The rise in money supply coincides with finance minister Yashwant Sinha's announcement on Satuday that Indian government's main challenge is to reduce the fiscal deficit to sustainable levels. "If we have a challenge in government, the challenge is the challenge of fiscal deficit," Sinha told a seminar organised by the Federation of Indian Chambers of Commerce and Industry in Mumbai.

The rise in money supply, analysts feel, is likely to lead to a overshooting of fiscal deficit at the end of the year. This is because the rise in money supply triggered by the rise in bank credit to the government. The net RBI credit to the government has been on the rise. As on November 27, this has gone up by 12.1% as compared to a rise of 9.4% in the previous week.

The netbank credit to the government has also gone up to 19% on a YoY basis as compared to a rise of 18% in the previous fortnight. Former RBI deputy governor S S Tarapore has called for a tight money policy without further delay. "M3 is increasing at a high year-on-year expansion of 20.5% and gimmicks to exclude Resurgent India Bonds to show a lower M3 would, to say the least, be a disservice. All this if allowed to continue could take the current account deficit in the balance of payments to over 3% and put India in a critical situation," Tarapore said.

Echoing this Sinha said today, "Much of the sentiment that governs the market will be guided by how we do, how we manage the whole situation. I am determined that not only should I do my best, and make government do its best to restrain deficit this year, but also set targets that will lead to the gradual reduction and final elimination of fiscal deficit," he added.

He said a consensus needed to be reached on this between government, industry and thepeople.

Sinha has set a fiscal deficit target of 5.6 percent of gross domestic product in 1998/99 (April-March), after the previous government left the current coalition with a deficit of 6.1 percent. However, analysts are already pegging the figure at 6.5% due to shortfall in revenues ad continuous rise in expenditure on the part of the government. Earlier this week the minister said there could be a shortfall in indirect tax revenues.

The net bank credit to the government which is one of the main causes for the rise in the M3 would have gone up further but for the Reserve Bank of India's continuous open market operations (OMO) in 1998-99. Up to November 6, the RBI conducted OMO of central government securities to the tune of Rs 11,410 crore. Taken into account repo deals -- conducted to the tune of Rs 4,774 crore -- the net effect of the OMO was Rs 6,636 crore.