The start of a monthly column is a good occasion to review the substantial changes that have taken place in financial balance sheets over the past year and a half.
We all know that the government is running a large deficit; we also know that the Reserve Bank of India is accumulating reserves apace; and we are told that credit growth of banks has been relatively sluggish. How, if at all, are these phenomena related? What role does and should policy play? What vulnerabilities are building up?
In looking at these questions, three sets of accounts are helpful: the balance of payments; the monetary survey; and variations in reserve money. Two recent publications of the Reserve Bank, the Mid-Term Review of Monetary and Credit Policy for 2003-04, and the Annual Report of late August give one the necessary background.
From the Annual Report we learn that over the course of 2002-03 the RBI acquired foreign exchange assets in the extraordinary amount of Rs 94,000 crore. This was offset by a reduction in net domestic assets of more than two thirds, roughly Rs 63,000 crore, such that the increase in reserve money was a modest Rs 31,000 crore, or 9.2 per cent.
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