MUMBAI, July 10: The year-on-year growth rate in the money supply stood at least 140 basis points over the Reserve Bank of India (RBI) target of 15 to 15.5 per cent, though experts said it might not lead to an inflation spiral.

Latest figures released by the Centre for Monitoring Indian Economy (CMIE) put the money supply growth at 16.9 per cent as on June 6, saying, ``at a time when money supply growth was creeping out of control, the cut in the bank rate by the RBI was not expected''.

The money supply growth had risen from 15.4 per cent in March 1997 to 16.9 per cent by June 6, more than one percentage point over the upper limit of 15-15.5 per cent growth projected for 1997-98, the CMIE said.

RBI governor, C Rangarajan, recently said at a function here that low inflation rate was a must to contain the low interest rates. ``Inflation will be pegged around six per cent by keeping the money supply growth within the band of 15-15.5 per cent'', he added. Economists and bankers contacted by PTI said though the money supply growth was way above the target and cut in the bank rate would only add to the money supply, there would not be a massive rise in the inflation rate. Senior economist with Tata Services Ltd P K Mukhopadyay said any hike in the inflation rate resulting from high money supply growth and cut in the bank rate would be manageable by the RBI.

``The Reserve Bank has been periodically reviewing the macro-economic parameters and its policies regularly. Any massive overshoots from the targets could be monitored and controlled by the central bank'', he said adding that RBI would be unveiling the busy season credit policy in October, which could also address the issue.

A top bank official with a leading public sector bank said the problems faced by the economy were that of low credit offtake and relatively higher interest rates despite a slush of liquidity. The inflation rate was at low and manageable levels, he said adding, ``though the bank rate cut may add to the money supply, it was a welcome move'', he said. CMIE attributed the jump in the money supply growth to the heavy inflows of foreign capital.

``The annual growth rates in foreign exchange assets with banks relative to year ago levels, have steadily and rapidy increased from less than two per cent in may 1996 to 37 per cent in may 1997'', it added. The domestic sources of M3 (broad money) showed marked deceleration with bank credit to the government and the corporate sectors falling considerably. According to CMIE, the rate of growth in bank credit to government declined from 15.7 per cent to 12.4 per cent between may 1996 and 1997. ``The other major source, bank credit to commercial sector, also decelerated from 16.9 per cent to 10.6 per cent during this period'', it added. On the foreign exchange assets with the RBI, the CMIE said the central bank added an average of around US$ 290 million per month between June 1996 and February 1997, and about $ 1,490 million per month during March-May 1997. ``By June 20, the forex assets with the RBI touched $ 24.876 billion'', it added. However, experts say, a major contributor to the forex assets, non-resident (external) deposits would come down due to the cut in the interest rates by commercial banks following the slashing of the bank rate last month.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.