Credit policy may signal liquidity crisis in FY03

It is not uncommon to hear one disparaging the credit policy as being a non-event. After all, the same phrases pack in similar content in 60-odd pages with new figures, or may be not even that.
In fact, in a lighter manner it is said that our goals never change and it is only the end result that is almost always disappointing. But, that is really not true if you look at this year’s policy, as there are some warning signals sent out, albeit though not very overtly. You need to read between the lines or rather numbers.
Let us put the facts together. The economy will do better than last year as 6-6.5 per cent growth in GDP is higher than 5.4 per cent.
Therefore, credit will grow at a higher rate, which means money supply will also have to rise at a similar rate. So far, it may still be a ‘cut and paste job’ as growth rates of 15-15.5 per cent and 14 per cent for credit and money supply respectively look suspiciously familiar having appeared in the previous four policies.
As is the case with the 6-6.5 per cent GDP growth rate projections. But, now things will take a nasty turn when the deposit growth rate is juxtaposed. They are to grow by 14 per cent this year and if these growth rates are converted into monetary numbers, a warning is signalled.
The second integral or rather the increase in incremental monetary aggregates succinctly states the problem. Deposits are to increase by Rs 154,000 crore (Rs 138,000 crore in FY02), credit by Rs 114,000 crore (Rs 80,000 crore) and money supply by Rs 210,000 crore (Rs 186,000 crore).
Putting all these numbers together you can smell a liquidity crunch. In terms of an increase in incremental values, deposits are to go up by Rs 16,000 crore while credit will be up by Rs 34,000 crore and money supply will rise by Rs 24,000 crore. This does not add comfort, as credit increase is higher than change in incremental deposits. Also, increase in incremental credit is higher than that in money supply.
Two conclusions can be drawn now. The first is that there will be a liquidity crunch as banks may be unable to meet the credit demand easily.
The second is that if the increase in money supply is to be lower than that in credit, then two other components will have to bear the brunt ie government borrowing and forex reserves.
They cannot be rising at a higher rate in the current year, and while the forex situation can be explained possibly by higher imports, lower government borrowings cannot be supported by the figures projected in the Budget.
Let us turn to the Budget now. Government borrowing through dated paper is to be Rs 124,000 crore (Rs 114,000 crore) while the 364 Tbills will be higher by Rs 6,500 crore, as the size of the issue is up from Rs 750 crore to Rs 1000 crore.
Therefore, additional borrowing will be of the order of Rs 16,500 crore and will put pressure on the liquidity situation.
This will also mean there will be some element of volatility in the G-secs market, as banks may want to reduce their investment-deposit-ratio to meet credit demand. Further, the RRBs will also be directly bidding for government paper in the market and add to the demand-supply imbalance.
Now, this probably explains why CRR has been cut even though there is an abundance of liquidity in the system. This also explains why even today, the MOF and RBI are talking of stable and low interest rates as there is a fear that economic recovery will mean substantial RBI intervention to avoid a liquidity crisis.
So, how are we to look at the situation? Do we want an economic recovery or a slump? A recovery will not only increase demand for credit but also increase consumption, which means lower savings. Lower savings will mean relatively less funds flowing into banks. Banks should take cognisance of these issues in the process of planning for the future.