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சொத்து வெளியீட்டாளர்

83652701

IV. Monetary and Liquidity Conditions

In the Q2 of 2011-12, liquidity conditions continued to remain in deficit mode, in line with the policy objective of the Reserve Bank. Base money decelerated as currency growth moderated. Money (M3) growth, however, accelerated moderately as the money multiplier increased. While credit growth is above the indicative trajectory, it will moderate as growth decelerates. Going forward, the global uncertainty and fiscal pressures pose challenges to effective monetary policy management.

Significant monetary tightening in the face of high inflation

IV.1 The Reserve Bank has been pursuing a tight monetary policy stance since early 2010 in response to sustained inflationary pressures. Inflation, which initially emerged from supply side constraints, increasingly became generalised and the Reserve Bank had to calibrate its policy response to anchor inflation expectations, while at the same time ensuring that the growth impulses of the economy were not hampered. In continuation of this policy stance, the Reserve Bank raised the policy repo rate by 50 bps in July 2011 and again by 25 bps in September 2011 (Table IV. 1). The level of policy rate and inflation presently are broadly comparable to the levels prevailing in September 2008 (Chart IV.1).

Table IV.1: Movements in Key Rates in India

(Per cent)

Effective Since

Reverse Repo Rate

Repo Rate

Marginal Standing Facility Rate

Cash Reserve Ratio

1

2

3

4

5

Apr. 21, 2009

3.25 (-0.25)

4.75 (-0.25)

 

5.00

Feb. 13, 2010

3.25

4.75

 

5.50 (+0.50)

Feb.27, 2010

3.25

4.75

 

5.75 (+0.25)

Mar. 19, 2010

3.50 (+0.25)

5.00 (+0.25)

 

5.75

Apr. 20, 2010

3.75 (+0.25)

5.25 (+0.25)

 

5.75

Apr. 24, 2010

3.75

5.25

 

6.00 (+0.25)

Jul. 2, 2010

4.00 (+0.25)

5.50 (+0.25)

 

6.00

Jul. 27, 2010

4.50 (+0.50)

5.75 (+0.25)

 

6.00

Sept. 16, 2010

5.00 (+0.50)

6.00 (+0.25)

 

6.00

Nov. 2, 2010

5.25 (+0.25)

6.25 (+0.25)

 

6.00

Jan. 25, 2011

5.50 (+0.25)

6.50 (+0.25)

 

6.00

Mar. 17, 2011

5.75 (+0.25)

6.75 (+0.25)

 

6.00

May 3, 2011

6.25 (+0.50)

7.25 (+0.50)

 

6.00

May 9, 2011

6.25

7.25

8.25

6.00

Jun 16, 2011

6.50 (+0.25)

7.50 (+0.25)

8.50 (+0.25)

6.00

July 26, 2011

7.00 (+0.50)

8.00 (+0.50)

9.00 (+0.50)

6.00

Sept. 16, 2011

7.25 (+0.25)

8.25 (+0.25)

9.25 (+0.25)

6.00

Note : 1. Reverse repo indicates absorption of liquidity and repo indicates injection of liquidity.
2. As announced in Monetary Policy Statement 2011-12, the Marginal Standing Facility came into effect from May 9, 2011.
3. Figures in parentheses indicate change in policy rates in percentage points.

Liquidity remained in deficit mode

IV.2 The average LAF injection, which was around `49,000 crore in the first quarter of 2011-12, dropped marginally to around `47,000 crore in the second quarter of 2011-12 mirroring the increase in centre’s cash deficit. Liquidity deficit largely remained within (+/-) 1 per cent of NDTL of the banks, in line with the stated policy objective of the Reserve Bank. The liquidity deficit, which had witnessed some stress in June 2011 due to quarterly advance tax payouts, eased in early July 2011, reflecting the drawdown of Central Government cash balances and transition to WMA/OD (Chart IV.2 and Table IV.2). Since the introduction of the new operating procedures of monetary policy in May 2011, injection of liquidity under the marginal standing facility (MSF) has been limited to two occasions (`100 crore on June 10 and `4,105 crore on July 15, 2011), which is indicative of the liquidity position not getting over tight.

1

IV.3 While repo auctions under LAF continued to be conducted between 9.30 am and 10.30 am, the Reserve Bank decided to shift the reverse repo auctions under LAF and MSF operations to the afternoon time slot of 4.30 pm to 5.00 pm on all working days (excluding Saturdays) with effect from August 16, 2011. The prime reason for shifting the reverse repo window to the afternoon slot is to encourage the market participants to trade amongst themselves and to park any surplus with the Reserve Bank only after exhausting all other avenues to deploy the funds in the money market.

Base money growth slows, reflects moderation in currency expansion

IV.4 The decelerating trend of base money since December 2010 continued during the second quarter of 2011-12 mainly on account of an absence of significant injection of primary liquidity by the Reserve Bank. While moderate amount of liquidity was injected through LAF operations, no significant primary liquidity was injected either by way of outright purchases of G-Sec or forex operations. In addition, currency growth, which had witnessed significant acceleration and remained above money supply growth for most part of 2010-11, has also been decelerating since the first quarter of 2011-12 which moderated the base money expansion. The increase in term deposit interest rates since September 2010 prompted a switch from currency holdings and demand deposits to time deposits (Chart IV.3).

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Table IV.2: Liquidity Position

(` crore)

Outstanding as on last Friday

LAF

MSS

Centre’s Surplus@

Total

1

2

3

4

5=(2+3+4)

2010

 

 

 

 

April

35,720

2,737

-28,868

9,589

May

6,215

317

-7,531

-999

June

-74,795

317

76,431

1,953

July

1,775

0

16,688

18,463

August

11,815

0

20,054

31,869

September

-30,250

0

65,477

35,227

October

-1,17,660

0

86,459

-31,201

November

-1,03,090

0

93,425

-9,665

December

-1,13,415

0

1,44,437

31,022

2011

 

 

 

 

January

-76,730

0

1,18,371

41,641

February

-72,005

0

77,397

5,392

March*

-1,06,005

0

16,416

-89,589

April

-39,605

0

-35,399

-75,004

May

-75,795

0

-9,544

-85,339

June

-96,205

0

8,339

-87,866

July

-48,555

0

-25,983

-74,538

August

-49,215

0

-21,192

-70,407

September

-82,645

0

-24,387

-1,07,032

October (on 14th)

-54,270

0

-32,883

-87,153

@ : Excludes minimum cash balances with the Reserve Bank in case of surplus.
* : Data pertain to March 31
Note: 1. Negative sign in column 2 indicates injection of liquidity through LAF.
2. Negative sign in column 4 indicates WMA /OD availed by the Central Government.


3

Growing endogeneity of money keeps money supply above trajectory

IV.5 While the base money growth has decelerated sharply, the money supply growth accelerated moderately as the money multiplier rose (Table IV.3 and Chart IV.4). This divergent trend in base money and broad money arises out of increasing endogeneity of money supply as banks respond to strong credit demand, which is met through recourse to additional borrowings, including that from the central bank.

Robust deposit growth

IV.6 Deposits registered robust growth since December 2010 due to successive hikes in interest rates. The opportunity cost of saving in lower interest bearing instruments like small savings increased, resulting in a shift from small savings to term deposits (Chart IV.5).

Table IV.3: Monetary Indicators

Item

Outstanding Amount (` crore) Oct. 07, 2011

FY variations (per cent)

Y-o-Y Variations (per cent)

2010-11

2011-12

Oct. 08, 2010

Oct. 07, 2011

1

2

3

4

5

6

Reserve Money (M0)*

13,84,833

6.2

0.6

21.4

12.8

Broad Money (M3)

69,62,822

6.9

7.1

15.8

16.2

Main Components of M3

 

 

 

 

 

Currency with the Public

9,49,232

8.6

3.8

18.9

13.8

Aggregate Deposits

60,11,223

6.6

7.7

15.3

16.7

of which: Demand Deposits

6,51,919

-5.9

-9.2

14.3

-3.5

Time Deposits

53,59,304

8.8

10.2

15.5

19.7

Main Sources of M3

 

 

 

 

 

Net Bank Credit to Govt.

21,57,973

5.2

8.8

22.5

22.9

Bank Credit to Commercial Sector

44,44,825

7.3

4.9

19.8

18.7

Net Foreign Assets of the Banking Sector

15,42,066

5.1

10.7

1.1

14.5

Note: 1. Data are provisional.
2. * : Data pertain to October 14, 2011.


4

IV.7 During 2011-12 so far, banks’ investment in government securities has accelerated (Chart IV.6 a). However, no sharp rise in SLR maintenance is observed as NDTL has increased at a higher rate (Chart IV.6 b).

Credit expansion still above indicative trajectory but may correct ahead

IV.8 Credit growth, which had witnessed a sharp deceleration in the first quarter of 2011-12, continued the trend in the initial period of the second quarter, partly reflecting high base of last year (Chart IV.7). Notwithstanding this deceleration, credit growth remained above the indicative trajectory of 18 per cent set out by the Reserve Bank in the July 2011 review, mainly due to high nominal GDP growth.

IV.9 During the first three quarters of 2010- 11, the divergence between credit growth and deposit growth was high and growing. As the cost of funds under LAF increased progressively with the rise in the repo rate, banks raised their deposit and lending rates. This stronger transmission of monetary policy helped in narrowing the divergence between deposit and credit growth. The gap between the two declined from 9 percentage points in mid- December 2010 to 5.6 percentage points in March 2011 and further to 2.1 percentage points in October 2011 (Chart IV.8).

Non-banking sources dominate credit expansion

IV.10 The non-bank sources have occupied the space that was vacated by banks in meeting the credit requirements of the economy during 2011-12 so far (up to September 2011) (Table IV.4). This is reflected in the increase in the share of non-bank sources in total flow of financial resources from about 46 per cent in April-September 2010 to 54 per cent in April- September 2011, with both domestic and foreign funding sources showing significant increase. Within domestic sources, net issuance under CPs, NBFCs-ND-SI and housing finance companies (HFCs) increased. The resource flow from external sources rose on account of higher mobilisation through FDI and ECBs.

5
 
6

Credit expansion not broad-based

IV.11 The credit growth of foreign banks registered a sharp rise, while that of public sector banks continued to witness a deceleration in continuation of the trend observed in first quarter of 2010-11. As public sector banks continued to be the largest lenders, the overall credit growth decelerated (Table IV.5).

7

IV.12 The credit deceleration has been diffused over a wide range of sectors that include chemical and chemical products, engineering, power, telecommunications and consumer durables (Table IV.6). The slowdown in credit growth may have been prompted by deceleration in investment demand that could have impacted term loans. Further, the top rated corporates resorted to relatively cheaper sources of borrowings including ECBs and CPs.

Real interest rates low and non-disruptive to growth

IV.13 Real lending interest rates have remained positive, but low and supportive of growth in the recent period (Chart IV.9). Despite monetary tightening, real interest rates have fallen due to high inflation.

8

Table IV.4: Flow of Financial Resources to the Commercial Sector

(` crore)

Item

April-March

April-September

2009-10

2010-11

2010-11

2011-12

1

2

3

4

5

A.

Adjusted Non-Food Bank Credit (NFC)

4,78,614

7,11,031

2,59,692

2,29,157+

 

i) Non-Food Credit

4,66,960

6,81,501

2,27,006

2,07,483+

 

of which: petroleum and fertilizer credit

10,014

-24,236

-24,130

1,573&

 

ii) Non-SLR Investment by SCBs

11,654

29,530

32,686

21,674+

B.

Flow from Non-banks (B1+B2)

5,88,784

5,14,495

2,20,690

2,70,441

 

B1. Domestic Sources

3,65,214

2,95,573

1,23,652

1,37,838

 

1 Public issues by non-financial entities

31,956

28,520

10,054

6,205

 

2 Gross private placements by non-financial entities

1,41,964

67,436

-

-

 

3 Net issuance of CPs subscribed to by non-banks

26,148

17,207

41,875

59,693*

 

4 Net Credit by housing finance companies

28,485

38,386

8,775

11,110&

 

5 Total gross accommodation by 4 RBI regulated AIFIs -NABARD, NHB, SIDBI & EXIM Bank

33,783

40,007

15,282

8,558

 

6 Systematically important non-deposit taking NBFCs (net of bank credit)

60,663

67,937

35,209

39,784$

 

7 LIC’s net investment in corporate debt, infrastructure and Social Sector

42,215

36,080

12,457

12,488&

 

B2. Foreign Sources

2,23,570

2,18,922

97,038

1,32,603

 

1 External Commercial Borrowings / FCCB

15,674

52,899

27,635

41,809

 

2 ADR/GDR Issues excluding banks and financial institutions

15,124

9,248

7,250

1,783

 

3 Short-term Credit from abroad

34,878

50,177

19,707

13,721#

 

4 Foreign Direct Investment to India

1,57,894

1,06,598

42,446

75,290&

C.

Total Flow of Resources (A+B)

10,67,398

12,25,526

4,80,382

4,99,598

Memo:

Net resource mobilisation by Mutual Funds through Debt (non-Gilt) Schemes

96,578

-36,707

3,266

3,426

+: up to October 7, 2011   *: up to August 15, 2011    $: up to July 2011    #: up to June 2011   &: up to August 2011
-: Not available
Note: FDI Data include equity capital of incorporated entities for the period April-August and does not include reinvested
earnings, other capital and equity capital of unincorporated entities.

Monetary overshooting a risk in the face of fiscal pressures

IV.14 Credit growth has remained strong notwithstanding the successive interest rate hikes. As a result, even though there has been only moderate injection of primary liquidity through LAF transactions, broad money growth has stayed above the indicative trajectory, operating on the impetus provided by the endogenous factors like strong credit growth and high deposit growth, bolstered by substitution from currency to deposits. Going forward however, credit growth could moderate as growth decelerates and inflation moderates. However, even with some deceleration expected in credit growth, containing monetary growth remains a challenge in face of large market borrowing.

Table IV.5: Credit Flow from Scheduled Commercial Banks

(Amount in Rupees crore)

Item

Outstanding as on October 7, 2011

Variation (y-o-y)

As on Oct 8, 2010

As on Oct 7, 2011

Amount

Per cent

Amount

Per cent

1

2

3

4

5

6

1. Public Sector Banks

30,38,986

4,24,615

 19.8

4,70,704

18.3

2. Foreign Banks

 2,21,422

17,923

11.4

45,898

26.1

3. Private Banks

7,86,334

1,25,973

24.5

1,45,213

22.6

4. All Scheduled Commercial Banks*

41,48,598

5,84,064

20.2

6,75,538

19.5

Note: 1. Data as on October 7,2011 are provisional.
2. *Including Regional Rural Banks.


Table IV.6: Sectoral Deployment of Credit

(Per cent)

Sector

Outstanding Credit as on Sept. 23, 2011 (` crore)

Y-o-Y Variation

Financial Year Variation

Sept. 24, 2010 over Sept. 25, 2009

Sept. 23, 2011 over Sept. 24, 2010

Sept. 24, 2010 over Mar.26, 2010

Sept. 23, 2011 over Mar. 25, 2011

1

2

3

4

5

6

Non-food credit

37,96,893

18.7

18.7

5.2

3.5

Agriculture and allied activities

4,33,791

19.3

7.9

-3.4

-5.8

Industry

17,42,163

24.4

22.9

8.1

7.5

of which, Chemical & chemical products

96,670

15.3

9.4

3.1

2.3

All engineering

1,01,632

27.8

22.5

12.4

8.9

Infrastructure

5,64,958

47.4

20.3

23.6

7.3

of which, Power

3,00,752

46.9

32.2

21.1

11.7

Telecommunications

89,964

94.7

-10.2

68.8

-10.4

Roads

1,03,545

28.3

31.9

6.7

11.9

Services

9,12,413

17.4

19.3

5.2

1.3

of which, Commercial Real Estate

1,14,459

7.9

12.6

10.3

2.3

NBFCs

1,83,761

18.5

46.2

10.8

4.7

Personal Loans

7,08,526

8.6

15.2

5.0

3.4

of which, Consumer durables

8,492

12.5

-6.5

9.5

-16.4

Housing (incl. Priority sector)

3,66,889

10.4

15.7

5.4

6.0

Education

48,339

23.6

18.1

11.1

10.6

Vehicle loans

83,981

16.1

19.3

10.3

5.9

Note: Based on data collected from select SCBs that account for 95 per cent of the total non-food credit
extended by all SCBs. These data are being disseminated every month from November 2010.


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