The table shows the relationship between GDP at market prices, the increase in money supply, and interest rates. GDP measures the amount of goods and services produced in the economy in a particular year, while the increase in M3 indicates the amount of extra money which finances this GDP.

An increased M3/GDP percentage, therefore, shows there is more money to fund growth. It will be noticed that in 1995-96, as a result of the Reserve Bank's credit crunch, the percentage of M3 increase to GDP fell drastically, making interest rates go up. An improvement in the M3/ GDP ratio, thereafter, led to progressively lower interest rates.

This year, if interest rates are to be maintained at current levels, the percentage of M3 to GDP should at least be at last year's levels. In fact, it should be higher, because much of last year's growth was from the agricultural sector, where the need for bank credit is comparatively lower.

Nevertheless, the relationship does give a broad idea of how much money supply growth is necessary. If we take the M3/GDP ratio at the same level as last year, at 8.3 per cent, and if we take the projected nominal GDP of Rs 20,00,100 crore, M3 growth for the year as a whole should be Rs 166,000 crore. That translates into a growth of 17 per cent. While M3 growth has remained at this rate for most of the year, it has recently fallen. As on September 24, M3 growth, year-on-year, was 16.1 per cent.

The RBI had projected that monetary expansion of 15.5 to 16 per cent this year would be consistent with serving the growth objectives of the economy. With M3 growth of at least 17 per cent being called for in terms of the computations given above, a further relaxation in monetary policy is called for. The central bank's liquidity stance will have to be more liberal than hitherto if it wants to allow growth without increasing interest rates.