1. Global Economic Prospects and the Indian Economy Usha Thorat September 2010

2. 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 3 Forecast for 2010 and 2011 Per cent

4. IMF's World Output Growth Forecast 4 20102011 World4.64.3 Advanced Economies2.62.4 Emerging and Developing Economies6.86.4 India9.48.4 Source: IMF, WEO (Update) July-2010 (Per cent)

5. Indian Economy - Growth Trajectory 5 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 Per cent

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

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

8. 8 Monetary and Inflation conditions Inflation - WPI and CPI

9. Fiscal Situation: Key Indicators YearPrimary deficitRevenue deficitGross Fiscal Deficit (1)(2)(3)(4) Centre 2008-092.64.56.0 2009-10 RE3.15.36.6 2010-11 BE1.94.05.5 States 2008-09#0.6-0.22.4 2009-10 RE#1.60.83.4 2010-11 BE#1.00.42.9 Combined 2008-093.44.38.5 2009-10 RE4.86.010.0 2010-11 BE3.04.48.3 RE: Revised Estimates; BE: Budgeted Estimates. # : data pertain to 27 State Governments.

10. 10 Current Trends - Real GDP Growth (Per Cent) Item 1950-802005-062006-072007-082008-092009-10@2010-11 Q1 (Average) 12345 678 1.Agriculture and Allied Activities 2.15.23.74.71.60.22.8 (18.1)(17.2)(16.4)(15.7)(14.6)(14.0) 2.Industry 5.48.113.69.33.110.411.4 (20.0)(20.7) (20.0)(20.5)(20.8) 2.1 Mining and Quarrying 4.61.38.73.91.610.68.9 2.2 Manufacturing 5.39.614.910.33.210.812.4 2.3 Electricity, Gas and Water Supply 9.66.610.08.53.96.56.6 3.Services 4.511.310.210.49.38.39.4 (61.9)(62.2)(62.9)(64.4)(64.9)(65.2) 3.1 Trade, Hotels, Transport Storage and Communication 5.112.111.710.77.69.312.2 3.2 Financing, Insurance, Real Estate and Business Services 3.512.814.513.210.19.78.0 3.3 Community, Social and Personal Services 4.37.62.66.713.95.66.7 3.4 Construction 4.912.410.610.05.96.57.5 4. Real GDP at Factor Cost 3.59.59.79.26.77.48.8 (100) Figure in parenthesis are percentage share to GDP; @: Revised estimates Source: Central Statistical Office

11. Demand Side Drivers of Growth 11 (Percentage to GDP ) 2008-092009-102009-10 Q12010-11 Q1 ShareContributionShareContributionShareContributionShareContribution Private Consumption59.578.257.633.459.933.556.522.6 Government Consumption11.533.611.815.711.530.811.916.3 Gross Fixed Investment32.925.832.830.831.2(-)4.430.523.7 Net Exports(-) 6.2(-) 36.2(-) 5.17.8(-) 4.836.4(-) 5.2(-) 9.8 Source: CSO

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

13. 13 Growing Openness India’s Trade Openness (% of GDP) ExportsImports Current Account Capital Account 1990s8.010.826.815.1 2000s12.217.545.433.8 2009-1013.922.855.248.3 Source: RBI

14. Increased Tradability of Services

15. 15 Current Account Balance & Capital Inflows

16. 16 Capital Flows US $ billion Item 2008-092009-10 Apr-Mar 1. Inward FDI35.231.7 2. FIIs-15.029.0 3. ECBs7.92.5 4. NRI Deposits4.32.9 5. Other Banking Capital-7.5-0.8 6. Short-term Trade Credits-1.97.7 Total7.253.4 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 (US $ million) 2006-072007-082008-092009-10 April-July 2009-10 April-July 2010-11 Equity16,39426,75727,80722,90810,3817,557 Re-invested Earnings5,8287,6796,4288,079 Other Capital*517292757695 Total22,73934,72834,99231,68210,3817,557 * Inter company debt transactions of FDI entities

18. FDI inflows as percentage of Gross Fixed Capital Formation, 2007-2009 (Per cent) 18 200720082009 Argentina 10.212.77.6 Brazil 14.514.79.9 Chile 38.636.436.3 Mexico 11.99.26.1 China 6.05.34.0 Hong Kong, China 130.3138.9110.2 Korea, Republic of 0.93.12.4 Taiwan Province of China 9.06.44.0 India 6.39.68.4 Indonesia 6.46.62.9 Malaysia 21.216.83.5 Philippines 13.86.38.2 Singapore 89.320.832.9 Thailand 17.411.49.2 World 16.912.69.1 Source: World Investment Report 2010

19. Net FIIs Inflow and Exchange Rate Movement

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

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

22. FDI Confidence Index:2010 22

23. Sovereign Credit Ratings of Top Ten Debtors amongst Developing Countries YearStandard & PoorsMoody'sFitch's RatingOutlookRatingOutlookRatingOutlook ChinaA+StableA1StableA+Stable RussiaBBBNegativeBaa1PositiveBBBNegative TurkeyBB-NegativeBa3StableBB-Stable BrazilBBB-StableBa1StableBBB-Stable IndiaBBB-StableBaa3PositiveBBB-Stable MexicoBBB+StableBaa1StableBBB+Negative IndonesiaBB-StableBa3StableBBStable PolandA-StableA2StableA-Stable ArgentinaB-StableB3Stable HungaryBBB-NegativeBaa1NegativeBBBNegative Source: India's External Debt - A Status Report, 2009 Note: For India data are updated upto June 2010 23

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

25. Global Stock Markets Country/Index Percentage Variation (year-on-year)Percentage Variation End-March 2009End-March 2010Sept. 7, 2009 over March 31, 2009 Sept. 7, 2010 over March 31, 2010 12345 Developed Markets US (Dow Jones)-38.042.724.8*-4.8 US (NASDAQ)-32.956.933.3*-7.9 FTSE UK 100-31.144.725.6-4.8 Euro area (FTSE 100)-40.144.831.6-2.3 Japan (Nikkei 225)-35.336.827.3-16.8 Hong Kong (Hang Seng)-40.656.452.00.8 Emerging Markets Russia-66.4128.058.5-7.6 Brazil-32.971.941.4*-5.2 ** South Korea-29.240.333.45.6 Singapore-43.569.9 55.5 5.1 Argentina-46.5110.8 60.7 1.9 India-37.980.5 65.0 6.4 China-31.731.0 21.4 -13.2 Memo: World (MSCI)-44.049.1 34.8 -6.4 EMEs (MSCI)-48.477.3 51.8 -0.4 * As on Sept. 8, 2009. ** As on Sept. 6, 2010. Source: Bloomberg.

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

27. Select Financial Indicators - All Banks (per cent) Mar-08Mar-09Mar-10Jun-10 CRAR13.0113.9814.5414.35 Core CRAR9.069.5710.139.99 Gross NPAs to Gross Advances2.392.442.502.55 Net NPAs to Net Advances1.081.13 1.10 Provision Coverage Ratio (PCR)52.5 50.6 53.855.8 Interest spread2.692.722.693.03* Return on Total Assets1.131.141.061.13* Return on Equity15.1814.4913.3313.44* Data on Capital Adequacy cover overseas operations; other data based on domestic operations only Figures on CRAR, Core CRAR are as per Basel – II, except for Mar-08, which is as per Basel-I * annualized PCR (%) = Provisions For Credit Losses * 100/Gross NPAs Interest spread = Net Interest Income * 100/ Avg. Total Assets Return on Total Assets = Profit after Tax * 100 / Avg. Total Assets Return on Equity = Profit after Tax * 100 / Avg. Total Assets

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. 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 %