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Growth in bank credit rises, money supply falls

Lower growth in money supply points to a liquidity squeeze, suggests that monetary policy may be too tight
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First Published: Tue, Dec 25 2012. 09 29 PM IST
The y-o-y growth in term deposits has slowed from 15% in the beginning of August to 13% at the end of November. Photo: Priyanka Parashar/Mint
The y-o-y growth in term deposits has slowed from 15% in the beginning of August to 13% at the end of November. Photo: Priyanka Parashar/Mint
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The chart shows that while bank credit growth has inched up in recent months, the growth of money supply (M3) has been steadily decelerating. If the economy has bottomed out and is recovering, then we should see an increase in the rate of growth of bank credit. But the lower growth in money supply points to a liquidity squeeze and suggests that monetary policy may be too tight. Growth in money supply has been lower than growth in nominal gross domestic product in the first half of the fiscal, indicating that liquidity was already stretched. It now seems to have tightened further. One reason for the lower growth in money supply has been the net foreign exchange assets of the banking sector—growth in them has been a mere 2.2% year-on-year (y-o-y). Indeed, these assets were lower at end-November than they were in the beginning of September. The y-o-y growth in term deposits has slowed from 15% in the beginning of August to 13% at the end of November.
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First Published: Tue, Dec 25 2012. 09 29 PM IST
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