Global Eco. & Financial MKT

8/13/2019 Global Eco. & Financial MKT

1/37

99

I C R A B U L L E T I N

Money

Finance&

J U N E . 2 0 1 3

The Global EconomicEnvironment and theIndian Financial Markets

Global EconomyG loba l economic prospects had improved in early 2013 as

economic activity began to stab ilise in ad vanced economies and picked

up some momentum in emerging and developing economies, supported

by po licy measures and some renew ed business and consumer

confidence. While policy easing in key emerging market economies has

supported internal demand , the financial ma rket ra lly has been helping

economic recovery by improving fund ing conditions a nd supporting

confidence.1The first q uarter of 2013 saw a marked improvement in

global business confidence, w ith respondents reporting reduced

pressures on cashflow and new o rders.2Improved a ccess to grow th

enhancing capital ha s also contributed to an o verall improvement in

business conditions. Though improved fina ncial ma rket conditions a re

benefiting the broa der economy, the tra nsmission is slow and

incomplete, with recovery suffering a setback early in the second

q uarter of the year. Thus grow th prospects for the rest of the year

remain broad ly unchanged (Chart G.1), even though the production

Note: A L ist of A bbreviations is presented at the end of this article.1 Since mid-2012, there has been a broad improvement in market

conditions; further confidence was renewed as policymakers defused two of the

imminent threats to global recoverya possible breakup of the Euro area and a

sharp fiscal contraction in the USwhich could have been caused by the fiscal cliff.A number of central banks in advanced and emerging market economies have

implemented mod est ra te cuts in response to la st years slow dow n, helping to support

internal demand.2According to the Global Economic Conditions Survey (GECS) of almost

2,000 senior finance professionals carried out by the Association of Chartered

Certified Accountants (ACCA) in partnership with the US-based Institute of

Management Accountants (IMA). The Moodys Analytics Survey of Business

Confidence has fallen from 32.3 in end-March to 28.5 in late-April. However, over

half of survey responses are positive and broad assessments of current conditions and

the outlook six months hence are good. Manufacturers, business and financial

service firms, and real estat e compan ies are show ing confid ence. The only pro blem is

soft hiring, besides office space demand.

Though improved

financial market

conditions are

benefiting the

broader economy,

the transmission is

slow and incomplete,

with recovery

suffering a setback

early in the second

quarter of the year.

Thus growth

prospects for the rest

of the year remain

broadly unchanged.


2/37

100


Money

Finance&

J U N E . 2 0 1 3

and consumption dyna mics in several economies are now poised toinitiate a n inventory-led rebound.3

Among the risks to glob al economic recovery, inflation

pressure is projected to remain contained in emerging market and

developing economies, supported by last years slow dow n and low er

food a nd energy prices. Policy action ha s low ered some major short-

term risks, like a breakup of the Euro area 4a nd a sharp economic

contra ction threatened by the US fiscal cliff. H ow ever, though risks

relat ed t o significant slow dow n in key emerging economies have

receded, as many of these economies have less policy room to

manoeuvre tha n b efore the G reat R ecession, investors reassessments oftheir grow th prospects could lead to sha rply low er investment and

increased capital outflow s.

3 IMF projects world output grow th to reach 3 per cent in 2013 and 4

per cent in 2014. Amid contracting manufacturing output and trade, investment had

stalled, causing a reduction in inventories. This could have set the stage for an

inventory-led rebound.4 Policy actions at the European levelincluding OMTs, the completion of

the European Sta bility M echanism, the deal on G reek debt relief, and t he agreement

on the Single Supervisory Mechanismhave increased confidence in the viability of

the economic and monetary union.

CHART G.1

Growth, Fiscal Balances and Key Monetary Policy Rates around the Globe

(per cent)

Policy rat es as of end-D ecember, 2012 and early-M ay, 2013. G D P grow th

rates for 2013 are IMF projections.

Chinas Policy rate is taken as the one-year benchmark lending rate.

Source: IM F, WEO and Fiscal M onit or, April 2013; central banks.

Though risks related

to significant

slowdown in key

emerging

economies have

receded, investors

reassessments of

their growth

prospects could

lead to sharply

lower investment

and increased

capital outflows.


3/37

101


Money

Finance&

J U N E . 2 0 1 3

C ontinued progress in reducing advanced economy deficits and

the grad ually improving external environment ha ve together low ered

short-term fiscal risks, a ccording to the IMF (GFSR, April 2013). M any

ad vanced economies are now close to achieving primary surpluses tha t

will allow them to stabilise their debt ratios. However, such a high

level of debt, even if stable, is detrimental to medium- and longer-term

economic prospects as it retards potential grow th, constrains the scope

for future discretiona ry policy, and leaves economies exposed to further

ma rket shocks. The key medium-term risks to globa l recovery therefore

relat e to f iscal a djustment fa tigue and inad equat e institutiona l reform

in major economies dealing with f iscal problems, prolonged sta gnat ion

and rising unemployment in the Euro a rea, a s w ell as high fiscal

deficits and debt in the US and Ja pan.

Uni ted States

The US economy expanded a t a slow er than expected pace in

the first qua rter of 2013, though far better than the near stagna tion in

end-2012. G D P increased at a n annua l rate of 2.5 per cent (qoq , saa r)

in the first q uarter, driven by positive contributions fro m PC E, private

inventory investment, exports, residential investment, a nd non-

residential fixed investment tha t w ere partly offset by negative

contributions from f ederal government spending and stat e and local

government spending a nd higher imports (Table G .1). PCE increased a

TABLE G.1

US GDP and Components

GDP and Contributors(percent age change over pr eviou s quart er, saar )

2011:Q 4 2012:Q 1 2012:Q 2 2012:Q 3 2012:Q 4 2013:Q 1

G D P G row th 4.1 2.0 1.3 3.1 0.4 2.5

PC E 2.0 2.4 1.5 1.6 1.8 3.2

Priva te Investment 33.9 6.1 0.7 6.6 1.3 12.3

Exports 1.4 4.4 5.3 1.9 2.8 2.9

Imports 4.9 3.1 2.8 0.6 4.2 5.4

Govt. Consumption

a nd Investment 2.2 3.0 0.7 3.9 7.0 4.1

Contr ibu ti on to change in G DP (per cent)

PC E 1.45 1.72 1.06 1.12 1.28 2.24

Priva te Investment 3.72 0.78 0.09 0.85 0.17 1.56

Exports 0.21 0.60 0.72 0.27 0.40 0.40

Imports 0.85 0.54 0.49 0.11 0.73 0.90

Net Exports 0.64 0.06 0.23 0.38 0.33 0.50

Govt Consumption

a nd Investment 0.43 0.60 0.14 0.75 1.41 0.80

Change in Private

Inventories 2.53 0.39 0.46 0.73 1.52 1.03

Source:U.S. Bureau of Economic Analysis.

The key medium-

term risks to global

recovery relate to

fiscal adjustment

fatigue and

inadequate

institutional reform

in major economies

dealing with

fiscal problems,

prolonged

stagnation

and rising

unemployment in

the Euro area, aswell as high fiscal

deficits and debt in

the US and J apan.


4/37

102


Money

Finance&

J U N E . 2 0 1 3

robust 3.2 per cent in the first q uarter, compa red w ith a n increase of

1.8 per cent in the fourth q uarter o f 2012. Personal income decreased

US$109.1 billion (3.2 per cent) in the first quarter, in contrast to an

increase of US$262.3 billion (8.1 per cent) in the fourth . The dow nturn

in personal income primarily reflected a sha rp dow nturn in persona l

dividend income and a sharp acceleration in contributions fo r

government social insurance resulting from the expirat ion o f the

payro ll tax holida y. Export s of goo ds and services increased 2.9 per

cent in the first q uarter, in cont rast t o a decrease of 2.8 per cent in the

previous, w hile import s of goo ds and services increased 5.4 per cent, in

contra st to a decrease of 4.2 per cent. Federal government consumption

expenditures and gross investment decreased 8.4 per cent in t he first

q uarter, compa red w ith a decrease of 14.8 per cent in the previous

quarter. As expected, the change in private inventories added 1.03

percentage points to the first q uarter G D P grow th a fter subtracting 1.52

percenta ge points in the last q uarter of 2012.

US industrial production rose by a more tha n expected 0.4 per

cent in M arch but the increase w as due to a surge in demand fo r

utilities during a cold spell, w hile ma nufacturing output a ctually

declined (Table G .2). ISM survey show s that its index of ma nufacturing

activity slipped to 50.7, dow n from 51.3 in M arch a nd the slow est pace

this year. The (M arkit Flash) PM I for April fell from 54.6 in M arch t o

52, ta king it 2.9 points below its first q uarter average; the breakup of

PM I numbers offered little to cheer about to o, a s output, new orders

and employment, all showed declines in April.

In early 2013, tra nsactions in housing markets moved upwa rd

at a stro ng pace, w ith the number of houses sold increasing ab out 20

per cent from one year a go. The major indices for housing ma rkets,

including t he S&P/C ase Shiller home price index, the FH FA house price

index and t he Census Bureau average sale price, a ll reported no ticeab le

increases from the previous year. Although the Ma rch gain in new-

home sales is softer than hoped, a t ight market, combined w ith sales

tha t a re up 19 per cent from the corresponding mo nth la st year,

indicates that the market for new homes is trending up.5H ousing starts

are up by 47 per cent from the March 2012 level.

The current account deficit, w hich is the combined ba lances on

tra de in goods and services, income, a nd net unilateral current

tra nsfers, is estimated t o have decreased to US$110.4 billion in t he

final q uarter of 2012 from US$112.4 billion in the third q uarter

(Table G .3).6The US current a ccount deficit, ho w ever, increased to

5 New -hom e sales picked up in M arch t o 417,000 annua lised units, an

increase of 1.5 per cent from February. Inventories also increased in the month, but

the new-home market remains tight w ith only 4.4 mo nths of supply. The median

new-house price is up by 3 per cent (yo y) in Ma rch.6 The decrease in the current account deficit was accounted for by

increases in the surpluses on income and services. These increases were again partly

offset by an increase in the deficit on goods and an increase in outflows of net

Federal government

consumption

expenditures and

gross investment

decreased 8.4% in

the first quarter,

compared with a

decrease of 14.8%

in the previous

quarter. The change

in private inventories

added 1.03

percentage points to

the first quarter GDP

growth aftersubtracting 1.52

percentage points

in the last quarter

of 2012.


5/37

103


Money

Finance&

J U N E . 2 0 1 3

US$475.0 billion in 2012 from US$465.9 billion in 2011, even as the

deficit on goods and services decreased to US$539.5 billion in 2012

from US$559.9 billion in 2011. Goods exports increased to US$1,564.1

billion from US$1,497.4 billion as all major end-use categories of

unilatera l current tra nsfers. Net finan cial inflow s were US$58.4 billion in the fourth

quarter, down from US$68.3 billion in the third. Growth of both US-owned assets

abroad and foreign-owned assets in the US slowed in the fourth quarter after rapid

growth in the third.

TABLE G.2

US Industrial Production and Inflation Levels

O ct - N ov- D ec- Jan- Feb- M ar- YoY

12 12 12 13 13 13 Change

Industrial Production 0.1 1.2 0.1 0.1 1.1 0.4 3.5

MARKET GROUP

C onsumer dura bles 0.4 2.5 2.7 1.4 2.0 0.8 7.2Autom otive products 0.4 2.9 4.5 3.5 2.9 2.6 8.5

Energy 2.2 0.4 5.7 2.4 2.5 4.8 11.8

Business eq uipment 1.1 2.4 0.4 1.4 1.9 0.1 5.1

C onstruct ion supplies 0.2 2.2 0.8 1.3 2.1 1.3 3.9

INDUSTRY GR OUP

M a nufa cturing (N AIC S) 0.4 1.4 0.9 0.3 0.9 0.1 2.9

D urable manufactur i ng 0.2 2.0 0.7 0.5 1.6 0.2 4.0

M otor vehicles and parts 0.3 5.2 2.6 3.9 2 2.9 10.2

Comput er and electroni cs 1.0 1.4 0.7 0.3 0.9 0.8 4.0

Survey Indi ces O ct - N ov- D ec- Jan- Feb- M ar- Year

12 12 12 13 13 13 A go

C FN AI 0.47 0.89 0.19 0.56 0.63 0.23 0.57

ISM -M a nufa cturing 51.7 49.9 50.2 53.1 54.2 51.3 53.3

ISM -N o nM nfg 54.8 54.8 55.7 55.2 56.0 54.4 55.0

In f la t ion O ct - N ov- D ec- Jan- Feb- M ar- YoY

12 12 12 13 13 13 Change

C PI 0.2 0.2 0.0 0.0 0.7 0.2 1.5

Food 0.2 0.2 0.2 0.0 0.1 0.0 1.5

Energy 0.1 3.4 0.8 1.7 5.4 2.6 1.6

Core I nflation 0.2 0.1 0.1 0.3 0.2 0.1 1.9

PPI (Finished G oods) 0.2 0.5 0.2 0.2 0.7 0.6 1.1Energy 0.9 3.1 0.5 0.4 3.0 3.4 1.9

Export 0.1 0.6 0.1 0.4 0.7 0.4 0.3

Import 0.3 0.7 0.6 0.5 0.6 0.5 2.7

Fuel 0.1 2.2 2.2 1.8 2.8 1.9 9.1

Housing (FHFA purchase-

only index) 0.6 0.5 0.6 0.6 0.9 1.3 7.2

Production and inflation indicators are mostly percentage changes from

the preceding month.

Source:Federal Reserve statistical releases; U.S. Bureau of Labor Statistics;

Federal Reserve Bank of Chicago; Institute for Supply Management

(ISM) and Federal Housing Finance Agency.

The US current

account deficit

increased to

US$475.0 billion in

2012 from

US$465.9 billion in

2011, even as the

deficit on goods and

services decreased

to US$539.5 billion

in 2012 from

US$559.9 billion

in 2011.


6/37

104


Money

Finance&

J U N E . 2 0 1 3

good s export s increased; encouragingly, more tha n ha lf the rise wa s

due to a n increase in capital goo ds. US goods imports also increased in

2012 to US$2,299.4 billion fro m US$2,235.8 billion in 2012, w ith a ll

categories of capital goods import registering increases. The financial

account show s that gro w th in foreign-ow ned assets in the US slow ed for

a second consecutive year a nd US-ow ned assets ab roa d decreased fo r

the first time since 2008, w hile fina ncial deriva tives shifted to net

outflow s in 2012 from net inflow s in 2011.7

Private demand has remained resilient this year, but across-the-

boa rd public spending cuts a re expected to ta ke a to ll of the recovery,

going forw ard . N ominal D PI decreased 4.4 per cent in the first q uarter,

in contra st to a n increase of 7.9 per cent in the fourth q uarter of 2012,

w hile real DPI decreased 5.3 per cent, in cont rast t o a n increase of 6.2

per cent (Chart G.2). In M arch, only 88,000 jobs w ere ad ded in a sharp

drop from the previous four mont hs, w hen hiring a veraged 220,000 per

month; ho w ever, the 165,000 jobs a dded in April have ta ken the

unemployment rate dow n to a four-year low of 7.5 per cent.

TABLE G.3

International Transactions

(US$ bil l i on)

20 12 :Q 1 20 12 :Q 2 20 12 :Q 3 20 12 :Q 4

Curr ent Account

Ba la nce on current account 133.8 118.4 112.4 110.4

Ba la nce on goods 194.6 186.0 174.2 180.6Ba la nce on services 46.0 48.3 49.3 52.2

Balance on goods and services 148.6 137.7 124.8 128.4

Ba la nce on income 47.5 52.1 46.6 52.4

Capital Account (US$ mill i on) 1.0 291.0 470.0 7198.0

Financial Account

N et f ina ncia l inflow s 166.1 106.9 68.3 58.4

Net US purchases of foreign securities 3.6 6.5 2.1 64.8

US direct investment abroa d 115.6 63.0 90.9 81.9

US officia l reserve assets 1.2 3.3 0.8 0.9

Net foreign purchases of US Treasury

securit ies 43.8 6.0 47.8 26.0

U.S. securities other than US Treasury

securit ies 3.7 43.1 47.6 68.5

Foreign direct investment in the US 23.1 49.5 41.8 60.3

Source: U.S. Bureau of Economic Analysis.

7 US-owned assets abroad decreased US$17.9 billion in 2012 following an

increase of US$483.7 billion in 2011. US government assets other than official

reserve assets decreased US$85.1 billion in 2012 following an increase of US$103.7

billion in 2011; the decrease resulted from a fa ll in central ba nk liquidity sw aps aft er

a sharp increase at the end of 2011. Net outflows of financial derivatives were

US$3.1 billion in 2012 af ter net inflow s of US$39.0 billion in 2011.

Private demand has

remained resilient

this year, but

across-the-board

public spending

cuts are expected to

take a toll of the

recovery, going

forward. Nominal

DPI decreased 4.4%

in the first quarter,

in contrast to an

increase of 7.9%

in the fourth

quarter of 2012.


7/37

105


Money

Finance&

J U N E . 2 0 1 3

The rate of credit grow th ha s been picking up gradua lly, a nd

ba nk lending conditions ha ve been easing slow ly from very tight levels.

While US private demand ha s been show ing strength a s credit a nd

housing markets are healing, a larger-than-expected fiscal adjustment is

projected to keep real G D P grow th a t a bout 2 per cent in 2013. The

budget sequester that has t aken effect since the beginning of M arch, if

not moderated, w ill continue to restra in economic activity in lat e 2013

and beyond.8An agreement reached in mid-April ensures the government

w ill remain funded fo r the rest o f the fiscal year, w hich ends in

September; the US debt ceiling will need to be raised again later this

year and fa ilure to d o so could be very da maging to t he globa l economy.

D eveloping a comprehensive medium-term deficit reduction fra mew ork

remains the top policy priority in the US, a ccording to t he IMF (Fiscal

Monitor, April 2013). D espite the progress ma de so fa r through

discretiona ry spending caps a nd modest ta x increases, a comprehensive

plan is needed that includes entitlement reform a nd ad ditiona l revenue-

raising measures to put public debt on a susta inable foot ing.

CHART G.2

US Productivity and Costs

(per cent)

*Includes wages, salaries, and employer costs for employee benefits for

Employees in Private Industry (qoq, sa)

**Non-farm Business Sector (qoq, saar).

Source: U.S. Bureau of Labor Statistics and U.S. Bureau of Economic Analysis.

8 Some of the effects of sequester were lessened by the passage of the

continuing resolution, which moved money around within departments to avoid

some of the harsher reductions.

An agreement

reached in mid-April

ensures the

government will

remain funded for

the rest of the fiscal

year, which ends in

September; the US

debt ceiling will

need to be raised

again later this year

and failure to do so

could be very

damaging to the

global economy.


8/37

106


Money

Finance&

J U N E . 2 0 1 3

Europe

Europe remains mired in recession; Euro a rea G D P cont racted

by 0.6 per cent in the fourth quarter of 2012, a fter having declined by

0.1 per cent in the third (Chart G.3). C apital formation (G FCF)

contra cted further in the fourth q uarter by 1.1 per cent (qoq);

investment has thus fa llen fo r seven consecutive qua rters, w ith a

cumulat ive fa ll of 6 per cent since the first q uarter of 2011. In the

CHART G.3

EU Growth and Components

(qoq percentage changes in chain-linked volumes)

Source: Eurosta t.

Europe remains

mired in recession;

investment has

fallen for seven

consecutive

quarters, with a

cumulative fall of

6% since the first

quarter of 2011.


9/37

107


Money

Finance&

J U N E . 2 0 1 3

fourth q uarter of 2012, both non-construction a nd construction

investment, each a ccounting for a round ha lf the tota l investment, fell

on a q uarterly basis.

C apita l format ion is expected to contra ct further in the short

term as a result of the continued w eakness in overall economic activity.

Production of capital goods, w hich is an indicato r of future non-

construction investment, d eclined in Ja nuary 2013, b y 1.2 per cent

(mom) (Table G .4). Industrial output in Ja nuary sto od a t the same level

as in the fourth q uarter of 2012, a relative improvement on the

q uarterly decline of 2.1 per cent recorded in the final q uarter of 2012.9

The manufa cturing PMI for April, w hich remains w ell below the

expansiona ry/contra ctionary threshold of 50, signals further w eakness

in Euro a rea economic activity.10

The economic and financial crisis continues to weigh on Euro

area la bour ma rkets and the unemployment rate ha s cont inued to rise

even a fter reaching unprecedented levels. Annua l labo ur productivity

grow th in the Euro area turned negative in the fourth q uarter of 2012,

dropping by 0.2 per cent; on a verage, the level of la bour productivity

remained a lmost unchanged in 2012, af ter exhibiting an a nnual grow th

ra te of 1.2 per cent in 2011. The grow th in compensa tion per employee

decelerated to 1.3 per cent in the fourth quarter, from 1.8 per cent in

the third. In 2012 as a w hole, compensation per employee grew by 1.7

per cent, o n a verage, a nd remained clearly b elow the rate of 2.1 per

cent observed in 2011. Reflecting, inter alia, an upwa rd impact of

low er productivity grow th, unit labour cost grow th stood at 1.4 per

cent in the fourth q uarter of 2012, compared w ith 1.7 per cent in the

third q uarter. O verall in 2012, unit lab our cost grow th rose to 1.6 per

cent, f rom 0.9 per cent in 2011, mainly on a ccount of la bour

productivity rising at a significantly slow er pace tha n compensat ion per

employee. Lo oking a head, w age pressures should remain conta ined,

given the w eak labo ur ma rket cond itions. Private consumption declined

by 0.4 per cent (q oq ) in the fourth q uarter of 2012, thereby ha ving

declined for five consecutive quarters. Survey data on the retail sector

suggest tha t the consumption of reta il goods w eakened further in the

first q uarter o f 2013. The PM I fo r the retail sector expectedly remains

in the contra ctionary territory of below 50 and in fact declined from

45.2 in the fourth q uarter of 2012 to 44.7 in the first q uarter of 2013.

Price pressures are expected to rema in cont a ined over the medium term

in an environment of w eak economic activity in the Euro area.

Euro area export and import o f good s strengthened somewha t

at the start o f 2013, rising in Janua ry by 2.2 per cent a nd 2.9 per cent

9 Industrial production, excluding construction, declined by 0.4 per cent

(mom) in Janua ry, follow ing a rise of 0.9 per cent in the previous month.10 The Markit Eurozone PMI Composite Output Index was unchanged on

Marchs reading of 46.5 in April, according to a flash estimate. The sub-50 reading

indicated a drop in activity for the nineteenth time in the past 20 months.

The economic and

financial crisis

continues to weigh

on Euro area labour

markets and the

unemployment

rate has continued

to rise even

after reaching

unprecedented

levels. Annual

labour productivity

growth in the Euro

area turned negative

in the fourthquarter of 2012,

dropping by 0.2%.


10/37

108


Money

Finance&

J U N E . 2 0 1 3

TABLE G.4

European Economic Indicators

O ct -12 N ov-12 D ec-12 Jan-13 Feb-13 M ar-13 YoY

Change

Euro Area G D P 0.6 0.2 1.0

EA(17) Industria l Production 0.7 0.7 0.7 0.6 0.3 1.0 1.7

Capital G oods 1.9 0.2 0.8 1.7 0.9 1.2 3.1I ntermediate Goods 0.7 0.9 0.2 0.1 0.2 0.1 4.6

Consumer D urables 1.7 1.3 1.9 1.8 0.7 1.9 2.2

C onstruction Sector 0.3 1.0 0.2 2.0 0.3 1.7 7.9

U nem plo y men t 11. 7 11. 8 11. 8 12. 0 12. 0 12. 1

C PI Inf la tio n 0.2 0. 2 0.4 1. 0 0.4 1.2 1.7

PPI Infla t ion 0.1 0.2 0.2 0.4 0.2 0.2 0.7

Capital G oods 0.1 0.0 0.0 0.2 0.2 0.0 0.7


Energy 0.4 0.5 0.6 0.9 0.4 0.6 0.0

Extra -EA17 Tra de Ba lance (sa , bln.) 6.8 10.4 10.1 9.2 12.7 18.7

Expor ts 1.2 1.0 2.1 2.1 0.2 2.8

Impor ts 0.8 1.4 2.1 3.0 2.2 1.0

Policy R a te 0.75 0.75 0.75 0.75 0.75 0.75 0.50* *

EU27 G D P 0.5 0.1 0.7

Industria l Production 0.5 0.6 0.6 0.5 0.3 0.9 1.1

Capital G oods 1.5 0.2 0.8 1.4 0.6 1.2 2.1

I ntermediate Goods 0.6 0.9 0.3 0.2 0.1 0.2 4.0



U nem plo y men t 10. 7 10. 7 10. 7 10. 9 10. 9 10. 9

C PI Inf la tio n 0.3 0. 1 0.3 0. 8 0.4 0.9 1.9

PPI Infla t ion 0.0 0.2 0.2 0.4 0.4 0.2 0.7

Capital G oods 0.1 0.0 0.0 0.2 0.2 0.0 0.8


Energy 0.5 0.9 0.9 0.9 1.3 0.6 0.5

Extra -EU27 Trade Ba la nce (sa , bln.) 8.3 3.2 4.7 1.9 1.6 8.1

Expor ts 1.3 1.1 2.1 3.3 0.1 3.4

Impor ts 1.7 2.1 1.1 1.3 2.4 1.1

Germany G D P 0.7 0.1 0.3


C onst ruc tion Sec tor 1 .2 0 .9 1.8 3.1 1 .6 3 .1 1 0.8

U nemplo yment 5.4 5.4 5.4 5.4 5.4 5.4

C PI Inf la tio n 0.1 0. 2 0.9 0. 7 0.8 0.4 1.8

P PI Inf la t io n 0. 0 0. 1 0. 3 0. 8 0. 1 0. 2 0.4France G D P 0.2 0.2 0.4


U nem plo y men t 10. 4 10. 5 10. 6 10. 8 10. 9 11. 0

C PI Inf la tio n 0.2 0. 2 0.4 0. 6 0.3 0.8 1.1

PPI Infla t ion 0.5 0.2 0.1 0.6 0.5 0.0 1.9

Italy G D P 0.9 0.5 2.3


U nem plo y men t 11. 2 11. 2 11. 2 11. 7 11. 5 11. 5

(conti nued on th e next page)


11/37

109


Money

Finance&

J U N E . 2 0 1 3

CPI Inflation 0.3 0.3 0.3 2.0 0.2 2.3 1.8

PPI Infla t ion 0.7 0.3 0.3 0.6 0.2 0.0 0.0

Spain G D P 0.8 1.9



U n em plo y men t 26. 0 26. 2 26. 2 26. 4 26. 5 26. 7

C PI Inf la tio n 0.5 0. 2 0.0 1. 8 0.1 1.9 2.6

PPI Infla tion 0.2 0.5 0.0 1.2 0.2 1.0 0.5

Greece G D P *


U nem plo ym en t 26. 1 26. 3 25. 9 26. 7 27. 0

C P I In fla t io n 0. 7 0. 3 0. 3 1. 4 1. 6 2. 5 0. 2

PPI Infla tion 1.0 0.9 0.2 0.7 1.7 1.1 1.3

United Kingdom G D P 0.3 0.3 0.6

In dust ria l P ro duct io n 0. 8 0. 1 1. 1 1. 4 0. 9 0. 7 0 .0


Unemployment 7.7 7.7 7.7 7.8 7.7C PI Infla t ion 0.5 0.2 0.5 0.5 0.7 0.3 2.8

P PI Infla tio n 0.4 0. 1 0. 3 0.7 1.7 0.2 0.6

H ouse Price Infla tion 0.6 0.0 0.0 0.5 0.2 0.0

Foreign Tra de (sa , billion) 9.3 9.1 8.7 8.2 9.2 9.1

M oneta ry Policy 0.5 0.5 0.5 0.5 0.5 0.5 0.5

Hungary G D P 0.9 2.8

I nd ust ria l P rod uc tion 3 .6 0.6 1.5 3.1 0.1 0.4 0 .6

U nem plo ym en t 10. 9 10. 9 11. 1 11. 2 11. 2

C PI Inf la tio n 0.2 0. 1 0.0 0.2 0.6 0.3 2.3

PPI Infla t ion 0.1 0.6 0.1 0.2 1.2 0.1 0.7

M oneta ry Policy 6.50 6.25 6.00/5.75 5.75 5.50 5.25 4.75**

Poland G D P 0.1 0.7

In dust ria l P ro duct io n 1. 4 0. 9 1. 4 1. 3 0. 9 0. 7 1. 5

U n em plo y men t 10. 3 10. 4 10. 4 10. 6 10. 6 10. 7

C PI Infla tio n 0.2 0.1 0.0 0.1 0.0 0.3 1.0

P PI In fla t io n 0. 5 0. 3 0. 4 0. 1 0. 3 0. 5 0. 5

M oneta ry Policy 4.75 4.50 4.25 4.00 3.75 3.25 3.00**

Romania G D P 0.4 0.5 1.3


U nemplo yment 6.8 6.7 6.7 6.6 6.7 6.7

C PI Inf la tio n 0.2 0. 1 0.3 0.9 0.4 0.1 4.4

PPI Infla tion 0.6 0.2 0.0 2.0 0.4 0.2 5.9

M oneta ry Policy 5.25 5.25 5.25 5.25 5.25 5.25

Russia G D P* 2.1

Industria l Production* 1.8 1.9 1.4 0.8 2.1 2.6

Unemployment 5.3 5.4 5.3 6.0 5.8 5.7

C PI Infla tion* 6.5 6.5 6.6 7.1 7.3 7.0

Foreign Trade (US$ billion) 14.9 15.3 16.5 17.7 15.9 16.1

M oneta ry Policy 8.25 8.25 8.25 8.25 8.25 8.25

Indicators are mostly percentage changes from the preceding month.

*Indicates yoy percentage changes.

**Indicates latest policy rate.

Source:Eurostat, National statistical agencies and central banks.

O ct -12 N ov-12 D ec-12 Jan-13 Feb-13 M ar-13 YoY

Change


12/37

110


Money

Finance&

J U N E . 2 0 1 3

(mom), respectively. Euro a rea tra de grow th remains w eak and the

outlook uncerta in as survey indicato rs suggest tha t do mestic and

foreign demand in the Euro area remain fra gile. N ew export o rders

index in the Euro a rea PM I stood at 51.7 in February, thus exceeding

the expansion threshold o f 50, but in M arch it declined aga in to 48.7.

The European C ommissions survey on export o rder bo ok levels also

pointed to a deteriora tion in Ma rch compa red with February.

The government deficit of bot h the Euro a rea a nd t he EU27

decreased in a bsolute terms in 2012, compared w ith 2011, w hile the

government debt for b oth groups of countries rose (Chart G.4). In the

Euro area, the government deficit to G D P ra tio decreased from 4.2 per

cent in 2011 to 3.7 per cent in 2012, a nd in the EU27, from 4.4 per cent

to 4.0 per cent. In the Euro area, the government debt to G D P rat io

increased from 87.3 per cent at the end of 2011 to 90.6 per cent a t t he

end of 2012, a nd in the EU27, from 82.5 per cent t o 85.3 per cent.

Fourteen M ember Stat es had government d ebt ra tios higher tha n 60 per

cent of G D P, including G reece (156.9 per cent), It aly (127.0 per cent),

Portuga l (123.6 per cent), Ireland (117.6 per cent), Fra nce (90.2 per

cent), the UK (90.0 per cent), C yprus (85.8 per cent), Spa in (84.2 per

cent), G ermany (81.9 per cent), a nd H ungary (79.2 per cent).

G ermany, Europes most f iscally secure economy, ma y contra ct

aga in after an expected recovery in the first qua rter. G erma n G D P

contra cted 0.6 per cent in the last q uarter of 2012 and high-frequency

CHART G.4

EU Government Deficit and Debt

(as percentage of GDP)

Pre-crisis refers to 2007.

Source: Eurosta t.

Debt

DeficitIn the Euro area, the

government deficit

to GDP ratio

decreased from

4.2% in 2011 to

3.7% in 2012, and

the government debt

to GDP ratio

increased from

87.3% at the end of

2011 to 90.6% at

the end of 2012.


13/37

111


Money

Finance&

J U N E . 2 0 1 3

indicator s suggest tha t investment started to contra ct before the end of

2012. G ermanys export-driven econo my is sensitive to business

fluctuations a mong its key trad ing partners and the adverse effect on

G D P from the disruption in Europe comes through tra de and private

investment. Apart f rom the fact tha t some of the key tra ding partners

are already in a recession, the still-elevated euro may further hurt

G erman exports. On the other hand , G ermanys net exports are

expected to be sta ble because of a broa d distribution of glob al tra ding

part ners. Low consumer confidence points to do mestic consumption

slow ing dow n as w ell. G erman composite PMI, measuring grow th in

bot h ma nufacturing a nd services, shrank fo r the first time in five

months in April. The (M arkit Flash) manufa cturing PM I also fell to

47.9 in April from 49 in M arch, reaching a f our-month low and

signalling further output contra ction.

In France, economic activity remains fragile; G D P contra cted

0.3 per cent (q oq ) in the last q uarter of 2012, follow ing a 0.1 per cent

expansion in the previous qua rter, a s w eaker fixed investment a nd

exports w eighed on grow th. The unemployment ra te climbed even

higher to 10.2 per cent in the three months to D ecember from 9.9 per

cent in t he previous qua rter; w eak priva te and public sector hiring

could continue to push up the unemployment ra te in the coming

q uarters. Frances fiscal deficit w idened to 27.1 billion this Februa ry

from 24.2 billion in Februa ry 2012; The French government has

acknow ledged tha t it w ill not meet its fiscal deficit reduction ta rget of 3

per cent of G D P by the end of this year a nd is aw aiting the European

C ommissions response to the request for a one-year extension.

Ita lys G D P contra cted 2.8 per cent (yoy) in the fourth q uarter

af ter a 2.4 per cent drop in the previous one. Though external t rad e

contributed to grow th, domestic demand fell. D epressed domestic

consumption, a rising jobless rate, tight credit, and uncerta inty a fter the

general elections w ill weigh on t he economy in coming q uarters. With

no fiscal or monetary space available to revive growth Italy will

continue to struggle. The format ion of a new Ita lian coalition

government in end-April has just b roken a tw o-month political

sta lema te fro m inconclusive elections in the recession-mired count ry.

The new government ha s indica ted its resolve to restructure the sta te

budget to support compa nies and low -earners, w hile cutting some

unprod uctive public spending to create resources needed to reduce

taxes.

Spain slashed economic forecasts and also said it w ould ta ke

tw o years longer than promised to reduce the fiscal deficit to the

desired level, as even the harsh austerity measures had failed to bring

finances under cont rol.11The country s deficit should fa ll to 6.3 per cent

11 Spains economy ministry warned that the countrys economy will

contract 1.3 per cent in 2013, instead of 0.5 per cent as originally predicted.

German composite

PMI, measuring

growth in both

manufacturing and

services, shrank for

the first time in five

months in April. The

manufacturing PMI

also fell to 47.9 in

April from 49 in

March, reaching a

four-month low and

signalling further

output contraction.


14/37

112


Money

Finance&

J U N E . 2 0 1 3

of G D P for t his year, more tha n 3 per cent higher than the ta rget set by

the European Union, t hough much low er than t he 2012 figure of 10.6

per cent. Slashing spending a nd raising ta xes have proved to be less

effective at reducing the deficit tha n initially thought, a nd perhaps

counter-prod uctive. Unemployment, w hich reached 27.2 per cent in the

first q uarter, is not expected to come dow n even to 25 per cent in the

next tw o years.

C yprus is the latest casualty in the Euro a rea debt crisis.

C ypriot b anks w ere hard hit by the write-dow n of their holdings of

G reek sovereign debt resulting from the G reek ba ilout a greement. An

agreement ha s been fina lly reached on a rescue progra mme for C yprus;

the final plan, a greed on in end-M arch, includes a ba ilout fund of

10 billion (including 1 billion supplied by the IM F) to support

government financing needs in exchange for an IMF-supervised reform

progra mme and a complete restructuring of the tw o largest ba nks. The

government ha s agreed to a t ax on bank d eposits as part o f the EU-led

ba ilout; this has ra ised certain concerns ab out d eposit flight from Euro

area b anks; how ever, no such signs of stress have show n up

immediately. 12

The Euro area is expected to continue to con tra ct in 2013

because of unrelenting fiscal ad justment, f inancial fra gmentation , a nd

ongoing ba lance sheet a djustments in t he periphery economies. Low er

sovereign spread s and improved ba nk liquidity have yet to tra nslate

into either improved privat e sector borro w ing conditions or stro nger

economic activity. The outlook f or Europe deteriorat ed further as the

sovereign debt crisis w as ba ck in the spotlight aft er the C ypriot ba ilout

and elections in Italy. In lat e February 2013, the C ouncil of the

European Union, the European P arliament a nd the European

C ommission reached an a greement on tw o EU regulat ions (the two-

pack), w hich aim to strengthen further the existing economic

governance framew ork fo r Euro a rea countries. The regulations a re

aimed at (i) monito ring and a ssessing dra ft budgetary plans and

ensuring the correction o f excessive deficit of t he Member Sta tes in the

Euro a rea; a nd (ii) strengthening the economic and budgetary

surveillance of Member States experiencing or threatened with serious

difficulties w ith respect t o t heir fina ncial stab ility in the Euro area.

Follow ing formal approva l by the EU Co uncil and the European

Pa rliament, the regulations a re expected to come into force at the end

of M ay 2013 and are expected to help prevent the build-up of

significant fiscal and economic imba lances, ensuring their early

correction a nd ma intaining confidence of the financial ma rkets.

12 Cypriot authorities also agreed that all bondholders, investors and

savers w ith over 100,000 in count rys tw o biggest banks would lose up to 60 per

cent of their deposits under the bailouts terms. Bank deposits dropped 3.9 per cent

from February to 44.6 billion euros, the tenth straight monthly decline.

An agreement has

been finally reached

on a rescue

programme for

Cyprus; the final

plan, agreed on in

end-March, includes

a bailout fund to

support government

financing needs in

exchange for an

IMF-supervised

reform programme

and a complete

restructuring of thetwo largest banks.


15/37

113


Money

Finance&

J U N E . 2 0 1 3

Responding to a drop in Euro a rea inflation w ell below its target level

and rising unemployment, the ECB reduced interest ra tes for the first

time in 10 months in beginning M ay. The ECB low ered its ma in rate by

a q uarter percenta ge point to a record low 0.50 per cent a nd indicated

the possibility of further policy act ion to support the recession-hit

economy.

The UK avoided slipping into triple-dip recession as G D P rose

0.3 per cent (qo q ) during the first qua rter of 2013, follow ing a

contra ction of 0.3 per cent in the fourth q uarter of 2012. The higher

tha n expected grow th in output w as driven by the service sector, w hich

accounts for a large portion of the UK economy, together with a

rebound in mining. The construction sector, long a w eak spot in t he UK

economy, continued to w eigh on grow th. H ousehold spending is

expected to remain the main dra g through 2013; unemployment w as

unchanged in M arch, w hile job security concerns continue to remain

high for w orkers in a number of key sectors. D omestic demand in the

UK cont inues to be constrained by tight credit conditions, ongo ing

private and public sector bala nce sheet adjustment a s w ell as w eak

household real income dynamics, w hile the contribution o f exports to

grow th is likely to be limited.

Among other EU27 economies, in Pola nd, industrial output

dropped in February by 2.4 per cent year o n year, as vehicle production

shrank by 30 per cent, while several other sectors, including

construction and energy, a lso contra cted. In the Czech Republic and

H ungary, industrial production f ell by 4.1 per cent a nd 1.4 per cent

(yoy), respectively. La bour markets in most o f the region a re slow to

recover; in Po land, the unemployment ra te increased further in

Februa ry, t o 14.4 per cent. Subdued domestic demand further slow ed

dow n inflation in these countries; a nnual inflat ion in February subsided

to 2.8 per cent in H ungary a nd 1.3 per cent in Poland . In both

countries, the central banks cont inued their cycle of mo netary easing,

reducing the corresponding policy ra tes in M arch by 25 and 50 ba sis

points, respectively.

Asia

Economic activity stab ilised in Asia b y t he beginning of 2013

(Chart G.5and Table G .5). Exports have recently picked up across the

region, reflecting firmer demand in China a nd the US. A combinat ion

of accommodative monetary policies, rapid credit growth, particularly

in some members of the ASEAN, a nd con tinued ro bust capita l inflow s,

which last year pushed stock prices up by 10 to 20 per cent across most

of the region, has helped economic recovery. According to the ADB

(ADO, April 2013), leading Asian economies are now settling into a

pattern of mo re moderate and sustainable grow th, fo unded o n new

opportunities nearer to home, w hich include domestic consumption and

intra-regional tra de. Developing Asias G D P is now forecast by the

ADB t o expand by 6.6 per cent in 2013, follow ing the slow er 6.1 per

Domestic demand in

the UK continues to

be constrained by

tight credit

conditions, ongoing

private and public

sector balance sheet

adjustment as well

as weak household

real income

dynamics, while the

contribution of

exports to growth is

likely to be limited.


16/37

114


Money

Finance&

J U N E . 2 0 1 3

cent pa ce in 2012, w hile inflation is expected to firm up from 3.7 per

cent in 2012 to 4.0 per cent in 2013.

In Japan, economic activity stabilised at the end of 2012; GDP

grow th in the last qua rter of 2012 w as revised upw ard s from 0.1 per

cent in the first release to 0.0 per cent (qoq, sa or 0.2 per cent

annualised), largely a s a result o f a smaller negative cont ribution from

priva te non-residential investment.13M ost recent economic da ta

releases seem to point to a gra dua l pickup in grow th in Ja pan o ver the

course of 2013. Ja pans monthly t rad e deficit na rrow ed to 922 billion

in M arch, from Februa rys 1.1 trillion short fa ll as exports rose for a

fifth straight month, reflecting a weaker yen and improved global

demand . Import s have been ga ining strongly, suggesting the economy is

grad ually coming out of recession. Private consumption remained firm

in Ja nuary, w hile consumer confidence improved further in M arch. 14

C PI inflation, how ever, remained in negative territory a t the start of

2013, w ith the annua l pace of d ecline accelerating to 0.5 per cent in

M arch. H ow ever, prices rose on a month-ago basis and the forw ard-

looking numbers improved, suggesting tha t M arch w as proba bly the

bot tom of t he deflat ionary cycle for t he CPI series. In its latest

monetary policy meeting in early-April 2013, the Ba nk of Ja pan

CHART G.5

Asian EconomiesGDP Growth, Inflation and Policy Rates

(yoy percentage changes)

Inflation and Policy rates are for April 2013.

Source: National statistical agencies and central banks.

13 Capital investment recorded a much smaller fall of 1.5 per cent (qoq)

compa red wit h the initial estima te of 2.6 per cent.14 Japanese consumer confidence continued to improve in March, up from

44.2 in the previous month to 44.8. The employm ent indicat or a nd w illingness to

buy durable goods improved over the month.

Most recent

economic data

releases seem to

point to a gradual

pickup in growth in

J apan over the

course of 2013.

J apans monthly

trade deficit

narrowed to 922

billion in March,

from Februarys

1.1 trillion shortfall

as exports rose for a

fifth straight month,reflecting a weaker

yen and improved

global demand.


17/37

115


Money

Finance&

J U N E . 2 0 1 3

TABLE G.5

Asian Economic Indicators

O ct -12 N ov-12 D ec-12 Jan-13 Feb-13 M ar-13

Ja pa n Industria l Production* 1.6 1.4 2.4 0.3 0.6 0.9

C onsumption Expenditure* 1.1 0.9 0.5 1.7 2.7 1.3

M achinery O rders* 0.8 3.8 1.3 7.5 4.2 14.2

Value of Public Works C ontracted 28.2 6.2 15.6 6.7 4.8 11.7

Unemployment R a te 4.2 4.2 4.3 4.2 4.3 4.1

C PI Infla tion 1.1 1.1 0.7 0.4 0.1 0.5

Rea l Exports* 2.3 0.2 0.4 2.5 2.4 2.8

Rea l Imports* 9.6 2.3 0.3 1.6 1.3 0.1

Policy R a te 0.00.1 0.00.1 0.00.1 0.00.1 0.00.1 0.00.1

C hina Industria l Production 9.6 10.1 10.3 9.9 9.9 8.9

Investments in Fixed Assets 20.7 20.7 20.6 21.2 21.2 20.9

C PI Infla tion 1.7 2.0 2.5 2.0 3.2 2.1

Trade Ba lance (US$ billion) 31.9 19.6 31.6 29.1 15.2 8.8

H ong Kong Industria l Production 1.3

Priva te C onsumption 2.8 7.0

C PI Infla tion 3.8 3.7 3.7 3.0 4.4 3.6

Tra de Ba la nce (H K$ billion) 42.7 44.1 48.0 27.5 34.0 49.1

M a la ysia Industria l Production 5.8 7.5 3.7 4.6 4.5 0.2

Priva te C onsumption 6.2 7.5

C PI Infla tion 1.4 1.3 1.2 1.3 1.5 1.6

Trade Ba lance (Ringgit billion) 9.6 9.3 8.2 3.3 8.2 5.1

Singa pore Industria l Production 5.0 2.8 1.6 0.2 16.4 3.8

C PI Infla tion 4.0 3.6 4.3 3.9 4.9 3.5

Exports (Non-oil) 7.9 2.6 16.3 0.4 30.6 4.8

South Korea Industria l Production 0.8 2.9 1.2 8.0 9.7 3.0

Priva te C onsumption 2.8

C PI Infla tion 2.1 1.6 1.4 1.5 1.4 1.3


Policy R a te 2.75 2.75 2.75 2.75 2.75 2.50

Tha ila nd Industria l Production 36.0 82.3 23.0 10.2 1.2 0.5

Priva te C onsumption 7.6 11.4 3.5 6.6 3.3 1.4

C PI Infla tion 3.3 2.7 3.6 3.4 3.2 2.7


Policy R a te 2.75 2.75 2.75 2.75 2.75 2.75

Indicators are mostly yoy percentage changes.

*Indicates mom percentage changes.

Source: Nat ional statistical agencies and central banks.

announced the introduction of Q uantitative and Q ualitative M onetary

Easing, w ith the aim of a chieving the price stab ility t arget of a 2 per

cent (yoy) rate of change in the C PI a t t he earliest possible timewithin

a t ime horizon of a bout tw o years. In order to raise inflation

expectat ions by boo sting asset prices, the BO J w ill greatly increase its

holdings of J apa nese G overnment b onds (JG B) and other securities.

C orrespondingly, the BOJ d ecided to sw itch the operation ta rget from


18/37

116


Money

Finance&

J U N E . 2 0 1 3

the overnight call rate to the monetary b ase, w hich it plans to double

by t he end o f 2014.15

C hinas grow th is set to accelerate slightly in 2013, reflecting

continued ro bust domestic demand in both consumption and investment

and renew ed external demand. R etail spending accelerat ed to 12.6 per

cent (yoy) in M arch, follow ing the 12.3 per cent expansion in the

opening tw o months of the year; a recovery in the housing ma rket is

spurring sales of household items such as appliances and f urniture.

After a strong Ja nuary a nd February, investment reverted in March to

the pace of the final mont hs of 2012. R eflecting slow ing investment,

industrial production grew 8.9 per cent in the year to M arch, slow er

tha n the combined Ja nuary-February ra te of 9.9 per cent. C hina

reported a US$900 million t rad e deficit fo r M arch a s export s

decelerat ed a fter several months of ab ove-trend grow th, w hile imports

rebounded. The HSBC PMI for April fell to 50.5 in April, closer to

February s reading of 50.4 from 51.6 in M arch; the sub-index

measuring new export orders fell to 48.6 in April from 50.5 in M arch,

reflecting a possible weakening of global demand in t he second quarter

of 2013. The recent slow dow n in C hinas output and investment d espite

rapid credit grow th ha s raised concerns that the loose credit policy is

not having the desired effect of stoking grow th a nd could instead

exacerbate property a nd inflationary risks.16In China , the use of more

market-ba sed fina ncial instruments means that a bout ha lf of financial

intermediat ion now ta kes place outside tra ditiona l banking channels in

less-w ell-supervised pa rts o f the financial system, ra ising concerns

about growing risks.

In Thailand , grow th is expected to return to a mo re sustainab le

pace aft er a sharp recovery driven by public reconstruction and o ther

flood-related investments in 2012. Thailand s fourth q uarter grow th

w as at 18.9 per cent (yoy), boosted by low ba se effects from the

devasta ting floods in lat e 2011. Thailand s economy should continue to

expand a t a sustaina ble pace, supported by robust household a nd

investment spending. The governments minimum w age law s and other

measures a re supporting private consumption, w hile infra structure

development a nd stead y fo reign investment are driving greater capital

accumulation. Export s have also improved w ith stronger demand fo r

15 Under the new quantitative easing, the BOJ will increase the monetarybase at the pace of 6070 trillion yen per year, including net increases of about 50

trillion yen wo rth of JG Bs per year. The qua litative easing means the BOJ w ill

expand the purchase target t o JG Bs w ith all ma turities, including 40-year bond s.

Co nsequently, the a verage remaining maturity o f the BO Js JGB purchases will

increase to seven years from the current level of less than three years. It will also

increase holdings of exchange-trade funds and Japan real estate investment trusts,

with a view to lowering the risk premia of asset prices.16 TSF rose to a record high and jumped by 160.6 per cent yoy in January

and by 58.2 per cent yoy in the first quarter. New home prices rose for the tenth

consecutive month as demand increased ahead of property curbs by local

governments; in Beijing and Shanghai, authorities announced a series of measures to

cool the resurgent property market, including higher down payments.

The recent

slowdown in

Chinas output and

investment despite

rapid credit growth

has raised concerns

that the loose credit

policy is not having

the desired effect of

stoking growth and

could instead

exacerbate

property and

inflationary risks.


19/37

117


Money

Finance&

J U N E . 2 0 1 3

auto mobiles and consumer electronic products. In Korea to o, stro ng

demand for sma rtphone and ta blet devices continues to support exports;

improved export s should help spur privat e investment and help grow th

rebound. After subdued ga ins through the second ha lf of 2012, Koreas

grow th picked up pace in the opening months of 2013; G D P grew 0.9

per cent in the first q uarter, a fter the fourth q uarters 0.4 per cent gain.

As Koreas government is plann ing to institute a fiscal stimulus to prop

up feeble domestic demand and the flagging housing market, the Bank

of Korea, d espite low inflation, left its key policy rat e on hold in April

at 2.75 per cent for a sixth straight month . The Singapore economy

expanded by 1.3 per cent in 2012, do w n from 5.2 per cent in 2011,

dra gged low er by cont inuing challenges in the globa l economy.

D emand slow ed drama tically for export-dependent sectors, part icularly

manufacturing, a nd w holesale and retail tra de. D omestic demand

oriented sectors a re expected to be the primary drivers of gro w th in the

near future as ma jor infrastructure projects and residential construction

could generat e positive spillovers for o ther secto rs. Such trends in

regiona l domestic demand could be beneficial for the entire region and

have positive spillover effects fo r Ind ia too .

Lati n America

O utput grow th moderated somew hat in Latin America a nd the

C aribb ean during 2012 (Chart G.6 and Table G .6), b ut do mestic

demand remained strong. C apital inflows ha ve been strong, a nd the

CHART G.6

Latin American EconomiesGDP Growth, Inflation and Policy Rates

(yoy percentage changes)

Inflation and Policy rates are the latest available as of end-December 2012.

Source: National statistical agencies and central banks.

As Koreas

government is

planning to institute

a fiscal stimulus to

prop up feeble

domestic demand

and the flagging

housing market, the

Bank of Korea,

despite low

inflation, left its key

policy rate on hold

in April at 2.75%

for a sixth

straight month.


20/37

118


Money

Finance&

J U N E . 2 0 1 3

pickup in portfolio flow s in the second half o f 2012 pushed up equity

prices and local currencies. Bank credit grow th a nd bond issuance

remained strong in many countries. H ow ever, a s long as the repair of

the Euro a rea fina ncial sector is incomplete, subsidiaries of European

ba nks in the Lat in American region remain vulnerab le to potential

deleveraging. M eanw hile, the accelerat ion of demand in C hina should

help support commo dity prices and the regions exports. The pace of

grow th, how ever, w ill be uneven a cross the region a s export s in the

most t rad e-intensive economies remain af fected by erratic globa l tra de

dyna mics and appreciating currencies.

In Bra zil, the regions largest economy, d ecelerat ion w as

part icularly prono unced a s the large policy stimulus ha s so far fa iled to

spur private investment. G D P expand ed by 0.9 per cent in 2012, but t he

economy is now building up steam, d riven by domestic consumption

and a mo dest recovery in industrial production. Employment conditions

continue to improve with steady real wage gains and declining

unemployment. The Brazilian banking sector remains strong; the

current 16 per cent plus capitalisation more than covers the Basel III

TABLE G.6

Latin American Economic Indicators

O ct -12 N ov-12 D ec-12 Jan-13 Feb-13 M ar-13

Mexico Industria l Production 3.4 2.9 1.1 1.8 1.0 4.9

EAI 4.3 3.9 1.4 3.5 0.5 1.8

Unemployment 5.0 5.1 4.5 5.4 4.9 4.5

C PI Infla tion 4.6 4.2 3.6 3.3 3.6 4.3

Tra de Ba lance (US$ million) 1645.6 1270.6 961.7 2866.4 46.1 1706.0

Policy R a te 4.50 4.50 4.50 4.50 4.50 4.00

Brazil Industria l Production 2.6 1.1 3.5 5.5 3.2 3.3

EAI 5.0 2.7 1.2 3.8 0.4 1.2

Unemployment 5.3 4.9 4.6 5.4 5.6 5.7

C PI Infla tion 5.5 5.5 5.8 6.2 6.3 6.6

Tra de Ba lance (US$ billion) 1.66 0.19 2.25 4.04 1.28 0.16

Policy R a te 7.25 7.25 7.25 7.25 7.25 7.25

Chile Industria l Production 8.7 1.0 0.3 4.3 1.2 3.0

EAI 6.3 5.5 5.2 6.0 3.4 3.0

Unemployment 6.6 6.2 6.1 6 6.2 6.2

C PI Infla tion 2.9 2.1 1.5 1.6 1.3 1.5


Policy R a te 5.00 5.00 5.00 5.00 5.00 5.00

Argentina Industria l Production 2.2 1.4 3.4 0.2 4.4 0.2

EAI 3.1 1.9 1.2 3.3 2.4

Unemployment 6.9

C PI Infla tion 10.2 10.6 10.8 11.1 10.8 10.6


Indicators are mostly yoy percentage changes.

Source:National statistical agencies and central banks.

In Brazil,

deceleration was

particularly

pronounced as

the large policy

stimulus has so far

failed to spur

private investment.


21/37

119


Money

Finance&

J U N E . 2 0 1 3

requirements. Asset q uality and provisioning ha ve also b een improving

over the past few years, a s reflected by the 3.7 per cent non-performing

loan ra tio. The grow th outloo k for Ch ina, Bra zils largest export

destina tion w ith 17 per cent ma rket share at present, is a ma jor facto r

af fecting the countrys tra de outlook.

In Mexico, grow th remains strong w ith domestic demand

underpinned by susta ined business and consumer confidence and

resilient exports. H igh capa city utilisat ion suggests tha t t he recovery in

investment w ill continue, and sustained employment grow th a nd

favo urable credit conditions should support consumption. M exicos

prospects remain closely linked to the US business cycle w ith a positive

grow th outlook reinforced by the implementation o f structural reforms

w ithin the country. The Centra l Ba nk of M exico reduced its reference

interest rat e by 50 ba sis points to 4.0 per cent in Ma rch, mostly in a n

at tempt to ta ckle higher capita l inflow s. Recent surges in portfo lio

inflow s into the economy are generat ing increasing concerns ab out

potential negative effects on t he moneta ry sta nce and financial sta bility.

The Argentine economy is decelera ting; t he abrupt unw inding of

multiple subsidy schemes, disruptive exchange rate controls and the

w idespread imposition o f import restrictions will all continue to

constrain grow th in the months to come.

C hile recorded a strong 5.6 per cent grow th ra te in 2012

fuelled by healthy grow th in both consumption and investment, w ith

mining and energy projects having boosted investment. While the

strength o f the Latin American region bod es w ell for globa l recovery,

the regions concern over excessive capita l inflow s may help divert

foreign capital to Asian emerging economies including India.

Indian Financial MarketsG loba l economic recovery remains sluggish a s fiscal

ad justments continue to w eigh on grow th in advanced economies w hile

w eak external demand a nd domestic structural bot tlenecks restrain

investment in some of the major emerging economies. D ragged low er

by the continuing slack in external demand a nd problems associated

w ith domestic investment, India s G D P grow th decelerat ed further to

4.5 per cent in the third quarter of 201213, the low est recorded since

the fourth q uarter of 200809. Softening of globa l commodity a nd input

prices combined w ith a d ip in domestic demand ha s led to low er

inflation ra tes in recent months; th is has allow ed the RBI some space

for monetary easing. Despite weak global growth and fiscal austerity

measures imposed in the US and in the Euro a rea, internationa l

financial ma rket cond itions improved significant ly supported b y

unconventiona l policy measures ado pted by central ba nks. Indias

capital ma rkets ha ve also benefited from the boo st in confidence in the

global financial markets and witnessed increased capital flows.

H ow ever, even as concerns ab out Ind ias w idening C AD may creat e

problems for sustained capita l inflow s going forw ard , reviving

Mexicos prospects

remain closely

linked to the US

business cycle with

a positive growth

outlook reinforced

by the

implementation of

structural reforms.

The Central Bank of

Mexico reduced its

reference interest

rate by 50 basis

points to 4.0%

in March, mostlyin an attempt

to tackle higher

capital inflows.


22/37

120


Money

Finance&

J U N E . 2 0 1 3

domestic financial savings and investment remains a ma jor area o f

concern.

M oney, Credi t and Debt M arkets

The softening bias in the inflation trajectory in recent

months,17together w ith a renewed commitment by t he government to

conta ining Indias tw in deficits, provided some space for po licy easing.

The RBI low ered policy ra tes further by 25 ba sis points in early M ay

2013, follow ing reductions amounting to 50 ba sis points in the fourth

q uarter of 201213, further easing lending conditions in an effort t o

revive growth.

D uring the fourth q uarter of 201213, the Indian money

markets w itnessed very tight liquidity conditions a s there wa s a large

build-up of government cash bala nces. The RBI provided liquidity

through LAF injections amount ing to a round R s. 1 trillion on a d aily

average ba sis during this period. In o rder to pre-empt end-quart er

liquidity pressures, the RBI low ered the CR R o f SCBs by 25 ba sis points

to 4.0 per cent of their ND TL effective from the fortnight beginning

February 9, 2013. Additiona lly, the RBI conducted several o utright

O M O (purchase) auctions during the fourth q uarter and accepted bids

amo unting to Rs. 335 billion in these auctions, ta king the tot al amount

of liq uidity injection to Rs.1.5 t rillion thro ugh these operations during

the financial year, including Rs. 231 billion t hrough the anony mous

trad ing platfo rm N D S-O M . Also, in view of t he anticipated large

volume of banking tra nsactions during the annual closing of a ccounts

for 201213, the RBI cond ucted a dditiona l LAFs in end-M arch to

fa cilitat e smooth a nd no n-disruptive conduct o f ba nking operat ions.

Even tho ugh rising C AD risks have prompted the RBI to exercise

caution while easing interest rates, such pre-emptive and calibrated use

of va ried instruments, w hich included reduction in CR R, O M O

purchases and ad ditiona l LAF arra ngements, ensured that the money

market rat es remained range bound . The CM R remained anchored

close to the repo ra te, the indicative upper bo und o f the interest ra te

corridor, b arring some exceptions, during the final q uarter of 201213

and in the first month o f fiscal 201314 (Chart F.1).

YTM s from the seconda ry debt ma rket (Char ts F.2-F.3) show

tha t d uring the last q uarter of 201213 yields of go vernment securities

declined markedly from the December 2012 levels. This overall

softening of yields reflected expectat ions of reductions in po licy ra te

due to significant slow ing in WPI inflat ion a long w ith decelerat ing

grow th. It also reflected the positive effects of several OM O purchase

auctions by the RBI, reduction in primary issuances, and expectat ions

17 After remaining in the range of 7.5 to 8.1 per cent during the first half

of 201213, WPI inflation moderated gradually to 5.96 per cent in March 2013.

Even as price pressures continued to persist from the food and fuel segments,

manufactured non-food products inflation came down sharply to 3.5 per cent in

March 2013, reaching its lowest level in the past three years.

In order to pre-empt

end-quarter liquidity

pressures, the RBI

lowered the CRR of

SCBs by 25 basis

points to 4.0% of

their NDTL effective

from the fortnight

beginning February

9, 2013.

Additionally, the RBI

conducted several

outright OMO

purchase auctions

during thefourth quarter.


23/37

121


Money

Finance&

J U N E . 2 0 1 3

of further measures from t he government to rein in the fiscal deficit a nd

consequent o ptimism a bout improvement in the fiscal situation.

Betw een D ecember a nd Februa ry, shor t-term yields declined by ab out

10 to 16 basis points, w hile longer term yields show ed a much sharper

decline of 25 to 35 basis points, even though yields hardened slightly in

end-Ja nuary af ter markets factored in the limited space for moneta ry

policy easing. In March tighter liquidity and fears that political

CHART F.1

CMR and RBIs Fixed Reverse Repo and Repo Rates

CHART F.2

CMR and T-bill Yields

CMR

Between December

and February, short-

term yields declined

by 10 to 16 basis

points, while longer

term yields showed

a much sharper

decline of 25 to 35

basis points, even

though yields

hardened slightly in

end-J anuary after

markets factored

in the limited space

for monetarypolicy easing.


24/37

122


Money

Finance&

J U N E . 2 0 1 3

uncertainty at the centre may impact capital inflows led to a firming up

of y ields by a bout 5 to 10 ba sis points at t he longer end o f the maturity

spectrum. The 5-year y ield ha rdened from 7.75 per cent in Februa ry to

7.88 per cent in M arch, w hile the 15-year yield firmed up fro m 8 to

8.11 per cent. While the overnight ra te remained sta ble in March,

yields of government securities of 3-months to 2-years maturity, in fact

dipped slightly in M arch; this led t o a slight correction in the inversion

CHART F.3

Constant Maturity Yields

While the overnight

rate remained stable

in March, yields of

government

securities of

3-months to 2-years

maturity, dipped

slightly in March;

this led to a slight

correction in the

inversion of the

yield curve,

indicating more

stable conditions in

the governmentsecurities market.


25/37

123


Money

Finance&

J U N E . 2 0 1 3

of the yield curve, indicat ing more sta ble conditions in the government

securities ma rket.

Real y ields across maturities, a s measured by the difference

betw een gilt yields a nd WPI inflation , ha ve gone up during the first

three months of 2013, on a ccount of low er inflat ion, even though

nomina l yields ha ve soft ened d uring the same period (Chart F4). In

fa ct, w ith WPI inflation slow ing significan tly from 7.3 per cent in

D ecember to b elow 6 per cent in M arch, t here w as a significant

improvement in real yields by a bout 110 to 120 ba sis points across the

maturity spectrum.

Foreign Exchange M arket

The exchange rate of the INR vis--v ismajor global currencies

remained ra nge bound in the last q uarter of 201213, as globa l

financial ma rket cond itions remained strong, even tho ugh Indias

external imbalances w orsened w ith the CAD to G D P rat io for the third

q uarter of 201213 reaching a historic high of 6.7 per cent. H ow ever,

as the C AD w as adequa tely financed by capital inflow s, without a ny

reserve depletion, it did not ha ve any ma jor ad verse impact on the

exchange rate of the INR . Various reform measures, including the

postponement of G AAR by tw o years, partia l deregulation of d iesel

prices, liberalised FDI limits for certain sectors, rise in FII limits in

corpora te debt a nd government securities market, a nd a nnouncement o f

CHART F.4

Real Interest Rates

(Difference between Constant Maturity Yields and WPI Inflation)

Indias external

imbalances

worsened with the

CAD to GDP ratio for

the third quarter of

201213 reaching a

historic high of

6.7%. However, as

the CAD was

adequately financed

by capital inflows,

without any reserve

depletion, it did not

have any major

adverse impact onthe exchange rate

of the INR.


26/37

124


Money

Finance&

J U N E . 2 0 1 3

a fiscal consolidation pa th, further boo sted the confidence of global

investors in the India n economy. H elped by these measures, the rupee

show ed modest a ppreciation betw een mid-Ja nuary a nd mid-February ;

by mid-February the INR had appreciat ed to R s. 53.3 per US dollar

from Rs. 55 levels in the end o f 2012. After remaining vo latile with a

depreciating trend fro m mid-Februa ry to early April to reach 54.6, the

exchange rate has again been improving since the second week of April

CHART F.5.1

Spot Rates (Rupees per US Dollar and Euro)

CHART F.5.2

Spot Rates (Rupees per UK Pound and 100 Yen)

After remaining

volatile with a

depreciating trend

from mid-February

to early April to

reach 54.6, the

exchange rate has

again been

improving since the

second week of

April and ended the

month below Rs. 54

to the US dollar.


27/37

125


Money

Finance&

J U N E . 2 0 1 3

and ended the month below Rs. 54 to the US dollar. Concerns regard ing

the CAD seem to ha ve diminished somew hat on a ccount of fa ll in

internationa l prices of crude oil and gold, the various measures being

ta ken to curb gold imports a nd some optimism regard ing export s. This,

along w ith certa in measures aimed at dra w ing in further FII

investments, w hich too k effect fro m beginning April, seems to ha ve had

a positive effect on the excha nge rate of t he INR . The movement of t he

CHART F.5.3

Annualised Premia for the US Dollar and Euro (3 Month, per cent)

CHART F.5.4

Annualised Premia for the UK Pound and Yen (3 Month, per cent)

The various

measures being

taken to curb gold

imports and some

optimism regarding

exports, along with

certain measures

aimed at drawing

in further FII

investments, which

took effect from

beginning April,

seem to have had a

positive effect on

the exchange rateof the INR.


28/37

126


Money

Finance&

J U N E . 2 0 1 3

INR s excha nge rate vis--v isthe euro and the UK pound w as almost

similar to tha t fo r the US dollar; ho w ever, a s the yen ha s been

depreciating sha rply a fter the a nnouncement of stimulus measures, the

INR has show n an a ppreciating trend aga inst the Ja panese currency.18

A recent f all in globa l commodity prices boo sted expecta tions

that India w ill be able to narrow its C AD . This along w ith a slow dow n

in inflat ion lead ing to expectat ions of a ra te cut at the RBI policy

meeting on M ay 3, a nd a slew reform measures to boost FII flow s to the

market t aken in early April, gave rise to the likelihood of a

strengthening rupee. The outlook w as reflected in the forw ard premia:

the 3-month premia for t he US dollar, w hich had risen by over 130

basis points between early January and the third week of March,

softened by over 80 basis points by the end of April (Chart s F.5.3-5 .4).

Gl obal and Indian Capital M arkets

G loba l financial market conditions have continued to improve

appreciably in 2013 so f ar, reflecting a combina tion o f renew ed policy

assurances, to gether w ith direct mo netary stimulus and con tinued

liquidity support fro m central ba nks across the globe. While

commitments by the ECB have reduced sovereign liquidity risk, the

continuing progress tow ard s a ba nking union and ad ditiona l debt relief

for G reece ha ve together grea tly reduced immediate risks to the Euro

area. This has helped boost the resilience of markets to political

uncertainty in Italy and the bailout in Cyprus. Markets have generally

become more optimistic and market vola tility ha s declined in 2013 so

fa r. Access to funding ha s improved for corpora tions and ba nks, though

banks in the Euro area periphery remain challenged by elevated

funding costs, deteriorat ing asset q uality a nd w eak profits, w hile credit

transmission remains weak in several economies (GFSR, April 2013).19

The BFCIUS (for the US) and BFCIEU (for t he Euro a rea) indices tha t

tra ck the overall stress in money, bo nd, a nd equity markets, thereby

enabling assessment of the availability and cost of credit, show steady

18 The yen has depreciated over 20 per cent in the past six months, making

it one of the wo rst-performing developed market currencies. In the first w eek of

April, the yen slipped to its lowest level against the US dollar in almost four years,

as the Japans central bank embarked on its latest round of aggressive stimulus

measures. In line with the recovery w itnessed early this year, the euro ha d ga ined till

mid-February, but has gone back to mid-December levels thereafter.19 Weak economic activity and persistent uncertainty continue to be

reflected in weak demand for bank loans. At the same time, although it has receded

in recent months, the fragmentation of financial markets is still curbing credit

growth. Finally, the fact that the debt levels of households and non-financial

corporations remain high in a number of countries is also weighing on loan growth.

G row th in loans to the non-financial private sector sta bilised in M arch, but

remained in negative territory as a result of both weak demand and, to a lesser

extent, supply constraints in a number of countries. The results of the Euro area

bank lending survey for the first quarter of 2013 suggest that while the net

tightening of the credit standards applied by banks to loans to enterprises and

households has continued to moderate, the net decline in demand for loans has

intensified, in particular for households.

The BFCIUS and

BFCIEU indices that

track the overall

stress in money,

bond, and equity

markets, thereby

enabling

assessment of the

availability and cost

of credit, show

steady rising trends

in April; during

this time last year,

these indices

were chartingnegative territory.


29/37

127


Money

Finance&

J U N E . 2 0 1 3

rising trends in April; during this time last year, these indices were

charting negat ive territory. Investor uncerta inty a bout near-term bond

market developments, as measured by option-implied volatility,

continued to decline in M arch in bo th the Euro a rea and the US; by

end-M arch, implied vola tility on bo th sides of the Atlant ic wa s

relatively low and close to pre-crisis levels. The spread o f the short-

term Euro area periphery sovereign bonds over G erman bunds has

fa llen ba ck to the Janua ry 2011 levels and corpora te CD S spread s

across Europe also tightened in April as sentiment improved. 20

G loba l financial ma rkets recovered lost mo mentum in early

2013 and indexes in most countries across the globe have returned t o

levels tha t prevailed before the financial crisis.21In continuation of the

buoya ncy w itnessed in the last few months of 2012, the S&P BSE

Sensex climbed from a bout the 19,500 levels in end-D ecember 2012 to

cross the 20,000 ma rk by mid-Ja nuary, but thereaf ter slid continuously

through February to below the 19,000 levels tow ard s the end of the

month (Chart F.6). The domestic eq uity ma rkets weakened during the

last q uarter of 201213, ma inly on a ccount of political uncerta inties

slow ing the reforms process, further slow dow n in G D P grow th a nd

exports, and low er corpora te earn ings reported by some blue chip

companies for the previous quarter. After gaining some strength till

mid-M arch to cross the 19,500 ma rk, the Sensex slid a lmost

continuously till mid-April, before rising back to 19,500 by the end of

the month. Better tha n expected US jobs da ta and corpora te earnings in

Europe and Ja pan, combined w ith the oversized stimulus in Japa n, led

to broadbased rallies in global equity markets in the recent past. Major

stock indexes in the US and G ermany hit a ll-time highs in early M ay ;

along w ith an ECB ra te cut, dat a show ed a strong US jobs market and

bolstered expecta tions that G ermany has returned to grow th.22The

20 A successful bond sale in Portugal indicated the country is on track to

exit its bailout; Portuga l sold bonds wort h 3 billion in its first 10-year bond

auction in more than two years, putting the country on course to exit its bailout on

time and qualify for a debt support programme from the ECB. Investors submitted

bids for 10.2 billion euros (US$13.3 billion) of the securities due in February 2024

being sold via banks, compared with the 3 billion-euro target. Yields on the new

bon ds were around 5. 6 per cent, o ne of the highest sovereign borro w ing rates in the

Euro area now, but still much lower than when Portugal last auctioned 10-year

bonds in January 2011 at a yield of 6.7 per cent. In early-May, yields on 10-yearItalian sovereign bonds extended their tightening, falling below 4 per cent following

the formation of a new coalition government; the fall in yields narrowed the credit

spread over G erman bunds to a pproximately 270 basis points, roughly half the peak

rates reached in November 2011.21This includes the stock indexes of developed markets, such as the US, the

UK and Japan, emerging Asian markets and also those of EU countries despite their

continued sufferings from the repercussions of the financial crisis.22 G ermany, Europes largest econom y, reported a 2.2 per cent rise in

industrial orders in March, compared with expectations of a 0.5 per cent drop. The

DAX became the first of the major European indexes to breach the record high set in

2007, following in the footsteps of the US S&P 500, which has been touching record

highs since mid-April.

The domestic equity

markets weakened

during the last

quarter of 201213,

mainly on account

of political

uncertainties

slowing the reforms

process, further

slowdown in GDP

growth and exports,

and lower corporate

earnings reported by

some blue chip

companies for theprevious quarter.


30/37

128


Money

Finance&

J U N E . 2 0 1 3

M SCI global index in early M ay crossed its June 2008 high; the Sensex,

following global cues and buoyed by global liquidity, rose almost to

the 20,000 level in the first week of May.

FII equity inflow s remained positive through the first four

months of 2013, w ith strong inflow s recorded in Ja nuary a nd February

(Chart F.7). FII inflow s to the Indian sto ck market slow ed thereaf ter

because of a slew of fa ctors such as profit-booking, concerns over high

C AD a nd political uncertainty. FII net investments plunged in M arch

and fell further to a 16-month low of R s. 54.14 billion in April.

H ow ever, FII inflow s w ent up significantly in early M ay as a n ECB rate

reduction b oosted glob al liquidity, w hile some soft ening of prices of

crude and gold ra ised hopes of a low ering of Indias CAD. Ind ian M Fs,

on the other hand, mostly w ithdrew funds from the eq uity ma rket a nd

have recorded negative net equity investments during 2013 so far.

The India n prima ry securities market remained subdued in

201213; the cumulative amount mobilised for the financial y ear 2012

13 stood at Rs. 308.6 billion through 60 issues, as a gainst R s. 484.7

billion ra ised through 71 issues during 201112. H ow ever, during the

financial year 201213, M Fs mobilised a net of R s. 765.4 billion as

compared w ith a n outf low of R s. 220.24 billion seen in 201112. FIIs

mad e net investments of Rs. 1.7 trillion in the capita l market in 2012

13, compared w ith tha t o f R s. 0.9 trillion in the previous year; their net

investment in equity w as a t R s. 1.4 trillion this financial year,

compared with Rs. 0.4 trillion last year. MFs also made significantly

higher net investments of Rs. 4.5 trillion in the capita l ma rket t his year,

compared with Rs. 3.3 trillion last year, but with most of it

CHART F.6

Movement in Indian Stock Indices

BSESensex

Nifty

FII net investments

plunged in March

and fell further to a

16-month low of

Rs. 54.14 billion in

April. However, FII

inflows went up

significantly in early

May as an ECB rate

reduction boosted

global liquidity,

while some

softening of prices

of crude and gold

raised hopes ofa lowering of

Indias CAD.


31/37

129


Money

Finance&

J U N E . 2 0 1 3

concentra ted in the debt market. The disinvestment progra mme of the

government a lso generated a bout Rs. 240 billion during 201213; the

disinvestment programme for 201314 is budgeted higher at Rs. 400

billion. 23

As part of a larger effort to attract foreign capital to help

finance a w idening C AD, the government relaxed ow nership limits in

India n debt for overseas investo rs in early April. To encoura ge grea ter

foreign investments in rupee-denomina ted debt instruments, the

government ha s simplified t he framew ork of FII debt limits and a lso

CHART F.7

FII and MF Stock Market Investments (Net, Rs. billion)

23The government divested its stake in various public sector enterprises,

like NBC C, H CL, NM DC , OIL, NTPC, RC F, NALCO a nd SAIL, with NTPC

mobilising the maximum amount of around Rs. 115 billion.

To encourage

greater foreign

investments in

rupee-denominated

debt instruments,

the government has

simplified the

framework of FII

debt limits and also

drawn a perspective

plan for enhancement

of these debt limits

in the future. Further,

foreign investors

will be eligible tobenefit from lower

withholding taxes

for interest income.


32/37

130


Money

Finance&

J U N E . 2 0 1 3

dra w n a perspective plan fo r enhancement o f these debt limits in the

future.24Further, fo reign investors w ill be eligible to benefit from low er

w ithholding ta xes for interest income accrued betw een June 1, 2013 and

M ay 31, 2015, regard less of w hen the debt w as bought . The rat e of ta x

deduction a t source on interest pa yments has been drastically reduced

to 5 per cent from 20 per cent for FII investments in government

securities and rupee-denomina ted co rpora te bo nds. These measures,

apa rt from dra w ing in overseas funds, a re also expected to help in the

development of the debt market, pa rticularly t he corpora te bond

market. Another regulatory move tha t ma y help deepen the corpora te

debt ma rket is a set o f cha nges mad e to investment limits in va rious

categories of debt b y the insurance regulator IR D A, w hich makes room

for ad ditiona l investment in higher yielding debt.25

The demand f or credit in India has been a dversely a ffected b y

the continuous decelerat ion in domestic grow th a nd shrinking aggregate

demand. Aggregate demand remained sluggish during the third q uarter

of 201213, w ith w eak expansion

Documents

Global Eco. & Financial MKT