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Monetary Trends
Credit Trends
New Monetary and Liquidity Aggregates
Reserve Money
Liquidity Management

Broad money (M₃) increased by 14.0 per cent during 2001-02, on a point-to-point basis, as against 16.8 per cent (14.5 per cent, net of India Millennium Deposits (IMDs)) during 2000-01. Currency growth at 15.2 per cent during 2001-02 was higher than that of 10.8 per cent recorded during the previous year reflecting the modest pick-up in economic activity (Chart 23). Aggregate deposits increased by 13.9 per cent during 2001-02, which was lower than that of 15.3 per cent (net of IMDs) recorded during the previous year. The accretion to aggregate deposits was largely on account of time deposits of commercial banks which increased by 15.7 per cent (15.8 per cent, net of IMDs, in 2000-01). Demand deposits of the commercial banks, on the other hand, decelerated to 6.4 per cent from 11.9 per cent in 2000-01.

The broad money growth of 14.0 per cent was in alignment with the indicativeprojection of 14.5 per cent set out in the Monetary and Credit Policy Statement for 2001-02 (Table 8 and Chart 24). On a monthly average basis, the year-on-year M₃ (net of RIBs/IMDs) growth rate at 15.2 per cent during 2001-02 was almost the same as that of 15.0 per cent recorded during 2000-01.

The growth in adjusted domestic credit (domestic credit inclusive of commercial banks’ non-SLR investments) decelerated to 12.2 per cent during 2001-02 from 16.3 per cent during 2000-01. This was due to a deceleration in adjusted non-food credit off-take (11.6 per cent during 2001-02 as against 16.0 per cent in 2000-01) due to subdued industrial activity. Food credit increased by Rs.13,987 crore (35.0 per cent) during 2001-02 as against Rs.14,300 crore (55.7 per cent) during 2000-01. Net bank credit to the Government increased by 14.8 per cent during 2001-02, which was lower than that of 16.0 per cent during the previous year. The share of net bank credit to the Government was consistently around 42.0 per cent of adjusted domestic credit. The higher net bank credit to the Government was largely provided by commercial banks; the share of the Reserve Bank in outstanding net bank credit to the Government sector, on the other hand, declined from 30.1 per cent at end-March 2001 to 26.3 per cent at end-March 2002 (Chart 25).

The new broad money aggregates (NM₃) [compiled on the basis of the recommendations of the Working Group on Money Supply: Analytics and Methodology of Compilation (Chairman: Dr. Y.V. Reddy)] registered a growth of 15.8 per cent as on February 22, 2002 as against an increase of 13.9 per cent a year ago. The trends in NM3, by and large, mirrored those of the existing broad money aggregates (M₃), netted for the IMDs. The three liquidity aggregates (L₁, L₂ and L₃) introduced along with new monetary aggregates suggest an increase in liquidity in the system during 2001-02 as compared with the previous year (Table 9).

Reserve money expansion during 2001-02 was 11.4 per cent (Rs.34,514 crore) as against 8.1 per cent (Rs.22,757 crore) during the previous year. The increase in reserve money was driven primarily by a steady accretion to the Reserve Bank’s foreign currency assets which, net of revaluation, rose by Rs.55,836 crore during 2001-02 as against Rs.27,463 crore in 2000-01. The year-on-year expansion in reserve money was 12.9 per cent as on April 19, 2002 as against 9.7 per cent a year ago. The ratio of net foreign assets of the Reserve Bank to currency increased steadily during the year to reach 105.2 per cent as on March 31, 2002 (Chart 26).

The net domestic assets (NDA) of the Reserve Bank (adjusted for revaluation), on the other hand, declined by Rs.23,480 crore during 2001-02 on top of a decline of Rs.4,444 crore during the previous year (Chart 27).

All the major components of net domestic assets (NDA) recorded a decline. Although the Reserve Bank’s subscription to the Centre’s fresh dated securities amounted to Rs.28,892 crore (at face value), it was more than offset by net open market sales amounting to Rs.30,335 crore. As a result, the net Reserve Bank credit to the Central Government declined by 0.3 per cent during 2001-02 (before closure of the Government accounts) as against an increase of 4.8 per cent during 2000-01. Recourse to refinance by commercial banks and Primary Dealers also declined by Rs.2,119 crore and Rs.1,782 crore, respectively.

The Reserve Bank’s net credit to the Centre can be viewed as a result of the interaction of direct monetisation of the fiscal deficit in terms of Reserve Bank’s primary operations and strategic open market (including repo) operations, reflective of the Reserve Bank’s assessment of the liquidity and absorptive capacity of the market rather than being passively determined by the budgetary gap, as was the case earlier (Table 10 and Chart 28).

The net foreign exchange assets of the Reserve Bank formed only 8.5 per cent of the average outstanding reserve money in 1990-91. The proportion, however, increased sharply to 61.5 per cent by 2000-01 and further to 70.6 during 2001-02 with a corresponding decline in the share of net domestic assets (Chart 29).

The broad money multiplier increased from a monthly average of 4.3 in 2000-01 to 4.5 during 2001-02 reflecting reduction in the CRR (Chart 30).

Adjusted for the first round impact of CRR changes, the reserve money registered a year-on-year growth rate of 14.5 per cent, on a monthly average basis, during 2001-02, which was higher than that of 11.7 per cent during 2000-01 (Chart 31).

The shift from a regime of administered interest rates and direct credit control to indirect market-based monetary instruments in India has necessitated the institution of an efficient liquidity management framework that ensures stable financial market conditions. Most central banks attempt to estimate the market liquidity, autonomous of policy action, and then conduct money market operations to achieve a targeted quantum or price of liquidity or a combination of both depending upon the relative efficacy of monetary policy transmission channels (Table 11).

In line with the evolving international practices and keeping in view the characteristics of the Indian economy, the Reserve Bank has put in place a liquidity adjustment facility in which the liquidity in the system is modulated primarily through repo and reverse-repo operations. The repo operations are supplemented by open market operations (outright purchases/sales of government securities), changes in reserve requirements, access to the Reserve Bank’s standing facilities and direct interest rate signals through changes in the Bank Rate/repo rates. Liquidity is modulated, to the extent feasible, by strategically counterbalancing autonomous liquidity (AL¹) with changes in both the quantum and the price of discretionary liquidity (DL) in order to ensure stability in the money market conditions (Chart 32).

The volatility in the inter-bank call rates and bank reserves, as measured by the co-efficient of variation, has come down appreciably in recent years (Chart 33).

The liquidity adjustment facility (LAF), introduced since June 5, 2000, has emerged as an effective and flexible tool to modulate liquidity conditions on a day-to-day basis (Chart 34). While the Bank Rate provides the medium-term signal, the operation of LAF through repo and reverse repo rates in conjunction with all other operating instruments lends support to the direction of interest rates consistent with the monetary policy stance from time to time. The repo and reverse repo rates are expected to operate a flexible corridor around the Bank Rate. This enables the LAF operations to meet the system’s mismatches in liquidity effectively and smoothens out aberrations in the short-term money market rates. The second stage of LAF with rationalisation of standing liquidity facilities, changes in the operating procedures and curtailment of call money lending by non-bank participants became effective in May 2001.

The liquidity conditions remained generally comfortable during 2001-02 prompting the Reserve Bank to absorb liquidity through repo operations. Injections of liquidity through reverse repos were, however, undertaken on a few occasions to manage temporary tightness in the money market (Chart 35).

The repo and reverse repo cut-off rates were reduced by 25 basis points to 6.75 per cent and 8.75 per cent, respectively, towards end-April 2001 signalling softer interest rate conditions. During the transitional period of switchover into the second stage of the LAF, monetary conditions were eased and a series of reverse repo injections were made during May 8-23, 2001 (averaging an outstanding amount of Rs. 3,340 crore) to stabilise the call money rates within an acceptable range. Repo and reverse repo cutoff rates were further reduced by 25 basis points each to 6.5 per cent and 8.5 per cent, respectively, during May-June 2001.

As monetary conditions eased, ample liquidity was available during the second half of 2001-02. A cut in the interest rate on small saving instrument in the Union Budget 2002-03 enabled the Reserve Bank to conduct a fixed rate repo auction at a lower cut-off rate of 6.0 per cent on March 5, 2002, which prevailed in the subsequent LAF auctions. The usual year-end tightening at end-March 2002 on account of balance sheet considerations and tax outflows was accommodated through liquidity injections by reverse repos.

The year 2002-03 commenced with a significant easing of liquidity conditions. This was reflected in higher repo bids received at the LAF auctions. The average daily repo outstanding amounted to Rs. 12,907 crore during the period April 2-16, 2002 with a peak repo outstanding amount of Rs. 30,055 crore recorded on April 4, 2002.