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Macroeconomic Overview
Money and Prices
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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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