Liquidity in the system has improved, but high inflationary expectations caused continuous hardening of interest rates in 2005-06 and 2006-07, it said.

The Survey, tabled in Parliament today, pointed out that the continued mismatch between credit and deposit growth had also hardened interest rates, despite ample liquidity. However, it forecast a likely slow down in credit growth in the days to come.

The credit-deposit ratio has continued to grow during the current year so far and was 74 per cent on January 19, 2007, compared to 70 per cent in the corresponding period of the previous year.

The Survey observed that the hardening of interest rates was more pronounced in the short-end. Reconciling the twin needs of facilitating credit for growth on one hand and containing liquidity to moderate inflation on the other remains a challenge.

The Survey said the RBI had announced various measures like CRR and repo rate hikes to contain credit off-take at the desired growth rate of 20 per cent and to stem inflationary expectations.

It suggested that a balance needs to be struck between taming inflation and maintaining the pace of growth, and asked for integrating the rural sector, especially agriculture, with the organised financial sector to arrest rising prices.

Inflation has continued to show some stubborn supply side induced hardening tendencies in spite of the benign impact of softening world crude oil prices in the current year. It reached a peak of 6.73 per cent on February 3, 2007.

On the financial performance of the banking sector, the Survey said the upbeat growth trend of 9.1 per cent in the first half of 2006-07 had led to a 32 per cent jump in gross bank credit to Rs 15,76,982 crore. The gross bank credit at the end of September 2005 stood at Rs 11,94,588 crore.

The report noted that the asset quality of banks too improved as gross NPAs of scheduled commercial banks stood at 1.9 per cent of their total assets in March 2006, substantially lower than 2.5 per cent observed a year ago. During the first nine months of the current fiscal, priority sector lending by banks stood at Rs 1,49,343.16 crore.

Provisional data on sector deployment of non-food credit for the first half of 2006-07 indicates the continuation of the trend of broadening outreach of such credit across various sectors, the Survey said.

On September 29, 2006, year-on-year increase in agriculture and allied activities was Rs 46,333 crore (33 per cent) and in industry (large and medium) was Rs 98,274 crore or 24.3 per cent.

On a year-on-year basis, housing loans and loans to real estate continued to expand at a faster rate of 37.3 per cent and 97.1 per cent respectively. However, food credit declined to 17 per cent at Rs 33,458 crore during the same period.

Economic Survey 2006-07: Complete Coverage