A Tale Of Three Quarters

Unlike the first half, liquidity has turned precious during the third quarter. Lending rates, which were at a ten year low, have hardened. Banks have increased their lending rates by 100 - 400 basis points.

n Following a sluggish first half and apprehensions on industrial recovery, in the third quarter there has been a pick up in advances by the banks to the commercial sector.

nBanks have also been reshuffling their investment portfolio. With credit picking up they have been off loading government securities to provident funds, insurance companies and RBI (which till recently bought securities from the market in order to support prices).

 

nAt the same time the net RBI credit to government which had declined by over Rs 1,000 crore over the March level at the end of the first half has shot up by Rs 11,000 crore during the third quarter.

nFollowing the gyrations of the Rupee vis a vis the Dollar, the foreign currency assets of RBI have declined in the third quarter.

The RBI might have gone for the jugular on January 16 when it hiked the cash reserve ratio and the Bank Rate, but the tightness had developed by the end of the third quarter.

While there were signs of a turnaround in liquidity, the decision by RBI to hike the cash reserve ratio from 9.5 per cent to 10 per cent in December 1997 and keep the CRR cuts in abeyance also contributed to the tightness in the market.

At the end of the first half of the financial year, the aggregate deposits of the banking system had grown by Rs 36,321 crore. On the assets side, advances to the commercial sector and investment in government and other approved securities had grown by Rs 12,252 crore.

In contrast, at the end of three quarters, deposits have grown by Rs 53,612 crore, while advances to the commercial sector and investment in government and other approved securities had grown by Rs 50,001 crore. During the third quarter, the absolute increase in deposit was lower than growth in advances. At the same time investments by banks in government securities and other approved securities declined by Rs 4,273 crore.

The pick up in credit exhibited in the third quarter continues into the fourth. Advances increased by Rs 6,657 crore during the first fortnight of January.

As on January 16, total resource flow from banking sector has grown by 11.23 per cent over end Mach 1997 levels. If non food credit continues to grow by an average of Rs 6,000 crore during the five remaining fortnights, then advances would have increased by 21.56 per cent in 1997-98. This is in line with the target announced by RBI in the October monetary policy. In the financial year 1996 and 1997 the growth in non food credit was 22.5 per cent and 10.9 per cent respectively.

"However it is anybody's guess on whether credit will pick up to the required extent in the remaining five fortnights. The liquidity squeeze in the banking sector should not be a constraint but and the political uncertainty could prove to be a hindrance in pick up of credit," says an official with State Bank of India. "If infrastructure projects achieve financial closure and there is disbursal of credit then advances should improve further," he adds.

The net RBI credit to central government has increased by Rs 5,367 crore in the current financial year by January 16. The stock of government securities with RBI increased to Rs 1,26,053 crore by January 16.

Following the dream budget or the fairy tale budget announced by the finance minister, there were strong capital inflows mainly on account of portfolio investment by the foreign institutional investors.

Consequently, the foreign currency assets (FCA) of RBI grew by $ 3,042 million in the first quarter and by $ 309 million in the second quarter. At the end of the first half of the financial year, the FCA of RBI had increased by $ 3,351 million.

The strong Dollar flows saw the problems of leads and lags developing, i.e. exporters were bringing their proceeds earlier than normal, corporates switched from Rupee credit to Dollar credit and importers were postponing their payments. The market was over sold. Analysts point out that one indicator of such a situation is that the forward premium crashes. They also point out that there is a remarkable similarity between the situation in October 1995- February 1996 and the developments since March 1997.

At a time when the foreign exchange market was in a oversold position, the south east Asian problem developed. While the strong dollars witnessed till august began to come down to a trickle, there was pressure on the rupee; importers began covering and exporters began canceling. The market was due for a correction and not only did the volatility in the foreign exchange market increase but the Rupee began to lose ground vis a vis the Dollar.

The situation had taken a U turn and RBI which had been buying dollars to keep the Rupee from appreciating turned a seller. Consequently, there has been a decline in the FCA of RBI by $ 2,287 million in the third quarter because of Dollar sales by the central bank to fight the depreciation of the rupee. The net result is that the FCA of RBI has increased by only $ 1,064 million in the current financial year.

The value of the stock of gold held by RBI has declined steadily during the course of the year on account of plummeting of gold prices. At the end of the third quarter, value of gold held by RBI as part of its foreign exchange reserves had declined by $ 741 million. This decline would get reflected in RBIs balance sheet through a reduction in the exchange fluctuation reserve maintained by it.

The RBI also holds Special Drawing Rights as part of its foreign exchange reserves and this has gone up marginally by $ 3 million.

During the course of this financial year, the foreign exchange reserves of RBI increased by $ 2,913 million in the first quarter, increased by $ 149 million in the second and decreased by $ 2,736 million in the third quarter. All in all foreign exchange reserves have grown by $ 695 million to stand at $ 27,118 million by January 16.

The RBI officials are confident that the increase in FCA should be positive at the end of the financial year for RBI has changed track; its hiked domestic interest rates and is not selling spot dollars to prop the Rupee up. But at the same time it must be recognized that by December end RBI has sold $ 1,956 million in the forward market and the quality of reserves stand reduced by that extent.