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Money and Prices


Macroeconomic Overview
Money and Prices
Fiscal Developments
External Sector
Issues and Priorities


Money and Prices

The annual rate of inflation, which was 6.7 per cent at the start of 1997-98, had fallen to an eleven-year low of 3.4 per cent by the end of August 1997, despite an increase in the administered prices of petroleum products and electricity.
The low inflation rate of less than 4 per cent was maintained up to end November 1997. Thereafter, there was a slight upward drift in the growth rate (caused by the increase in prices of some primary products) and the year 1997-98 ended with an inflation rate of 5 per cent
Prices of primary products, which include major essential commodities, rose only by 5.5 per cent on a point to point annual basis at the end of March 1998. The Targeted Public Distribution System replaced the erstwhile PDS from June 1997. Under the new system, a two-tier subsidised pricing system was introduced to benefit the poor. Under the system, each below poverty line (BPL) family is entitled to 10 Kgs. of foodgrains per month at specially subsidised
prices. The State Governments were to streamline the PDS by issuing special cards to BPL families and selling essential articles under TPDS to them at specially subsidised prices with better monitoring of the delivery system.
The RBI set a lower indicative target of 15 to 15.5 per cent for broad money (M3) growth in 1997-98 based on a projected real GDP growth of about 6 per cent and an anticipated inflation rate of the same order. The expansion in broad money in 1997-98 at 17.0 per cent was higher than 16.0 per cent in the previous financial year.
The RBI's flexibility and autonomy in conducting monetary policy was enhanced by the new system of Ways and Means Advances introduced with effect from April 1997. This replaced the practice of issuing of ad-hoc treasury bills, which in earlier years resulted in automatic monetisation of the budget deficit.
Despite the easy liquidity situation, especially in the first half of 1997-98, credit growth continued to be low because of weak demand for credit and banks' cautious approach to lending. Non-food credit, however, expanded by 14.2 per cent during 1997-98 as against 10.9 per cent growth in 1996-97.
In an effort to increase the depth of the call money market, the SLR and the CRR on inter-bank liabilities were removed from April 26, 1997. The SLR was also simplified into a single uniform rate of 25 per cent on total NDTL with effect from October 25, 1997. Actual investment in government securities was, however, in excess of the SLR requirements.
RBI reactivated the Bank Rate by making it a reference rate for key interest rates in the market and a signal for its monetary policy stance.
Developments in the external environment leading to speculative activity resulted in a temporary change in the direction of monetary policy during November-January, 1997-98. The CRR, which was reduced to 9.5 percent in November 1997, was raised to 10 per cent from December 6, 1997 and to 10.5 per cent from January 17 1998. The Bank Rate was increased by 2 percentage points to 11 per cent, These measures were reversed partially in March 1998, following more orderly conditions in the foreign exchange market.The Bank Rate, which was reduced to 10 per cent with effect from April 3, 1998, has further been reduced to 9 per cent with effect fromApril 30, 1998. The CRR was reduced to 10 per cent with effect from the fortnight beginning April 11, 1998.

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