The high multiplier will have a bearing on the forthcoming credit policy in the mid October.
For the period between March 31, 1996 and August 30, 1996 money supply increased by Rs 28,906 crore.
However, during the same period reserve money fell by Rs 10,142 crore. The decline of reserve money and expansion of money supply indicates a high velocity of money. This essentially means that any increase in the reserve money will have a stronger multiplier effect on broad money supply.
If the velocity of funds is very high, it remains to be seen whether the Reserve Bank will reduce the cash reserve ratio.
The rationale is that any further infusion of funds in the system will result in a situation where the money supply scenario increases rapidly, which, in turn, will fuel inflation.
In the sources of reserve money, the net RBI credit to the government, net non monetary liabilities and the net foreign currency assets of RBI have risen during the period March 31 to August 30. However, there has been a large fall of Rs 15,433 crore in the RBI credit to banks and the commercial sector, due to which Reserve money has shown a negative growth.
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Bankers feel that the CRR cut can be neutral of money supply growth only if refinance to banks and commercial sector is also discontinued.
The incremental ad hoc treasury bills have, meanwhile, fallen to Rs 2,775 crore as of August 30, 1996 over March 31, 1996. In the corresponding period last year, ad hocs stood at Rs 10,280 crore. The total outstanding ad hocs, as per the latest figure, is Rs 32,220 crore. On March 31 1996, the figure for outstanding ad hocs was Rs 29,445 crore.
The reduction of ad hocs treasury bills is seen as a welcome sign as it will arrest the creation of fresh high powered money. The issue ad hocs is nothing but the monetisation of the fiscal deficit.
That apart, resort to ad hocs will cease form March 31, 1997 onwards. It is to be replaced by the proposed ways and means method of financing. In this context, the reduction of outstanding adhocs in a phased manner is welcome, bankers said.
The foreign currency assets have increased, with the figure touching $18.14 billion on September 13, 1996, up from $18.04 billion on September 6, 1996.
The level of gold has stayed put at $4.45 billion, but SDRs fell to $155 million from $185 million. The total foreign exchange reserves rose to $22.75 billion on September 13, 1996, up from $22.68 billion on September 6, 1996.
A buoyant reserves position is crucial at a time when the country is going through a repayment hump of $14 billion. Now that the reserves are rising, the hump will easily be crossed over, says a banker.