FII - Basic info

t Note: These FAQs are prepared with a view to help FII applicants. FII registration and investment are mainly governed by SEBI (FII) Regulations, 1995. In case of ambiguity, the readers are requested to consult the Regulations.

DEFINITIONS

Q1. Who is a Foreign Institutional Investor (FII)?

Ans. FII means an entity established or incorporated outside India which proposes to make investment in India.

Q2. What is a sub-account?

Ans. Sub-account includes those foreign corporates, foreign individuals, and institutions, funds or portfolios established or incorporated outside India on whose behalf investments are proposed to be made in India by a FII.

Q3. What is a Designated Bank?

Ans. Designated Bank means any bank in India which has been authorized by the Reserve Bank of India to act as a banker to FII.

Q4. Who is a Domestic Custodian?

Ans. Domestic Custodian means any entity registered with SEBI to carry on the activity of providing custodial services in respect of securities.

Q5. What is a Broad Based Fund?

Ans. Broad Based Fund means a fund established or incorporated outside India, which has at least twenty investors with no single individual investor holding more than 10% shares or units of the fund.

Provided that if the fund has institutional investor(s) it shall not be necessary for the fund to have twenty investors.

Provided further that if the fund has an institutional investor holding more than 10% of shares or units in the fund, then the institutional investor must itself be broad based fund.

FII REGISTRATION

Q6. Who can get registered as FII?

Ans. Following entities / funds are eligible to get registered as FII:

1. Pension Funds
2. Mutual Funds
3. Insurance Companies
4. Investment Trusts
5. Banks
6. University Funds
7. Endowments
8. Foundations
9. Charitable Trusts / Charitable Societies

Further, following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIs:

1. Asset Management Companies
2. Institutional Portfolio Managers
3. Trustees
4. Power of Attorney Holders

Q7. What are the parameters on which SEBI decides FII applicants' eligibility?

Ans.

1. Applicant's track record, professional competence, financial soundness, experience, general reputation of fairness and integrity. (The applicant should have been in existence for at least one year)
2. whether the applicant is registered with and regulated by an appropriate Foreign Regulatory Authority in the same capacity in which the application is filed with SEBI
3. Whether the applicant is a fit & proper person.

Q8. Which form needs to be filled in when applying for FII registration?

Ans. "Form A" as prescribed in SEBI (FII) Regulations, 1995.

Q9. Which documents need to be sent with "Form A"?

Ans.

1. Certified copy of relevant clauses (clauses permitting the stated activities) of Memorandum of Association, Article of Association or Article of Incorporation.
2. Audited financial statement and annual report for the last one year (period covered should not be less than twelve months

Q10. How much is the fee for registration as FII?

Ans. US $ 5,000.

Q11. When is the registration fee payable?

Ans. At the time of submitting the application for registration.

Q12. What is the mode of payment?

Ans. Demand Draft in favour of "Securities and Exchange Board of India" payable at New York

Q13. How many days it takes to get registered as FII?

Ans. SEBI generally takes seven working days in granting FII registration. However, in cases where the information furnished by the applicants is incomplete, seven days shall be counted from the days when all necessary information sought, reaches SEBI.

In cases where the applicant is bank and subsidiary of a bank, SEBI seeks comments from the Reserve Bank of India (RBI). In such cases, 7 working days would be counted from the day no objection is received from RBI.

Q14. What is the registration process for FII?

Ans.

Q15. What is the validity period of FII registration?

Ans. The FII registration is valid for 5 years. After expiry of 5 years, the registration needs to be renewed.

Q16. What is the process of renewal?

Ans. Same as initial registration. Along with "Form A" and all the relevant documents, the applicants are required to fill in additional form (Annexure 1) while applying for renewal.

Q17. Is there any renewal fee?

Ans. Yes, US $ 5,000 needs to be paid for renewal of FII registration.

Q18. When the application for renewal should be submitted

Ans. Three months before expiry of the FII registration.

Q19. What are 100 % debt FIIs/sub-accounts, and what is the process for their registration?

Ans. 100 % debt FIIs are debt dedicated FIIs which invest in debt securities only. The procedure for registration of FII/sub-account, under 100% debt route is similar to that of normal funds besides a clear statement by the applicant that it wishes to be registered as FII/sub-account under 100% debt route.

Q20. Where the application for FII registration should be sent?

Ans. The FII registration application should be sent to:

Securities and Exchange Board of India
Division of FII & Custodian
Mittal Court "B" Wing, First Floor
224, Nariman Point
Mumbai 400 021
India

Note: In case the applicant is a 'Bank' or "Subsidiary of a Bank" then the application form and relevant documents need to be submitted in duplicates.

SUB-ACCOUNT REGISTRATION

Q21. Who can get registered as sub-account?

Ans.

1. Institution or funds or portfolios established outside India, whether incorporated or not.
2. Proprietary fund of FII.
3. Foreign Corporates
4. Foreign Individuals

Q22. Who need to apply for sub-account registration?

Ans. The FII should apply on the behalf of the Sub-account. Both the FII and the Sub-account are required to sign the Sub-account application form.

Q23. Which form needs to be filled when applying for sub-account registration?

Ans. "Annexure B" to "Form A" (FII application form).

Q24. What documents need to be sent with Annexure A?

Ans. None

Q25. How much is the fee for sub-account registration?

Ans. US $ 1,000

Q26. When is the registration fee payable?

Ans. At the time of submitting the application.

Q27. What is the mode of payment?

Ans. Demand Draft in the name of "Securities and Exchange Board of India" payable at New York

Q28. How many days it takes to get a sub-account registered?

Ans. SEBI generally takes three working days in granting FII registration. However, in cases where the information furnished by the applicants is incomplete, three days shall be counted from the days when all necessary information sought, reaches SEBI.

Q29. What is the validity period of sub-account registration?

Ans. The validity of sub-account registration is co-terminus with the FII registration under which it is registered.

Q30. What is the process of renewal of sub-account?

Ans. Same as initial registration.

Q31. Is there renewal fee?

Ans. Yes, US $ 1,000

Q32. Can OCBs / NRIs permitted to get registered as FII/sub-account?

Ans. No, they are not permitted.

POST-REGISTRATION PROCESSES

Q33. What is the procedure in case the FII/sub-account changes its name?

Ans. If a registered FII/sub-account undergoes name change, then the FII need to promptly inform SEBI about the change. It should also mention the reasons for the name change and give an undertaking that there has been no change in beneficiary ownership.

In case of name change of FII, the request should be accompanied with documents from home regulator and registrar of the company evidencing approval of name change, and the original FII registration certificate issued by SEBI should be sent back for necessary amendment.

Q34. What is the procedure for transferring a sub-account from one FII to another?

Ans. The FII to whom the Sub-account is proposed to be transferred has to send a request along with a declaration that it is authorized to invest on behalf of the Sub-account. The transferor FII should also submit a No-objection certificate.

Q35. What is the procedure for change of domestic custodian?

Ans. The FII should send a request, along with no-objection certificate from existing domestic custodian, for change in domestic custodian.

Q36. Can FII/sub-account registration be cancelled on request?

Ans. Yes, the FII would be required to send a request for cancellation of its registration or registration of its Sub-account/s clearly mentioning the name and registration number of the entity. The FII should ensure that it / Sub-account has nil cash / securities holdings.

Q37. What if the FII does not renew its/sub-account's registration?

Ans. The registration of the FII / Sub-account would get expired at due date and it would not be allowed to trade in Indian securities markets. If it is not interested in renewal but has certain residual assets, it can apply for disinvestment in terms of Circular No. FITTC/CUST/12/2001 dated June 04, 2001 and abide by the guidelines specified in this regard.

INVESTMENT OPPORTUNITIES

Q38. Which financial instruments are available for FII investments?

Ans.

1. Securities in primary and secondary markets including shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in India;
2. Units of mutual funds;
3. Dated Government Securities;
4. Derivatives traded on a recognized stock exchange;
5. Commercial papers.

Q39. What are the investment limits on equity investments by FII/sub-account?

Ans.

1. FII, on its own behalf, shall not invest in equity more than 10% of total issued capital of an Indian company.
2. Investment on behalf of each sub-account shall not exceed 10% of total issued capital of an India company.
3. For the sub-account registered under Foreign Companies/Individual category, the investment limit is fixed at 5% of issued capital.

These limits are within overall limit of 24% / 49 % / or the sectoral caps a prescribed by Government of India / Reserve Bank of India.

Q40. What are the investment limits on debt investments by FII/sub-account?

Ans. The FII investments in debt securities are governed by the policy if the Government of India. Currently following limits are in effect:

• For FII investments in Government debt, currently following limits are applicable:

100 % Debt Route	US $ 1.55 billion
70 : 30 Route	US $ 200 million
Total Limit	US $ 1.75 billion

• For corporate debt the investment limit is fixed at US $ 500 million.

Q41. What other investment limits are there?

Ans.

Normal FII (70:30 Route)	100% Debt FII
Total investment in equity and equity related instruments shall not be less than 70% of aggregate of all investments.	100% investment shall be made in debt security only.

Q42. In whose name should the securities be registered?

Ans.

1. In the name of FII when making investments on its own behalf
2. In the name of sub-account when making investments on behalf of Sub-account
3. In the name of "FII a/c sub-account" when making investments on behalf of Sub-account.

DERIVATIVES POSITION LIMITS

Q43. What are the restrictions on investment in derivatives?

Ans.

2. The FII position limits in a derivative contracts (Individual Stocks)

The FII position limits in a derivative contract on a particular underlying stock i.e. stock option contracts and single stock futures contracts are:

o For stocks in which the market wide position limit is less than or equal to Rs. 250 Cr, the FII position limit in such stock shall be 20% of the market wide limit.

o For stocks in which the market wide position limit is greater than Rs. 250 Cr, the FII position limit in such stock shall be Rs. 50 Cr.

2. FII Position limits in Index options contracts

FII position limit in all index options contracts on a particular underlying index shall be Rs. 250 Crore or 15 % of the total open interest of the market in index options, whichever is higher, per exchange.

This limit would be applicable on open positions in all option contracts on a particular underlying index.

3. FII Position limits in Index futures contracts:

FII position limit in all index futures contracts on a particular underlying index shall be Rs. 250 Crore or 15 % of the total open interest of the market in index futures, whichever is higher, per exchange.

This limit would be applicable on open positions in all futures contracts on a particular underlying index.

In addition to the above, FIIs shall take exposure in equity index derivatives subject to the following limits:

i. Short positions in index derivatives (short futures, short calls and long puts) not exceeding (in notional value) the FII's holding of stocks.

ii. Long positions in index derivatives (long futures, long calls and short puts) not exceeding (in notional value) the FII's holding of cash, government securities, T-Bills and similar instruments.

2. FII Position Limits in Interest rate derivative contracts

At the level of the FII

The notional value of gross open position of a FII in exchange traded interest rate derivative contracts shall be:

1. US $ 100 million.
2. In addition to the above, the FII may take exposure in exchange traded in interest rate derivative contracts to the extent of the book value of their cash market exposure in Government Securities.

At the level of the sub-account

The position limits for a Sub-account in near month exchange traded interest rate derivative contracts shall be higher of:

• Rs. 100 Cr

or

• 15% of total open interest in the market in exchange traded interest rate derivative contracts.

OFFSHORE DERIVATIVES/PARTICIPATORY NOTES

Q44. Can FII/sub-account issue Offshore Derivatives / Participatory Notes?

Ans. Yes, FII/sub-account may issue, deal in or hold off-shore derivative instruments such as Participatory Notes, Equity Linked Notes or any other similar instruments against underlying securities, listed or proposed to be listed on any stock exchange in India.

Q45. Who can subscribe to/invest in Participatory Notes?

Ans.

1. Any entity incorporated in a jurisdiction that requires filing of constitutional and/or other documents with a registrar of companies or comparable regulatory agency or body under the applicable companies legislation in that jurisdiction;
2. Any entity that is regulated, authorised or supervised by a central bank, such as the Bank of England, the Federal Reserve, the Hong Kong Monetary Authority, the Monetary Authority of Singapore or any other similar body provided that the entity must not only be authorised but also be regulated by the aforesaid regulatory bodies;
3. Any entity that is regulated, authorised or supervised by a securities or futures commission, such as the Financial Services Authority (UK), the Securities and Exchange Commission (Sub-account), the Commodities Futures Trading Commission (Sub-account), the Securities and Futures Commission (Hong Kong or Taiwan), Australian Securities and Investments Commission (Australia) or other securities or futures authority or commission in any country , state or territory ;
4. Any entity that is a member of securities or futures exchanges such as the New York Stock Exchange (Sub-account), London Stock Exchange (UK), Tokyo Stock Exchange (Japan), NASD (Sub-account) or other similar self-regulatory securities or futures authority or commission within any country, state or territory provided that the aforesaid mentioned organizations which are in the nature of self regulatory organizations are ultimately accountable to the respective securities / financial market regulators.
5. Any individual or entity (such as fund, trust, collective investment scheme, Investment Company or limited partnership) whose investment advisory function is managed by an entity satisfying the criteria of (a), (b), (c) or (d) above.

Q46. What are the reporting Requirements for the FII / Sub-account issuing

Participatory Notes?

Ans.

1. FII/sub-account who issue/renew/cancel/redeem PNs, require to report on Monthly basis. The report should reach SEBI by the 7th day of the following month.
2. The FII/sub-account merely investing/subscribing in/to the Participatory Notes/Access Products/Offshore Derivative Instruments or any such type of instruments/securities with underlying Indian market securities are required to report on quarterly basis (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec).
3. FIIs/sub-accounts who do not issue PNs but have trades/holds Indian securities during the reporting quarter (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec) require to submit 'Nil' undertaking on a quarterly basis.
4. FIIs/sub-accounts who do not issue PNs and do not have trades/ holdings in Indian securities during the reporting quarter. (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec): No reports required for that reporting quarter.

Q47. How to send report on Participatory Notes?

Ans.

• The format for reporting on issuance/ renewal / redemption of the Participatory Notes is prescribed as per "Annexure B" in our Circular No. IMD/CUST/15/2004 dated April 02, 2004 [The reporting format is downloadable from our website www.sebi.gov.in ]
• The reports should be e-mailed only to ODIreporting@sebi.gov.in
• In case of Nil-reports, 'Annexure B' is not required. Instead the FII on behalf of its Sub-account should submit the undertaking prescribed in our circular No. IMD/CUST/9/2003 dated November 20 , 2003
• The reporting should be done in MS Excel format only

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what is monetary Policy

Monetary policy is the process by which governments and central banks manipulate the quantity of money in the economy to achieve certain macroeconomic and political objectives. The targets are usually: - economic growth, changes in the rate of inflation, higher level of employment, and adjustment of the exchange rate. Monetary policy is categorized into two types: contractionary and expansionary. Contractionary (or "tight") monetary policy aims to reduce the amount of money circulating through the economy, and reduce short-term economic growth in exchange for higher (hoped-for) long-term growth.

Expansionary ("loose") policy, on the other hand, aims to increase the money supply and increase short-term economic activity at the expense of long-term economic activity.

 What are the Tools of Monetary Policy?

1. Interest Rates

The tools used in monetary policy  hinge on manipulating variables that either directly or indirectly change interest rates. The most common monetary-policy instrument entails decisions by the Federal Reserve to change interest rates.  Here is how it works. If the Fed believes that the economy is overheating (if the supply of money is outpacing production of goods), it will raise interest rates and bring money supply down to what it perceives to be the "equilibrium" level. By the same token, if the Fed believes economic growth is outpacing money supply (causing deflation/ less inflation), it will reduce interest rates. When interest rates are lower, it's cheaper for individuals to take out loans to start new businesses or buy goods and services. It also discourages them from keeping their money in a bank account, because they would make less interest.

Occasionally, a central bank will also reduce interest rates to alleviate the economic impact of a major political event, as the Fed did immediately after September 11, 2001. Generally, the Fed is calculating that short-term economic stability, and immediately re-establishing credibility in economic institutions (banks and businesses) is supremely important.

2. Monetary Base

The monetary base is the amount of money circulating the economy. The government can adjust the monetary base through open-market operations, specifically the sale and purchase of bonds in the bond market.

3. Reserve Requirements and Discount Window

The government can exert regulatory control on the amount of reserves as a proportion of total assets that banks must hold. This number is called the "reserve requirement." The private incentives of banks mean that they want to keep reserves as low as possible, so that they can loan out as much money as possible. If reserves at a bank drop too much, however, a run on a bank could mean that the bank does not have enough reserves to meet the demands of its depositors. Were that to happen, the bank would go bankrupt, and other depositors would lose most of their money, go bankrupt themselves, causing other banks to go bankrupt, etc. A banking contagion was a major causal factor of the Great Depression.

The actual reserve in the local bank, however, is essentially a loan from the central bank, which has ultimate monetary authority. Restricting or expanding the size of this loan as a percentage of the bank's total loan portfolio, then, amounts to another potent instrument of Fed policy.

Why does Raising Rates Cool Down the Economy?

Rational investors price transactions by opportunity cost. In buying something, a rational investor believes that the asset will have greater yield than other assets. High interest rates mean a higher opportunity cost of spending money, because the consumer sacrifices higher guaranteed return. Lower interest rates equal a lower opportunity cost of consuming, instead of saving.

What is Inflation, and Why Would a Drop in Demand Slow the Rate of Inflation?

Inflation, most simply, is "a higher price for the same thing." More technically, it is the rate of increase in the money supply beyond the rate of increase in the supply of goods. According to economic theory, predictable inflation should have minimal economic impact, whether it's high or low. In practice, medium and high rates of inflation portend higher future rates of inflation, discouraging investment and increasing overall uncertainty. High, variable inflation means that the central bank is failing its prime directive of maintaining credibility in the currency. It discourages individuals from holding money (crimping consumption) and makes the pricing of bonds much more difficult.

Since inflation is a function of the money supply relative to actual production, inflation can come from sources other than central banks. Many experts would argue that hedge funds, with substantial credibility among banks and the ability to use massive amounts of leverage, have much more influence on monetary policy than central banks do (unless central banks begin printing money on a massive scale, which is an entirely different story.) 

More on Inflation

Academically speaking, inflation relates to the money supply as follows:

 M * V = P * T

M = total amount of money available in the economy for circulation.

V = velocity of circulation. A good way to conceptualize this is "the amount of times a dollar bill changes hands over a specific period of time."

P = price level of the economy for a specific period.

T = "the real value" of aggregate transactions.

Assuming T and V stay constant, an increase in the money supply will increase prices. This means that the government can use open market policy or change the reserve requirement to tweak M, so that P will change. Increasing interest rates has the effect of reducing M, because most people tend to deposit funds to receive the higher rates of interest. This is the most common method of combating inflation.

Another variable monitored by a central bank is the value of the currency relative to other currencies (the exchange rate). Certain countries have fixed exchange rate regimes where the currency is not allowed to appreciate or depreciate out of a certain band. This is also known as a "dirty float," and is very popular with developing economies that want their currencies to be freely traded up to a point, but do not wish to expose themselves to sudden disturbances in international currency markets, which are much larger than the developing economies themselves.

Other countries whose central banks lack the credibility or track record of the established currencies simply peg their currency to the dollar. Essentially, they outsource monetary policy to the United States. This makes their currency more credible, at the price of operating on a monetary policy geared to the well-being of the US economy, not the economy of the small, dollar-pegging one.

The major FX currencies (US dollar, euro, yen, British pound, most developed-economy currencies) operate on an "unmanaged float," in which international markets entirely determine the exchange rate for the given currency.

 

Monetary Policy: highlights

RBI Governor Dr Y Venugopal Reddy presented the First Quarter Review of Annual Statement on Monetary Policy for the Year 2007-08 on Tuesday.

Highlights

Bank Rate kept unchanged.

• Reverse Repo Rate and Repo Rate under LAF kept unchanged.
• Withdrawal of the ceiling of Rs. 3,000 crore on daily reverse repo under the LAF with effect from Monday, August 6, 2007. The Reserve Bank, however, retains the discretion to re-impose a ceiling as appropriate.
• The second LAF, conducted between 3.00 p.m. and 3.45 p.m. on a daily basis, is withdrawn with effect from Monday, August 6, 2007.
• Cash Reserve Ratio to be increased by 50 basis points to 7.0 per cent with effect from the fortnight beginning August 4, 2007.
• GDP growth projection for 2007-08 retained at around 8.5 per cent, barring domestic or external shocks.
• Holding inflation within 5.0 per cent in 2007-08 assumes priority in the policy hierarchy, while reinforcing the medium-term objective to condition policy and perceptions to reduce inflation to 4.0-4.5 per cent on a sustained basis.
• While non-food credit growth has decelerated, the acceleration in money supply and reserve money warrants an appropriate response.
• Recent financial market developments in India and potential uncertainties in global markets warrant a higher priority in the policy hierarchy for managing appropriate liquidity conditions at the current juncture.
• Barring the emergence of any adverse and unexpected developments in various sectors of the economy and keeping in view the current assessment of the economy including the outlook for inflation, the overall stance of monetary policy in the period ahead will broadly continue to be:
• To reinforce the emphasis on price stability and well-anchored inflation expectations while ensuring a monetary and interest rate environment that supports export and investment demand in the economy so as to enable continuation of the growth momentum.
• To re-emphasise credit quality and orderly conditions in financial markets for securing macroeconomic and, in particular, financial stability while simultaneously pursuing greater credit penetration and financial inclusion.
• To respond swiftly with all possible measures as appropriate to the evolving global and domestic situation impinging on inflation expectations, financial stability and the growth momentum.

Reddy also presented the First Quarter Review of Annual Statement on Monetary Policy for the Year 2007-08. The Review consists of three sections: I. Assessment of Macroeconomic and Monetary Developments; II. Stance of Monetary Policy; and III. Monetary Measures.

Domestic Developments

• Real GDP growth during the quarter January-March 2007 is placed at 9.1 per cent as against 10.0 per cent in the corresponding quarter a year ago and real GDP growth for the year 2006-07 is revised upwards from 9.2 per cent to 9.4 per cent.
• Inflation, measured by variations in the wholesale price index (WPI) on a year-on-year basis, declined from 5.9 per cent at end-March 2007 to 4.4 per cent as on July 14, 2007.
• The average international price of the Indian crude oil basket increased from US $ 56.2 per barrel in January-March 2007 to US $ 66.2 per barrel in April-June 2007 and to around US $ 73.5 per barrel on July 27, 2007.
• Growth in money supply (M3) at 21.6 per cent on a year-on-year basis on July 6, 2007 was above the projected trajectory of 17.0-17.5 per cent indicated in the Annual Policy Statement for 2007-08 and higher than 19.0 per cent a year ago.
• The year-on-year increase in aggregate deposits of scheduled commercial banks (SCBs) at 24.4 per cent (Rs.5,31,881 crore) up to July 6, 2007 was higher than 20.9 per cent (Rs.3,77, 392 crore) a year ago.
• The year-on-year non-food credit growth of SCBs at 24.4 per cent (Rs.3,67,258 crore) on July 6, 2007 was lower than 32.8 per cent (Rs.3,70,899 crore) a year ago.
• The total overhang of liquidity under the LAF, the MSS and cash balances of the Central Government taken together declined from an average of Rs.97,449 crore in March 2007 to Rs.72,823 crore on July 27, 2007. An assessment of the total liquidity overhang, however, should also reflect the transfer of Rs.35,351 crore from the Central Government to the Reserve Bank during this period on account of transfer of shares from the Reserve Bank to the Central Government.
• During the first quarter of 2007-08, financial markets experienced sizeable fluctuations in liquidity and attendant episodes of volatility in the money market with overnight rates in the call, market repo and collateralised borrowing and lending obligations (CBLO) segments displaying close co-movement.
• Banks had generally increased their deposit rates by about 25-50 basis points across various maturities between March 2007 and June 2007, but reduced them during July 2007, especially in the shorter maturities. The majority of public sector banks (PSBs) adjusted their deposit rates upwards by10-25 basis points on maturities above one year, particularly at the longer end.
• By the beginning of the current financial year, several banks had drawn down holdings of statutory liquidity ratio (SLR)-eligible securities close to the statutory floor. Exclusive of liquidity adjustment facility (LAF) operations, however, banks' investments in Government and other approved securities increased by Rs.27,331 crore during the current year so far (up to July 6,2007) as compared with an increase of Rs.751 crore in the corresponding period of the previous year.
• Gross market borrowings (dated securities and 364-day Treasury Bills) of the Central Government during 2007-08 at Rs.85,628 crore up to July 27, 2007 (Rs.70,813 crore a year ago) constituted 45.4 per cent of the budget estimates while net market borrowings at Rs.46,047 crore (Rs.34,822 crore) constituted 2.0 per cent of the budget estimates.

External Developments

• During the first two months of 2007-08, export growth rose to 20.2 per cent from 19.2 per cent in the corresponding period of the previous year. Imports also posted a sharp rise of 33.0 per cent as compared with 16.9 per cent in the corresponding period of the previous year.
• Non-POL imports rose by 47.3 per cent whereas oil imports remained broadly stable at the level recorded a year ago. As a result, the merchandise trade deficit widened to US $ 13.3 billion during April-May 2007 from US $ 8.2 billion in April-May 2006.
• As on July 20, 2007 India's foreign exchange reserves increased by US $ 22.9 billion over their end-March 2007 level to US $ 222.0 billion.
• During April-June 2007, the rupee appreciated by 6.63 per cent against the US dollar, by 5.19 per cent against the euro, by 4.41 per cent against the pound sterling and by 10.44 per cent against the Japanese yen.

Global Developments

• According to the World Economic Outlook (WEO) of the International Monetary Fund (IMF) released in April 2007, global real GDP growth was expected to decline from 5.4 per cent in 2006 to 4.9 per cent in 2007 and 2008. The update of the WEO released in July 2007 has revised this estimate upwards to 5.5 per cent for 2006 and its forecast for 2007 and 2008 to 5.2 per cent.
• Globally, headline inflation has picked up in the wake of increase in commodity prices and core inflation has also generally remained firm. The inflation outlook remains a matter of concern on account of energy and other commodity prices, increased capacity utilisation rates in developed and major emerging economies and the impact of rising wages on inflation in advanced industrial economies.
• Perceptions of inflation pressures ahead have prompted monetary authorities generally to persevere in withdrawing monetary accommodation. The central banks that have tightened their policy rates include the ECB; the Bank of England; the Bank of Japan; the Bank of Canada; the Reserve Bank of Australia; the Reserve Bank of New Zealand; the People's Bank of China; the Bank of Korea; the Banco de Mexico; and the Banco Central de Chile. Some central banks, such as China and Korea, have used supplementary measures for tightening, besides increasing the key policy rates such as increases in reserve requirements.
• In the first half of 2007, emerging markets outperformed stocks in developed markets. Foreign investor demand for emerging market assets was reflected in a broad-based rise in inflows into dedicated bond and equity markets of the EMEs. Emerging market corporate bond issuance in international bond markets rose to a record level in 2006. The exposure of emerging markets to risky financial assets of the mature markets has increased, and therefore, the overall global financial risks have increased.

Overall Assessment

• Domestic economic activity has continued to expand at a strong pace and there are indications that the impulses of growth are getting broad-based. The recent gains in bringing down inflation and in stabilising inflation expectations should support the current expansionary phase of the growth cycle.
• It is, however, necessary to note that demand pressures and cyclical effects persist, mirrored in investment and consumer demand, monetary and banking aggregates, capacity constraints and a widening trade deficit. Financial markets are reflecting the interplay of these factors, although increases in capital inflows and large changes in liquidity conditions are obscuring an accurate assessment of risks, with attendant uncertainty.
• While there is an abatement of inflation in the recent period, upward pressures persist. In this regard, it is essential to carefully monitor developments relating to aggregate supply conditions and the supply response to the impulses of demand in the short-term, while stepping up efforts to expand production capabilities over the medium-term.
• It is also necessary to continuously assess the risks to the inflation outlook emanating from high and volatile international crude prices, the continuing firmness in key food prices and the uncertainties surrounding the evolution of demand-supply gaps, both globally as well as in India.
• Risks from global developments continue to persist, especially in the form of inflationary pressures, re-pricing of risks by financial markets and danger of downturn in some asset classes, with implications for EMEs in general. International food and energy prices are likely to settle at higher levels than before with indications that the sharp acceleration recorded in 2006 will not reverse. In addition, there are risks emanating from the developments in global financial markets.

Stance of Monetary Policy for the Remaining Period of 2007-08

• The projection of real GDP growth in 2007-08 at around 8.5 per cent, as set out in the Annual Policy Statement of April 2007, is retained, barring domestic or external shocks.
• The outlook for inflation in 2007-08 remains unchanged. Accordingly, holding headline inflation within 5.0 per cent in 2007-08 assumes priority in the policy hierarchy; while reinforcing the medium-term objective to condition policy and perceptions to reduce inflation to 4.0-4.5 per cent on a sustained basis.
• For the purpose of monetary policy formulation, the Annual Policy Statement of April 2007 projected growth of money supply (M3) at around 17.0-17.5 per cent for 2007-08 in consonance with the outlook on growth and inflation. Consistent with the projections of money supply, the growth in aggregate deposits in 2007-08 was placed at around Rs.4,90,000 crore while non-food credit including investments in bonds/debentures/shares of public sector undertakings and private corporate sector and commercial paper (CP) was projected to decelerate to 24.0-25.0 per cent in 2007-08 from the average of 29.8 per cent over 2004-07. While non-food credit growth has decelerated, the acceleration in money supply and reserve money warrants an appropriate response.
• The global outlook is positive with continuing prospects for strong and stable growth but there are concerns about inflationary pressures worldwide. Monetary authorities are inclined to regard the current levels of real interest rates as warranting further withdrawal of monetary accommodation and are indicating a preparedness to respond to the manner in which the inflation scenario evolves. Financial markets have been aggressively re-pricing risks; however, the wide diffusion of risks and the abundance of liquidity have imparted considerable uncertainty. These developments are necessitating intensified policy monitoring with a policy preference for insulating domestic real activity from these shocks.
• Monetary policy in India would continue to be vigilant and pro-active in the context of any accentuation of global uncertainties that pose threats to growth and stability in the domestic economy. The domestic outlook continues to be favourable and would dominate the dynamic setting of monetary policy in the period ahead.
• It is important to design monetary policy such that it protects growth by contributing to the maintenance of stability. Accordingly, while the stance of monetary policy would continue to reinforce the emphasis on price stability and well-anchored inflation expectations and thereby sustain the growth momentum, contextually, financial stability may assume greater importance in the months to come.
• Recent developments in financial markets in India and potential uncertainties in global markets warrant a higher priority for managing appropriate liquidity conditions in the policy hierarchy at the current juncture.
• The Reserve Bank will continue with its policy of active demand management of liquidity through appropriate use of the CRR stipulations and open market operations (OMO) including the MSS and LAF, using all the policy instruments at its disposal flexibly, as and when the situation warrants.
• Barring the emergence of any adverse and unexpected developments in various sectors of the economy and keeping in view the current assessment of the economy including the outlook for inflation, the overall stance of monetary policy in the period ahead will broadly continue to be:

1) To reinforce the emphasis on price stability and well-anchored inflation expectations while ensuring a monetary and interest rate environment that supports export and investment demand in the economy so as to enable continuation of the growth momentum.

2) To re-emphasise credit quality and orderly conditions in financial markets for securing macroeconomic and, in particular, financial stability while simultaneously pursuing greater credit penetration and financial inclusion.

3) To respond swiftly with all possible measures as appropriate to the evolving global and domestic situation impinging on inflation expectations, financial stability and the growth momentum.

Monetary Measures

• Bank Rate kept unchanged at 6.0 per cent.
• Reverse Repo Rate and Repo Rate under LAF kept unchanged at 6.00 per cent and 7.75 per cent, respectively.
• In view of the current macroeconomic and overall monetary and liquidity conditions, it has been decided to withdraw the ceiling of Rs. 3,000 crore on daily reverse repo under the LAF with effect from Monday, August 6, 2007. The Reserve Bank, however, retains the discretion to re-impose a ceiling as appropriate and has the flexibility to conduct repo/reverse repo auctions at a fixed rate or at variable rates as circumstances warrant.
• The Reserve Bank retains the option to conduct overnight or longer term repo/reverse repo under the LAF depending on market conditions and other relevant factors. The Reserve Bank will continue to use this flexibility including the right to accept or reject tender(s) under the LAF, wholly or partially, if deemed fit, so as to make efficient use of the LAF in daily liquidity management.
• The second LAF, which was introduced from November 28, 2005 and is conducted between 3.00 p.m. and 3.45 p.m. on a daily basis, is withdrawn with effect from Monday, August 6, 2007.
• On a review of the current liquidity situation, it is considered desirable to increase the CRR by 50 basis points to 7.0 per cent with effect from the fortnight beginning August 4, 2007.

The Mid-Term Review of the Annual Policy Statement for the year 2007-08 will be undertaken on October 30, 2007.