However, despite sterilisation operations, the sheer volume of accumulation of RBIs net foreign assets (NFA) expanded reserve money at the rate of 18.3 per cent, the highest since 1994-95. Broad money (M3) expansion was also the highest since the late 1990s.
As a result, financial markets operated in conditions of ample liquidity. The interest rates at the short end of the market persistently ruled below the RBIs Liquidity Adjustment Facility (LAF). Further, the report says that the reserve money growth nearly doubled during 2003-04, led by strong capital inflows.
The ratio of net foreign assets (NFA) to reserve money consequently rose to 120.7 per cent by February 2004, the highest level since the mid 1950s.
The analysis of domestic credit reflects a significant slowdown in bank credit to the Government as well as a delayed pick-up in commercial credit. The commercial banking survey reveals a concentration of activity in the latter half of the year in terms of deposits, non-food credit, call/term borrowings and two-way movements in foreign assets/liabilities.
During 2003-04, however, bank credit to industry decelerated to 5.9 per cent from 13.4 per cent in 2002-03, even as industrial growth picked up to 6.9 per cent from 5.7 per cent.
According to the report, the pattern of credit behaviour in the Indian economy has been undergoing structural shifts as a result of newer avenues of resource mobilisation as well as new areas of deployment of assets.Demand for credit by corporates is becoming increasingly sensitive to cost considerations, availability of internal funds and international market developments, RBI said.
On the supply side, banks are beginning to optimise portfolios by arbitraging between the rates of return on advances in domestic currency and foreign currency to residents as well as treasury operations in gilts and in foreign assets. Thus, there is a growing substitution of domestic and foreign avenues of resource mobilisation and credit deployment. Borrowing from international markets by commercial banks rose from Rs 7,208 crore at end March 2003 to Rs 17,028 crore at end March 2004.