Not enough money in market, despite RBI printing more currency; star strategist lists two reasons

By: |
April 17, 2019 4:53 PM

As growth continues to slow and inflation stays below the target, interest rates may keep falling, but likely not fast enough to revive growth quickly.

India has a money problem: it doesn’t have enough in the market, despite RBI printing more and currency in circulation rising in high double digits. Money creation has slowed down in recent times, possibly due to inefficiency in financial system and lack of coordination between monetary and fiscal policies, says equity strategist Neelkanth Mishra. This needs to be checked if India wants to remain one of the fastest growing countries in the world, Neelkanth Mishra, co-head of Asia Pacific Strategy and India Strategist for Credit Suisse, wrote in The Indian Express on Wednesday.

Neelkanth Mishra expressed concerns regarding the shortage of money in India. “How can there be a shortage of money when the RBI is printing so much that currency in circulation is 17 per cent higher than at the same time last year?’’ he wrote. There may be two probable reasons.

One reason behind the slowdown in money creation may be the ineffectiveness in the functioning of the financial system, which is reeling under high NPAs, and liquidity crisis in the NBFC sector. This has affected the system-wide credit growth, Mishra wrote.

A second challenge creating shortage of money supply is lack of coordination between fiscal and monetary policies in India. Currently government bond yields, which form the benchmark for the interest rates on a lot of debt in India, are significantly higher than the rates set by the Monetary Policy Committee (MPC), he noted.

READ MORE: Modi’s minister says need to do more on jobs, but the real crisis is data

The markets fear about fiscal slippage, due to i) combined deficit of the centre and state being among the highest in the world; ii) excessive borrowings by public sector enterprises, and: iii) implementation of 7th pay commission, wrote Neelkanth Mishra. Moreover, there has been a decline in the ratio of household financial savings to GDP, which further constraints the credit growth needed for money creation.

The gradual policy cuts may not have any significant immediate impact on growth. “As growth continues to slow and inflation stays below the target, interest rates may keep falling, but likely not fast enough to revive growth quickly,” he wrote.

Do you know What is Cash Reserve Ratio (CRR), Finance Bill, Fiscal Policy in India, Expenditure Budget, Customs Duty? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Karnataka Budget: No burden of additional taxes on common people, says CM Yediyurappa
2GSDP estimated to contract 5.6% in Delhi, says Lt Governor Anil Baijal
3Determined push to power reforms