Global Economic Prospects and the Indian Economy

1. Global Economic Prospects and the Indian Economy UshaThorat September 2010

2. Broad Outline • Global economy and India – recent trends • Concerns of Inflation; Fiscal Situation • Developments in real and external sectors • Investment Climate • Banking Sector scenario • Quick SWOT analysis – India • RBI’s latest assessment – September 16, 2010

3. Global Economy - Prospects Per cent Forecast for 2010 and 2011

4. IMF's World Output Growth Forecast (Per cent)

5. Indian Economy - Growth Trajectory Per cent • Average GDP growth at 8.9 per cent during 2003-08 • Real GDP grew at 8.8 per cent in 2010-11 (Q1) (6.0 per cent in 2009-10 (Q1)) • RBI places real GDP growth forecast at 8.5 per cent for 2010-11

6. High Domestic Saving & Investment Rates- with Modest Current Account Deficit 6

7. Inflation has increased significantly after being moderate during first half of 2009-10 7

8. Monetary and Inflation conditionsInflation - WPI and CPI

9. Fiscal Situation: Key Indicators RE: Revised Estimates; BE: Budgeted Estimates. # : data pertain to 27 State Governments.

10. Current Trends - Real GDP Growth (Per Cent)

11. Demand Side Drivers of Growth (Percentage to GDP) 11

12. Growth in Index of Industrial Production (Y-o-Y) Per cent During April-July 2010, the IIP growth increased to 11.4per cent as compared with 4.7 per cent last year.

13. Growing Openness Source: RBI

14. Increased Tradability of Services

15. Current Account Balance & Capital Inflows

16. Capital FlowsUS $ billion FII flows amounted to US$3.5 billion during April-June 2010-11 as against US $ 8.3 billion during April-June 2009-10

17. FDI Flows to India Source: RBI

18. FDI inflows as percentage of Gross Fixed Capital Formation, 2007-2009 (Per cent) Source: World Investment Report 2010

19. Net FIIs Inflow and Exchange Rate Movement

20. Movement in NEER and REER (1993-94=100)(6-currency trade based weights) Index

21. India’s Foreign Exchange Reserves(US$ billion) Note: Reserves change on BoP basis are not available after Jan-Mar 2010 quarter.

22. FDI Confidence Index:2010

23. Sovereign Credit Ratings of Top Ten Debtors amongst Developing Countries

24. Indian Stock Markets Equity Market revived indicating restoration of investor confidence.

25. Global Stock Markets

26. Banking Sector Scenario • Indian banks continue to remain well capitalized as per Basel II requirements • NPAs at manageable level despite the downturn • Significant liquidity buffers - CRR and SLR prescriptions • Focus on CD ratio and SLR requirement help in limiting leverage

28. Structural Reforms • Discussion paper on licensing New Private Sector Banks issued in August 2010 • Discussion paper on presence of foreign banks to be issued shortly • Working Group looking into Holding Company structure

29. Financial Stability and Development Council GOI setting up Financial Stability and Development Council (FSDC) for: • Achieving inter-regulatory coordination and overseeing systemic risks and • laying down a macro-prudential overlay to financial sector regulation

30. Focus on Financial Inclusion • Adoption of BC model – entities eligible to act as BCs enlarged to include even individuals • Inclusion of ‘for profit companies’ as BCs under consideration • Adoption of mobile- based and smart card based technologies

31. Basel III • BCBS release Basel III norms on September 12, 2010 – implementation in a phased manner • Capital adequacy of Indian banks will not be impacted significantly – they already have high CRAR and Core CRAR • Leverage ratio will be around 6, much comfortable than the Basel requirement of 3 • Indian banks lagely follow retail model and therefore liquidity is not an issue for them

32. India's SWOT analysis STRENGTHS • High savings/investment , forex reserves, quality talent and IT, broad based and growing entrepreneurial class, market size, macro economic and financial stability, language, democracy and political system stability WEAKNESSES • Physical infrastructure, human development indicators, agriculture, shortage of skilled manpower OPPORTUNITIES • Demographic dividend, knowledge based growth , increased integration with world economy, urbanisation THREATS • Global Uncertainty, fiscal deficit, climate change – energy and food security, regional and social inequalities

33. Macroeconomic situation – RBI’s latest assessment on September 16, 2010 Global Scenario • Recovery slowing; global environment continues to be a cause for caution Domestic Scenario • Recovery consolidating; economy rapidly converging to its trend rate of growth. Agri. growth prospects boosted; sustained growth in service sector. • Inflation dominant concern; implications for real interest rates • Fiscal deficit conforming to budget estimates • External front -export growth constrained by continuing sluggishness in global economy; demand for imports increased due to strong domestic recovery • Overall assessment - growth remains steady. Inflation appears to have stopped accelerating though the rate may remain high for some months. Monetary Measures announced • Repo rate under LAF increased by 25 basis points from 5.75 % 6 %. Reverse repo rate increased by 50 basis points from 4.5 % to 5.0 %