"The global economic and financial crisis had a relatively muted effect on India, due to the country's limited dependence on external demand, and strong fiscal and monetary stimulus measures," the Treasury Department said in its semi-annual report to the US Congress.

Delayed by nearly three months, the 35-page report to the Congress on international economic and exchange rate policies, however, notes that the rate of growth of the Indian economy slowed down during the period of the global economic crisis, though it has bounced back.

"Economic growth slowed to 6.8 per cent in 2009, compared to an average rate of 9.4 per cent in 2005 to 2007. Real GDP expanded by 16.8 per cent on a seasonally adjusted annualised basis in the third quarter of 2009, before contracting in the fourth quarter by 2.8 per cent as the worst monsoon in nearly 25 years resulted in a steep decline in agricultural output," it said.

"The fourth quarter was only a pause in the recovery. The economy grew by 13.5 per cent on an annualised basis in the first quarter of 2010. The IMF expects the Indian economy to grow by 9.4 per cent in 2010," the report said.

Noting that the 2009 monsoon boosted inflation, it said rising food prices pushed average monthly CPI inflation to 13.3 per cent year-over-year in the second half of 2009, compared to an average of 9.6 per cent in the first half of the year.

In April, 2010, CPI inflation in India stood at 14.4 per cent.
As a result of India's robust recovery in the second half of 2009 and rising inflationary pressures, the Reserve Bank of India (RBI) and the Indian government are normalising monetary and fiscal policy conditions, it said.

In January, 2010, the RBI raised its cash reserve ratio by 75 basis points (to 5.75 per cent) to reduce excess liquidity in the banking system.

In March, it raised both the repo (lending) and reverse-repo (liquidity absorption) rates by 25 basis points. Subsequently, in April, it raised all three policy rates by an additional 25 basis points, the report said.

In its latest annual Budget, the Treasury informed the Congress that the Indian government is aiming at a modest fiscal consolidation to reduce the central government fiscal deficit to 5.5 per cent of GDP from 6.9 per cent of the GDP in FY2009-10.

The planned deficit reduction would be achieved through increased revenue mobilisation, rather than cutbacks in government spending.

India is expected to continue to pursue fiscal consolidation, due to its large general government deficit (about 11 per cent of the GDP in FY2008-09) and high public debt to GDP ratio (about 80 per cent, substantially higher than most emerging market economies), it said.

Observing that India's official exchange rate arrangement is a managed float and the rupee moved significantly in both directions during 2009, the report said the rupee was unchanged against the dollar in the third quarter of 2009, but appreciated by 2.8 per cent in the fourth quarter in line with improvements in risk appetite and capital inflows.
"The rupee appreciated an additional 4.6 per cent in 2010 through April, but has since fallen 4.0 per cent through mid-June.

"On a real effective basis, the rupee appreciated by 3.9 per cent in the second half of 2009 and by 9.6 per cent during the first five months of 2010, according to the BIS index.
"Foreign currency reserves rose by USD 4.5 billion in the second half of 2009 to USD 259 billion and as of end-March, 2010, declined to USD 255 billion. The changes were due primarily to valuation effects," it said.

Noting that the stated aim of foreign exchange intervention is to smooth volatility, the report said: "While the RBI seeks to achieve its monetary objectives of price stability and well-anchored inflation expectations by adjusting market liquidity through its policy rates and the cash reserve ratio, at times, it has used the exchange rate to help meet monetary objectives."