Money supply up by 15% in first half

MUMBAI, Oct 17: The money supply (M3) growth in the first half of the current financial year has overshot the projected trajectory of 15-...

MUMBAI, Oct 17: The money supply (M3) growth in the first half of the current financial year has overshot the projected trajectory of 15-15.5 per cent by a wide margin to be pegged at 19.3 per cent. The spurt has been mainly because of the inflow of Rs 17,945 crore into the system on account of the Resurgent India Bond (RIB) proceeds.

The RBI has said that if these proceeds are not taken into account the M3 growth has been to the tune of 16.3 per cent which is also higher than the projected trajectory of 15-15.5 per cent set by the RBI in April 1998.Analysts said that the rise in the M3 has been mainly on account of the rise of the net bank credit to the government which has increased by 21 per cent on a year-on-year basis. As a result, inflation will only rise when the RBI is able to bring down the level of monetisation.

"There is no fear of inflation except for the rise in the primary food articles as most of the M3 growth has been to finance the government’s borrowing needs," an analyst in a leadingbrokerage said.

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It may be recalled that the RBI has created a sinking fund christened `RIB-Maintenance of Value Account’ (RIB-MOV) to cover the exchange risk on the Resurgent India Bond scheme. Under the arrangement — chalked out by the RBI in consultation with the Government of India — the SBI and the centre will contribute to the RIB-MOV every year to make good the exchange loss on account of depreciation of the rupee.

While the SBI will bear the exchange loss to the extent of one per cent per annum on the rupee equivalent of the principal amount sold to the RBI and the interest thereon the government will issue non-negotiable, non-interest bearing special securities without specified maturity in favour of the central bank. The proceeds of the securities will be deposited in the RIB-MOV account.

During the operation of the scheme, there will be an increase in the Reserve Bank’s net credit to the government to the extent of the central bank’s investments in the non-negotiable securities issued bythe centre towards its contribution to the MOV account. However, this is not monetised deficit and it will have no bearing on money supply, reserve money or currency in circulation.

India’s foreign currency assets increased by $ 282 million to $ 26.46 billion during the week ended October 9. The total foreign exchange reserves as a result swelled to $ 29.46 billion, according to the supplement released by the RBI.

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The FCA’s are $ 491 million more than the end-March level, while the total reserves are higher by $ 98 million over the same period last year. Since December 1997, accretion to FCA has been to the extent of $ 2.5 billion, the supplement said.

During the week ended October 2, the Central government resorted to ways and means advances (WMA) from RBI to raise Rs 2,489 crore, thereby raising WMA exposure to Rs 3,820 crore.

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