M3 Rides On Rbi Credit To Centre
Net RBI credit to the government, an important source of reserve money, has grown by 27.6 per cent year on year as on July 31, having the effect increasing money supply by 17.3 per cent on a year on year basis.
In fact, the year on year growth in money supply has never been below 17 per cent from the beginning of this fiscal, against a target of 15-15.5 per cent underlined in the credit policy for the first half of 1997-98. As per the latest figures released by the RBI in its weekly statistical supplement, net credit to the government has grown by 11.5 per cent in the current fiscal so far, as compared to -4.9 per cent in the corresponding period last year. In fact, the growth in net RBI credit to the government in this fiscal has so far ranged between -3.7 per cent (on April 24) to 15.8 per cent (on July 10), against a range of -4.9 per cent (on July 31) to 4.7 per cent (on June 12) for corresponding period in 1997-98.
Correspondingly, the reserve money has also shown a year on year growth of 10.9 per cent as on July 31. The high net RBI credit to the government has been caused by a high degree of devolvement taken by the RBI at the auctions of dated securities and treasury bills during the year. RBI's support at the primary auctions of dated securities alone stands at Rs 17414.31 crore as of date, which includes two private placements for Rs 10,000 crore. Of this, a part, however, has been offloaded by way of open market operations. Over and above, the RBI had also taken devolvements at the auction of 364 day t-bills during the year.
Monetisation to this extent has hence had an expansionary effect on money supply, which has risen without a corresponding growth in real output. The target of Rs 7,000 crore for RBI's support to the government for this fiscal, set out in the interim budget, has also been revised to around 10,000 crore by the RBI.
This inability to meet targets is a cause for concern as the RBI has traditionally set money supply as an intermediate goal for achieving the larger objective of price stability.
While replacement of ad hoc treasury bills by ways and means advances was done with the intention of eliminating automatic monetisation of fiscal deficit, the repeated breaching of the WMA limits by the central government during the financial year, too, has forced the RBI to issue fresh flotation of securities, thereby coming to the market even when its appetite was satiated.