Analysts said that the rise in M3 will not have an immediate impact on inflation. Inflation on September 5 was pegged at 8.09 per cent after touching a 148-week high of 8.48 per cent in the previous week.

"Most of the money will be tied up with infrastructure projects and it will take time for these projects to take off. So, money will flow in later not now," said MR Madhavan, analyst at ICICI Securities (I-Sec).

The last time M3 had crossed the 20 per cent mark was on December 1994 when it touched 20.93 per cent. The rise was chiefly on account of the GDR inflows at that point of time, analysts said.

The Reserve Bank has said that excluding the proceeds of the RIBs, the year-on-year (YoY) M3 growth rate would have been pegged at 17.7 per cent. To offset the growth in M3, the Reserve Bank of India has managed to reduce the net RBI credit tothe government substantially. On a YoY basis, the net RBI credit was pegged at 20.6 per cent for the week ended September 4, down from 27.1 per cent in the previous week.

The RBI has been able to bring down the level of monetisation through active open market operations in the past two months.

M3 growth in '97 was lower

Part of the reason for the sudden jump in YoY M3 growth to above 20 per cent, compared with 17.29 per cent at end-July, is because the growth in M3 during August 1997 was comparatively low. Nevertheless, that is not the whole story. The RBI says that RIB inflows are responsible for the growth in M3. These inflows have occurred only recently and their multiplier effect will take some more time to work through the system. In other words, the RIB effect on M3 growth will be felt even more strongly in future. This is in addition to the multiplier effect of the massive monetisation undertaken earlier. Although open market operations reduce the monetisation, the multiplier effect ofmonetisation continues to seep through the system. All this is cause for concern. The RBI will now have to do one of two things -- either tighten liquidity, and see an increase in short-term interest rates; or see a resurgence of inflation.