The liquidity crunch continues, with banks still borrowing around 1 trillion on an average daily from the Reserve Bank of India’s repo window. The chart alongside clearly shows the unprecedented crunch, with money supply (M3) growth being much lower than the growth in nominal gross domestic product (GDP) during the first half of the year. The chart shows that while GDP at current prices and at factor cost increased by 19.8% during the first half of 2010-11, M3 increased by a comparatively tepid 14.7%.

Also See Liquidity Tightens This Year (PDF)

On the other hand, the chart also shows that in earlier years the growth in money supply outpaced the growth in nominal GDP. It was only during the first half of the current fiscal year that the reverse has happened, leading to the liquidity crunch.

Could it be that M3 growth year-on-year (y-o-y) is always lower during the first half and we’re not actually comparing like with like? Not really—at end-September 2009, y-o-y M3 growth was 19.5%, in September 2008 it was again 19.5%, it was 21.5% in September 2007 and so on and so forth. Clearly, this year has been special, thanks to the large amounts the government has got from the 3G auction and its refusal to spend that amount so far. M3 growth has gone up a bit from end-September 2010 to 15.3% by 3 December, but with inflation continuing to be high, it’s likely to be still below nominal GDP growth.

Graphics by Yogesh Kumar/Mint

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