Controlling M3 More Crucial Than Exchange Rate For Rbi: Reddy

Controlling money supply growth is more crucial to the central bank than the exchange rate, but intervention to hold back the strong rupee can be sustained, Reserve Bank of India (RBI) deputy governor Y V Reddy said on Monday. Asked where the RBI's priority lay between money supply growth and the rupee rate, Reddy said the former held the key.

"Money supply is naturally the dominant factor that we have to keep in view," he told Reuters Financial Television while attending the annual meeting of the Bank for International Settlements in Basle.

"If money supply goes out of hand then it will ultimately result in inflation and exchange rate distortions--so they are not separate in that sense," he said. The RBI has a 15.0-15.5 M3 monetary growth target. Latest M3 data on May 9 showed growth running at 16.3 per cent year on year.

 

Heavy RBI intervention in the currency market, buying dollars and selling rupees, has raised worries that domestic monetary growth could surge unless the central bank sterilises the inflow of rupees through sales of government debt. Reddy said the RBI had managed to do this successfully in 1996/7 (April-March) and could do so again if needed. "Last year actually we intervened and mopped up more than $5.0 billion and managed with a money supply of just 15.6 per cent."

"And in the first two months of this year (April-May) we have already intervened...(to the tune of) $2.0 billion," he said. "It just shows that we can do that and we may have to continue to do that," he added.

Reddy said the RBI had a large enough stock of government debt to sell, but this would have to be combined with other measures to sterilise any sustained intervention.

He said the country was on the right track for capital account convertibility, as mapped out in a report by a committee appointed by the RBI which was published last week.

He also said he did not see any particular reason for a rapid moderation in foreign capital inflows into India after they doubled to $6.5 billion in 1996/97.