Interesting developments in money market
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The Finance Ministry would appear confident of preventing an enlargement of the fiscal deficit even with an increase in non-plan expenditure, as tax receipts have been quite heartening with a spurt in revenues from direct taxes.
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THE MONEY market has been passing through an interesting phase in recent months with contrary forces at work and speculation about the trend of interest rates.
The Prime Minister has observed that there will not be any change in interest rates despite the sharp rise in the inflation rate. This prognosis is presumably due to the impression that the accentuation of inflationary pressures has been mainly on account of external factors and that there may be an improvement in the price situation within the country with the kharif harvests from the middle of October.
Though the kharif foodgrain estimate will come down to 100.29 million tonnes from 108 million tonnes, the rabi performance is expected to be satisfactory and the output of fine and coarse cereals and pulses for the whole year may not be lower than 195 million tonnes. On the other hand, the cotton crop is placed at an all time record level of 213 lakh bales while oilseeds production too may be higher this season.
As world prices for crude also have been fluctuating in wide limits, though below the peak level touched a few weeks ago, the impression is gaining ground that they will come down in the coming months and their inflationary impact may be less pronounced.
GDP to grow at 6.5-7 p.c.
With the gross domestic product likely to rise by 6.5-7 per cent in 2004-05 and high liquidity in the banking system despite efforts to immobilise surplus funds to a certain extent through operations of the Market Stabilisation Scheme and a hike in cash reserve ratio, quite a few bankers seem to be of the view that interest rates will remain stable with even a downward bias. But other bankers have been raising interest rates on housing loans and issuing new loans on a floating rate basis.
Will interest rates go up?
The question now is for how long the prevailing low interest rates will continue and whether they will tend to harden as the months pass by. It has also to be borne in mind that interest rates in developed countries are on the rise though the U.S. Federal Reserve is inclined to be cautious when taking decisions about further rise in its discount rate.
While it remains to be seen how the changes in interest rates elsewhere impact the structure of interest rates in India, there has been a noticeable slowdown in the growth of forex reserves in recent months. However, the outgo of $4.6 billion in five weeks in July-September should be ascribed to an outflow of interest bearing obligations, particularly NRI deposits. On the other hand, inflow of non-debt resources has been quite sizable. After a pause, FII inflows have been increasing with purchases of equities on the bourses and support to new issues.
BoP comfortable
Thus, even with foreign exchange assets rising at a slower rate by $5.37 billion upto September 10, against $12.24 billion a year ago, the rupee has not come under any pressure. So long as the secular trend is observed and the Balance of Payments position gets strengthened with a reduction in interest bearing obligations and larger inflows of invisible receipts, the rupee will remain fairly steady and the variations may be due to a strengthening of the U.S. dollar and other currencies.
High liquidity of banks
The money market has not witnessed any diversion of funds to the forex market as there has been no volatility in rupee parity. Besides, additions to money supply will be satisfactory even though at a slower rate.
The scheduled commercial banks have thus been experiencing an increasing growth in their deposits, though the additions this year upto September 3 are lower at Rs. 84,904 crores against Rs. 94,716 crores.
But in the 12 months ended September 3, the growth in deposits has been spectacular at Rs. 2,13,750 crores against Rs. 1,49,540 crores. It is interesting to note, of course, that banks have been utilising surplus funds more profitably, as incremental bank credit in the 12 months under reference has risen by 83.09 per cent of incremental deposits against 50.72 per cent comparably. Fresh investments out of incremental deposits accounted for only 42.89 per cent against 86.68 per cent.
If the UPA Government is keen on increasing credit availability to the farm sector and loans extended to borrowers in industry and trade also tend to rise, the liquidity in the banking system may slowly disappear. As the monetary authorities would seem to be keen on intensifying operations with the MSS with a view to containing inflationary pressures, the CRR is being raised to 5.0 per cent from 4.5 per cent in two stages and an amount of Rs. 8,000 crores will get immobilised by October 2. The intention is perhaps not to increase interest rates when the Credit Policy for the busy season is announced by the end of October.
Centre's borrowing
This line of thinking is perhaps correct as the Reserve Bank has indicated that the target for the issuance of securities by MSS for 2004-05 has been raised to Rs. 80,000 crores from Rs. 60,000 crores.
The issue of new loans by MSS in the coming months may nevertheless have larger notified amounts, as Government borrowing is slated to be only Rs. 44,000 crores in October-March 2004-05 against Rs. 66,000 crores in April-September or a total of Rs. 1,10,000 crores against the target of Rs. 1,15,501 crores for net borrowing in 2004-05.
The Finance Ministry would appear confident of preventing an enlargement of the fiscal deficit even with an increase in non-plan expenditure, as tax receipts have been quite heartening with a spurt in revenues from direct taxes by 50.69 per cent upto September 15 to Rs. 27,240 crores from Rs. 18,077 crores.
What is significant is the sharp rise in income tax collections by 55.51 per cent to Rs. 17,999 crores from Rs. 11,574 crores. As the demand for various products has been rising and industrial production also has increased by 7.8 per cent in April-July against 5.9 per cent comparably, the revenues from indirect taxes too may not show any shortfall from Budget estimates.
As there has been no aggressive borrowing by the Centre and State governments also have not been securing their requirements in a big way till now, the yields on new loans have not risen noticeably, though the yields on gilt-edged securities in the open market have been rising slowly and banks with excess holdings of securities, particularly in long-term loans, fear that the income from treasury operations may not be of last year's dimensions and their net profits may not rise at the rate seen in recent years.
The happenings in the money market during the busy season may thus be on different lines and it will be interesting to watch whether MSS operations will have to be slowed down if the credit deposit ratio continues to rise impressively. It may thus not be feasible to raise the CRR further and also immobilise additional funds through as it will add to the interest burden ofo the Central Exchequer.
P. A. Seshan
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