Containing Money Growth

The central banks optimism may also be driven by the easy liquidity condition of banks which seem to have whetted their appetite for government securities, thus containing growth of RBI credit to the government. But this seems a precarious situation. The governments borrowing (net of repayments) is slated to increase from Rs 24,500 crore in 1996-97 (revised estimates) to Rs 34,400 crore (budget estimates) in the coming fiscal year. With repayment obligations at Rs 10,900 crore, gross borrowing will be Rs 45,300 crore. The ability of the market to absorb such amounts of government paper is open to question, especially since banks appetite for gilts is expected to burn itself out once bank credit to the commercial sector starts picking up in earnest. Monetary control is also complicated by the fact that release of rupee funds into the system is almost instantaneous when the RBI intervenes to buy dollars. However, in the case of monetisation through credit to the government, there is a significant lag before

the governments expenditure finds its way fully into the system. Thus even though the RBI governor may have effected a subtle change in stance to reserve money targeting, keeping a strict tab on money supply expansion may prove to be difficult.

The RBI seems to be doing a good job at monitoring liquidity in the banking system. It has indicated its seriousness in tackling dollar inflows at the same time as not adding further liquidity in the system. It has shifted its attention to the forward markets, which obviates immediate infusion of rupees. Simultaneously, activity in repurchase agreements is gathering momentum. Market expectations are that the RBI would soon be coming out with seven-day or more repos. In doing so, the RBI has sent out strong signals that it is in control of the situation and thereby nipped incipient speculative pressures. Half its job is done.