Growth in money supply rises 17%

MUMBAI, NOV 15: Dark clouds are once again gathering on the monetary front with the money supply growth - or M3 in economic textbooks - ris...

MUMBAI, NOV 15: Dark clouds are once again gathering on the monetary front with the money supply growth – or M3 in economic textbooks – rising to the year’s high of 17 per cent. At this level, the money supply growth has overshot the target of 15-15.5 per cent set by the Reserve Bank of India for the year 1997-98.

According to the RBI weekly supplement, money supply growth has gone up from 16.5 per cent (as on October 10, 1997) to 17 per cent by October 24, 1997. The growth was only 15.1 per cent as on October 25, 1996. The expansion in money supply beyond the targeted level is likely to pose problems in maintaining a “reasonable degree of price stability.”

The sharp rise in money supply is attributed to increase in foreign exchange inflows and steps initiated by the RBI in bringing down interest rates. As a result, interest rates have gone down, but money supply has gone beyond the targeted level. The rise in money supply is expected to lead to higher inflation level and nominal interest rates.

"Maintaining the balance between money supply and interest level is going to a tough proposition for the RBI, " said a banker, “It cannot afford to take measures which will push up interest rates.” It may be recalled that interest rates shot up to the 17 per cent level last year following the tight money supply regime enforced by the RBI. This enabled the authorities to bring down inflation rate. The rise in money supply at a time when the RBI has initiated steps to bring down interest rates will give another headache to monetary managers. However, the low level of inflation will still give the RBI some room to manoeuvre.