"RBI need not worry about increased money supply"

It said the current rise in inflation is more on account of the rise in the price of primary articles and cannot be attributed to a demand enhancing monetary stimulus.

J M Financial said the rise in M3 since August 14 has been partially on account of the growth of foreign currency assets which have contributed to the extent of 28 per cent of money supply growth.

"If the Resurgent India Bond (RIB) effect is excluded then the M3 growth is only 16.9 per cent onannualised basis (on September 25)," it said.

However, it said, rising money supply requires tightening as it could stroke inflation when economic recovery emerges.

J M Financial said RBI can be expected to rein in the M3 growth in second half of 1998-99 by conducting open market operations and keeping short-term interest rate at higher levels.

It said credit off-take has shown signs of picking up with the two fortnights up to October nine witnessing a credit growth of Rs 10,694 crore (Rs 8,190 crore in the same period last year).

The growth in credit off-take highlights the turnaround in certain industries like fast moving consumer goods, two-wheelers, cement and pharmaceuticals, it said.

However, it added that a major part of the growth continues to be due to half-yearly window dressing and quarterly acquired interest.

"The pick-up in the credit off-take is expected to sustain into the second half when the busy season starts" J M Financial said.

According to the latest update, the substantialdecline in the outstanding repos amount in the current fortnight also highlights that surplus liquidity has declined.

The investment banker said in order to provide greater depth to the money market, RBI could introduce 28 and 182 days treasury bills in the second half, as the government borrowing programme will be concentrated at the short end of the yield curve.