Column : Multiplying the money

Font Size

Print

Feedback

Email

Discuss

: What RBI will do depends on how its actions have played out so far. One little noticed change, as RBI tightened and eased monetary policy, has been on the money multiplier, the ratio between broad money and reserve money. As CRR has changed so has the money multiplier. The multiplier declined from 4.7 at the end of March 2007 to 4.3 at end march 2008, this was the period CRR hikes took place as RBI targeted inflation. After the reductions in CRR, the money multiplier has increased to 5.2.

This is a sharp increase and what has been its impact on credit? If you look at RBI’s third quarter review, year-on-year credit growth is high; 24% rise between January 2007 and January 2008. Public sector banks seems to have lent handsomely and infrastructure, oil, steel, chemicals, engineering have been major recipients.

But month-to-month credit data is showing a somewhat different picture. Even without getting into that debate, RBI’s own data gives a perspective on credit squeeze. Remember that industry raises resources not just from banks but from capital markets and global financial sources. RBI’s third quarter review shows that the total flow of resources to the commercial sector, when compared to 2007-08, is lower by about Rs 14,000 crores so far in 2008-09.

This shows two things. RBI’s own data, is demonstrating that flow of funds to industry is shrinking. It also shows the enhanced importance of bank credit now—with other sources drying up.

One should view banks’ current preferences through this prism. True, at times of uncertainty banks are worrying about accruing not performing assets. But the amount parked in government securities is still huge—3.1 percentage point above the prescribed statutory liquidity ratio of 24%. Higher government borrowing isn’t helping either.

The RBI governor in a recent speech at the Bankers’ Club in Kolkata remarked that although not often acknowledged, efficient financial intermediation has been one of the important factors behind India’s recent growth episode. He has therefore given the best reason why RBI action is critical as growth is faltering.