On Trade-off and the Impossibility

1
On Trade-off and the Impossibility 

• The Trilemma of Exchange Rate Management and
  Autonomous Monetary Policy under CAC

2
The trilemma

• CAC
• ERM
  
• 
  

3
Some Definitions

• Fiscal Deficit Total Expenditure Total
  Receipts Revenue Expenditure Capital
  Expenditure interest payments subsidies
  defence expenditure
• Capital
  Expenditure Total Receipts
• Primary Deficit Fiscal Deficit interest
  payments
• subsidies defence expenditure
  Capital Expenditure
• Total Receipts

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CAC
Capital Imports
ER Appreciation
Reserve Accumulation
Rise in Mo
Interest payments
Rise in M3
Cut in PD
Rise in FD
Rise in prices
Cut in public investment
OMO
Cut in subsidies
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• Forex Inflows and
  Monetary Sterilization in India (Rs. Crore)

Source GOI, Economic Survey 2007-08
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. Priority sector lending as percentage of NBCs
Financial Year public sector banks private banks foreign banks
FY2001 43.7 36.7 33.5
FY2002 43.1 40.9 34.0
FY2003 42.5 44.4 33.9
FY2004 44.0 47.4 34.8
Source Basic statistical returns, RBI, various
issues.
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Loans to SSI sector in
priority sector (in )
Source Basic statistical returns, RBI, various issues.
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Composition of gross banking credit of SCBs
(FY2001-FY2004)
FY2001 FY2002 FY2003 FY2004
Gross Bank credit Gross Bank credit
Food procurement 8.5 10.1 7.4 4.7
Non-food 91.5 89.9 92.6 95.3
Priority 32.9 32.7 31.6 34.5
Industry-Large 34.7 32.1 35.1 32.3
Wholesale trade 3.8 3.8 3.4 3.3
Others of which 20.1 21.3 22.5 25.2
Housing 3.4 4.2 5.5 6.8
Consumer durables 1.2 1.3 1.1 1.1
NBFCs 1.7 1.8 2.1 2.2
Individuals against shares 0.4 0.3 0.3 0.3
Real estate 0.4 0.5 0.9 0.7
Personal 3.9 4.4 4.2 4.6
Advances against fixed deposits 4.3 4.0 3.4 3.4
Tourism 0.2 0.3 0.4 0.4
Source RBI Report on Trends Progress of
Banking in India, various issues. Note Only
the important items have been listed under
others. Source RBI Report on Trends Progress
of Banking in India, various issues.
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Retail portfolio of banks 2004-05
Amount outstanding (Rs bn) As to retail Impaired credit Net NPA as a of net advances
Housing loan 894.49 47.3 1.9 1.4
Consumer durables 62.56 3.3 6.6 4.0
Creditcard receivables 61.67 3.3 6.3 2.4
Other-personal loans 871.7 46.1 2.6 1.6
Total 1890.41 100.0 2.5 1.6
to total 22.0
Total Loans and advances 8590.92
Source RBI Report on trends and progress, of
Banks 2004
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Profitability of loans ()


of average assets Mortgages Car loans Two-wheeler Personal Top-tier Corporate Credit card SME
Yield 8.0 9.5 18.0 15.0 6.0 24.0 9.5
Interest cost 3.5 3.5 3.5 3.5 3.5 3.5 3.5
Lending spread 4.5 6.0 14.5 11.5 2.5 20.5 6.0
Source As discussed with banks.
The interest rate on cash balances with RBI is
3.5.
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On Profit ranges Number of
industrial units as at end of March 2005
Profit range (percentages) Industry Services
Above 1000 1 4
Between 100-990 6 38
Between 50-99 7 257
Between 10-49 12 311
Between 0-9 1625 549
Between (-).01 to (-) 20 499 176
Less than (-) 20 363 324
Total no of firms 2513 1659
Source CMIE, Prowess Online data
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Corporate Investments (Rs Crores)
2002-3 2003-4 2004-5
Total investments 50200 73510 83841
Securities of financial institutions 12463 (24.82) 22053 (30.0) 25836 (30.81)
Shares and debentures of subsidiaries 12928 (25.75) 15344 (20.87) 19560 (23.32)
Industrial securities 21942 (43.02) 30490 (41.47) 29053 (34.65)
Debentures include privately placed debentures
with financial institutions. Figures in brackets
indicate percentages. Source Reserve Bank of
India Bulletin September 2006
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Selected Financial Ratios of Public Limited
Companies (percentages) 2004-05 .
Sales range Quick assets to current liabilities Gross fixed asset formation to total use of funds Net fixed assets to total net assets
Rs 50-100 crores 51.9 43.2 40.0
Rs 100-500 crores 53.4 44.1 42.2
Rs500-1000 crores 58.5 41.3 42.2
gt Rs 1000 crores 50.4 38.0 40.8
Quick assets comprise of (a) sundry debtors (b)
book value of quoted investments and (c) cash
and bank balances
Source Reserve Bank of India Bulletin
September 2006
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Fiscal deficit,Primary Deficit and Interest Payments As Percenrage of GDP Fiscal deficit,Primary Deficit and Interest Payments As Percenrage of GDP Fiscal deficit,Primary Deficit and Interest Payments As Percenrage of GDP Fiscal deficit,Primary Deficit and Interest Payments As Percenrage of GDP Fiscal deficit,Primary Deficit and Interest Payments As Percenrage of GDP Fiscal deficit,Primary Deficit and Interest Payments As Percenrage of GDP Fiscal deficit,Primary Deficit and Interest Payments As Percenrage of GDP Fiscal deficit,Primary Deficit and Interest Payments As Percenrage of GDP

















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Components of Expenditure under Primary Deficit as Percentages of GDP Components of Expenditure under Primary Deficit as Percentages of GDP Components of Expenditure under Primary Deficit as Percentages of GDP Components of Expenditure under Primary Deficit as Percentages of GDP Components of Expenditure under Primary Deficit as Percentages of GDP Components of Expenditure under Primary Deficit as Percentages of GDP Components of Expenditure under Primary Deficit as Percentages of GDP Components of Expenditure under Primary Deficit as Percentages of GDP