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ANNUAL REPORT 2007-08

overall inflation as on March 29, 2008, followed by primary articles at 28.2 per cent and the fuel group at 18.9 per cent.

On an average basis (average of 52 weeks), the wholesale price inflation was lower at 4.7 per cent in 2007-08 when compared to 5.4 per cent in 2006-07. Consumer price inflation for industrial workers was higher than WPI inflation upto January 2008. With increase in food prices, the gap has reduced to some extent CPI inflation for industrial workers for March 2008 stood at 7.9 per cent as against 6.7 per cent observed in March 2007. On average basis (average of 12 months) CPI inflation during 2007-08 worked to 6.2 per cent as against 6.7 per cent in 2006-07.

DOMESTIC FINANCIAL MARKETS

Global financial markets remained turbulent due to surge in liquidity demand because of turmoil in the US sub-prime mortgage market. However, the financial markets in India remained relatively unaffected except for equity markets and for brief spells in the money market. Policy interventions by the RBI helped the markets to come back to normalcy.

Money Market

The money market remained largely orderly during 2007-08, barring occasional spells of volatility on account of volatility in capital flows and large changes in cash balances of the Central Government with the Reserve Bank. The policy intervention by the RBI under the liquidity adjustment facility (LAF) caused some tightening in the money market and subsequent withdrawal of this policy imposition helped the Call/notice rates to lie within the corridor of repo and reverse repo rates. Over the year as a whole, the call rate averaged 6.07 per cent, 115 basis points lower than that in 2006-07. Interest rates in the collateralised segments of the money market – the market repo (outside the LAF) and the collateralised borrowing and lending obligation (CBLO) – moved in tandem with call rates. The collateralised market is now the predominant segment of the money market in India accounting for nearly 80 per cent of the total volume during 2007-08. During 2007-08, interest rates averaged around 5.20 per cent in CBLO, 5.50 per cent in market repo and 6.07 per cent in the call/notice money market. A year ago the interest rates for the above segments were 6.24 per cent, 6.34 per cent and 7.22 per cent

respectively. The weighted average rate of the above three money market segments worked out to 5.48 per cent during 2007-08 compared with 6.57 per cent a year ago. In other segments of the money market, the weighted average discount rate for certificates of deposit (CDs) was 10 per cent at end March 2008 as compared with 10.75 per cent at end March 2007. In the commercial paper market, the weighted average discount rate declined from 11.33 per cent on March 31, 2007 7.65 per cent at end October 2007 and hardened to 10.38 per cent as on March 31, 2008.

Foreign Exchange Market

The Indian rupee generally exhibited two-way movements in the range of Rs.39.26 to 43.15 per US Dollar during 2007-08. At the beginning of the year, tight liquidity conditions in the domestic money market and US Dollar sales by banks led the rupee to appreciate from its level of Rs. 43.60 per US Dollar at end-March 2007 to Rs. 40.46 per US Dollar as on May 29, 2007. Foreign institutional investment (FII) outflows, bearish conditions in the Indian equity market and concerns over the sub-prime mortgage crisis in the US resulted in depreciation of the Indian rupee during the first half of August 2007 to Rs.41.58 per US Dollar The exchange rate of the rupee appreciated thereafter on account of large capital inflows, interest rate cut by the US Fed, weakening of the US Dollar vis-à-vis other major currencies. During October 2007 to January 2008 the rupee moved in the range of Rs.39.26 to Rs.39.84 per US Dollar. At the beginning of February 2008, on account of FII outflows (rising crude oil prices and heavy Dollar demand by oil companies), the rupee started depreciating and at the end March 2008 it was Rs.39.99 per US Dollar. Between end March 2007 and end March 2008 the exchange rate of the rupee appreciated by 9.0 per cent against the US Dollar. Over the same period, the rupee appreciated by 7.6 per cent against the Pound Sterling, while it depreciated by 7.8 per cent against the Euro, 7.6 per cent against the Japanese Yen. The conditions in the spot foreign exchange market and generally comfortable liquidity conditions in the domestic money markets kept forward premia on the US Dollar low during 2007-08. Capital inflows during the year were significantly higher than the current account deficit. India’s foreign exchange reserve during 2007-08 comprising

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