The moderation in credit offtake and the deployment of resources to mop up government securities seem to have slowed down the pace of money in circulation.
The money supply (M3) growth fell to 18.7 per cent on a year-on-year basis in the fortnight ended January 16, 2009 from 19.6 per cent for the 14 days period ended January 2, 2009. This is below RBI’s revised estimated rate of 19 per cent for 2008-09. It had raised the M3 estimate from 17 per cent to 19 per cent in the recent third-quarter review of the monetary policy. During the fortnight, the money supply grew by 0.5 per cent to Rs 45,14,800 crore against 1.4 per cent in the fortnight ended January 2, 2009.
“The money supply growth is in line with RBI’s expectations. Also, companies are shelving their capital expenditure plans, which leads to a drop in bank credit to the commercial sector,” said a public sector bank executive.
Besides the drop in demand, bankers have also turned cautious in extending advances. This has left them with more resources, which they cannot keep idle and have deployed to earn income.
Banks have also directed a part of their resources for buying additional government bonds. This locks up funds. So, the money supply would be impacted over a period, said a senior executive with a public sector bank. Also, there is some lingering effect of the RBI’s earlier efforts to bring down inflation, which saw an increase in the Cash Reserve Ratio (CRR).
Demand deposits with banks that have a maturity of less than one year fell by 0.8 per cent in the fortnight from 7.6 per cent as people preferred to stay in term deposits, which is still giving attractive returns of 9-10 per cent. Term deposits, on the other hand, increased marginally by 22.5 per cent from 22.4 per cent in the fortnight ended January 2, 2009.