M3 In 16-17% Groove Over Six Months

Broad money supply (M3) has consistently remained range-bound at 16-17 per cent levels during the first six months of the current financial year. On an year on year basis as on September 26, M3 moved up by 15.6 per cent or Rs 1,00,556 crore.

During the current financial year, M3 expanded by Rs 44,536 crore, an increase of 6.3 per cent to Rs 7,44,719 crore as on September 26 from Rs 7,00,183 crore on March 31. As against this, M3 increased by Rs 40,155 crore or 6.6 per cent during the corresponding period of the previous year. Meanwhile, during the fortnight ending September 26, M3 moved up by Rs 6,215 crore or eight basis points.

Astronomical accretion to time deposits with banks is the prime factor for M3 moving up during the current financial year. Time deposits increased by Rs 42,674 crore or 9.3 per cent during the first six months.

Time deposits with banks increased due to the surge in net foreign exchange assets of the banking sector. The assets have increased by Rs 11,807 crore or 11.5 per cent during the first six months of the current financial year. This indicates a year on year growth of 27.9 per cent, that is Rs 25,021 crore as on September 26.

Another reason cited by bankers for the surge in fixed deposits is the shake out in the non-bank finance companies. The CRB fiasco led to panic among depositors and sentiments shifted to secured investments as against high interest bearing deposits, says an investment banker. The other components of M3 have moved up marginally which stalled the runaway expansion of the money supply. In fact demand deposits with banks shows an outflow of Rs 1,255 crore during the period under review. That apart, other deposits with the Reserve Bank of India (RBI) moved up negligibly by Rs 833 crore and the currency with the public contributed another Rs 2,220 crore.

Good dollar inflows and the RBIs forex intervention exercise to stymie volatility in the local foreign exchange market also has lead to the expansion of M3. When the apex bank intervenes in the forex market to buy dollars, it infuses rupees into the banking system. Foreign currency assets moved northward between April and August, which is an indication of the central bank buying dollars aggressively. With the Indian currency turning weak from mid-August to September, RBI to stabilise rupee indulged in reverse intervention by selling dollars. This sucked out liquidity. The RBI action served two purpose - it stabilised the rupee and secondly breaks were put on the expansionary effect on the M3.

This can be seen from the fact that foreign currency assets moved up northward to touch $26.43 till August 29. Thereafter, the apex bank was a net seller of dollars till September 19, when the forex assets dipped to $25.53. This means during August 29 to September 19, the apex bank sold nearly $900 million.

Forex assets in the RBI's books on October 10 amounted to $26.11 billion. This means that during the current financial year, foreign currency assets have ballooned by $3.744 billion till October 10 and the foreign exchange reserves have surged by $426 billion.