Money Supply, Non-Food Credit In Focus

What measures will the Reserve Bank (RBI) governor C Rangarajan announce in the monetary policy for the second half on October 21 is the million dollar question tormenting bank heads.

Scheduled commercial banks have not been able to keep up with the pace of reforms set by the RBI, said A T Pannir Selvam, chairman Union Bank of India, at a recently held Bank Economists Conference.

RBI signalled the second phase of banking reform in its monetary policy announced on April 15. The policy measures not only kept the inflation under tight leash and brought it down to the 11-year low at 3.75 per cent on September 20.

 

Money supply (M3) increased to Rs 7,39,096 crore on September 12 from Rs 7,10,783 crore on April 11, 1997. Controlling M3 and boosting the credit would be the two prime considerations before the RBI in the forthcoming monetary policy, said abank executive director.

However, the non-food credit continues to show a negative growth at Rs 3,003 crore till September 12 against Rs 5,070 crore till September 13, last year. The Reserve Bank had said the total flow of funds to commercial sector till September 12 during the current financial year is a turnaround at Rs 7,593 crore as against a negative growth of Rs 4,027 crore in the same period of the previous year.

Following the monetary policy announcement on April 15, the reserve money displayed tendency of ballooning. It stood at Rs 2,05,433 crore on April 18, and was seen gradually moving up to Rs 2,08,348 crore on May 23. It registered a six-month peak of Rs 2,13,526 crore on June 13, but came down to settle at Rs 2,00,912 crore on September 19.

The reserve money supply, however, is at a six-month low at Rs 2,00,912 on September 19 against RS 2,04,482 on April 11, showing a rise of Rs 867 crore, or four basis points, during the financial year till September 19. This is as against a decline of Rs 8,939 crore, or a fall of 4.6 per cent, during the same period of the previous financial year.

One of the factors attributed to keeping the reserve money supply is the steady growth in the net foreign exchange assets (NFEA) of the banking sector. In rupee terms, NFEA has expanded by a whopping Rs 11,684 crore during the period under review. The assets stood at Rs 99,277 crore on April 11 and steadily marched northward since then. It moved up to Rs 1,05,405 crore on June 6 and peaked on August 29 at Rs 117,293 crore. It, however, declined to Rs 114,022 crore on September 12.

However, the declining net Reserve Bank credit to the centre, the other source of the reserve money, eventually kept it under tight leash. The centre had drawn credit amounting to Rs 1,26,851 crore from its bank on April 11. This moved up gradually to a high of Rs 1,29,873 crore on June 13 before registering a dip in the fortnight ending May 30 when the drawals were Rs 1,22,464 crore. Thereafter, the Centres banking on the RBI credit steadily decreased; it is at its lowest in the financial year at Rs 1,11,726 crore on Sept 19.