Attributes:-A recession has many attributes that can occur simultaneously and can include declines incoincident measures of activity such as employment, investment, and corporate profits.

A severe (GDP down by 10%) or prolonged (three or four years) recession is referred to as aneconomic depression, although some argue that their causes and cures can be different.

.

Causes of recessions:- Under consumption Overproduction Financial crisis Price of Fuels Currency crisis Energy crisis War

Effects of recessions Bankruptcies Credit crunches Deflation (or disinflation) Foreclosures Unemployment


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RESEARCH

METHODOLOGY


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RESEARCH METHODOLOGY

OBJECTIVE:-

To Know the impact of recession on National Stock Exchange.

To Know the impact of recession on banking sector in national stock

exchange.

To know the impact of recession on public sector bank and private

sector bank.

To evaluate the best performing bank in public sector and private sector

bank.

To know the impact of implementation of RBI policies during recession.

Database for the current Study:-

i. Data for the current study as selected from the NSE website of 2 year duration

ii. Annual report of best performing bank in public and private sector.

iii. Secondary data is used for the analysis which is collected through various sources like

internet, books of journals and newspaper articles.

Type of Research-:

Exploratory research is a type of research conducted for a problem that has not been clearlydefined. Exploratory research helps determine the best research design, data collection method andselection of subjects. It should draw definitive conclusions only with extreme caution. Given itsfundamental nature, exploratory research often concludes that a perceived problem does notactually exist.

Exploratory research often relies on secondary research such as reviewing available literatureand/or data, or qualitative approaches such as informal discussions with consumers, employees,management or competitors, and more formal approaches through in-depth interviews, focus groups , projective methods, case studies or pilot studies . The Internet allows for research methods

that are more interactive in nature. For example, RSS feeds efficiently supply researchers with up-to-date information; major search engine search results may be sent by email to researchers byservices such as Google Alerts ; comprehensive search results are tracked over lengthy periods of time by services such as Google Trends ; and websites may be created to attract worldwidefeedback on any subject.

The results of exploratory research are not usually useful for decision-making by themselves, butthey can provide significant insight into a given situation. Although the results of qualitative research can give some indication as to the "why", "how" and "when" something occurs, it cannot
http://en.wikipedia.org/wiki/Secondary_researchhttp://en.wikipedia.org/wiki/Focus_grouphttp://en.wikipedia.org/wiki/Focus_grouphttp://en.wikipedia.org/wiki/Case_studieshttp://en.wikipedia.org/wiki/Pilot_studieshttp://en.wikipedia.org/wiki/Internethttp://en.wikipedia.org/wiki/RSShttp://en.wikipedia.org/wiki/Search_enginehttp://en.wikipedia.org/wiki/Emailhttp://en.wikipedia.org/wiki/Google_Alertshttp://en.wikipedia.org/wiki/Google_Trendshttp://en.wikipedia.org/wiki/Websitehttp://en.wikipedia.org/wiki/Qualitative_researchhttp://en.wikipedia.org/wiki/Qualitative_researchhttp://en.wikipedia.org/wiki/Secondary_researchhttp://en.wikipedia.org/wiki/Focus_grouphttp://en.wikipedia.org/wiki/Focus_grouphttp://en.wikipedia.org/wiki/Case_studieshttp://en.wikipedia.org/wiki/Pilot_studieshttp://en.wikipedia.org/wiki/Internethttp://en.wikipedia.org/wiki/RSShttp://en.wikipedia.org/wiki/Search_enginehttp://en.wikipedia.org/wiki/Emailhttp://en.wikipedia.org/wiki/Google_Alertshttp://en.wikipedia.org/wiki/Google_Trendshttp://en.wikipedia.org/wiki/Websitehttp://en.wikipedia.org/wiki/Qualitative_researchhttp://en.wikipedia.org/wiki/Qualitative_research


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tell us "how often" or "how many".Exploratory research is not typically generalizable to the population at large.

Research Process:-

Study Of VariouseBanks In Nse

Interpret the Data andreach to FindingsData Collected by

secondary sources

Analysis the Datawith the help of various tools of

ResearchMethodology

Research Design

Review someOld Project for

concepts

Review some previous

research papers
http://en.wikipedia.org/wiki/Statistical_populationhttp://en.wikipedia.org/wiki/Statistical_population


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Data Collection:-

The data has been collected from the secondary sources NSE website, Annual Reports, Offer

Documents and closing values of NIFTY have been noted from www.nseindia.com,

www.bseindia.com and banks Personal Sites.

Sample & Sampling Technique:-

SAMPLE SIZE: 2 year data banks namely sbi, icici,axis bank,yes bank,dena bankand HDFC has

been selected of nifty

SAMPLING TECHNIQUE: In the present study Convenience Sampling technique has been used.

Limitations of Project:- Project is restricted to bank policies. Area of project is very wide so its difficult to cover each and every point.


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DATA INTRPRETATION


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Date

psubank

ICICI

SBI

HDFC

PNB

BANK NIFTY

axis

idbi

yes

2-Jul-07 2199.02

950.2 1831 1147.55

528.3 4313.75

607.4 121.4 184.3

3-Jul-07 2251.66

966.7 1530.75

1150.5

542.95

4357.55

623.45

121.1 184.8

4-Jul-07 2222.9

985.95

1836.9

1150.75

534.45

4359.3

618.6 118.05

193.95

5-Jul-07 2199.7

1003.65

1581.85

1129.1

529.05

4353.95

630 118.3 192.65

6-Jul-07 2197.07

981.5 1563.85

1158.3

524.25

4384.85

628.75

116.35

196.5

9-Jul-07 2264.81

996.55

1547.05

1167.6

544 4419.4

634.5 119.05

194.4

10-Jul-07

2248.26

970.7 1550.5

1149.3

538.75

4406.05

630.7 117.05

185.2

11-Jul-07

2255.45

981.5 1570.95

1148.75

529.8 4387.15

631.95

117.4 185.15

12-Jul-07

2288.71

963.95

1550.75

1201.45

541.1 4446.15

642.55

121.75

184.4

13-Jul-07

2304.71

985.5 1541.3

1226.4

553.25

4504.55

644.8 120.6 183.2

16-Jul-07

2387.62

953.55

1559.2

1217.65

572.55

4512.15

645.75

122 183.9

17-Jul-07 2353.5 973 1559.95 1199.3 573.7 4496.75 649.7 119.4 180.8518-Jul-07

2337.39

980 1611.75

1200.05

561.65

4499.55

656.2 115.75

178.75

19-Jul-07

2358.94

967.65

1964 1209.25

580.4 4562.1

650.1 112.35

183.6

20-Jul-07

2334.4

972.5 1583.1

1200.9

572.5 4566.05

644.6 109.9 181.85

23-Jul-07

2338.81

1001 1575.6

1230.3

566.3 4619.35

624.4 109.45

181.95

24-Jul-

07

2335.

69

970.9 1595.

75

1248.

9

564.5 4620.

75

614.9

5

108.8

5

181.4

25-Jul-07

2310.68

973.7 1584.25

1239.05

553.4 4588.7

618.55

111.1 181.4

26-Jul-07

2290.99

983.35

1914.9

1217.25

524.75

4619.8

615.3 113.6 182.7

27-Jul-07

2206.16

1010 1900.5

1169.35

499.55

4445.2

614.35

109.05

180.05

30-Jul-07

2274.25

989.6 1585.25

1168.85

504.2 4440.05

639.15

110.95

183.75


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DATA ANALYSIS

RECESSION IMPACT ON BANKING SECTOR IN INDIA

Stock market and recessions:-Some recessions have been anticipated by stock market declines. In Stocks for the Long Run,Siegel mentions that since 1948, ten recessions were preceded by a stock market decline, by a leadtime of 0 to 13 months (average 5.7 months), while ten stock market declines of greater than 10%in the DJIA were not followed by a recession.The real-estate market also usually weakens before arecession. However real-estate declines can last much longer than recessions.

Since the business cycle is very hard to predict, Siegel argues that it is not possible to takeadvantage of economic cycles for timing investments. Even the National Bureau of EconomicResearch (NBER) takes a few months to determine if a peak or trough has occurred in the US.

During an economic decline, high yield stocks such as fast moving consumer goods, pharmaceuticals, and tobacco tend to hold up better. However when the economy starts to recover and the bottom of the market has passed (sometimes identified on charts as a MACD), growthstocks tend to recover faster. There is significant disagreement about how health care and utilitiestend to recover. Diversifying one's portfolio into international stocks may provide some safety;however, economies that are closely correlated with that of the U.S. may also be affected by arecession in the U.S.

There is a view termed the halfway rule according to which investors start discounting aneconomic recovery about halfway through a recession. In the 16 U.S. recessions since 1919, theaverage length has been 13 months, although the recent recessions have been shorter. Thus if the2008 recession followed the average, the downturn in the stock market would have bottomedaround November 2008.


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Key announcements Impact

What came in?

New banking licenses for few private sector players and NBFCssubject to meeting RBIs eligibility

criteria.

Positive for NBFCs such as Reliance Capital, IFCI,M&M Financial services.

Capital Infusion of Rs165bnfor PSU banks in FY11thereby enabling themmaintain Tier I capitalabove 8% by March 31,2011.

Positive for small PSU Banks - Dena Bank,Syndicate Bank, UCO Bank & United Bank of India.

Extension in repayment of the loan under the Debt

Waiver and Debt Relief Scheme for farmers by sixmonths to June 30, 2010

Positive for PSU Banks.

IIFCL to refinance bank lending towardsinfrastructure projects.

Positive for banks as it would improve ALM andincrease funding to the sector

FY11 net market borrowings of Governmentestimated at lower Rs3.45tn; fiscal deficit for the year pegged at 5.5% of GDP

Positive for the sector, with pick up in creditdemand clarity over the borrowing programme willensure adequate moves in interest rates, and leavingnegligible impact on banks treasury book.

Extension of interestsubvention scheme toMarch 31, 2011 on housingloans up to Rs1mn on

property value up to Rs2m.

Positive for Housing Finance Companies and Bankswith home loan portfolio.

Interest subvention of 2%for farmers who repay their short-term crop loans onschedule.

Neutral as long as the interest part waived is re-paid by the Go to banks.

Impetus towards FinancialInclusion

Positive for the sector in general as it aims atreaching unbanked areas thereby increasing the

penetration levels of Insurance and other financial products.


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Global :-1. The global economic outlook deteriorated sharply over the last quarter. In a sign of theferocity of the down turn, the IMF made a marked downward revision of its estimate for globalgrowth in 2009 in purchasing power parity terms from its forecast of 3.0 per cent made in

October 2008 to 0.5 per cent in January 2009. In market exchange rate terms, the downturn issharper global GDP is projected to actually shrink by 0.6 per cent. With all the advancedeconomies the United States, Europe and Japan - having firmly gone into recession, thecontagion of the crisis from the financial sector to the real sector has been unforgiving and total.Recent evidence suggests that contractionary forces are strong: demand has slumped, productionis plunging, job losses are rising and credit markets remain in seizure. Most worryingly, worldtrade the main channel through which the downturn will get transmitted on the way forward is

projected to contract by 2.8 per cent in 2009.

2. Policy making around the world is in clearly uncharted territory. Governments and central banks across countries have responded to the crisis through big, aggressive and unconventionalmeasures. There is a contentious debate on whether these measures are adequate and appropriate,

and when, if at all, they will start to show results. There has also been a separate debate on howabandoning the rule book driven by the tyranny of the short-term, is compromising medium-termsustainability. What is clearly beyond debate though is that this Great Recession of 2008/09 isgoing to be deeper and the recovery longer than earlier thought.

Emerging economies

3. Contrary to the 'decoupling theory', emerging economies too have been hit by the crisis.The decoupling theory, which was intellectually fashionable even as late as a year ago, held thateven if advanced economies went into a downturn, emerging economies will remain unscathed

because of their substantial foreign exchange reserves, improved policy framework, robustcorporate balance sheets and relatively healthy banking sector. In a rapidly globalizing world, the'decoupling theory' was never totally persuasive. Given the evidence of the last few months capital flow reversals, sharp widening of spreads on sovereign and corporate debt and abruptcurrency depreciations - the 'decoupling theory' stands totally invalidated. Reinforcing the notionthat in a globalized world no country can be an island, growth prospects of emerging economieshave been undermined by the cascading financial crisis with, of course, considerable variationacross countries.

Questions that will be addressed

4. India too has been impacted by the crisis and by much more than it was suspected earlier.What I propose to do in the rest of my speech is to address the following four questions:

i. Why has India been hit by the crisis?

ii. How has India been hit by the crisis?

iii. How have we responded to the challenge?

iv. What is the outlook for India?

Why Has India Been Hit By the Crisis?

5. There is, at least in some quarters, dismay that India has been hit by the crisis. This dismaystems from two arguments.


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6. The first argument goes as follows. The Indian banking system has had no direct exposure tothe sub-prime mortgage assets or to the failed institutions. It has very limited off-balance sheetactivities or securitized assets. In fact, our banks continue to remain safe and healthy. So, theenigma is how can India be caught up in a crisis when it has nothing much to do with any of themaladies that are at the core of the crisis.

7.The second reason for dismay is that India's recent growth has been driven predominantly bydomestic consumption and domestic investment. External demand, as measured by merchandize

exports, accounts for less than 15 per cent of our GDP. The question then is, even if there is aglobal downturn, why should India be affected when its dependence on external demand is solimited?

8.The answer to both the above frequently-asked questions lies in globalization. Let me explain.First, India's integration into the world economy over the last decade has been remarkably rapid.Integration into the world implies more than just exports. Going by the common measure of globalization, India's two-way trade (merchandize exports plus imports), as a proportion of GDP,grew from 21.2 per cent in 1997-98, the year of the Asian crisis, to 34.7 per cent in 2007-08.

9.Second, India's financial integration with the world has been as deep as India's tradeglobalization, if not deeper. If we take an expanded measure of globalization, that is the ratio of total external transactions (gross current account flows plus gross capital flows) to GDP, this ratiohas more than doubled from 46.8 per cent in 1997-98 to 117.4 per cent in 2007-08.10.Importantly, the Indian corporate sector's access to external funding has markedly increased inthe last five years. Some numbers will help illustrate the point. In the five-year period 2003-08,the share of investment in India's GDP rose by 11 percentage points. Corporate savings financedroughly half of this, but a significant portion of the balance financing came from external sources.While funds were available domestically, they were expensive relative to foreign funding. On theother hand, in a global market awash with liquidity and on the promise of India's growth potential,foreign investors were willing to take risks and provide funds at a lower cost. Last year (2007/08),for example, India received capital inflows amounting to over 9 per cent of GDP as against acurrent account deficit in the balance of payments of just 1.5 per cent of GDP. These capital flows,in excess of the current account deficit, evidence the importance of external financing and thedepth of India's financial integration.

11.So, the reason India has been hit by the crisis, despite mitigating factors, is clearly India's rapidand growing integration into the global economy. How Has India Been Hit By the Crisis?

12.The contagion of the crisis has spread to India through all the channels the financial channel,the real channel, and importantly, as happens in all financial crises, the confidence channel.

13.Let us first look at the financial channel. India's financial markets - equity markets, moneymarkets, forex markets and credit markets - had all come under pressure from a number of directions. First, as a consequence of the global liquidity squeeze, Indian banks and corporatesfound their overseas financing drying up, forcing corporates to shift their credit demand to thedomestic banking sector. Also, in their frantic search for substitute financing, corporates withdrewtheir investments from domestic money market mutual funds putting redemption pressure on themutual funds and down the line on non-banking financial companies (NBFCs) where the MFs hadinvested a significant portion of their funds. This substitution of overseas financing by domesticfinancing brought both money markets and credit markets under pressure. Second, the forexmarket came under pressure because of reversal of capital flows as part of the global deleveraging

process. Simultaneously, corporates were converting the funds raised locally into foreign currency


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to meet their external obligations. Both these factors put downward pressure on the rupee. Third,the Reserve Bank's intervention in the forex market to manage the volatility in the rupee further added to liquidity tightening.

14.Now let me turn to the real channel. Here, the transmission of the global cues to the domesticeconomy has been quite straight forward through the slump in demand for exports. The UnitedStates, European Union and the Middle East, which account for three quarters of India's goods andservices trade are in a synchronized down turn. Service export growth is also likely to slow in the

near term as the recession deepens and financial services firms traditionally large users of outsourcing services are restructured. Remittances from migrant workers too are likely to slowas the Middle East adjusts to lower crude prices and advanced economies go into a recession.

15 Beyond the financial and real channels of transmission as above, the crisis also spread throughthe confidence channel. In sharp contrast to global financial markets, which went into a seizure onaccount of a crisis of confidence, Indian financial markets continued to function in an orderlymanner. Nevertheless, the tightened global liquidity situation in the period immediately followingthe Lehman failure in mid-September 2008, coming as it did on top of a turn in the credit cycle,increased the risk aversion of the financial system and made banks cautious about lending.

16. The purport of the above explanation is to show how, despite not being part of thefinancial sector problem, India has been affected by the crisis through the pernicious feedback loops between external shocks and domestic vulnerabilities by way of the financial, real andconfidence channels.

How Have We Responded to the Challenge?17. Let me now turn to how we responded to the crisis. The failure of Lehman Brothers inmid-September was followed in quick succession by several other large financial institutionscoming under severe stress. This made financial markets around the world uncertain andunsettled. This contagion, as I explained above, spread to emerging economies, and to India too.Both the government and the Reserve Bank of India responded to the challenge in closecoordination and consultation. The main plank of the government response was fiscal stimuluswhile the Reserve Bank's action comprised monetary accommodation and counter cyclical

regulatory forbearance.Monetary policy response :-18. The Reserve Bank's policy response was aimed at containing the contagion from the

outside - to keep the domestic money and credit markets functioning normally and see that theliquidity stress did not trigger solvency cascades. In particular, we targeted three objectives: first,to maintain a comfortable rupee liquidity position; second, to augment foreign exchange liquidity;and third, to maintain a policy framework that would keep credit delivery on track so as to arrestthe moderation in growth. This marked a reversal of Reserve Bank's policy stance from monetarytightening in response to heightened inflationary pressures of the previous period to monetaryeasing in response to easing inflationary pressures and moderation in growth in the current cycle.Our measures to meet the above objectives came in several policy packages starting mid-

September 2008, on occasion in response to unanticipated global developments and at other timesin anticipation of the impact of potential global developments on the Indian markets.

19. Our policy packages included, like in the case of other central banks, both conventionaland unconventional measures. On the conventional side, we reduced the policy interest ratesaggressively and rapidly, reduced the quantum of bank reserves impounded by the central bank and expanded and liberalized the refinance facilities for export credit. Measures aimed atmanaging forex liquidity included an upward adjustment of the interest rate ceiling on the foreigncurrency deposits by non-resident Indians, substantially relaxing the external commercial


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borrowings (ECB) regime for corporates, and allowing non-banking financial companies andhousing finance companies access to foreign borrowing.

20. The important among the many unconventional measures taken by the Reserve Bank of India are a rupee-dollar swap facility for Indian banks to give them comfort in managing their short-term foreign funding requirements, an exclusive refinance window as also a special purposevehicle for supporting non-banking financial companies, and expanding the lendable resourcesavailable to apex finance institutions for refinancing credit extended to small industries, housing

and exports.Government's fiscal stimulus:-21. Over the last five years, both the central and state governments in India have made aserious effort to reverse the fiscal excesses of the past. At the heart of these efforts was the FiscalResponsibility and Budget Management (FRBM) Act which mandated a calibrated road map tofiscal sustainability. However, recognizing the depth and extraordinary impact of this crisis, thecentral government invoked the emergency provisions of the FRBM Act to seek relaxation fromthe fiscal targets and launched two fiscal stimulus packages in December 2008 and January 2009.These fiscal stimulus packages, together amounting to about 3 per cent of GDP, includedadditional public spending, particularly capital expenditure, government guaranteed funds for infrastructure spending, cuts in indirect taxes, expanded guarantee cover for credit to micro andsmall enterprises, and additional support to exporters. These stimulus packages came on top of analready announced expanded safety-net for rural poor, a farm loan waiver package and salaryincreases for government staff, all of which too should stimulate demand.

Impact of monetary measures:-22. Taken together, the measures put in place since mid-September 2008 have ensured that theIndian financial markets continue to function in an orderly manner. The cumulative amount of

primary liquidity potentially available to the financial system through these measures is over US$75 bln or 7 per cent of GDP. This sizeable easing has ensured a comfortable liquidity positionstarting mid-November 2008 as evidenced by a number of indicators including the weighted-average call money rate, the overnight money market rate and the yield on the 10-year benchmark government security. Taking the signal from the policy rate cut, many of the big banks havereduced their benchmark prime lending rates. Bank credit has expanded too, faster than it did lastyear. However, Reserve Banks rough calculations show that the overall flow of resources to thecommercial sector is less than what it was last year. This is because, even though bank credit hasexpanded, it has not fully offset the decline in non-bank flow of resources to the commercialsector.

Evaluating the response:-23. In evaluating the response to the crisis, it is important to remember that although theorigins of the crisis are common around the world, the crisis has impacted different economiesdifferently. Importantly, in advanced economies where it originated, the crisis spread from thefinancial sector to the real sector. In emerging economies, the transmission of external shocks todomestic vulnerabilities has typically been from the real sector to the financial sector. Countrieshave accordingly responded to the crisis depending on their specific country circumstances. Thus,even as policy responses across countries are broadly similar, their precise design, quantum,


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sequencing and timing have varied. In particular, while policy responses in advanced economieshave had to contend with both the unfolding financial crisis and deepening recession, in India, our response has been predominantly driven by the need to arrest moderation in economic growth.

What is the outlook for India?24. The outlook for India going forward is mixed. There is evidence of economic activityslowing down. Real GDP growth has moderated in the first half of 2008/09. The services sector too, which has been our prime growth engine for the last five years, is slowing, mainly inconstruction, transport and communication, trade, hotels and restaurants sub-sectors. For the firsttime in seven years, exports have declined in absolute terms for three months in a row duringOctober-December 2008. Recent data indicate that the demand for bank credit is slackeningdespite comfortable liquidity in the system. Higher input costs and dampened demand have dentedcorporate margins while the uncertainty surrounding the crisis has affected business confidence.The index of industrial production has shown negative growth for two recent months andinvestment demand is decelerating. All these factors suggest that growth moderation may besteeper and more extended than earlier projected.

25. In addressing the fall out of the crisis, India has several advantages. Some of these arerecent developments. Most notably, headline inflation, as measured by the wholesale price index,has fallen sharply, and recent trends suggest a faster-than-expected reduction in inflation. Clearly,falling commodity prices have been the key drivers behind the disinflation; however, somecontribution has also come from slowing domestic demand. The decline in inflation shouldsupport consumption demand and reduce input costs for corporates. Furthermore, the decline inglobal crude prices and naphtha prices will reduce the size of subsidies to oil and fertilizer companies, opening up fiscal space for infrastructure spending. From the external sector

perspective, it is projected that imports will shrink more than exports keeping the current accountdeficit modest.

26. There are also several structural factors that have come to India's aid. First,notwithstanding the severity and multiplicity of the adverse shocks, India's financial markets haveshown admirable resilience. This is in large part because India's banking system remains sound,healthy, well capitalized and prudently regulated. Second, our comfortable reserve position

provides confidence to overseas investors. Third, since a large majority of Indians do not participate in equity and asset markets, the negative impact of the wealth loss effect that is plaguing the advanced economies should be quite muted. Consequently, consumption demandshould hold up well. Fourth, because of India's mandated priority sector lending, institutionalcredit for agriculture will be unaffected by the credit squeeze. The farm loan waiver packageimplemented by the Government should further insulate the agriculture sector from the crisis.Finally, over the years, India has built an extensive network of social safety-net programmes,including the flagship rural employment guarantee programme, which should protect the poor andthe returning migrant workers from the extreme impact of the global crisis.

RBI's Policy Stance :-

27. Going forward, the Reserve Bank's policy stance will continue to be to maintaincomfortable rupee and forex liquidity positions. There are indications that pressures on mutualfunds have eased and that NBFCs too are making the necessary adjustments to balance their assetsand liabilities. Despite the contraction in export demand, we will be able to manage our balance of

payments. It is the Reserve Bank's expectation that commercial banks will take the signal from the policy rates reduction to adjust their deposit and lending rates in order to keep credit flowing to productive sectors. In particular, the special refinance windows opened by the Reserve Bank for the MSME (micro, small and medium enterprises) sector, housing sector and export sector should


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see credit flowing to these sectors. Also the SPV set up for extending assistance to NBFCs shouldenable NBFC lending to pick up steam once again. The government's fiscal stimulus should beable to supplement these efforts from both supply and demand sides.

When the turn around comes28. Over the last five years, India clocked an unprecedented nine per cent growth, drivenlargely by domestic consumption and investment even as the share of net exports has been rising.This was no accident or happenstance. True, the benign global environment, easy liquidity andlow interest rates helped, but at the heart of India's growth were a growing entrepreneurial spirit,rise in productivity and increasing savings. These fundamental strengths continue to be in place.

Nevertheless, the global crisis will dent India's growth trajectory as investments and exports slow.Clearly, there is a period of painful adjustment ahead of us. However, once the global economy

begins to recover, India's turn around will be sharper and swifter, backed by our strongfundamentals and the untapped growth potential. Meanwhile, the challenge for the governmentand the RBI is to manage the adjustment with as little pain as possible.

Monitory policy during recession

Monetary And Credit Policy Operations:-Monetary management during 2008-09 had to contend with the challenges of high inflation in thefirst half and the high speed and magnitude of the external shock and its spill-over effects throughthe real, financial and confidence channels in the second half. Policy initiatives by the ReserveBank were aimed at providing ample rupee liquidity, ensuring comfortable foreign exchangeliquidity and maintaining a market environment conducive for the continued flow of credit atviable rates to productive sectors of the economy. The large government borrowings resultingfrom the fiscal stimulus, and net capital outflows in the second half of the year warrantedsimultaneous offsetting operations by the Reserve Bank in different markets, particularly themoney market, the government securities market and the foreign exchange market. The flexibleuse of multiple instruments enabled the Reserve Bank to steer the liquidity and interest rateconditions amidst uncertain global macroeconomic environment.

III.1 The stance of monetary policy shifted in phases in response to multiple challenges thatemerged during the course of the year in the form of significant changes in both outcome andoutlook relating to inflation, growth and stability of financial markets. Both the Government andthe Reserve Bank responded to the challenges decisively, swiftly and in close coordination andconsultation. The policy stance shifted from monetary tightening in response to the elevatedinflationary pressures in the first half of 2008-09 to monetary easing in the second half assignificant moderation in inflationary pressures created the scope for enhancing the magnitude andspeed of response to the weakening growth impulses as well as to occasional disorderly pressuresin financial markets. The changing stance of policy must be seen in the context of the previous

period of gradual withdrawal of monetary accommodation from September 2004 till August 2008during which the repo/reverse repo rates had been increased by 300/150 basis points, the cashreserve ratio (CRR) for scheduled banks had been raised by 450 basis points, and risk weights andgeneral provisioning requirements for standard advances were raised in the case of specificsectors. In response to the knock-on effects of the global economic crisis on the Indian economy,since October 11, 2008 the Reserve Bank has reduced the CRR by a cumulative 400 basis pointsto 5.0 per cent of NDTL, the repo rate by 425 basis points to 4.75 per cent and the reverse reporate by 275 basis points to 3.25 per cent.


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III.2 The magnitude and the pace of the response have to be seen particularly in the context of thefact that despite significant moderation, Indias growth remained one of the highest in the world,at 6.7 per cent for the full year, and the minimum quarterly growth during the year was 5.8 per cent. Thus, the policy stance clearly reflected the forward looking undertone, particularly theexpectations of more prolonged adverse external conditions in the face of no visible risks toinflation. Moreover, the gradual withdrawal of monetary accommodation that had started fromSeptember 2004 was a signal of the Reserve Banks assessment of possible overheating, eventhough subsequent monetary tightening was in response to building of inflationary pressures up tomid 2008-09. The need for monetary policy cycle remaining ahead of the business cycle, whichemerged as a lesson from the current global crisis, was already evident in the Reserve Banksactual conduct of policy even before the crisis. Similarly, the current post-crisis suggestion for useof pro-cyclical provisioning norms and counter-cyclical regulations as a bulwark against financialinstability had already been implemented in India prior to the crisis.

Organisational Framework for Monetary Policy

Technical Advisory Committee

III.3 The Reserve Bank had constituted a Technical Advisory Committee (TAC) on MonetaryPolicy in July 2005 with four external experts in the areas of monetary economics, central

banking, financial markets and public finance with a view to strengthening the consultative process in the conduct of monetary policy. The TAC reviews macroeconomic and monetarydevelopments and advises the Reserve Bank on the stance of monetary policy and monetarymeasures. The Committee was reconstituted in April 2007 and the membership of the Committeewas expanded by including two additional members of the Central Board of the Reserve Bank andone more external expert. The tenure of the reconstituted Committee was extended up to June 30,2009. The Reserve Bank has now reconstituted the TAC on Monetary Policy with effect from July1, 2009 with a view to obtaining continued benefit of advice from external experts. The tenure of the Committee is for two years, i.e. , up to June 30, 2011. The Committee is headed by Governor,with the Deputy Governor in charge of monetary policy as the vice-chairman. The other Deputy

Governors of the Bank are also members of the Committee. The TAC normally meets once in aquarter. However, the meeting of the TAC could be held at any other time also, if necessary. Therole of the TAC is advisory in nature.The responsibility, accountability and time path of thedecision making remain entirely with the Reserve Bank. In addition to the quarterly pre-policymeeting where the TAC members contributed to enriching the inputs and processes of policysetting, there were two special meetings held on June 23, 2008 and December 17, 2008 in thecontext of the evolving global economic crisis and to advise the Reserve Bank on the stance of monetary policy.

Pre-policy Consultation Meetings

III.4 It has been the endeavour of the Reserve Bank to make the policy making process moreconsultative. As part of this outreach and the Reserve Banks growing emphasis on strengtheningthe consultative process of monetary policy formulation, the Reserve Bank has constituted a

process of consulting different entities/ experts before each policy Statement/Review.Accordingly, with effect from October 2005, the Reserve Bank has introduced pre-policyconsultation meetings with the Indian Banks Association (IBA), market participants (FixedIncome Money Market and Derivatives Association of India, Foreign Exchange DealersAssociation of India, and Primary Dealers Association of India), leaders of trade and industry andother institutions (urban co-operative banks, non-banking financial companies, rural co-operatives


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and regional rural banks). This consultative process has contributed to enriching the policyformulation process and enhanced the effectiveness of monetary policy measures.

III.5 The specific aspects of monetary policy operations of the Reserve Bank during 2008-09 and2009-10 so far and the context against which policy decisions were formulated and implementedhave been outlined in this chapter.

MONETARY POLICY OPERATIONS: 2008-09

III.6 The conduct of monetary policy during 2008-09 witnessed two distinctly different phases.The first phase up to mid-September 2008 was characterised by monetary tightening, reflectingthe need to contain high inflation and adverse inflation expectations. The policy stance during thesecond phase starting from mid-September 2008 was guided by the ramifications of the globalfinancial crisis for economic growth and financial markets in India.

Annual Policy Statement for 2008-09III.7 The Annual Policy Statement (APS) for 2008-09 (April 29, 2008) had noted that there weresignificant shifts in both global and domestic developments in relation to initial assessments

presented for 2007-08. In the backdrop of the deteriorating outlook for the global economy, theAPS highlighted that the dangers of global recession had increased at the time of announcement of the Third Quarter Review of January 2008. It also added that since January 2008, the upside

pressures from international food and energy prices appeared to have imparted a degree of persistent upward pressure to inflation globally. On the domestic front, the outlook remained positive up to January 2008, with some indications of moderation in industrial production,services sector activity, business confidence and non-food credit thereafter.

III.8 The initial forecast predicted a near-normal rainfall in the 2008 South-West monsoon season,suggesting sustenance of the trend growth in agriculture. The Statement noted that the expecteddecline in world GDP growth in 2008 in relation to the preceding year could temper the prospectsof growth in the industrial and services sectors at the margin, although the underlying momentumof expansion in these sectors was likely to be maintained. In view of this overall macroeconomicscenario, the APS placed real GDP growth during 2008-09 in the range of 8.0 to 8.5 per cent for

policy purposes, assuming that (a) global financial and commodity markets and real economywould be broadly aligned with the central scenario as assessed at that stage; and (b) domestically,normal monsoon conditions may prevail. In view of the lagged and cumulative effects of monetary policy on aggregate demand and assuming that supply management would beconducive, capital flows had to be managed actively and in the absence of new adversities

emanating in the domestic or global economy, the Policy Statement indicated that the monetary policy endeavour would be to bring down inflation from the prevailing high level of above 7.0 per cent to around 5.5 per cent in 2008-09, with a preference for bringing it close to 5.0 per cent assoon as possible, recognising the evolving complexities in globally-transmitted inflation. TheStatement also added that going forward, the Reserve Bank would continue to condition policyand perceptions for inflation in the range of 4.0-4.5 per cent so that an inflation rate of around 3.0

per cent became a medium-term objective consistent with Indias broader integration into theglobal economy and with the goal of maintaining self-accelerating growth over the medium-term.


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III.9 The Statement also noted that money supply remained above indicative projections persistently through 2005-07 on the back of sizeable accretions to the Reserve Banks foreignexchange assets and a cyclical acceleration in credit and deposit growth. In view of the resultingmonetary overhang, the Statement mentioned that there was a need to moderate monetaryexpansion in the range of 16.5-17.0 per cent in 2008-09 in consonance with the outlook on growthand inflation so as to ensure macroeconomic and financial stability. Consistent with the

projections of money supply, the growth in aggregate deposits for 2008-09 was placed at around17.0 per cent or around Rs.5,50,000 crore. Based on the overall assessment of the sources of funding and the overall credit requirements of various productive sectors of the economy, thegrowth of non-food credit, including investments in bonds/debentures/ shares of public sector undertakings and private corporate sector and commercial paper (CP), was placed at around 20.0

per cent for 2008-09 consistent with the monetary projections.

III.10 Given the unprecedented complexities involved and the heightened uncertainties, a number of factors influenced the stance of monetary policy for 2008-09. First, there was the immediatechallenge of escalated and volatile food and energy prices, which possibly contained somestructural components apart from cyclical components. Second, while demand pressures persisted,there was some improvement in the domestic supply response. Third, previous initiatives in regardto supply-management by the Government of India and monetary measures by the Reserve Bank were in the process of impacting the economy. Fourth, policy responses emphasised managingexpectations in an environment of the evolving global and domestic uncertainties. Fifth, monetary

policy had demonstrated a resolve to act decisively on a continuing basis to curb any signs of adverse developments with regard to inflation expectations.

III.11 In view of the macroeconomic conditions and then prevailing inflationary condition, theReserve Bank continued with its pre-emptive and calibrated approach to contain inflationexpectations, and raised CRR by 25 basis points to 8.25 per cent with effect from the fortnight

beginning May 24, 2008. This followed the hike in the CRR by 25 basis points each effectivefrom the fortnights beginning April 26 and May 10, 2008 respectively. The Reserve Bank announced on June 11, 2008 an increase in the repo rate under the Liquidity Adjustment Facility

(LAF) by 25 basis points to 8.00 per cent from 7.75 per cent with immediate effect.

III.12 Inflation, based on variations in the wholesale price index (WPI) on a year-on-year basis,increased to 11.05 per cent as on June 7, 2008 from 7.75 per cent at end-March 2008 and 4.28 per cent a year ago. At that juncture, the overriding priority for monetary policy was to eschew anyfurther intensification of inflationary pressures and to firmly anchor inflation expectations and tourgently address aggregate demand pressures which appeared to be strongly in evidence.Accordingly, the Reserve Bank increased the repo rate under the LAF from 8.00 per cent to 8.50

per cent effective from June 25, 2008. The CRR was also raised by 50 basis points to 8.75 per centin two stages, 25 basis points each, effective from the fortnights beginning July 5 and July 19,2008 respectively.

First Quarter Review 2008-09:-

III.13 The First Quarter Review of the Annual Statement on Monetary Policy for 2008-09 (July29, 2008) noted that after the announcement of the Annual Policy Statement in April 2008, globalas well as domestic developments on both supply and demand sides pointed to accentuation of inflationary pressures, especially in terms of inflation expectations. In an environment of surgingglobal inflation, and with domestic inflation also rising to a 13-year high, the Reserve Bank notedwith concern that inflation had emerged as the biggest risk to the global outlook, having risen to


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very high levels across the world, not generally seen for a couple of decades.

III.14 The First Quarter Review stated that inflation was expected to moderate from the then highlevels in the months to come and a noticeable decline in inflation was expected towards the lastquarter of 2008-09. Accordingly, it emphasised that while the policy actions would aim to bringdown the prevailing intolerable level of inflation to a tolerable level of below 5.0 per cent as soonas possible and around 3.0 per cent over the medium-term, at that juncture a realistic policyendeavour would be to bring down inflation from the then prevailing level of about 11.0-12.0 per cent to a level close to 7.0 per cent by end-March 2009. It stated that taking into account aggregatedemand management and supply prospects, the projection of real GDP growth of the Indianeconomy in 2008-09, in the range of 8.0 to 8.5 per cent as set out in the Annual Policy Statementof April 2008, might prove to be optimistic and hence, for policy purposes, a projection of around8.0 per cent appeared to be a more realistic scenario, barring domestic or external shocks.

III.15 The First Quarter Review emphasised the necessity of moderating monetary expansion andrevised the projection for indicative money supply growth in the range of around 17.0 per cent in2008-09 in consonance with the outlook on growth and inflation so as to ensure macroeconomicand financial stability in the period ahead.

III.16 The First Quarter Review noted that in view of the criticality of anchoring inflation

expectations, a continuous heightened vigil over ensuing monetary and macroeconomicdevelopments was to be maintained to enable swift responses with appropriate measures asnecessary, consistent with the monetary policy stance. Furthermore, in view of the thenmacroeconomic and overall monetary conditions, the First Quarter Review announced an increasein fixed repo rate under the LAF by 50 basis points from 8.5 per cent to 9.0 per cent with effectfrom July 30, 2008 and an increase of CRR by 25 basis points to 9.0 per cent with effect fromAugust 30, 2008.III.17 As the global liquidity crisis deepened in September 2008, capital inflows dried up and thedemand for credit from the domestic banking system increased, thereby aggravating the liquidity

pressures. In the wake of the emerging stress on Indias financial markets as a result of thecontagion from the global financial crisis, the immediate challenge for the Reserve Bank was toinfuse confidence by augmenting both domestic and foreign exchange liquidity. Accordingly, theReserve Bank announced the first phase of measures on September 16, 2008, including increase inthe interest rate ceilings on FCNR (B) deposits of all maturities and on deposits under the

NR(E)RA for one to three years maturity by 50 basis points and other measures to augmentliquidity (for details see Chapter II.5, Box II.27).

III.18 Liquidity conditions tightened even further after October 7, 2008 as contagion from the USfinancial crisis spread to Europe and Asia. Globally, money markets froze and the stock marketsturned highly volatile. Even coordinated policy actions by monetary authorities in America,Europe, Asia and Australia failed to inspire the confidence of financial markets. In view of the

persisting uncertainty in the global financial situation and its impact on India, and continuingdemand for domestic market liquidity, the Reserve Bank took further measures in October 2008

including a cumulative reduction of 250 basis points in the CRR effective from the fortnight beginning October 11, further increase in the interest rate ceilings on FCNR (B) deposits of allmaturities and on deposits under the NR(E)RA for one to three years maturity by 50 basis pointseach and other measures to enhance availability of liquidity in the financial system (for details seeChapter II.5, Box II.27). On October 20, 2008 in order to alleviate the pressures on domesticcredit markets brought on by the indirect impact of the global liquidity constraint and, in

particular, to maintain financial stability, the Reserve Bank decided to reduce the repo rate under the LAF by 100 basis points to 8.0 per cent with immediate effect.


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Mid-Term Review 2008-09

III.19 The Mid-Term Review of the Annual Policy Statement 2008-09 (October 24, 2008) was setin the context of several complex and compelling policy challenges as the global financial crisiswitnessed unprecedented dimensions. Governments, central banks and financial regulators aroundthe world responded to the crisis with aggressive, radical and unconventional measures to restorecalm and confidence to the markets and bring them back to normalcy and stability.

III.20 The Mid-Term Review highlighted that Indias financial sector continued to remain stableand healthy. All indicators of financial strength and soundness such as capital adequacy, ratios of non-performing assets (NPA) and return on assets (RoA) for commercial banks were robust. TheReview also noted that the global developments, however, had some indirect, knock-on effects ondomestic financial markets.

III.21 The Mid-Term Review noted that the measures taken since mid-September 2008substantially assuaged liquidity stress in domestic financial markets arising from the contagion of adverse external developments. The total liquidity support through reductions in the CRR, thetemporary accommodation under the SLR and the first instalment of the agricultural debt waiver and debt relief scheme was of the order of Rs.1,85,000 crore. The Review further noted that thecut in the repo rate effected on October 20, 2008 was expected to ease the conditions in the moneyand credit markets, restore their orderly functioning and sustain financial stability.

III.22 The First Quarter Review of July 2008 had placed the projection of real GDP growth in2008-09 at around 8.0 per cent for policy purposes. The Mid-Term Review noted that since thenthere had been significant global and domestic developments, which rendered the outlook uncertain, suggesting increased downside risks associated with this projection. Taking thesedevelopments and prospects into account, the Mid-Term Review revised the projection of overallreal GDP growth for 2008-09 to the range of 7.5-8.0 per cent.

III.23 The Mid-Term Review assessed that inflation would remain a concern and emphasised that

the Reserve Bank would keep a strong vigil on inflation. Keeping in view the supply managementmeasures taken by the Central Government and the lagged demand response to the monetary policy measures taken by the Reserve Bank over the last one year, the Review maintained theearlier projection of inflation of 7.0 per cent by end-March 2009 for policy purposes.

III.24 The Mid-Term Review noted that Indias balance of payments till then reflected strengthand resilience in a highly unsettled international environment. Assessing the various factorsaffecting balance of payments, the Review expected somewhat higher current account deficit in2008-09 than in the preceding year, but it also expected enough capital inflows to meet theexternal financing requirement in 2008-09.

III.25 The Review expressed the Reserve Banks concerns about the depth of global financialcrisis and its endeavour to remain proactive, and take measures to manage the unfoldingdevelopments by easing pressures stemming from the global crisis. Against the backdrop of theensuing global and domestic developments and in the light of measures taken by the Reserve Bank over September-October 2008, the Bank Rate, the repo rate and the reverse repo rate and the cashreserve ratio (CRR) were kept unchanged.

III.26 Early signs of a global recession became evident by late October 2008 as global financialconditions continued to remain uncertain and unsettled. Globally, commodity prices, includingcrude oil prices, began to abate which reduced domestic inflationary pressures. It was also


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important to ensure that credit requirements for productive purposes were adequately met so as tosupport the growth momentum of the economy. Accordingly, the Reserve Bank announced aseries of measures on November 1, 2008 including reduction in the repo rate under the LAF by 50

basis points to 7.5 per cent with effect from November 3, 2008, reduction in the CRR by 100 basis points to 5.5 per cent of NDTL and the relaxation of the SLR, on a temporary basis earlier, wasmade permanent and reduced to 24 per cent of NDTL effective from November 8, 2008. By mid-

November 2008, there were indications that the global slowdown was deepening with a larger than expected impact on the domestic economy, particularly for the medium and small industrysector and export-oriented units. In the context of these developments, for augmenting rupee andforex liquidity, and strengthening and improving credit delivery mechanisms, the Reserve Bank announced measures on November 15, 2008 including increase in interest rate ceilings onFCNR(B) and NR(E)RA deposits by 75 basis points each to Libor/ swap rates plus 100 basis

points and Libor/swap rates plus 175 basis points, respectively. On a further review of the then prevailing liquidity conditions, the Reserve Bank again announced measures for liquiditymanagement and improving credit flows on November 28, 2008.

III.27 The global outlook deteriorated further during December 2008 indicating that the recessionwould be deeper and the recovery longer than anticipated earlier. With indications of slowingdown of the domestic economic activity while inflationary pressures abated significantly, theReserve Bank initiated a series of measures on December 6 and 11, 2008 which includedreduction in the repo rate under the LAF by 100 basis points to 6.5 per cent, reduction in thereverse repo rate by 100 basis points from 6.0 per cent to 5.0 per cent, effective from December 8,2008 and measures relating to refinance facilities (for details see Chapter II.5, Box II.27). Thesemeasures were aimed at improving the credit flow to productive sectors to sustain the growthmomentum.

III.28 While domestic financial markets continued to function in an orderly manner, Indiasgrowth trajectory was impacted by the global recession. The Reserve Banks monetary policystance recognised the concerns over rising credit risk together with the slowing of economicactivity which appeared to affect credit growth. Accordingly, in order to stimulate growth, theReserve Bank took the following measures on January 2, 2009: (i) the repo rate under the LAF

was reduced by 100 basis points to 5.5 per cent with effect from January 5, 2009; (ii) the reverserepo rate under the LAF was reduced by 100 basis points to 4.0 per cent with effect from January5, 2009; and (iii) the CRR was reduced from 5.5 per cent to 5.0 per cent of NDTL effective fromthe fortnight beginning January 17, 2009.

MONETARY POLICY OPERATIONS: 2009-10:-

III.37 The Annual Policy Statement (APS) 2009- 10 (April 21, 2009) was presented in the midstof exceptionally challenging circumstances in the global economy. It noted that the globaleconomic crisis had called into question several fundamental assumptions and beliefs governingeconomic resilience and financial stability. What started off as turmoil in the financial sector of

the advanced economies had snowballed into the deepest and most widespread financial andeconomic crisis of the last 60 years. The Statement noted that although the governments andcentral banks around the world responded to the crisis through both conventional andunconventional fiscal and monetary measures, the global financial situation remained uncertainand the global economy continued to cause anxiety for several reasons. There was no clear estimate of the quantum of tainted assets, and doubts persisted on whether the initiatives underwaywere sufficient to restore the stability of the financial system. There was a continued debate on theadequacy of the fiscal stimulus packages across countries, and their effectiveness in arresting the


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downturn, reversing job losses and reviving consumer confidence.

III.38 The Statement mentioned that both the Government and the Reserve Bank responded to thechallenge of minimising the impact of the crisis on India in co-ordination and consultation. The

policy responses in India beginning September 2008 were designed largely to mitigate the adverseimpact of the global financial crisis on the Indian economy. The conduct of monetary policy hadto contend with the high speed and magnitude of the external shock and its spill-over effectsthrough the real, financial and confidence channels. The evolving stance of policy had beenincreasingly conditioned by the need to preserve financial stability while arresting the moderationin the growth momentum. The Policy Statement also mentioned that taking a cue from the ReserveBanks monetary easing; most banks started to reduce their deposit and lending rates.

III.39 It was viewed that the fiscal and monetary stimulus measures initiated during 2008-09coupled with lower commodity prices could cushion the downturn in the growth momentumduring 2009-10 by stabilising domestic economic activity to some extent. While based on theavailable information it was found that domestic financing conditions had improved, externalfinancing conditions were expected to remain tight. Private investment demand was, therefore,expected to remain subdued. On balance, with the assumption of normal monsoon, the Statement,for policy purpose, projected real GDP growth for 2009-10 at around 6.0 per cent.

III.40 On account of a slump in global demand, pressures on global commodity prices abatedmarkedly around the world by the end of the fiscal year 2008-09. The sharp decline in prices of crude oil, metals, foodgrains, cotton and cement had influenced inflation expectations in most

parts of the world. This was also reflected in the domestic WPI inflation reaching close to zero.Keeping in view the global trend in commodity prices and domestic demand-supply balance, theStatement projected WPI inflation at around 4.0 per cent by end-March 2010. The Statementemphasised that monetary policy in India would continue to condition and contain perceptions of inflation in the range of 4.0-4.5 per cent so that an inflation rate of around 3.0 per cent becomesthe medium-term objective.

III.41 Monetary and credit aggregates had exhibited deceleration from their peak levels in October 2008. The liquidity overhang emanating from the earlier surge in capital inflows had substantiallymoderated in 2008-09. The Reserve Bank was committed to provide ample liquidity for all

productive activities on a continuous basis. As the upside risks to inflation declined, monetary policy started responding to slackening economic growth in the context of significant globalstress. Accordingly, for policy purposes, the Statement projected money supply (M 3) growth at17.0 per cent for 2009-10.

III.42 The Annual Policy Statement recognised that while continuing to support adequate liquidityin the economy, the Reserve Bank would have to ensure that as economic growth gathersmomentum, the excess liquidity is rolled back in an orderly manner. Based on the overallassessment of the macroeconomic situation, the Policy Statement emphasised the need to ensure a

policy regime that would enable credit expansion at viable rates while preserving credit quality soas to support the return of the economy to a high growth path. It indicated that the Reserve Bank would continuously monitor the global and domestic conditions and respond swiftly andeffectively through policy adjustments as warranted so as to minimise the impact of adversedevelopments and reinforce the impact of positive developments. The stance further emphasisedto maintain a monetary and interest rate regime supportive of price stability and financial stabilitytaking into account the emerging lessons of the global financial crisis. Against the backdrop of global and domestic developments, the Reserve Bank reduced the repo rate under the LAF by 25


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basis points from 5.0 per cent to 4.75 per cent with effect from April 21, 2009. The reverse reporate under the LAF was also reduced by 25 basis points from 3.5 per cent to 3.25 per cent witheffect from April 21, 2009.

Changing Stance of Monetary Policy in India:-

2008-09 Annual Policy Statement (April 2008) To ensure a monetary and interest rate environment that accords high priority to price

stability well-anchored inflation expectations and orderly conditions in financial marketswhile being conducive to continuation of the growth momentum.

To respond swiftly on a continuing basis to the evolving constellation of adverseinternational developments and to the domestic situation impinging on inflationexpectations, financial stability and growth momentum, with both conventional andunconventional measures, as appropriate.

To emphasise credit quality as well as credit delivery, in particular, for employment-intensive sectors, while pursuing financial inclusion.

First Quarter Review (July 2008) To ensure a monetary and interest rate environment that accords high priority to price

stability, well-anchored inflation expectations and orderly conditions in financial marketswhile being conducive to continuation of the growth momentum.

To respond swiftly on a continuing basis to the evolving constellation of adverseinternational developments and to the domestic situation impinging on inflationexpectations, financial stability and growth momentum, with both conventional andunconventional measures, as appropriate.

To emphasise credit quality as well as credit delivery, in particular, for employment-intensive sectors, while pursuing financial inclusion .

Mid-Term Review (October 2008) Ensure a monetary and interest rate environment that optimally balances the objectives of

financial stability, price stability and well-anchored inflation expectations, and growth; Continue with the policy of active demand management of liquidity through appropriate

use of all instruments including the CRR, open market operations (OMO), the MSS andthe LAF to maintain orderly conditions in financial markets;

In the context of the uncertain and unsettled global situation and its indirect impact on thedomestic economy in general and the financial markets in particular, closely and

continuously monitor the situation and respond swiftly and effectively to developments,employing both conventional and unconventional measures; Emphasise credit quality and credit delivery, in particular, for employment-intensive

sectors, while pursuing financial inclusion.

Third Quarter Review (January 2009) Provision of comfortable liquidity to meet the required credit growth consistent with the

overall projection of economic growth.


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January 6, 2007 6.00 6.00 7.25 5.50 (+0.25) 25

January 31, 2007 6.00 6.00 7.50 (+0.25) 5.50 25

February 17, 2007 6.00 6.00 7.50 5.75 (+0.25) 25

March 3, 2007 6.00 6.00 7.50 6.00 (+0.25) 25

March 30, 2007 6.00 6.00 7.75 (+0.25) 6.00 25

April 14, 2007 6.00 6.00 7.75 6.25 (+0.25) 25

April 28, 2007 6.00 6.00 7.75 6.50 (+0.25) 25

August 4, 2007 6.00 6.00 7.75 7.00 (+0.50) 25

November 10, 2007 6.00 6.00 7.75 7.50 (+0.50) 25

April 26, 2008 6.00 6.00 7.75 7.75 (+0.25) 25

May 10, 2008 6.00 6.00 7.75 8.00 (+0.25) 25

May 24, 2008 6.00 6.00 7.75 8.25 (+0.25) 25

June 11, 2008 6.00 6.00 8.00 (+0.25) 8.25 25

June 25, 2008 6.00 6.00 8.50 (+0.50) 8.25 25

July 5, 2008 6.00 6.00 8.50 8.50 (+0.25) 25

July 19, 2008 6.00 6.00 8.50 8.75 (+0.25) 25

July 30, 2008 6.00 6.00 9.00 (+0.50) 8.75 25

August 30, 2008 6.00 6.00 9.00 9.00 (+0.25) 25

October 11, 2008 6.00 6.00 9.00 6.50 (-2.50) 25

October 20, 2008 6.00 6.00 8.00 (-1.00) 6.50 25

October 25, 2008 6.00 6.00 8.00 6.00 (-0.50) 25

November 03, 2008 6.00 6.00 7.50 (-0.50) 6.00 25

November 08, 2008 6.00 6.00 7.50 5.50 (-0.50) 24 (-1.00)

December 08, 2008 6.00 5.00 (-1.00) 6.50 (-1.00) 5.50 24

January 05,2009 6.00 4.00 (-1.00) 5.50 (-1.00) 5.50 24

January 17,2009 6.00 4.00 5.50 5.00 (-0.50) 24

March 05,2009 6.00 3.50 (-0.50) 5.00 (-0.50) 5.00 24

April 21,2009 6.00 3.25 (-0.25) 4.75 (-0.25) 5.00 24


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ANALYSIS OF BANKING SECTOR

A small report of Market Capitalization for 31st March, 2009 is also shown here.

Index/Exchange Company

Name

Close Price Mkt. Cap. in

Rs Mn

Weightage

CNX BANK INDEX

Axis Bank Ltd. 414.95 148969.17 6.65

CNX BANK INDEX

Bank of Baroda 234.35 85365.83 3.81

CNX BANK INDEX

Bank of India 219.4 115222.91 5.14

CNX BANK INDEX

Canara Bank 165.7 67937 3.03

CNX BANK INDEX

HDFC Bank Ltd.

973.4 414062.52 18.47

CNX BANK INDEX ICICI Bank Ltd. 332.8 370343.67 16.52

CNX BANK INDEX

IDBI Bank Ltd. 45.4 32902.6 1.47

CNX BANK INDEX

Kotak Mahindra Bank Ltd.

282.2 97547.75 4.35

CNX BANK INDEX

Oriental Bank of Commerce

110.1 27584.42 1.23

CNX BANK INDEX

Punjab NationalBank

411.45 129731.21 5.79

CNX BANK INDEX State Bank of India 1067.1 677480.68 30.23CNX BANK INDEX

Union Bank of India

146.85 74176.56 3.31

TOTAL 2241324.34 100


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KEY FINANCIAL RATIOS OF ICICI BANK:-