The major areas of worry are the industrial slowdown and high money supply growth. And, of course, the cloud of political uncertainties.

Given this background, Reserve Bank governor, Bimal Jalan, is likely to stay clear of interest rate and cash reserve ratio (CRR) cuts and instead focus on structural issues to clear the bottlenecks and smoothen the flow of credit given that the banking industry the fiscal 1999 with a sharp drop in credit offtake--12.9 per cent, down from 16.4 per cent growth in the previous fiscal.

The banking industry missed the Reserve Bank-set target of a 15 per cent growth in credit as the shadow of industrial slowdown loomed large over the Indian economy in FY 1999. This, coupled with tighter prudential and asset classification norms, is likely to tell onthe profits of the industry.

The year also witnessed a drop in credit growth due to a fall in non-food credit, which grew by Rs 37,594 crore as on March 26, 1999, as compared to the Rs 40,789 crore growth in the previous year. Overall bank credit grew by Rs 41,925 crore in fiscal 1999, down from Rs 45,677 crore in the previous year.

Analysts have attributed the tardy credit growth to the sluggish industrial growth with the overall production registering an annual increase of 4.9 per cent in February '99 and 3.9 per cent during April-February 1998-99.

With no signs of credit offtake, banks were forced to deploy funds in government securities. The sovereign gross borrowing programme--initially pegged at Rs 86,000 crore--was raised to Rs 79,876 crore. The large size of the borrowing programme depressed market sentiment. After a brief spurt in April on expectations of rate cuts, bond prices fell with every government security auction.

The growing presence of the government in the debt market sawinvestments by banks rising by 16.2 per cent as compared to 14.6 per cent in 1997-98. Banks' investment in government securities grew by Rs 35,414 crore as compared to Rs 28,192 crore in the previous year. This in effect means that the banking sector contributed nearly 40 per cent of the gross government borrowing of Rs 92,000 crore. Investments on March 26 stood at Rs 2,54,119 crore.

The nuclear tests conducted by India and Pakistan in May were followed by economic sanctions by the US and other developed nations.

This led to the government of India launching the Resurgent India Bond issue (RIB), which mopped up $4.2 billion from non-resident Indians (NRIs). Despite RIB inflows of Rs 17,945 crore, deposits grew at a slower pace in fiscal 1999. Aggregate bank deposits grew at 18.5 per cent in 1998-99, down from 19.7 per cent in 1997-98 although in absolute term, deposits grew by Rs 1,11,861 crore, up from Rs 99,811 crore. Excluding the RIB proceeds, the growth in deposits would be much lower at 15.5 percent during the just concluded year.

Growth in broad money (M3) has been targeted at 15-15.5 per cent, during the last two fiscals. Actual growth in 1997-98 was recorded at 17.6 per cent while the year-on-year (YoY) growth till March 12 was 18.6 per cent. A break-up of the components of broad money growth reveals a significant growth in time deposits with banks. Apart from the Rs 17,945 crore lumpy inflow arising from RIB receipts in September 1998, increased preference of the household sector for relatively risk-averse investment avenues has been the primary driver for deposit growth.

Although reserve money during the week ended March 26 fell by 4.1 per cent, on a YoY basis, reserve money grew by 8.6 per cent in 1998-99, up from 7.3 per cent in the previous year. Monetisation has been a significant source of growth in reserve money. The significant difference has been primarily due to the fact that private placement in 1997-98 were concentrated in March'98. Reserve Bank credit to banks and commercialsector has grown 56 per cent on a YoY basis. The primary reason behind increased credit to banks was the growth in utilisation of export credit refinance following the reduction in rate from 9 per cent to 7 per cent in August'98.

The government's dependence on the ways and means advances (WMA) fell by Rs 1,846 crore to Rs 2,873 crore on March 26. This amount was vacated by March 31. Out of total amount of Rs 83,763 crore (excluding borrowings through 364-day T-bills) raised by the government through its borrowing programme in fiscal 1999, Rs 38,305 crore was either privately placed or devolved on the Reserve Bank. The central bank, however, sold securities worth Rs 26,348 crore, which effectively means that the RBI has monetised Rs 11,477 crore in 1998-99.

The trade deficit has increased to $7.79 billion in the first ten months of the fiscal compared to $5.58 billion in the corresponding period last year. Exports declined by 2 per cent during this period. The fall in international oil prices was a savinggrace and oil imports declined by 25 per cent. Non-oil imports have grown by 12.5 per cent. The overall balance of payment position appears comfortable with the forex reserves of the country touching an all-time high of $32 billion as on April 1. But the caveat is that the current account deficit has touched 2.1 per cent of GDP.

Lower crop output had resulted in sharp increase in inflation of primary articles this year, with prices of vegetables rising by 170 per cent in November. Lower demand in the economy combined with softer international prices resulted in low inflation in manufactured goods as well as fuel products. The divergence in inflation of primary articles and manufactured products was reflected in the consumer price index inflation, which peaked at 19.7 per cent in November. After the last harvest, prices of food articles have declined. Consequently, WPI inflation has eased to around 5 per cent and inflation (based on consumer price index) has dipped below 10 per cent.

The rupee at thebeginning of the fiscal was at a nervous $39.5, after the steep fall in east-Asian currencies. Following the nuclear tests conducted in May and the sanctions later on, the currency came under sustained pressure and dipped to $42.40. And as the six-month annualised forward premia shot up to touch almost 20 per cent, the Reserve bank indicated that it would monitor "excessive speculation" and eased forward cover restrictions on foreign institutional investors.

The Russian default crisis in August triggered off another round of depreciation in emerging markets currencies and the rupee dropped to a new low of $43.70 in August. In order to defend the currency, The Reserve Bank raised the repos rate by three percentage points to 8 per cent and banks' cash reserve ratio (CRR) to 11 per cent from 10 per cent.

Authorised dealers were asked to report peak intra-day open positions in addition to the end-day positions in a measure to curb speculation. These moves have been effective and the rupee has traded in the$42.40-42.80 range since then.

The money market was also affected by these tightening measures. The repos rate of 8 per cent set an effective floor for call money rates.

Since at that margin, call rates are the cost of liquid funds in the banking system, the yields of liquid securities in the below three year segment also tightened. At the same time, low activity in the long-end combined with aggressive OMO sales by the Reserve Bank have prevented the long end of the yield curve from shifting significantly. However, after a three-pronged rate cut on March 1, the yield curve on gilts steepened significantly with the yield differential between the one-year and ten-year securities widening to 200 basis points.