The year-on-year (Y-o-Y) increase in money supply (M3) was 16.7 per cent on March 13 as against a 13.2 per cent growth in the corresponding period in 1996-97.
The M3 growth in 1997-98 is higher than the growth target of 15-15.5 per cent set by the Reserve Bank of India (RBI) for 1997-98.
The Y-o-Y growth in net bank credit to government was 13.2 per cent (12.3 per cent in the corresponding period in 1996-97), bank credit to commercial sector grew by 14.6 per cent (5.8 per cent) and net foreign exchange assets of banking sector increased by 22.3 per cent (17.4 per cent).
The strong foreign exchange inflows during the first half of the financial year 1998 coupled with sluggish credit off take ensured that the money market was awash with liquidity.
This ensured that interest rates declined and lending rates touched a 10-year low.
The foreign exchange reserves of RBI has increased by $2,357 million with the foreign currency assets of the apex bank increasing by $2,999 million. The value of gold held by the central bank declined by $641 million on account of the fall in international gold prices.
Given that banks were flush with funds, initially there was interest in treasury bills. However, since the onset of the volatility in the foreign exchange market, Reserve Bank of India has hiked domestic interest rates. But the yields on treasury bills have not been hiked in line with other instruments.
Thus treasury bills lost their sheen. Consequently, the outstanding stock of the 91-day treasury bills has declined by Rs 3,700 crore during the financial year 1997-98.
However, the outstanding stock of the 364-day treasury bills has increased by Rs 6,219 crore principally on account of heavy subscriptions at the auctions held in April 1997.
The stock of the 14-day treasury bills declined since its introduction in July from Rs 2,327 crore to Rs 240 crore.
Investments by banks, state governments and other entities in treasury bills has increased by Rs 4,921 crore, Rs 1,624 crore and Rs 984 crore, respectively. However, the stock of the 91-day treasury bills held by the central bank (RBI does not hold 14-day and 364-day treasury bills) decreased by Rs 867 crore.
In the financial year 1999, the high borrowing programme of the Union government and the possibility of an increase in credit off take would put upward pressure on interest rates.
To ensure that interest rates do not rise sharply, Reserve Bank of India might opt for an expansionary monetary policy in the current fiscal.
