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A matter of capital

A matter of capital
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First Published: Sat, Feb 17 2007. 12 20 AM IST
Updated: Wed, Jan 09 2008. 03 40 PM IST
Money supply in India is now growing at a pace not seen for nearly a decade. The Reserve Bank of India (RBI) said on Friday that M3 (the broadest measure of money supply) grew at 21.3% over the past year. This is far in excess of the average 15% M3 growth that RBI has maintained in recent years.
High M3 growth results in inflation down the line. The blunt question is whether the central bank is now losing control over the most important monetary variable in the economy. If it is, then the logical corollary is that it is fighting a losing battle against inflation.
RBI has tried hard to curb monetary expansion by increasing the rate at which it lends to banks as well as by forcing banks to hold more reserves. Despite these measures, M3 growth has accelerated in recent weeks.
The main reason why money supply is not responding to RBI policy is that India is now an open economy. The sheer force at which foreign capital is flowing into the economy is pushing up M3. Thailand tried to impose curbs on foreign inflows in December, and failed.
The game has changed.
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First Published: Sat, Feb 17 2007. 12 20 AM IST
More Topics: Capital | M3 | RBI | Money supply | Banks |