ROYAL MONETARY AUTHORITY OF BHUTAN

ROYAL MONETARY AUTHORITY OF BHUTAN MONETARY POLICY STATEMENT MAY 2015

ROYAL MONETARY AUTHORITY OF BHUTAN This Report has been prepared by the Royal Monetary Authority of Bhutan in accordance with Chapter II Section 10 of the RMA Act of Bhutan 2010. Unless specified, the source of data presented in tables and charts is the Royal Monetary Authority of Bhutan or the National Statistics Bureau. Macroeconomic projections presented in the Outlook Section of this Report have been prepared by the multi-sector Macroeconomic Framework Coordination Technical Committee composed of various government and statistical agency representatives, and led by the Ministry of Finance, Royal Government of Bhutan. Projections and assumptions adopted thereof are a representation of collective judgment. For monthly, quarterly and annual publications of the Royal Monetary Authority of Bhutan, please visit the RMA website. All rights reserved. Please acknowledge if material is reproduced. P.O Box 154 Thimphu, Bhutan Telephone: +975-2-323110, 323111, 323112 Fax: +975-2-322847 Email: rma.rsd@rma.org.bt Website: www.rma.org.bt RMA Financial Literacy Webpage: www.rma.org.bt/flp/index.html

CONTENTS ACRONYMS... v GOVERNOR S STATEMENT... vii I. The State of the Bhutanese Economy: Recent Developments... 1 II. Bhutan s International Reserve Status... 4 III. RMA Monetary Policy Operations: FY 2013/14 FY 2014/15... 6 IV. Medium Term Outlook for Bhutan: FY 2014/15-2016/17: Risks and Challenges... 10 ANNEX 1... 13 ANNEX 2... 21 ANNEX 3... 22 Monetary Policy Statement May 2015 iii

ACRONYMS CASA Current and Savings Account deposits CC Convertible Currency CPI Consumer Price Index CRR Cash Reserve Ratio FY Fiscal Year (July 1 June 30) GDP Gross Domestic Product GOI Government of India INR Indian Rupees M2 Broad Money MFCC Macroeconomic Framework Coordination Committee MFCTC Macroeconomic Framework Coordination Technical Committee NBFI Non-Bank Financial Institution NPL Non Performing Loan NPPF National Pension and Provident Fund NSB National Statistics Bureau RBI Reserve Bank of India RGOB Royal Government of Bhutan RMA Royal Monetary Authority of Bhutan RSEBL Royal Securities Exchange of Bhutan Limited RSTLAW RMA Short Term Liquidity Adjustment Window SBI State Bank of India SCF Standby Credit Facility (also referred to as Line of Credit, LoC) SLR Statutory Liquidity Requirement WPI Wholesale Price Index y-o-y Year-On-Year Monetary Policy Statement May 2015 v

GOVERNOR S STATEMENT Vigilance over credit growth and financial soundness will continue to remain the important policy imperatives for the Royal Monetary Authority of Bhutan. Annual growth in credit to the private sector, which had been averaging 33 percent in the five years up to 2012 was contained at below 10 percent in 2013 and 2014. Since then, and following the reintroduction in September 2014 of housing and vehicle loans (suspended in 2012), annual credit growth has increased to 9.4 percent as of December 2014 and further to 13.5 percent as of March 2015. Credit growth was expected to pick up immediately, partly to meet new as well as pent-up demand for housing and vehicle loans. The housing sector continues to dominate the loan portfolios of the financial institutions. The RMA therefore, will continue to vigilantly monitor credit growth to mitigate risks and potential pressure build-ups through targeted macroprudential policy measures, such as the tightening of loan-to-value and loan-to-income ratios for the housing and vehicle portfolios. Macro prudential regulations pertaining to the restriction on distribution of profits, debt to equity ratio, loan to value and loan to income, minimum ceiling on leverage ratio and the margin requirement component of the time varying capital provisioning and margin requirement have already been implemented. In addition, the RMA will also implement the time varying capital component as well as the disclosure requirements within the next fiscal year. Counter-cyclical measures aimed at leaning against the financial cycle such as counter-cyclical capital buffer and sectoral capital requirement are also in place to be implemented if required. The RMA is also finalizing its Liquidity Management Strategy and Plan as part of its overall objective of developing market-based monetary policy instruments. In the meantime, the RMA continues to rely on the cash reserve ratio (CRR) and statutory liquidity requirements (SLR) to regulate domestic liquidity. The CRR was increased from 5 to 10 percent from March 2015 to sterilize persistent excess liquidity in the banking system. On the reserves front, the RMA s recent efforts have focused on managing recurrent pressures on Indian Rupee reserves. The operational threshold for convertible currency reserves established as part of the RMA s reserve management policy will ensure adequate composition of reserves Monetary Policy Statement May 2015 vii

between the Indian Rupee and other convertible currency to position for Indian Rupee needs. The RMA has not availed any short-term overdraft since June 2013 and the Indian Rupee Swap loan from the RBI was also fully liquidated in September 2013. However, the current account deficit, driven by the trade deficit, remains and is projected to remain elevated at over 25 percent of GDP over the medium term, while the current account deficit continues to be financed by major grants and loan inflows. Therefore, even though pressures on reserves have abated somewhat, we cannot allow room for complacency. Lessons learnt since 2012 must be structured into cohesive long-term strategies by all stakeholders in both the public and private sectors for a sustainable recovery process. With the worst of the 2012 imbalances behind us, the RMA is keen to support growth and recovery efforts. Recovery is on the horizon with the GDP growth forecast at around 6 percent for FY 2014/15 and FY 2015/16. Growth in the construction and manufacturing sectors are expected to improve with the lifting of the 2012 credit measures. Inflation decreased to 6.7 percent in the last quarter of 2014 and further to 6.3 percent by the first quarter of 2015. The Reserve Bank of India recently adopted flexible inflation targeting aimed at bringing inflation to below 6 percent by January 2016 and subsequently targeting 4 percent with a band of +/- 2 percent. Since inflationary conditions in Bhutan reflect developments in India, the shift in India s monetary policy strategy to inflation targeting bodes well for Bhutan in terms of expectations of low and stable inflation. In the recent collaborative review of the financial institutions base rates, the lower band for commercial banks base rate increased marginally to 10.49 percent for 2015 from 10.32 percent in 2014 primarily because of the increase in the cash reserve ratio from 5 percent to 10 percent in March 2015. The base rate for the non-bank financial institutions has fallen to 11.57 percent from 12.00 percent in 2014. Exemptions continue for priority sectors and to support the socio-economic development of the country. In support of recovery and growth, the RMA s monetary policy stance will be accommodative while being mindful of any potential re-emergent overheating concerns. Daw Tenzin Governor May 2015 viii Monetary Policy Statement May 2015

I. The State of the Bhutanese Economy: Recent Developments 1 1. Bhutan s real GDP growth slowed down to 2.1% in 2013 from 5.1 percent in 2012. Amongst the major economic sectors, the secondary sector recorded the highest growth at 3.5% followed by the primary sector at 2.9% and tertiary at 0.3%. Sectors that performed relatively well and contributed to the overall growth in 2013 were mining and quarrying (36.2%); electricity and water (10.7%); and agriculture, livestock and forestry. The manufacturing, construction and general government sectors displayed negative real growth in the year. At the sectoral level, the tertiary sector constituted 41.5% of GDP followed by the secondary and primary sectors with 42.3% and 16.2%, respectively. 2. From an average of 9.6% in FY 2013/14, Bhutan s quarterly inflation has fallen to 6.7% in the December quarter of 2014. Inflation has also fallen when compared to 11.3% in the same quarter of 2013. The decline was driven by a significant drop in food inflation from 14.5% in the December quarter of 2013 to 6% in December 2014. Price levels in India as featured by their WPI (RBI) grew by 0.7% during the fourth quarter of 2014 compared to 7% in the same quarter of 2013. 3. As of December 2014, broad money supply (M2) 2 grew by 26% up from 3.3% (year-on-year growth) during the same period last year. Growth in M2 was contributed mainly by higher growth of net foreign assets (34.6%), followed by time and foreign currency deposits (24.6%), and transferable deposits (31.2%). Although net foreign assets continued to influence major monetary aggregates as in the past, its spillover impact has not been transmitted directly to the banking sector s credit growth in recent years due to tighter credit conditions. As a result, the growth of domestic credit has remained relatively lower, reaching 7.2% in December 2014. 4. As of the last quarter of 2014, the growth of combined assets of the financial sector 3 increased to 26% (Nu.102.5 billion). Of the total assets, 88.8% belonged to the commercial banks and the residual to 1. This section features developments during FY 2013/14 and updates as of December 2014 where available. Annex 1 presents a summary of Bhutan s key economic indicators and charts. 2. For monetary analysis, the balance sheet data of financial corporations are classified within the framework of the Monetary and Financial Statistics Manual (MFSM 2000) of the IMF. Accordingly, data classification done here are not directly comparable to those compiled and published by the Financial Regulation and Supervision Department of the RMA. 3. Excluding the NPPF. Monetary Policy Statement May 2015 1

the NBFIs. During the same period, banking sector assets alone grew by 25.4% to Nu.91 billion while that of the NBFIs grew by 31.8% to Nu.11.5 billion. NPLs increased from Nu.3.8 billion to Nu.4.0 billion recording a growth of 7.2% at the end of December 2014 against 35% in the same period last year. In particular, high NPLs were observed under the trade and commerce (23.1%), housing (19%), personal loan (17.1%) and manufacturing and industry (13.6%) sector. 5. In Bhutan s balance of payments, Bhutan s current account deficit increased from Nu.27.5 billion in FY 2012/13 to Nu.28.8 billion in FY 2013/14. The current account deficit continues to remain elevated, reaching an estimated 27.6 percent of GDP in FY 2013/14. While the trade deficit increased only marginally in the year, by 1.8 percent, the deficit has persisted at a large level, reaching Nu.22.4 billion or 21.5 percent of GDP in the year. Deficits also persist in the services and primary income accounts, with the services deficit in particular almost doubling from last year, but mainly because of improved coverage of data. 6. The net inflows in the capital and financial account were more than sufficient to finance the current account deficit. In particular, Indian Rupee denominated hydropower loans increased by 10.5 percent from 14.8 billion to 16.3 billion 4. Additionally, 9.4 billion, an almost equivalent amount as in the last fiscal year was received in FY 2013/14 as grants for hydropower development. After accounting for other flows in the capital and financial account and the net errors and omissions, against a current account deficit of Nu.28.8 billion, the capital and financial account surplus stood at Nu.31.4 billion with a subsequent increase in reserves by an equivalent of Nu.6.1 billion. At the end of the fiscal year, gross international reserves stood at USD 997.9 million increasing from USD 916.9 million as of end-june 2013. Reserves were sufficient to finance 13.0 months of merchandise imports while covering 56.9 percent of public external debt. Of the total reserves, USD 829.3 million were convertible currency reserves while 10.1 billion were Indian Rupee reserves. (Table 1). 7. Bhutan s external debt obligations as of December 2014 totaled USD 1.8 billion, increasing by 4.8% from the end of FY 2013/14 (as of June 2014). Of the total, 33% were outstanding convertible currency loans and the remaining 67%, Indian Rupee denominated debt (mostly 4. Includes interest during construction of 3 billion and 3.6 billion, respectively in each year. 2 Monetary Policy Statement May 2015

for hydropower development). Overall debt servicing FY 2013/14 amounted to an equivalent of USD 25.4 million for convertible currency debt and 9.4 billion for Indian Rupee debt. For the first half of FY 2014/15 (up to December 2014) debt servicing has amounted to USD 15.4 million on convertible currency debt and 1.9 billion on Rupee debt. As of December 2014, Bhutan s total debt outstanding stood at 111.9% of GDP and the debt service ratio at 27.9%. 8. On the fiscal front, according to the latest updates from the Ministry of Finance 5, total revenue including grants increased from 30.4% of GDP in FY 2012/13 to 33.9% of GDP in FY 2013/14. On the other hand, total expenditure fell from 36.2% of GDP in 2012/13 to 31.1% of GDP in 2013/14 being the first year of the 11 th five-year-plan with the focus on mobilizing resources and carrying out preparatory investment works. Out of the total revenue and grants, domestic revenue collection totaled Nu.23.2 billion (an increase of 10.2% from the previous year) which was more than sufficient to finance current expenditure (Nu.17.9 billion). Grants financed 41.1% of total expenditure. Total revenue and grants of Nu.37.8 billion were more than sufficient to finance total expenditure of Nu. 34.6 billion with a resulting national budget surplus of 3.9 percent of GDP, a turnaround from the 4.2% deficit in the 2012/13. 5. Source: Ministry of Finance, National Budget Report 2015-2016. Monetary Policy Statement May 2015 3

II. Bhutan s International Reserve Status 9. The RMA s recent efforts have focused on managing recurrent pressures on Indian Rupee reserves. The operational threshold for convertible currency reserves established as part of the RMA s reserve management policy will ensure adequate composition of reserves between the Indian Rupee and other convertible currency to position for Indian Rupee needs. The RMA has not availed any short-term overdraft since June 2013 and the Indian Rupee Swap loan from the RBI was also fully liquidated in September 2013. Table 1. Bhutan s CC and INR Reserves Indicators Particulars Dec '13 Mar '14 Jun '14 Sep '14 Dec '14 Total Reserves (USD millions) 933.1 965.4 997.9 1102.7 1183.9 Gross CC reserves (USD millions) 833.8 873.4 829.3 877.9 854.0 Gross INR reserves (INR millions) 6,160.2 5,532.2 10,133.3 13,844.9 20,891.6 Gross Reserves coverage (months) of total imports (goods)* 12.6 12.6 13.0 14.7 16.3 Gross reserves coverage of goods & services imports* Gross reserves coverage of essential imports** 10.1 22.7 10.1 23.5 10.5 24.3 11.8 24.4 13.1 26.2 *Reserves coverage of total imports are based on the provisional import figures for FY 2013/14 and are subject change. The data for reserves coverage are not comparable to our past publications because of change in import figures. **The essential import figure of USD 448.9 million, as defined by the March 2012 Indian Rupee Task Force, was used as a base with an incremental growth of 10% in FY 2013/14 and another 10% in FY 2014/15. Table 2. Bhutan's Reserve Position: As of May 1, 2015 Particulars 1. Total Reserves (USD millions) 948.5 2. CC Reserves Position (USD millions) 789.1 Royal Monetary Authority 753.2 Commercial Banks 35.9 3. Rupee Position (INR millions) 10,132.7 Of which, Commercial Banks' Holdings 858.2 Note: CC reserves exclude the Kuwait Fund deposit of USD 60 million 4 Monetary Policy Statement May 2015

Table 3. Summary of Major INR Flows: For 2014 by Quarter (in INR millions) Particulars Jan-Mar '14 Apr-Jun '14 Jul-Sep '14 Oct-Dec '14 Inflows 23,785.6 26,885.9 23,595.9 20,625.7 GOI Funds 8,713.8 16,305.5 12,887.0 6979.7 Hydropower 548.1 583.3 3,884.4 5768.7 Interest Income 75.3 119.2 136.1 251.4 Commercial Banks 14,448.4 6,850.1 4,847.7 6065.6 Reserve Recomposition - 3,027.7 1,840.8 1560.3 Outflows 16,816.5 19,354.6 17,403.9 16,062.1 Industry 3059.3 3375.3 2803.4 3038.4 Hydropower projects 3906.9 5892.6 4608.1 2576.8 Govt & Corporations 1010.7 1034.8 929.2 1152.4 Remittances 398.0 426.0 637.7 567.9 Card Payments 1328.22 1235.6 1143.3 1160.3 Fuel 2193.0 2166.9 1896.6 2092.1 Interest Expenses on GOI LoC 123.3 123.3 124.7 126.0 Other imports 4797.1 5100.1 5261.0 5348.1 Notes: 1) Data are as per records with the Foreign Exchange & Reserve Management Department, RMA. 2) All outflows pertain to transactions carried out through the banking system (RTGS) only and therefore exclude all INR transactions carried out in cash issued over the banking counters. 3) Other Imports include meat, footwear, vegetables, garments, vehicle spare parts, groceries, ticketing etc. 4) External Debt Service (interest or principal) is also excluded. Monetary Policy Statement May 2015 5

III. RMA Monetary Policy Operations: FY 2013/14 FY 2014/15 6 Review of Key Financial Sector Developments and Reforms 10. In line with the provisions of the Financial Services Act of Bhutan, 2011, the RMA finalized several regulations and guidelines to strengthen its role as Bhutan s integrated financial regulator. Three sets of regulations were issued during FY 2013/14 (the first two were drafted in conjunction with the Capital Development Master Plan, 2012-2014): i) The Investment Advisor and Management Company Regulations was issued in October 2014 to license investment advisory services and fund management companies; ii) The Regulation on Credit Rating Agencies in Bhutan was issued in May 2014 to license credit rating business in Bhutan; and, iii) The Macro Prudential Rules and Regulations was issued on 7 May, 2014, to support and strengthen financial sector stability and macroeconomic growth. 11. The following regulations under the Macro Prudential Rules and Regulations have already been implemented: Restriction on Distribution of profits; Debt to Equity ratio; Loan to Value and Loan to Income; Minimum Ceiling on Leverage Ratio; and the margin requirement component of the Time Varying Capital Provisioning and Margin Requirement. The time varying capital provisioning component is expected to be implemented by January 2016. The Disclosure Requirement will be implemented by December 2015 while counter-cyclical measures aimed at leaning against the financial cycle such as the counter-cyclical capital buffer and sectoral capital requirement are also in place to be implemented if required. In addition, the RMA is also in the process of setting up the Financial Stability Unit to conduct regular macro-prudential surveillance, monitoring and mitigation of potential risks to financial stability in Bhutan. 12. The Capital Markets Master Plan (2012-2014) has been formulated by a joint RMA-Ministry of Finance team. The plan lays out strategies to develop Bhutan s capital markets, strengthen the role and mandate of the Royal Securities Exchange of Bhutan Ltd, and more importantly, build domestic supply in the economy. 13. Following the 98 th meeting of the RMA Board of Directors, the RMA with effect from 1 September 2014, lifted the temporary ban on loans for 6. Please see Annex 2 for supplementary data. 6 Monetary Policy Statement May 2015

housing and personal vehicles imposed in 2012. Guidelines on housing, vehicles and consumer loans from commercial banks outlining several micro prudential provisions were issued by the RMA. 14. The RMA is also finalizing its Liquidity Management Strategy and Plan as part of its overall objective of developing market-based monetary policy instruments. The development of a liquidity management framework has been made possible with the technical assistance of the ADB under the broader ambit of supporting financial stability in Bhutan. The framework will assist the RMA in identifying the major drivers of liquidity so that it can enable the deployment of the right monetary policy tools to manage liquidity in an efficient and timely manner. 15. In the meantime, the RMA continues to rely on the cash reserve ratio (CRR) and statutory liquidity requirements (SLR) to regulate domestic liquidity. The CRR was increased from 5% to 10% from March 2015 to sterilize persistent excess liquidity in the banking system. The SLR continues to remain unchanged at 20%. 16. The RMA conducted the 3rd Base Rate Review meetings with the commercial banks in May 2015. The base rates of the commercial banks for 2015 were computed in line with their audited accounts for the year 2014 and the standing provisions contained in the Revised Base Rate Operational Guidelines. The new base rate computations reflect the RMA s accommodative monetary policy stance to channel domestic liquidity towards priority sectors that boost domestic production while continuing vigilance on demand-side external account pressures. 17. Accordingly, the base rates of the commercial banks for 2015 are as follows: Commercial Bank 2014 2015 BOBL 10.32% 10.49% BDBL 10.84% 10.67% BNBL 11.43% 11.00% TBank 10.76% 11.56% DPNBL 11.15% 10.84% Monetary Policy Statement May 2015 7

18. Compared to 2014, the lower band on the base rate has risen marginally from 10.32% to 10.49%. This was mainly due to application of CRR from 5% to 10% which became effective since March 2015. The base rates for BDBL, BNBL and DPNBL have fallen from 2014 because of the following factors: (i) fall in the CASA adjustment due to decline in the share of current account balances of the banks through RMA s sweeping facility; (ii) improvements in profit levels; (iii) growth of capital base; and (iv) improvement in deployable deposits of the banks. 19. The base rate of NBFIs for 2015 was computed at 11.57% (2014: 12.00%). This was computed by taking the average of all commercial banks base rates. The base rate for the NBFIs has declined marginally to reflect the decline in the base rates of the BNBL, DPNBL and BDBL. This marginal decline in the base rate for the NBFIs seems appropriate given Bhutan s current macroeconomic situation and renewed appetite for liquidity for domestic investment. All the cost components of the banks are implicitly accommodated while computing the average base rate of the NBFIs. Thus, the computed base rate for the NBFIs remains less competitive for the banks since the NBFIs are not required to follow stringent prudential requirements and other obligations of the RMA. 20. In order to promote the flow of credit towards priority sectors, the RMA has continued to provide the following exemptions on the base rate framework to the financial institutions: i) Loans for the agricultural sector; ii) Loans for small businesses and artisan schemes; iii) Entrepreneurship Development Program loans; iv) Staff incentive loans; v) Loans against fixed deposits; vi) Loans which call for renewal, restructuring, enhancement and rescheduling; vii) Pension membership loans of the NPPF. 8 Monetary Policy Statement May 2015

Key Policy Variables Policy variables Q4, 2013 Q4, 2014 Policy Rate 6.00 6.00 RSTLAW Rate 7.00 7.00 CRR 5.00 5.00 SLR 20.00 20.00 Term Deposit Rates 5.00-9.00 5.00-9.00 Base Rates 10.81-11.25 10.49-11.56* Government T-Bill Rate (91 days) 2.93 0.24 Economic variables Consumer Price Index (CPI) (y-o-y) 11.31 6.68 Broad Money (M2, growth %) 3.26 26.04 Domestic Credit (growth %) 2-5.81 7.17 Of which: Credit to the Private Sector (growth %) 7.96 9.43 Money Multiplier (M2/Reserve Money) 2.65 2.11 Income Velocity (GDP/M2) 1.79 1.42 */ The Base Rates for commercial banks are as of May 2015. Monetary Policy Statement May 2015 9

IV. Medium Term Outlook for Bhutan: FY 2014/15-2016/17: Risks and Challenges 7 Macroeconomic forecasts for Bhutan s medium-term are prepared by the multi-sectoral Macroeconomic Framework Coordination Technical Committee (MFCTC) taskforce and endorsed by the high-level Macroeconomic Framework Coordination Committee (MFCC), chaired by the Finance Secretary, and comprising executives from various government departments and the RMA. The compilation of macroeconomic and fiscal projections involves estimating revenues, issuing a statement of strategic fiscal policy, and establishing a budget envelope for the medium-term period. Careful monitoring of possible policy changes is vital to prepare and address emerging issues in the Bhutanese context, where a few variables can have a dramatic effect on the overall macroeconomic and fiscal picture. 21. With the momentum of activities picking up in the industry and the services sector, the GDP growth forecast for FY 2014/15 is expected to slightly improve to 6.8% from 4.7% in the previous year. The growth in the industry sector will be on account of the hydro power constructions and as well as the private constructions which is expected to improve with the reintroduction of the housing loans. The manufacturing sector is also expected to pick up and average around 8.4% during the medium term. Real GDP growth is expected to remain at around 6.3% during the medium term. 22. Headline inflation has declined in advanced economies, reflecting the decline in oil prices, softer prices for other commodities and weaker demands in a number of countries already experiencing below-target inflation. Lower prices for oil and other commodities have contributed to reductions in inflation in emerging markets. (IMF World Economic Outlook, April 2015). Similarly in India, CPI inflation was below the January 2015 target of 8 percent by close to 300 basis points. In the second half of 2014-15 so far, average food inflation fell by 340 basis points from 8.2 per cent in April-September 2014 (RBI Monetary Policy Report April 2015). With inflation in Bhutan closely tied to inflation in India, Bhutan s annual inflation decreased to 6.7% during the fourth quarter of 2014 from 11.3% during the same quarter of 2013. Bhutan s CPI inflation is expected to remain between 7 to 8% in the medium term. 7. Please see Annex 3 for a summary of Bhutan s macroeconomic projections from FY 2014/15. Projections have been revised as of March 2015 and will be different from the series published in the 2014 Monetary Policy Statement. 10 Monetary Policy Statement May 2015

23. Over the medium term, the current account deficit will continue to remain elevated averaging about 21.7 percent of GDP. Although a slowdown in hydro-related imports is expected towards the end of the medium term, Bhutan s trade deficit is expected to persist due to the large and sustained growth of non-hydro imports that are not offset by the increase in hydro exports. While hydro imports are expected to slow down with a medium-term average of Nu.18.8 billion per annum, non-hydro imports are expected to grow and average around Nu.32.7 billion per annum over the medium term. With the commissioning of Dagachhu and partial commissioning for Mangdechhu and Puna II, hydro exports are expected to improve slightly averaging at around Nu.12 billion per annum. 24. Official inflows in the form of capital transfers (grants for hydropower development) and external loans of the RGOB are expected to continue to finance the current account deficit. Consequently, with anticipated surpluses in the capital and financial account, Bhutan s overall balance is forecast to be positive in the medium term implying growth in the nation s gross international reserves (USD 1,810.2 million by the end of 2016/17). 25. On the domestic front, the fiscal deficit is expected to increase to around 3.2% of GDP by FY 2015/16 from 2.3% of GDP in FY 2014/15. The fiscal deficit is expected to improve to 0.7% of GDP in 2016/17. Domestic revenue receipts are expected to average 18.8% of GDP over the medium term while capital expenditure is expected to average 15.0% of GDP. Monetary Policy Statement May 2015 11

Outlook for India: FY 2015/16 The Government of India and the Reserve Bank of India signed a Monetary Policy Framework agreement in February 2015 marking a historical shift in India s monetary policy strategy to a flexible inflation targeting framework. The new monetary policy framework sets to achieve the monetary policy objective of price stability by using a nominal anchor numerically defined as below 6 percent CPI inflation for 2015/16 (to be achieved by January 2016) and 4 +/- 2 percent for all subsequent years. The RBI projects CPI inflation to remain below the target of 6 percent set for January 2016, hovering around 5 percent in the first half of 2015/16, and a little above 5.5 percent in the second half, based on the following assumptions: Indian crude oil basket price at US$ 60 per barrel in the first half and US$ 63 per barrel in the second half of FY 2015/16; current level of the exchange rate; no change in LPG and kerosene prices; normal monsoons during 2015/16; expected global economy growth of 3.5 per cent in 2015 (weaker by 0.3 percentage point from earlier projections) as per the WEO January 2015 update, IMF; achievement of fiscal deficit targets as indicated in the Union Budget for 2015/16; no major change in domestic macroeconomic/structural policies during the forecast horizon. India s Central Statistics Office released new GDP data, rebased to 2011/12, on February 9, 2015. Accordingly, real GDP growth for FY 2013/14 was revised upwards from 4.7% to 6.9%. Initial projections by the RBI for FY 2014/15 of 5.5 percent real GDP growth was tracked by the CSO s provisional estimates based on the old series (base:2004-05) up to the second quarter of 2014/15. Real GDP growth projections are at 7.4% for 2014-15 according to the CSO. Significant divergences between the old and new series have created difficulties in terms of accurately assessing the business cycle and appropriate monetary policy stance for the RBI. None-the-less, the macroeconomic environment is expected to improve in 2015/16, with fiscal policy gearing to an investment-led growth strategy and monetary policy using available room for accommodation. Large declines in commodity prices and the benign inflation outlook for the near-term are expected to provide a boost to growth. Source: RBI Monetary Policy Report, April 2015 and On the dragon s tail February 14 2015 issue of The Economist. 12 Monetary Policy Statement May 2015

ANNEX 1 BHUTAN: KEY ECONOMIC INDICATORS Indicator 2010/11 2011/12 2012/13 2013/14 Dec.'14 GDP Growth and Prices (percent change) GDP at Constant (2000) Price (a), (b) 11.73 7.90 5.10 2.05 n/a Consumer Prices (c) 8.33 13.53 5.51 8.60 6.7 Producer Price Index (d) -0.20 Wholesale Prices (India) (e) 9.87 7.43 4.88 5.61 0.7 Government Budget (in millions of Nu.) (f) Total Revenue and Grants 28171.80 32646.40 30656.12 33171.75 n/a Of which: Foreign Grants 10497.70 12501.50 9562.64 11179.83 n/a Total Expenditure and Net Lending 29842.40 33688.00 34900.81 37773.34 n/a Current Balance 2938.90 3439.20 2996.93 2730.60 n/a Overall Balance -1670.70-1041.70-4244.69-4601.59 n/a (in percent of GDP) -2.30-1.23-4.36-4.41 n/a Money and Credit (percent change, end of period) Broad Money, M2 21.21-1.02 18.61 6.62 26.0 Credit to Private Sector 29.36 30.07 7.07 6.44 9.4 Interest Rates (end of period) Term Deposit Rates 4.5-8.5 4.5-8.5 5.0-9.0 5.0-8.7 4.0-9.5 Lending Rates 10.0-16.0 10.0-16.0 11.5-16.0 10.0-16.0 11.7-16.0 Treasury Bills (91-days) 1.99 4.12 3.00 2.28 0.24 Balance of Payments (in millions of Nu.) Trade Balance (Goods) -20835.3-19880.6-1823.3-43055.7 n/a (In percent of GDP) -28.7-23.4-1.9-41.2 n/a With India -15160.0-12795.1-17218.5-17607.4 n/a Current Account Balance -23431.1-19571.2-6861.7-47749.4 n/a (In percent of GDP) -32.3-23.0-7.0-45.7 n/a With India -17981.1-15482.8-7740.5-43946.1 n/a (In percent of GDP) -24.8-18.2-7.9-42.1 n/a RGOB Loans 11974.7 11435.1 18447.1 18993.6 n/a Of which: India 7376.8 9878.4 14790.8 16347.5 n/a Errors and Omissions -1823.4-9516.7 2278.6 20915.4 n/a Overall Balance 797.5-9068.4 9212.2 4570.2 n/a (In percent of GDP) 1.1-10.7 9.5 4.4 n/a External Indicators (end of period) Gross Official Reserves in millions of USD 796.18 674.29 916.86 997.91 1,183.9 (In months of merchandise imports) 8.38 8.96 12.65 13.01 16.3 External Debt (percent of GDP) 79.53 87.41 98.43 101.27 111.9 CC debt (percent of GDP) 32.55 34.39 35.49 36.24 36.9 Rupee debt (percent of GDP) 46.98 53.02 62.94 65.02 74.9 Debt-Service Ratio (g) 51.65 127.13 229.20 27.01 27.9 Monetary Policy Statement May 2015 13

BHUTAN: KEY ECONOMIC INDICATORS continued. Item 2010/11 2011/12 2012/13 2013/14 Dec.'14 Memorandum Items (in millions of Nu. unless otherwise indicated) Nominal GDP (a), (b) 72496.6 84950.0 97453.0 104378.1 n/a Ngultrum per USD (fiscal year average) 45.3 50.3 54.9 61.5 Money Supply, M2 (end of period) 50209.4 50122.9 59451.2 63387.8 73366.1 Money Supply, M1 (end of period) 27901.5 31960.2 37794.1 39701.8 43296.2 Counterparts Foreign Assets (Net) 35144.5 35168.6 48566.4 53886.5 69081.6 Domestic Credit 30705.7 46466.1 52432.3 52299.0 51449.6 Claims on Private Sector 33625.2 43734.6 46824.6 49838.7 53350.1 Components Currency Outside Banks 5812.3 6390.7 5681.2 5704.6 5671.6 Transferable Deposits 22089.2 25569.5 32112.9 33997.3 37624.6 Other Deposits 22307.9 18162.7 21657.1 23686.0 30069.9 Reserve Money, M0 (end of period) 19727.6 16743.1 23997.4 26638.2 34746.4 of which: Banks' Deposits 11927.4 9397.7 16607.6 18543.7 26431.0 Money Multiplier (M2/M0) 2.55 2.99 2.48 2.38 2.11 Income Velocity (GDP/M2) 1.44 1.69 1.64 1.65 1.42 Population Growth Rate (h) 2.47 2.40 3.04 1.51 n/a Unemployment Rate (a), (i) 3.30 3.10 2.10 2.90 n/a a) On a calendar year basis, e.g., the entry under 2013/14 is for 2013. b) Source: National Accounts Statistics 2014, NSB. c) The CPI reflected in this table is for the last quarter of the fiscal year. d) The first PPI bulletin for Bhutan was released by NSB during Q2,2012 and the data available are year-on-year inflation. e) Source: Reserve Bank of India. e) Wholesale Price Index of All Commodities, Base = 2004-05. Effective August 2010, the RBI revised the base year from 1993-04 to 2004-05, creating a break in the continuity and comparison of data. The newly-recalculated WPI commences from April 2004; reference period same as for Bhutan CPI. f) Fiscal data for 2013/14 are revised estimates. g) Debt service payments in percent of exports of goods and services. h) Data on CY basis; sourced from NSB; i) Updates sourced from Labour Market Information System, MOLHR. 16 Chart 1: Sectoral Growth of GDP 14 percent 14 12 10 8 6 4 2 12 10 8 6 4 2 0 2010 2011 2012 2013 0 Agriculture Services Industry Real GDP growth (RHS) 14 Monetary Policy Statement May 2015

Chart 2: CPI Inflation (y-o-y) 20 16 18 16 14 12 10 8 6 4 2 14 12 10 8 6 4 2 0 0 Q3 Q4 Q1 Q2 Q3 percent Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2011 2012 2013 2014 Non-Food Food Overall (RHS) Chart 3: CPI Inflation (quarter average) percent 16 14 12 10 8 6 4 2 0 2011/12 2012/13 2013/14 Dec'14 14 12 10 8 6 4 2 0 Food Non-Food Overall (RHS) Monetary Policy Statement May 2015 15

Chart 4: India WPI (quarter average) 12 10 8 percent 6 4 2 0 2009/10 2010/11 2011/12 2012/13 2013/14 Dec'14 MONETARY AGGREGATES (y-o-y Growth in %) 2010/11 2011/12 2012/13 2013/14 Dec'14 M2 21.2 (1.0) 18.6 6.6 26.0 Reserve Money (4.1) (15.1) 43.3 11.0 58.3 Net Foreign Assets 0.8 0.0 36.7 11.0 34.6 Net Domestic Assets 131.9 (3.4) (25.4) (12.7) (37.6) Domestic Credit 32.7 51.3 12.8 (0.3) 7.2 Credit to the private sector 29.4 30.1 7.1 6.4 9.4 Credit to the public sector 662.7 43.4 53.8 94.3 89.1 Note: Includes only banking sector credit. 16 Monetary Policy Statement May 2015

MONETARY AGGREGATES (% Share of M2) End of period 2010 2011 2012 2013 2014 Nu. in Million M2 51,112.1 53,228.6 56,289.7 58,209.9 73,366.1 Domestic Credit 29,162.5 40,310.2 50,971.5 48,009.6 51,449.6 Credit to the Private Sector 30,808.4 40,262.5 45,158.8 48,751.8 53,350.1 % growth rates M2 16.5 4.1 5.8 3.4 26.0 Domestic Credit 58.9 38.2 26.4 (5.8) 7.2 Credit to the Private Sector 51.4 30.7 12.2 8.0 9.4 % share of M2 Domestic Credit 57.1 75.7 90.6 82.5 70.1 Credit to the Private Sector 60.3 75.6 80.2 83.8 72.7 CD ratio (%)* 70.9 91.9 102.8 100.9 87.9 CA ratio (%)** 55.0 71.2 75.0 73.4 65.4 */ CD ratio refers to credit to deposit ratio of commercial banks. This ratio is not comparable with the ratio published by the Financial Regulation and Supervision Department of the RMA, as the balance sheet data of financial corporations are classified within the framework of the Monetary and Financial Statistics Manual (MFSM 2000) of the IMF. **/ CA ratio refers to credit to asset ratio of commercial banks. Chart 5: Broad Money 80000 30 70000 25 Nu. in Millions 60000 50000 40000 30000 20000 20 15 10 5 10000 0 0 2010/11 2011/12 2012/13 2013/14 Dec'14 M2 in Millions M2 (RHS in %) -5 Monetary Policy Statement May 2015 17

Chart 6: Credit to Domestic and Private Sector 60000 35 50000 30 Nu. in Millions 40000 30000 20000 25 20 15 10 In percent 10000 5 0 2010/11 2011/12 2012/13 2013/14 Dec'14 0 Domestic Credit (LHS, Nu. mill) Credit to the private sector Chart 7: Net Foreign Assets 80000 40 70000 35 60000 30 Nu. in Millions 50000 40000 30000 25 20 15 In percent 20000 10 10000 5 0 2010/11 2011/12 2012/13 2013/14 Dec'14 0 NFA (LHS, Nu. in Millions) Net Foreign Assets 18 Monetary Policy Statement May 2015

Chart 8: Reserve Money 40000 70 Nu. in Millions 35000 30000 25000 20000 15000 10000 5000 60 50 40 30 20 10 0-10 In percent 0-20 Reserve Money Reserve Money Growth (RHS) SECTORAL CREDIT OF FINANCIAL INSTITUTIONS June end; Nu.in Million Sector 2011 2012 2013 2014 Dec'14 % of Total Agriculture 657.5 1,116.1 1,514.0 2,287.1 2,653.6 4.1 Services 4,889.8 6,164.1 6,667.7 9,896.1 8,827.2 13.8 Manufacturing/Industry 7,093.3 7,827.3 10,167.9 9,915.9 10,236.4 16.0 Housing 10,287.5 13,578.1 14,906.1 15,785.0 16,414.7 25.7 Trade/Commerce 5,806.6 4,262.8 6,751.5 8,703.7 9,892.6 15.5 Transport 4,042.9 4,881.9 3,739.1 2,751.7 2,390.1 3.7 Personal Loans 6,516.0 8,334.7 10,013.2 11,919.6 11,499.3 18.0 Loan Against Shares 255.6 522.0 557.3 640.5 702.6 1.1 Government (Short term loans) - - 1,356.7 - - - Credit Card 6.6 7.1 7.7 7.2 8.6 0.0 Others* 1,089.9 4,611.1 1,096.9 1,280.2 1,357.0 2.1 Total Loans of FIs 40,645.6 51,305.2 56,778.3 63,187.0 63,982.0 100.0 Source: Financial Institutions (excluding NPPF) *) Others includes Staff Loans, Entrepreneur Development Program and Small Business and Artisan Schemes. Monetary Policy Statement May 2015 19

NON-PERFORMING LOANS OF FINANCIAL INSTITUTIONS June end; Nu.in Million % of Sector 2011 2012 2013 2014 Dec'14 Total Agriculture 131.2 166.3 218.2 354.3 250.2 6.2 Trade/Commerce 625.2 434.5 1,812.9 2,202.2 934.2 23.1 Manufacturing/Industry 546.1 542.3 843.1 1,013.4 548.7 13.6 Services 255.1 455.2 476.4 845.3 446.0 11.0 Housing 436.6 503.5 841.9 1,324.1 768.3 19.0 Transport 300.8 450.1 492.5 633.5 385.3 9.5 Loan Against Shares 7.6 1.5 8.0 42.1 1.6 0.0 Personal Loan 416.8 483.7 779.6 1,138.5 692.4 17.1 Credit Card 2.2 5.0 6.1 3.9 3.8 0.1 Others 738.0 971.8 51.0 43.3 15.1 0.4 Total NPL 3,459.5 4,014.1 5,529.7 7,600.6 4,045.7 100.0 Total Loans of Fis 40,645.6 51,305.2 56,778.3 63,187.0 63,982.0 Total NPL Ratio 8.5 7.8 9.7 12.0 6.3 Source: Financial Institutions (excluding NPPF). SELECTED DEBT INDICATORS 2010/11 2011/12 2012/13 2013/14 Dec'14 Total External Debt Outstanding (in USD millions) 1,289.3 1,333.7 1,606.8 1,759.0 1,843.7 (Growth in %) 47.6 3.4 20.5 9.5 4.8 In % of GDP * 79.5 87.4 96.5 101.3 111.9 Rupee Debt Outstanding (in INR millions) 34,062.3 45,550.9 61,341.7 67,870.2 78,215.8 o.w. Hydropower Debt 24,647.5 32,546.3 44,369.0 56,595.9 67,085.7 o.w. Overdraft 4,914.8 5,156.0 - - - o.w. GOI Line of Credit 3,000.0 6,000.0 10,000.0 10,000.0 10,000.0 CC Debt Outstanding (in USD millions) 527.6 524.7 579.3 629.5 608.7 Hydropower debt (millions of Nu)** 31,376.8 41,471.7 54,561.5 66,979.1 77,509.5 Rupee Debt Service (in INR millions) 16,522.5 44,804.3 82,897.9 9,437.1 1,958.1 Interest 1,825.6 2,391.0 3,408.8 2,209.3 1,049.3 Principal 14,696.9 42,413.4 79,489.1 7,227.8 908.8 CC Debt Service (in USD millions) 21.4 22.8 22.1 15.4 Interest 6.5 8.0 7.2 8.7 4.8 Principal 14.9 14.8 14.8 16.7 10.6 Debt Service Ratio (excluding OD) 12.5 12.9 17.5 26.8 27.9 Debt Service Ratio (including OD) 51.7 127.1 213.8 26.8 27.9 Source: Department of Public Accounts, Ministry of Finance, RMA and private enterprises for private debt data. * Calendar year GDP; 2012/13 value in % of 2011 calendar year GDP. ** Includes INR hydropower debt and CC debt on the Dagachhu and Basochhu hydropower projects. 20 Monetary Policy Statement May 2015

ANNEX 2 Items (Nu. in millions) Jun'11 Jun'12 Jun'13 Jun'14 Dec'14 1. Quick Assets of Commercial Banks 10,131.4 14,445.3 22,826.5 28,005.8 35,996.9 2. Capital Fund (Tier 1+Tier 2) 6,382.3 10,263.0 12,441.4 15,115.6 16,133.6 Tier 1 Capital (Core Capital) 5,179.0 7,954.6 10,704.5 11,600.9 12,585.2 Tier 2 Capital (Secondary Capital) 1,203.3 2,308.4 1,736.9 3,514.7 3,548.4 3. Total Liabilities of Commercial Banks 62,694.4 62,829.2 79,337.3 87,143.5 97,124.51 4. SLR Position [20% of (3-2)] 11,262.4 10,513.2 13,379.2 14,405.6 16,198.2 Structural Liquidity (1-4) (1,131.0) 3,932.0 9,447.3 13,600.2 19,798.7 Amount of Sterilization 8,286.8 2,363.3 2,654.7 3,158.2 5,764.3 CRR 8,286.8 2,363.3 2,654.7 3,158.2 3,765.55 RGoB T- Bills - - - - 1,998.80 Source: FRSD, RMA. LIQUIDITY STATUS AND STERILIZATION Chart 9: Operations of Treasury Bills Nu. in Millions 8000 7000 6000 5000 4000 3000 2000 1000 0 6 5 4 3 2 1 0 Bids Received (Nu. In Millions) Bids Accepted (Nu. In Millions) Discount Rate (%, RHS) Monetary Policy Statement May 2015 21

ANNEX 3 MACROECONOMIC FORECASTS: FY 2013/14 2016/17 Particulars 2013/14 2014/15 2015/16 2016/17 (prov.) Output and Prices Nominal GDP at market prices (mn. of Nu, fiscal year) 111400.4 125064.1 138741.8 153340.9 Real GDP (annual % change) 4.7 6.8 6.2 5.9 Agriculture & Allied 3.0 2.8 3.1 3.8 Industry 6.1 7.6 6.5 4.4 Manufacturing 0.6 8.5 8.3 8.5 Electricity & water 3.6 1.1 6.2 3.6 Construction 7.3 11.7 4.7 0.6 Services 4.6 6.9 6.4 7.5 CPI (annual % change) 10.4 7.6 7.6 7.7 Balance of Payments and Reserves (mn. of Nu) Current account balance -28136.4-32875.7-29994.3-26158.59 (in % of FY GDP) -25.3-26.3-21.6-17.1 Merchandise exports 33574.9 37118.5 40713.9 44184.9 (growth in %) 3.3 10.6 9.7 8.5 Merchandise imports (c.i.f.) 55306.9 61592.6 63640.2 65481.2 (growth in %) 6.5 11.4 3.3 2.9 Trade balance (% of FY GDP) -19.5-19.6-16.5-13.9 Current and capital grants 24234.9 24852.9 29638.0 34022.4 o.w. Budgetary Grants 11398.1 8376.2 14273.8 18455.0 Financial account balance -14556.7-21844.9-25763.7-23655.1 Overall balance (mn. of Nu) 6068.8 9242.6 20509.5 26011.6 International Reserves (mn. of USD) 1012.2 1132.3 1434.8 1810.2 (months of merchandise imports) 13.2 13.7 17.1 21.4 National Budget (mn. of Nu) Revised Budget (projections) Projecttions Total Resources 37819.1 36400.1 41017.9 43780.7 (in % of FY GDP) 33.9 29.1 29.6 28.6 Domestic revenue 23244.6 24900.1 26145.1 27042.6 (in % of FY GDP) 20.9 19.9 18.8 17.6 Grants 14236.4 11153.3 14872.8 16738.1 Total expenditure 34609.9 40881.1 47348.2 46846.5 Current 17941.2 22044.1 23871.3 25506.5 Capital 16668.8 18836.9 23476.8 21340.0 Net Lending -1332.0-1670.1-1843.6-2014.6 Fiscal balance 4296.3-2810.9-4486.7-1051.2 (in % of FY GDP) 3.9-2.3-3.2-0.7 Data as of the FY ending June, including GDP which is also on FY basis. Source: MFCTC, Ministry of Finance (projections as of March 2015). 1) Fiscal projection source: Ministry of Finance. 2) BOP data source: RMA. 3) GDP and CPI data source: NSB. Note: Any data in this table as a percent of GDP uses FY GDP and are not comparable with the table in Annex I which uses CY GDP. 22 Monetary Policy Statement May 2015