Mumbai, July 26: Money supply (M3) has dipped for the second time during the current financial year by 0.5 percentage points to 16.3 per cent, putting to rest apprehensions that M3 might breach the 17 per cent barrier. For the fortnight ended July 4, M3 was pegged at 16.3 per cent, down from 16.8 per cent in the previous fortnight.

Money supply which has been growing unabated since April 25 fell during the fortnight largely because of the fact that the Reserve Bank of India (RBI) kept away from intervening in the forex markets.

Analysts said that the RBI stayed away from the forex market and allowed the market forces to determine the rupee during the fortnight ended July 4. This led to a fall in the growth of net foreign exchange assets of the central bank. While in the previous fortnight (ended June 20) forex assets grew by 2 per cent to Rs 1,11,304 crore, the fortnight ended July 4 saw only a 1.5 per cent rise to Rs 1,12,984 crore.

In the fortnight ended June 6, M3 had grown to 16.8 per cent primarily because of the rise in the forex assets in the banking system. "This trend was reversed in the next fortnight," a banking analyst in a brokerage said.

Bank credit to the commercial sector which has been sluggish over the previous two fortnights recovered mildly during the fortnight to post a 0.3 percentage point rise. "Bank credit which is one the major components of M3 did not go up significantly to offset the fall in the forex assets," the banking analyst added. However, the year-on-year credit growth was still in the negative.

The net RBI credit to the government (another source of M3) went up drastically by Rs 7,730 crore during the fortnight ended July 4. However, the government's recourse to ways and means continued to remain nil. "The government is not resorting to ways and means as the government borrowing programme is ahead of schedule and all the short-term shortfalls are being met through the net bank credit to the government, an economist with a foreign institutional investor (FII) said.

Foreign exchange reserve went up by $ 73 million during the week ended July 17 to touch $ 29.45 billion. The rise was attributed to an increase in the foreign currency assets which went up by an identical amount. "Although the RBI was aggressive in the forex markets through its interventions, it shows that it has mopped up very small amounts", a forex analyst said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.