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Flow of Funds reflects changes in Indian economy

Posted on Feb 13, 10:26AM | UNI

New Delhi, Feb 12 : An RBI study shows that Flow of Funds (FoF)for 2008-09 to 2009-10 reflected the changes in the Indianmacroeconomic and financial envirnoment which translated from arobust state in 2007-08 to period when overall growth and privatesector investment slumped and financial markets came under pressure under the indirect impact of the global financial crisis in 2008-09 but recovered fairly quickly in 2009-10 and coordinated fiscal monetary policy actions took effect.

Aggregate financial claims issued by all sectors as a ratio to
national income declined in 2008-09 but recovered in 2009-10, and
were, in fact, placed above the average during 2003-04 to 2007-08.

The decline in the total claims issued in 2008-09 was primarily

reflected in the private corporate business followed by the rest of the world and other financial transactions. The claims of the

government sector increased, reflecting in overall borrowings necessitated by the fiscal stimulus measures.

The claims of almost all sectors particularly, the private business and other financial institutions (including insurance and mutual funds) recovered substantially in 2009-10.

The financial claims of the government sector declined only
marginally as the fiscal stimulus programme continued.

The claims of the banking sector, however, declined further
in 2009-10 which, resulted from inter-alia, the unwinding of the Market Stabilisation Scheme (MSS) balances.

The resource gap of the private business sector narrowed in
2008-09 as investment declined more than savings. This was reflected across the major sources of funding, especially the rest of the world and banks. In 2009-10, as macroeconomic conditions improved, the higher financial financial deficit of the private corporate business sector was funded largely by the banking and rest of the world.

The household sector remained the finacial surplus sector. The
financial surplus of the households declined somewhat in 2008-09 but increased in 2009-10, in line with their financial savings. A major chunk of household financial surplus was invested in bank deposits in 2008-09. In 2009-10 the share of household financial surplus channelised towards other financial institutions increased with a turnaround in the financial position.

The share of both bank deposits and government securities in total financial claims issued by the sectors, increased while that of non-government securities (in mutual funds) declined during 2009-09 against the backdrop of financial market uncertainty, In 2009-10, the share of non- Government securities in total financial claims improved significantly.

The finance rate, the financial inter-relations ratio and the new issues ratio declined in 2008-09, but recovered in 2009-10 to
somewhat above trend, indicating the pace of financial deepening had largely recovered in 2009-10.