Bankers expect the Reserve Bank of India to either increase the money supply growth target or announce measures to sharply curtail broad money growth in the forthcoming monetary policy. They point out that some action by the RBI has become necessary, since money supply growth during the current fiscal year has consistently overshot the targeted level of 15-15.5 per cent.
Money supply growth on a year-on-year basis has stayed above 16 per cent for much of the current financial year. Only once for the fortnight ending August 29 did money supply growth fall to 15.8 per cent, which is still above the year-end target.
According to a senior State Bank of India official, This trend is dangerous as M3 growth is already high in the first half of the year. Historically, money supply has grown more rapidly in the second half than in the first half, which means a growth of over 17 per cent in M3 in September-March of the current year. This calls for drastic action on the part of the Reserve Bank.
In actual terms, money supply grew by Rs 38,914 crore (5.6 per cent) till September 12 to touch Rs 7,39,096 crore. The rapid M3 supply growth has been fuelled by an accretion in net foreign currency assets of the banking sector. The net foreign currency assets of the banking sector increased by Rs 12,008 crore or 1.7 per cent till September 12.
The rise in foreign assets is attributed to the strong capital flows into the country, which have led to the rupees appreciation. Given the unpredictability of foreign inflows, it remains to be seen if the governor will increase the money supply target, says an Industrial Development Bank of India official.
But RBI governor C Rangarajan has left the money supply target open to change. Announcing the credit policy for the first half of 1997-98, the governor had said the projected increase in money supply may be reviewed and revised depending on macroeconomic developments.
A section of bankers points out that since the governor wants a further lowering of interest rates and inflation is low, he might increase the money supply target. This will also give greater elbow room to intervene in the forex market and prevent an appreciation of the rupee.
It is anticipated that the credit offtake in the second half of the current fical year will be better than the first half, which will require an increase in money supply targets.
In fact, the credit scenario in the current year is much better than the previous years.
Bank credit has fallen by just Rs 1,900 crore till September 12, 1997 in the current fiscal, against Rs 6,066 crore in the previousfinancial year.
This figure does not include the investment of banks in bonds and commercial paper.
If that is taken into account, credit flow to the commercial sector proves to be positive.
For instance, the outstanding commercial paper alone in the banks books amounted to Rs 3,159 crore on September 15, 1997.
However, bankers say the Reserve Bank of India governor might not revise money supply targets in the monetary policy but wait for credit offtake to pick up before taking a decision on the matter.
