Column

With GDP growth impressive and inflation under control, no fine-tuning of monetary instruments is likely

With another review of the credit policy scant days away, no major changes seem to be in the works. Although not everything has gone as per the Reserve Bank’s game plan, a do-nothing stance is indicated by the fact that the economy during the current fiscal is on course to achieving the 8.5% spurt in real GDP (gross domestic product) as envisaged by the bank. In fact, the performance may be even better.

The Prime minister’s think-tank, the Economic Advisory Council, sounded even more optimistic with its projection of 8.9%. So, why rock the boat when the going is good, this may well be RBI’s reasoning when it undertakes its final exercise for the financial year on Tuesday.

On the price front, inflation rate continues to be benign — at 3.83% for the week ended January 12, it is ruling below the RBI’s targeted 5%. Thus, high growth with low inflation - a major plank of the monetary policy- is an attainable goal during 2007-08.

On this main consideration alone, the central bank may opt for the status quo and as such, no fine-tuning of monetary instruments may be in the offing. Perhaps, with a view to nudge banks to lower interest rates, RBI may send a signal via repo rates; as such, a fractional cut in repo and reverse repo rates may be expected.

But banks, with year-end considerations, would like to do nothing that may jeopardise their deposit mobilisation effort. And, without any changes in the interest rates on the liability side, little change is in prospect on the assets side of the balance sheets of banks.

However, not everything is hunky-dory. The incremental growth in money stock during the first nine months of the year is much more than anticipated by the RBI. The central bank had pegged this rise at 17 to 17.5% for the fiscal year, while on a point-to-point basis, the monetary expansion has been of the order of 22%. Even on an incremental basis, so far the rise is higher than what it was a year ago.

More disturbing still is the spurt in reserve money, which is a measure of liquidity build-up in the economy. On a year-on-year measure, reserve money has jumped by almost 28% as compared to 17% last year while even the incremental growth has faster this year. The culprit is, of course, the continued heavy inflow of overseas funds — RBI’s forex assets have swelled by a phenomenal 40% so far this year, as compared to 29% during the preceding fiscal. This is mainly responsible for the sharp spurt in the high-powered money and hence in money stock.

Commercial lending is subdued, with the growth rate slowing down to 11.8% from the preceding year’s 17.5% till January 4. After taking into account the investments by banks in bonds and debentures as well as commercial paper, the total accommodation thus far suggests this may be well below the RBI’s projection of 24-25% increase during 2007-08.

But the picture is rosy on the deposit front. As of early January 2008, the mobilisation by banks stands at an impressive Rs 3,79,898 crore - a marked improvement over the Rs 2,78,398 crore level at this point in the last fiscal. Since the final quarter of the year usually witnesses a leap in deposits, the RBI’s indicative target of Rs 4,90,000 crore may be met.

Scheduled commercial banks are busy augmenting their investment portfolio this year — an area where they were paring down their exposure during 2006-07 to generate funds for large-scale lending. SLR investments have gone up by as much as Rs 1,64,458 crore till January 4, 2008, while the increase was only Rs 48,086 crore during the comparable period of 2006-07.

Though this development was expected by the central bank to enable commercial banks to meet their statutory and liquidity management requirements, the extent of the SLR investments seems to be more than what RBI had visualised.

Given the rapid pace of deposit accretion to the banking system during the current year and the glaring mismatch between investment growth and credit offtake, the incremental ratios of these variables to deposits show a contrasting movement in 2006-07 and 2007-08. The ratio of investments to deposits has increased from 17.3% to 43.3% while the ratio of non-food lending to deposits has declined from 92.2% to 58.7%.