The Reserve Bank of India will conduct its mid-term review of the economy where monetary parameters have not changed much but priorities for the economy may have.
In the last two policies -- annual policy in April and quarterly review in June, the concern for the RBI was to check the unhealthy credit growth, prevent potential asset prices bubble and curb imported inflation.
The scenario in this quarter is a bit different as the growth is broadbased and healthy. Inflation is rising but not on account of international crude prices, which have figured below $60 per barrel from highs of $76-78 a barrel.
Essential commodities, which are pushing up inflation are more supply driven than demand, thus invite less monetary action. The government has projected growth rate of 10 per cent for the terminal year of the five year plan period -- 2011-2012. The RBI also may increase its growth rate for the plan period from 8.5 per cent to 8.9 per cent.
Since the sensitive sectors contribute only 14-15 per cent in total credit component, productive sectors comprise the rest. Services sector, contributing to 60 per cent of the economy, is primarily driven by productive services sector that has impulses for the two other two components- agriculture and manufacturing.
Credit has been quite robust and is growing at an average rate of 29-30 per cent. However, if the assumption that the prudential measures taken to curb the growth in sensitive sectors will show results with a lag is true, the RBI has reasons to be happy.
The credit growth since April 2006 has come down in absolute terms in a fortnight ended October 13 by RS 11,014 crore for the first time.
The caveat is that the data has to be observed for a longer period; otherwise it could be interpreted as roll over of short term loans given by banks as part of window dressing for quarter end.
The credit growth is supported by equally strong pick up in deposits as well. Since there has been shift in deposit holding from individuals to corporate (flush with funds owing to restructuring during recessionary years since 2001-2002), the banks are vying with each other for tapping such deposits and thus are pushing up the rates.
This may be a concern as for arranging liquidity to support he credit story, liquidity will be dearer if not fall short. The RBI may have to resort to open market operations to infuse liquidity into the system going forward.
On the other hand, money supply has been ruling at an unprecedented levels of 18-19 per cent. Not only has the currency in circulation has gone up, deposits also contribute quite a substantial chunk.
However, the growth in deposits has one more component - portion withdrawn from small savings. This component has been growing as deposits with banks since the government has been withdrawing various small saving schemes.
Therefore the money supply has to be analysed with a different perspective rather than just a trigger for inflation.
Also, the policy comes at a time when the US Federal Reserve, Bank of England and Bank of Japan have yet to ascertain sustained growth in their economies and, thus, have preferred to take a pause on further revision in interest rates.
Further, oil prices, the key factor for fuelling global inflationary expectations, has mellowed down of late. A volatile correction has affected commodity markets across the globe since the beginning of May 2006, resulting in breaking the continuous increasing trend in major commodity prices.
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