Special Securities With Rbi To Total 15% Of Money Supply

Special securities held by the Reserve Bank of India, which is essentially monetisation of government borrowings, will form around 15 per cent of the money supply on March 31, 1997. Bankers point out that these high levels of monetisation by the government has caused extensive damage to the monetary system.

After the conversion of the outstanding ad hocs into special securities on March 31, 1997, the amount of total special securities will touch Rs 1,06,000 crore.This works out to 15.7 per cent of the money supply on February 14, 1997, which is Rs 6,75,033 crore. Bankers point out that since the money supply is expected to go up by the end of the current fiscal special securities will be around 15 per cent of it. The Reserve Bank of India (RBI), at a later stage, may use the outstanding stock of special securities for open market operations by converting them into marketable lots.

 

This was stated by Dr. Y V Reddy, deputy governor, RBI, while commenting on the treatment of the stock of outstanding special securities.However, bankers point out that it will very difficult for the central bank to get the special securities out of its books.

They are of the opinion that the Reserve Bankof India should utilise the special securities for repos. In the past, the incremental stock of ad hocs at the end of the financial year was classified as special securities. The outstanding level of ad hoc treasury bills at the end of March 1997 will have to be funded into special securities. These securities carry an interest rate of 4.6 per cent. With the conversion in March 1997, the outstanding stock of special securities will go up from Rs 71,000 crore to Rs 1,06,000 crore.

Given the quantum of the special securities, bankers point out that market will take a long time to absorb them. For instance, the aggregate deposits of the commercial banks currently stand at Rs 4,82,648 crore.

With the special securities at Rs 1,06,000 crore, it will form 21.9 per cent of the aggregate deposits. With current level of liabilities there is no way that the banks can absorb the special securities in the next five years, says a banker. Even the investments of the banking system stood at Rs 1,87,133 crore as against the special securities figure of Rs 1,06,000 crore.Bankers point out that the government has done a lot of damage to the system through the issue of ad hoc treasury bills. The unbridled expansion has caused pangs to the monetary system as it also meant sharp contractions.

The ultimate parties to suffer were the industry due to the expansion and contraction of money supply and the savers of the economy who saw the value of their savings deplete due to the issue of money, says a bank economist.