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Saturday, 18 February 2012

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Balance of Payments to record surplus

As has been announced from time to time, the Central Bank has been intervening in the domestic forex market in recent years to build up foreign reserves and to smooth out any undue fluctuations in the exchange rate. Such interventions resulted in the build up of foreign reserves to a historically high level of US dollars 8.2 billion by August 2011, thereby preventing an excessive appreciation of the rupee.

However, during the second half of 2011, the widened trade deficit underpinned mainly by the sharp increase in import expenditure necessitated the Central Bank to supply foreign exchange to meet a part of such increased demand, despite increased receipts on account of remittances, tourism and inflows to the capital and Financial Account, a Spokesman of the Central Bank said.

Although the Central Bank expected this import demand to decelerate towards the latter part of 2011 due to the uncertain global conditions, such a moderation did not take place and therefore, on February 3, 2012, the following policy measures were introduced to strengthen the external sector of the economy, and to contain the high growth in bank credit: first, an increase in the policy interest rates by 50 basis points with effect from February 3, so that the resultant increase in borrowing cost would restrain credit growth leading to the reduction of import demand; and second, a Central Bank direction to commercial banks to limit their credit expansion in 2012 to 18 percent 23 percent if 5 percent of funds could be raised from abroad] as compared to the 2011 increase of 34 percent, with a view to effectively reduce the quantity of credit granted.

At the same time, in view of increased oil prices in the international market, the government has also decided to increase the domestic prices of petroleum products with effect from February 12, 2012. Such policy action would encourage energy conservation and help reduce the use of oil products, thereby reducing the expenditure of imports further.

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