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D I V I S I O N OF I N T E R N A T I O N A L F I N A N C E B O A R D OF G O V E R N O R S F E D E R A L RESERVE SYSTEM H . 13 December 7, 1966. No. 277 CAPITAL MARKET DEVELOPMENTS ABROAD I. II. III. I„ India: India Ten Charts on Financial Markets Abroad Latest Figures Plotted in H. 13 Chart Series Money and Capital Markets in the Third Quarter-1966 1. 2. 3. 4. 5; 6. 7. 8. 9. 10. Introduction Wholesale prices and production Money supply Banking developments Money market Government bonds Stock market Gold market Exchange rate International reserves and foreign trade 1. Introduction. During the third quarter, the Indian economy reacted to the devaluation and accompanying measures of June 6. The trade balance improved sharply, price increases were halted, and productive activity slowed down. The trade balance improved dramatically since the 36.5 per cent devaluation of the rupee. In the three-month period June-August, imports decreased 35 per cent while exports decreased 27 per cent, compared with the three previous months, March to May. As a result, the trade deficit was sharply reduced by 45 per cent over this period. However, from the end of June to September, India's reserves decreased by $118 million to $657 million--significantly more than in the corresponding months in 1965--primarily because of the smaller share of aidfinanced imports. During the quarter, domestic inflationary pressures eased significantly. The index of wholesale prices rose by less than 1 per cent in the third quarter compared to 7.3 per cent in April-June. Industrial production also slowed down dramatically. In the first half of the year the index of industrial production averaged only 1,5 per cent higher than January-June 1965, compared with a year-toyear gain of 8.7 per cent in the same period last year. In July, the index abruptly decreased by 2,9 per cent and was more than 1 per cent below July 1965. Recent newspaper reports indicate that the slowdown is only partly due to the decrease in aid-financed industrial imports since aid was 1 suspended in September 1965 because of -the war with Pakistan, and to delays in issuing import licenses under new aid commitments„ In addition, a sharp decline in final demand appears to have led to increased inventories, to further production cutbacks and to increased unutilized capacity. Real national income was reportedly down 4 per cent and per capita income 7 per cent in the year ending March 1966. OFFICIAL USE ONLY (Decontrolled after 6 months) OFFICIAL USK ONLY -2- Expectations of a normal agricultural crop this year changed suddenly as a result of a late drought. The extent of crop damage is still unknown, but four northern states claim that a food famine is imminent. On October 20, the Prime Minister said that the Government could provide relief for the distressed areas without causing another national food crisis. A few days later the Government announced that the IL S, was considering an Indian request for 2 million tons of additional foodgrains in the last two months this year and for 8 million tons next year. Since the expected shortfall in agricultural production this year follows a sharp decrease last year, the supply of agricultural commodities to the industrial sector this year may not be adequate to support large increases in industrial production. The third quarter witnessed a sharp decrease in new capital issues of industrial firms and a rapid increase of participations by government-financed underwriters. At the same time, stock prices were depressed because of declining corporate profits. The value of new shares issued has been declining and in September was 11 per cent below the paid-up value in 1961. As the economy continued to slow down, the monetary authorities moved to ease credit conditions in the harvest season beginning on November 1. In announcing the credit relaxation in late October, the Reserve Bank Governor estimated that bank credit would increase by Rs. 6 billion by the end of April next year, double the expansion during the previous harvest season. <Ihe Governor indicated that the Reserve Bank would accommodate the banks' needs for seasonal financing--which he estimated at Rs. 1.7 billion--by lending at bank rate of 6 per cent, eliminating the penalty borrowing rates previously in effect. At the same time the Governor advised banks to channel about 80 per cent of their advances to industrial borrowers. He also cautioned the government to avoid deficit financing in order to contain inflationary pressures in the coming months. 2, Wholesale prices and production. In the third quarter price increases were drastically reduced. From July through September 1966 the price increase was only 0.4 per cent in contrast to the 7.3 per cent increase in the April-June period, (See Table 1), The abatement of upward price pressues which this reflects stems in part frorh favorable crop reports and in part from increases in grain imports„ As a result, the index of wholesale prices fell back 2.8 per cent from the second week of August to the end of September, compared with a decrease of only 1.6 per cent in the same period last year. However- recent newspaper reports indicate that drought and floods in at least four northern states have caused extensive crop damage and that a famine is imminent. On October 20, the Prime Minister found it necessary to assure the country in a nationwide broadcast that the current food shortage would be solved. To do this India may require food imports of 10 million tons this crop year. The slowdown in the rate of increase in prices followed a slowdown in the rate of increase in industrial production. In the first 6 months the index of industrial production was only 1.5 per cent higher than a year earlier compared with an increase of 8.7 per cent in the corresponding period last year. The OFFICIAL USE ONLY OFFICIAL USK ONLY slowdown in the growth of industrial production is reportedly due not only to shortages of imported raw materials, components and spare parts but also to a decrease in demand. As a result, inventories and unutilized capacity have increased. For example, the government-owned Hindustan Steel Ltd., which accounts for over 50 per cent of India's steel production, has announced that it expects to export steel inventories at a loss because domestic demand is inadequate. The government has agreed that the loss would be absorbed through subsidies and by increasing domestic steel prices. The index of wholesale prices was 13.5 per cent higher at the end of September than a year earlier. (See Table 1). This was mainly due to a 15 per cent increase in food prices, a 20.6 per cent increase in industrial raw materials prices and a 7.8 per cent increase in the prices of manufactures. Table 1. India: Wholesale Price Trends 1964-66 (1952-53=100) a/ Index Numbers — Percentage Change Annual Between Periods 139.0 147.7 159.7 159.4 9.3 10.2 17.2 17.5 6.3 8.1 -0.2 151.0 158.3 165.0 169.0 8.6 7.2 3.3 6.0 -5.0 4.8 4.2 2.4 173.9 186.6 187.3 15.2 17.9 13.5 2.9 7.3 0.4 \ a/ End of period. 3. Money supply. The seasonal contraction of the money supply from the end of April to October was 3.0 per cent or Rs. 1.35 billion. This compares favorably with a contraction of 1.0 per cent or Rs. 0.44 billion for the same period last year. „ As a result, the monthly annual rate of growth decreased sharply from 10.4 per cent in April to 8.3 per cent in October. (See Table 2). OFFICIAL USE ONLY -i^- OFFICIAL USE ONLY Table 2. India: Money Supply with the Public (last Friday of the period-in billions of rupees) Quarterly Annual Percentage Rates of Change I II III IV a/ 1960-61 1961-62 5.5 3.9 3.4 4.8 6.2 7.6 9.4 9.9 1962-63 8.7 10.4 12.0 13.7 Month 1965f/ 19661/ January February March April May June July August September October 39.79 40.24 40.80 41.97 41.93 41.75 41. 12 41.04 40.93 41.53 43.63 44.21 45.30 46.34 46.14 46.05 45.63 45.33 44.55 44.99 1963-64 13.4 13.5 10.7 10.1 1964-65-' 1965-66^/ 10.0 9.3 10.6 10.2 11.0 10.3 Monthly Annual Percentage Rate of Change 9.7 9.9 11.0 10.4 10.0 10.3 11.0 10.5 8.8 8.3 Provisional. 4. Banking developments. The decrease in agricultural production and the sharp slowdown in industrial activity combined with restrictive credit and import policies, increased the seasonal reflow of funds into the banking system. In the season between harvest, May to October, deposits increased 52 per cent more than last year but credit contracted 16 per cent less. The banks used the increased liquidity to more than double their holdings of government securities and to reduce borrowings from the Reserve Bank. (See Table 3). The seasonal reflow of funds exceeded the target set by the Governor on June 29. The realized increase in deposits amounted to Rs. 2,605 million, compared with the target of Rs. 2,000 million, and the realized decrease in bank credit amounted to Rs. 845 million, compared with the target of Rs. 1,000 million. In addition, banks decreased borrowings from the Reserve Bank by Rs. 280 million and increased cash and balances with the Reserve Bank by Rs. 90 million. On October 28, the Reserve Bank policies for the harvest season beginning year. Credit expansion is expected to be of last year. The Reserve Bank estimates Governor announced an easing of credit November 1 and ending in April next Rs. 6,000 million, almost double that that the banks will be able to provide OFFICIAL USE ONLY OFFICIAL USE ONLY Rs. 3,100 million by selling Treasury bills to the. Reserve Bank and Rs. 1,200 million from deposits. net of liquidity requirements. The gap of Rs. 1,700 will be filled by borrowing from the Reserve Bank. The Governor thought that the credit expansion would be necessary to stimulate the economy. In particular, the expected recovery of agricultural production, which has since been revised, the anticipated increase in imports and the revival of industrial production were cited as factors necessitating an increasing credit expansion. The Governor stressed that 80 per cent of the credit expansion of banks with deposits of Rs. 500 million or mere should be channelled to industry, broadly defined to include plantations, mining ? transport and power generation and distribution. At the same time, he urged banks to use the refinancing facilities of the Agricultural Refinance Corporation by purchasing debentures of land mortgage banks. The Reserve Bank also announced a liberalization of bank borrowings. The bank eliminated the link between the sliding scale of penalty interest, rates on borrowings and the net liquidity ratio, Under the previous system a bank's borrowing rate increased 1 percentage point over the 6 per cent bank rate for each decrease of one percentage point in the net liquidity ratio. Under the new system, banks may borrow at the 6 per cent bank rate so long as their net liquidity ratio does not fall, below 30 per cent. In addition, even if a bank's net liquidity ratio as of October 28 were less than 30 per cent, a bank could borrow up to 10 per cent of their deposit liabilities as of October 28 at the bank rate. A penalty rate of 10 per cent will be charged for borrowings beyond these limits„ The aggregate net liquidity ratio on October 28 was 40 per cent„ The Governor advised banks that this liberalization of bank borrowings is to permit banks to increase advances to State governments and their agencies to procure foodgrains and to provide discounts for export and import bills To help banks mobilize deposit resources, the Reserve Bank decontrolled the interest rates on time deposits of 3 to 6 months and 6 to 12 months which were 5 and 5.5 per cent., respectively, but confirmed the 6 per cent rate on deposits of one year and more and the 4 per cent, rate on savings deposits. At the same time, the Governor announced that non-bank companies would be prohibited from accepting deposits from the public in excess of 25 per cent of paid-up capital and free, reservesTable 3 India: Scheduled Banks--Changes in Deposits, Borrowings from the Reserve Bank and Principal Assets (in millions of rupees) Holdings Borrowings Per Cent. Per Cent of Govt. Per Cent from Deposits Change Credit. Change Securities Change Reserve Bk„ 1965 I II III IV 554 1,273 831 745 2.,2 4, 9 3 2 7 - 2,221 362 7 12 1,023 12 3 1 8 - 3 .4 5, 1 - 453 71 1,154 - 1.41 OFFICIAL USE 0N1Y - 5 .9 . 1.0 15 .9 1,. 7 - 1,171 869 573 101 Cash & Balances with Reserve Bk. OFFICIAL USE ONLY - 6- Table 3 (cont.) Borrowings Holdings from Per Cent of Govt. Per Cent Per Cent Depos its Change Credit Change Securities Change Reserve Bk. 1966 I II III 731 1,828 1,907 April May July August—/ September October—/ 930 250 649 973 924^/ 10 159 6.1 110 289 8.9 .5 1.3 166 ,963 2,031 2.1 11.9 22.4 3.2 0.8 2.1 3.1 2.9 0.0 0.5 379 - 138 - 351 - 234 1,763 -1,240 5 1 .7 - 0 .6 - 1,.5 - 1..0 7.,8 - 5,.1 0.,0 161 279 523 1,034 960 37 482 2.0 3.4 6.1 11.4 9.5 0.3 4.3 2.6 6.2 Cash & Balances with Reserve Bk. 592 701 1,535 -208 284 - 64 434 132 399 17 1,441 111 16 174 - 24 134 - 78 19 122 41 -1 ,208 280 1,,280 1.,000 203 90 54 144 - - Comparison of Slack Season 1965 and 1966 End of April to fourth week of September 1965 1966 1/ 3/ 1/ 2/ 3/ 1.,718 2,,605 624 3.,229 6 .5 8,.6 10,.7 -1,006 - 845 442 - 403 - 5,.0 - 3,.6 - 1..7 1;,381 3;,021 294 3,,315 19..2 36,.5 40.,1 - Since scheduled State Cooperative banks accounts were included from August 12, 1966, the monthly and quarterly changes from August 1966 are not comparable with previous periods. Provisional. Scheduled State Cooperative banks. 5. Money market. The average day-to-day inter-bank rate in Bombay dipped seasonally from the 4 per cent level at the end of April to a low of 3.6 per cent at the end of July and then recovered to the 4 per cent level by the end of September. Throughout, this rate remained well below the bank rate of 6 per cent and sharply below last year's levels. (See Table 4). Although the third quarter average rate this year, at 3.84 per cent, is below last year's third quarter average rate of 5.51, per cent, it is still much higher than the 2 percent level of the third quarter of the two previous years, 1963 and 1964. The total amount of Treasury bills outstanding increased Rs. 3.86 billion (25 per cent) to Rs. 19.58 billion in the year ending September 1966. (See Table 5). Gross sales to the Reserve Bank increased 53 per cent, to State governments and approved bodies 83 per cent and to the public 54 per cent. Net Reserve Bank claims on government increased Rs. 1.64 billion (5.6 per cent) to Rs. 30.88 billion at the end of September compared with a year earlier. This increase amounts to 45 per cent of the expansion in money supply of Rs. 3.62 billion in the same period. OFFICIAL USE ONLY OFFICIAL USE ONLY Table 4. India: -7- Inter-Bank Call Money Rates in Bombay — ^ Quarterly Averages 1963 1964 1965 1966 I II III IV 5.64 4.46 2.01 2.93 5.67 5.01 2.22 3.04 5.92 7.88 5.51 5.67 4.69 4.48 3.84k/ Selected Months - 1966 January February March a/ b/ April May June 3.99 4.04 6.04 5.30 4.14 3.99 July Augus t September 3.72^ 3.86^/ 3.95k/ Average of weekly averages weighted by deposits, Provisional. Table 5. Average Rate of Discount for Auction Sales in % Per Annum -S' India: Treasury Bills and Reserve Bank Claims on Government (in billions of rupees) Gross Sales _§/ To State Govts. & Approved To To Bodies Public Reserve Bk. 1965 I II III IV 2.91 3 .50 3,.50 3,.50 .369 .584 ' 1 . 660 1 .168 1966 I II III 3,.50 3..50 3..50 January February March April May d/ Total Outstanding at End of Period Total Reserve Bank Claims , . on Govt. (Net) — — at end of Period 2.486 3.439 14 .11 15 .31 10 .81 12 .18 14.44 15.90 15.72 15.19 28.55 30.41 29.24 31.10 .758 1 .702 2,.559 1.404 1.684 4.554 11,.92 15,.83 16..58 15.25 19.22 19.58 32.30 34.02 30.88 3. 50 3. 50 3. 50 .378 .234 .147 .356 .620 .428 6.,81 3.,97 1.,15 16.01 15.31 15.25 31.83 32.12 32.30 3. 50 3. 50 3. 50 ,552 ,396 ,755 .544 .664 .476 9. 57 4. 82 1.45 17.21 18.26 19.22 34.23 34.40 34.02 d/ OFFICIAL USE ONLY OFFICIAL USE ONLY - 8 - Table 5 (cont.) Average Rate of Discount for Auction Sales in % Per Annum — ' Gross Sales a/ To State Govt. & To To Approved Reserve Bk. Bodies Public Total Outstanding at End of Period Total Reserve Bank Claims on Govt. (Net) b/£/ at End of Period 1966 July August September 3..50 3..50 3..50 1.166 .796 .597 1 .278 1,.790 1,.485 10.116 4.068 2.400 21.12 20.40 19.58 32..41 31..64 30..88 October 3. 50 .841 1..038 6.416 19.43 32..68 _§/ _b/ c/ 6/ Includes intermediate Treasury bills. From Ju!j.y 12, 1965, auction sales were suspended and Treasury bills were offered at fixed discounts. Claims on government net of deposits. Includes central and state government claims. Provisional or partial. Separate figure not available. Amount included in sales to the Reserve Bank. 6. Government bonds. The yield on a representative short-term security increased slightly from 4.20 per cent to 4.23 per cent from the second to the third quarter after dipping to a low of 4.18 per cent in July. (See Table 6). The medium-term yield decreased from 5.13 per cent at the end of June to a low of 4.75 per cent in the third week of August and then increased to 4.84 per cent at the end of September. The yield on the long-term security remained steady at 5.58 per cent during the third quarter. Compared with a year earlier, in the third quarter, the short-term yield was 0.14 percentage points higher, and the long-term yie].d was 0.06 percentage points higher. However, the medium-term rate was 0.41 percentage points lower. On July 19, subscriptions to two new central government issues were closed after subscriptions reached Rs. 2,752.3 million. Since three maturing issues amounted to Rs. 1,939.2 million (three-foutths of which was converted) net borrowings amounted to only Rs. 813.1 million, somewhat less than the Rs. 860 mill-ion which the budget authorized the government to borrow. The two new issues are a 25-year, 5.5 per cent issue priced to yield 5.56 per cent, for which subscriptions totalled Rs. 1,080.3 million and a 5-year, 4.5 per cent issue priced to yield 4.53 per cent, for which subscriptions totalled Rs. 1,672 million. These yields are higher than the prevailing yields of 5.48 per cent and 4.09 per cent on comparable issues in early July. At the same time, the large seasonal reflow of funds into banks and the lower money rates on inter-bank lending (4 per cent) and on Treasury bills (3.5 per cent) made investments in government securities attractive to the banks. Subscription to 14 state government issues were open from September 12 to 18. These issues were all 12-year maturities with a coupon rate of 5.5 per cent but some were sold at varying prices below par that would increase the yields up to 5.61 per cent. Subscriptions totalled)Rs. 982.2 million, but only Rs. 973.6 million was accepted. OFFICIAL USE ONLY OFFICIAL USE ONLY -9- In addition to the Central and State government issues, the Industrial Finance Corporation, a government-owned institution, on September 26 issued Rs. 60 million in 12-year, 5 - 5 per cent bonds priced to yield 5.61 per cent. Table 6. India: Yields on Selected Government Securities (end of period--in per cent per annum) Short — / Medium — / Long J=V 1962 1963 1964 1965 3.89 3.89 3.81 4.10 3.94 4.15 4.19 5.29 4.76 4.57 4.84, 5.53 1966 I II III 4.14 4.20 4.23 5.30 5.13 4.84 5.52 5.57 5.58 4.16 4.18 4.20 4.18 4.20 4.23 5.29 5.28 5.13 4.89 4.80 4.84 5.52 5.50 5.57 5.58 5.58 5.58 April May July Augus t September a/ b/ c/ 3-3/4 per cent N.P.B., 1968. 3-3/4 per cent 1974. 3 per cent 1986 or later. 7. Stock market. The index of variable dividend industrial securities decreased 3.9 per cent from the end of June to the end of September, when it was only 1 per cent higher than a year earlier. (See Table 7). While the sharp decline in the third quarter was partly seasonal, it was also influenced by the slowdown in economic activity. The value of new shares issued from 1961 to September 1966 depreciated 10.5 per cent below their paidup value. Of a total of 235 issues, 45 were quoted above par, 57 at par and 133 below par. In the third quarter, the amount of new capital issues decreased sharply, by 82 per cent, to Rs. 28 million from Rs. 157 million in the second quarter, The stagnation increasing proportion of total of Rs. 185 million Rs. 50 to 60 million (27 to corporate investment. ins titutions. of the capital market forced underwriters to take up an the new shares. Newspaper reports indicate that of the in new shares, in the second and third quarters, only to 30 per cent) was transferred from individual savings The remainder was acquired by government financial OFFICIAL USE ONLY OFFICIAL USE ONLY -10- All forms of assistance from government financial institutions to private industrial investment in 1965-66 amounted to Rs. 1,820 million, up 54 per cent from a year earlier. However, for the Third Plan as a whole (1961-62 to 1965-66) government assistance to private investment amounted to Rs. 5,480 million or about 13 per cent of the total estimated private sector investment of Rs. 42 billion. This is compared with Rs. 1,210 million or about 5 per cent in the Second Plan (1955-56 to 1960-61) of a total of Rs. 24 billion. Table 7. India: Quarterly Averages I II III IV Price Index of Variable Dividend Industrial Securities (1952-53=100) 1962 1963 1964 1965 1966 190.0 192.6 185.0 173.6 167.4 162.9 162.5 172.7 170.4 163.7 166.0 163.7 162.0 156.3 151.8 143.8 144.4 156.0 154.3 Monthly Averages - 1966 January February March 143.1 143.2 147.0 April May June 154.3 156.7 157.0 July August September 157.3 154.8 151.0 8. Gold market. The official rupee price of gold in Bombay increased only 9.2 per cent in the week after devaluation on June 6 compared with the seasonal increase of 5.3 per cent last year for the same week. The larger increase was probably due to uncertainties associated with the devaluation. However, the rupee price subsequently decreased more than seasonally by 6.1 per cent from the week after devaluation to the last week in September compared with a 4.2 per cent decrease in the same period last year. In the last week of September, the rupee gold price was 7.2 per cent higher than a year earlier„ However, due to the 36.5 per cent devaluation of the rupee in June, the rupee gold price in U. S. dollars in the last week of September was 32 per cent lower at $57.55 per fine ounce than a year earlier at $84.58. The price of gold converted at the official rate of exchange indicates that the official exchange rate had considerably overvalued the rupee in terms of gold prior to devaluation. (See Table 8). That this is probably still the case even after devaluation is suggested by the level of the gold price and by the wide difference between the Bombay rupee gold prices converted to U. S. dollars per fine ounce at the official rate and at the Hong Kong cross rate. (See Table 8, column 5). It will be noted that the price of gold in Bombay is quite close to the Hong Kong price when converted into dollars at the Hong Kong rate. (See Table 8, column 6). OFFICIAL USE ONLY OFFICIAL USE ONLY Table 8. 1966 Month (1) Official —/ Rate (2) a/ c/ d/ e/ £/ Hong Kong —f Rate (3) $42.66 42.67 42.17 41.48 41.70 38.49 40.75 40.29 40.77 41.92 $88.87 92.93 92.19 97.92 94.58 60.96 60.19 59.47 57.84 57.85 January February March April May June — ! July August September October b/ India: Price of Gold Bullion in Bombay —/ (in U. S. dollars per fine ounce) Hong Kong —/ Gold Price (4) $40.78 40.54 40.40 40.38 40.48 40.48 40.26 40.54 40.33 40.36 Difference (2) - (3) (5) Difference (3) - ( 4 ) (6) $46.21 50.26 50.02 56.33 52.88 22.47 19.44 19.18 17.07 15.93 f/ f/ f/ f/ 1.88 2.13 1.77 1.10 1.22 -1.99 .49 - .25 .44 1.57 Monthly averages of averages of Friday spot rupee quotations in Bombay in 14 carat gold per 10 grams converted to U. S. dollars per fine ounce. Official exchange rate of 4.7619 rupees per U. S. dollar up to the devaluation on June 6 and 7.5 rupees thereafter. (See Table 9). Hong Kong monthly average cross rates of rupees per U. S. dollar. (See Table 10). Hong Kong gold price converted from 94.5 per cent purity to fine ounces. First 5 days omitted. Estimated. Table 9. India: Price of Gold Bullion in Bombay a/ (U. S. dollars per fine ounce at the official rate of exchange) Quarterly Averages I II III IV 1962 1963 1964 1965 1966 79 .38 80 .60 82 .06 71,.41 66 .98 72,.10 69,.98 66,,42 72.24 75.99 78.60 75.38 78.31 84.46 86.63 85.32 91,.32 86,.77 59.,17 Monthly Averages -• 1966 January February March a/ 88. 87 92. 93 92. 19 April May June 97.92 94.58 60.96 July Augus t September October 60 .19 59,.47 57,.84 57.85 Average of Friday spot rupee quotations in 14 carat gold per 10 grams from August 28, 1963, converted to U. S. dollars per fine ounce at the official rate of 4.7619 rupees per U. S. dollar up to May 1966 and 7.5 rupees thereafter. OFFICIAL USE ONLY OFFICIAL USE ONLY -12- On November 2 gold controls were liberalized. The main provisions were (1) to permit manufacture of gold ornaments of higher than 14 carat purity previously prohibited, (2) to allow holdings of gold ornaments up to 2,000 grams or about $2,250 at the international price without requiring registration, and (3) to prohibit holdings of primary gold in the form of bars, ingots, slabs or billets. Newspaper reports indicate that the use of gold may be decreasing. Gold consumption for industrial uses decreased about 50 per cent since the introduction of gold controls in 1962. Bank advances against gold and gold ornaments decreased from Rs. 420 million to Rs. 200 million in the 1962-66 period. However, a government official estimates that gold smuggling still amounts to about Rs. 1,000 million per year or about $133 million at the new exchange rate. 9. Exchange rate. The devaluation weakened the free market selling rate of Indian rupee notes in Hong Kong from 10.80 rupees per U. S. dollar in May to 11.64 rupees in June. (See Table 10). The discount on the rupee from the official rate in May averaged 56 per cent. After the 36.5 per cent devaluation on June 6, the discount still averaged 36 per cent in June. However, since June the discount decreased and was 28 per cent in October. The strengthening could be due to the sharp slowdown in the rate of increase of the price level. Table 10. India: Hong Kong and Bangkok Free Market Selling Rates of Indian Rupee Banknotes per U. S. Dollar Quarterly Average I II III IV 1963 Hong Kong — 1964 1965 5 .83 6,.18 7,.05 6,.94 6.99 7.52 7.96 7.93 7.93 8.94 8.75 8.76 1966 10.23 11.23 10.93 £/ 1963 5.42 5,.70 6,.57 6..19 Bangkok —f 1964 1965 6.43 7.01 7.44 7.06 Monthly Average - 1966 January February March April May June July August September October a/ Average of month. b/ End of month. c/ FRASER Provisional. for Digitized Hong Kong 9.92 10.37 10.41 11.24 10.80 11.64 11.08 c/ 11.07 c/ 10.64 c/ 10.35 c/ OFFICIAL USE ONLY Bangkok 8.63 9.04 9.00 9.86 9.81 10.32 9.86 I®.-30 10.30 7.42 8.05 8.38 7.91 1966 8.89 10.03 10.15 OFFICIAL USE ONLY -13- 10„ International reserves and foreign trade„ India's gold and foreign exchange reserves were $657 million at the end of September, $118 million lower than at the end of June but $158 million higher than a year earlier. The reserves of the Reserve Bank decreased $76 million to $508 million and those held by the Government decreased by $42 million. (See Table 11). Since required reserves to back the currency are $420 million., free reserves at the end of September were $237 million or about one month's imports. The decline in reserves occurred in spite of a marked improvement in the trade balance as imports fell more than exports. The deficit balance decreased 45 per cent ($180 million) to $224 million for the three months of June to August from $404 million in the previous three months of March to May. (See Table 12). Exports decreased $115 million or 27 per cent while imports decreased $295 million or 35 per cent. One of the factors that initially reduced exports was the near standstill of sales to communist bloc countries, which accounted for 19 per cent of India's exports in 1965 „ Since these countries have bilateral rupee payment agreements with India the devaluation required renegotiation with each country to obtain an increase in rupee export prices. All of the communist bloc countries agreed to the 57o5 per cent increase with the exception of Russia which permitted an increase of only 47.5 per cent. In addition, exports in general were delayed due to the confusion created in the weeks following devaluation by the elimination of various forms of export subsidies and the imposition of certain export duties„ Cost calculations became uncertain and the establishment of new market prices was delayed. 'Additional uncertainties were imposed by rapid and numerous changes "in export duties and in the export commodities covered by the program* On August 16, the government reinstated cash subsidies, ranging from 10 to 20 per cent, for exports of engineering goods, sugar, steel scrap and woolen carpets to assist these exports to meet foreign price competition. Newspaper reports indicate that these new export subsidies are inadequate because of increases in domestic costs of production since devaluation. It is said that the August increase in exports represents only the clearing of export shipments that would have been made in June and July. The sharp decrease in imports during the June-August period reflects the impact of the devaluation. To soften the impact of, the increase in rupee import prices, the government reduced certain import duties, eased credit availabilities and simplified complex import licensing procedures by introducing an open general licensing system for a list of essential imports. The government expects aidfinanced imports to increase in the coming months as a result of a consortium pledge of $900 million in non-project aid. OFFICIAL USE ONLY OFFICIAL USE ONLY Table 11. Quarter India: Gold and Foreign Exchange Holdings of the Reserve Bank and Foreign Exchange Holdings of the Government (in millions of U. S. dollars at the end of the period) Reserve Bank Change Government Change Total Changt 1965 I II III IV 461 443 456 460 14 -18 13 4 63 76 48 136 12 13 -38 88 524 519 504 596 26 - 5 -15 92 ii: 5 • i ii HI 474 •584-508 14 110 -76 151 191 149 15 40 -42 625 775 657 29 150 -118 January February March 474 481 474 14 7 - 7 144 131 151 8 -13 20 604 612 625 8 8 13 April May 636 605 584 162 -31 -21 173 191 191 22 18 0 809 796 775 184 . -13 -21 July August September October 471 471 508 497 -113 0 37 -11 210 189 149 19 -21 -40 681 660 657 -94 -21 - 3 ) Table 12. Year Month India: Balance of Trade (in mi^ lions of US dollars) Imports Exports Balance 306 251 242 799 141 129 141 411 -165 -122 -101 -388 356 231 247 834 161 190 188 539 162 132 136 430 81 101 133 315 -194 - 99 -111 -404 - 80 - 89 - 55 -224 1965 July August TOTAL 1966 March April May TOTAL July August TOTAL Prepared b y : Henry F. Lee, Africa and Latin America Section, forAsia, FRASER Division of International Finance. Digitized NEW Y O R K , L O N D O N , M O N T R E A L : YIELDS FOR U . S . D O L L A R I N V E S T O R S O N 3 - M O N T H F U N D S DOLLAR DEPOSIT RATES: NEW Y O R K - L O N D O N EURO-DOLLAR DEPOSIT U . S . C E R T I F I C A T E OF D E P O S I T E U R O - D O L L A R OVER U . S . C E R T I F I C A T E OF D E P O S I T FINANCE CO. PAPER RATES (covered) : QUOTED IN NEW YORK CANADIAN FINANCE COMPANY U . K . HIRE PURCHASE \ U.S. FINANCE COMPANY Mar. Jun. Sept. 1964 Dec Mar Jun 1965 Sept Dec Mar Jun. 1966 Sept. Dec. t i ^ D O N i j r i E J . D S EURO-DOLLAR FOR U.S. DEPOSIT DOLLAR INVESTORS 180 90 O N 3 - M O N T H FUNDS RATES DAY DAY CALL 30 HIRE PURCHASE AND LOCAL EURO-DOLLAR DAY AUTHORITY DEPOSIT RATES (covered) DEPOSIT HIRE PURCHASE FAVOR HIRE P U R C H A S E DIFFERENTIAL FAVOR EURO-DOLLAR LOCAL EURO AUTHORITY DOLLAR DEPOSIT DEPOSIT FAVOR LOCAL AUTHORITY FAVOR EURO DOLLAR ; v \ DIFFERENTIAL 1964 1965 1966 v\ , Chart 3 [INTEREST A R B I T R A G E : F R A N K F U R T / L O N D O N , FRANKFURT INTERBANK LOAN ZURICH/LONDON! RATE VS. L O N D O N EURO D O L L A R RATE ( C O V E R E D ) I N TERMS Oj „ INTERBANK LOAN RATE EURO-DOLLAR T~ DIFFERENTIAL I ZURICH DEPOSIT RATE VS. LONDON I EURO-DOLLAR I FAVOR EURODOLLAR RATE ( C O V E R E D ) IN (NCS TERMS/OVW^ EURO-DOLLAR SWISS DEPOSIT RATE r DIFFERENTIAL FAVOR ZURICH FAVOR E U R O D O L L A R S P R I C I OF G O L D I N L O N D O N us doii, 35.2 35.0 1964 1965 1966 INTKMST A l B I T t A G f , UNITED S T A T I S / C A N A D A 3-MONTH T R E A S U R Y BILL RATES CAN. F I N . CO. IPAPER CANADA — • ^ U N I T E D STATES RATE D I F F E R E N T I A L A N D FORWARD C A N A D I A N V \ S P R E A D IN FAVOR OF CANADA V DOLLAR 1 0 v ,r' 3-MONTH FORWARD RATE COVERED , \ A . RATE D I F F E R E N T I A L S (NET I N C E N T I V E S ) FAVOR CA P R I M E F I N A N C E PAPER FAVOR U.S. FAVOR C A N A D A TREASURY BILLS FAVOR U.S. I IIIIIII 1963 1964 INTEREST ARB'ITRAGI 3-MONTH TREASURY Nfc* BILL >ORK/LONDON RATES ; LONDON U.K. LOCAL AUTHORITY DEPOSITS ! NEW YORK RATE D I F F E R E N T I A L FORWARD [ AND STERLING I V 3-MONTH I i f-- | I " i ! SPREAD IN FAVOR OF LONDON PREMIUM DISCOUNT FORWARD RATE ^ t \ RATE D I F F E R E N T I A L WITH FORWARD i EXCHANGE COVER (NET INCfeNtfVfe) IN FAVOR OF LONDON IN FAVOR OF NEW YORK 1963 1964 1965 1966 r 0 S H O R T - T E R M INTER t S f j R J l T ES * U.K. i E l j f t § - b D L L A R - LONDON ' W U.S. SWITZERLAND JAPAN CANADA U.S. 11.1 1962 * 1963 1964 1965 3-month treoiury bill ratei for all cou nlr let except Japan (Average rote on bank loam o-nd ducounu J Switzerland /3 monlh depovt rate) and Germany (inter bank loon Role) 1966 L O N G - T E R M B O N D YIELDS GERMANY EURO DOLLAR BONDS NETHERLANDS CANADA U.S. SWITZERLAND 1962 1963 1964 */Avirafl« of yields lor four foreign government dollar bonds quoted in London 1965 1966 S P O T E X C H A N G E RATES - M A J O R C U R R E N C I E S A G A I N S T U . S . D O L L A R S W I S S FRANC / GERMAN MARK U.K. STERLING BELGIAN FRANC FRENCH FRANC i_ DUTCH GUILDER CANADIAN DOLLAR ITALIAN LIRA JAPANESE YEN M J S 1964 D M J 1965 s D M S 1966 D V3 3-MONTH AGAINST FORWARD U.S. EXCHANGE DOLLARS —NEW RATES YORK Per cenl per onnum PREMIUM GERMAN MARK V SWISS FRANC POUND STERLING DISCOUNT — T T DUTCH GUILDER FRENCH FRANC j CANADIAN DOLLAR DISCOUNT AGAINST POUND STERLING — L O N D O N PREMIUM SWISS FRANC I : ' ,\M I GERMAN MARK U.S. DOLLAR M J s [1964 D M J 1965 s D M J 1966 ' S D Chort 10 | loiio icole 300 SWITZERLAND 250 GERMANY U.K. 200 U.S. 150 100 300 250 JAPAN 200 CANADA /v' 150 100 1963 1964 Swill Bonk Corporation induttriol Hock ind«» Japan: inde* of 22 5 industrial and other slocks traded on the Tokyo exchange 1965 1966 fit H. 13 No. 277 December 7, 1966 III. Latest Figurei Plotted in H.13 Chart Series. 196 6 (#11 figure* per cent per annua) Upper Panel Chart 1 (Wednesday, Nov. 30 ) Buro-$ Deposit 6.88 U.S. certif. of deposit Lower Panel (Friday, U.S. Canada Hire-purchase paper, U.K. U.K. U.S. Forward pound -0.52 Net incentive (U.K. +) +0.92 Chart 6 (Friday. Dec. 2 Chart 2 (Friday, Dec. 2 ) Treasury bills: Buro-$ deposits: _6.50_ 7.50 Treasury bills: Spread favor U.K. Dec. 2 Finance co. paper: Call 7-day 30-day Chart 3 Cfriday, Dec. 2 90-day 180-day 7. 63 Hire-purchase paper (Nov. 25) 7.25 Local-authority deposit (Nov. 25) Chsrt 3 Upper Panel (Period: Nov. 24-30 ) U.S. U.K. Canada Interbank loan rate (Careen) (Nov. 24-30) • Euro-? deposit (London) Zurich 3-ao. deposit (Date: Nov. 15 Japan coaposit rate (Date: Sept. 30 Chart 7 Interbank loan (aid-point) 7. 23 Buro-$ deposit (averege) 7.25 U.S. Gov't. (Wed.. Nov. 30 ) ) Lower Panel (Date: Nov. 15 Zurich 3-ao. deposit Price of gold (Friday, Nov. 25) Chart 4 (Friday, Dec. 2 Net Incentive (Canada +) Canadian finance paper 6.9: German Fed. (Fri., Nov. 25 ) 8.0^ 35.166 Swiss Confed. (Fri.. Nov. 25) 4.1: Canadian Gov't. 5.9: 5.01 5.13 -0.12 Canada U.S. Spread favor Canada Forward Canadian * U.K. War Loan (Thurs., Dec, l) 4.25 ) Treasury bills: • +0.37 . 4. 7S +0.25 6.38 (Wed.. Nov.3d> Netherlands Gov't perpetual 3% (Friday, • Nov. 25 ) 5. 9^ Buro-$ bonds (Fri., 6.31 Dec. 2 ) For descriptions and sources of data, see special supplement to H.13, Nuaber 239, March 16, 1966. * Oct. 15 4.25 Nov. 7 4.25 23 4.25 15 4.25 30 4. 25
@FedFRASER