Monetary profile

Monetary aggregates seem to be shaping better, indicating pick up in formal credit and deposits. Growth of informality in form of currency in circulation is on the decline. The M2 growth shows monetary easing reaping fruits – as it grew by Rs781 billion (6.1%) in 9MFY17 versus Rs622 billion (5.6%) in the corresponding period last year.

The adverse affect of tax on banking transaction imposed from July 2015 is finally withering. The idea was that the money out of the formal system as will eventually revert to formal segment. In FY16, more than half of the broad money flow flew out of the banking system and within 9MFY16, the CIC contribution was four fifth of M2.

Now the trend is changing as in 9MFY17 the CIC constituted mere one fifth of broad money growth. And that explains a robust growth in bank deposits which quadrupled to Rs630 billion in Jul-March 17.

On the asset side, net domestic assets are growing while the net foreign assets are far and few. NFA has fallen by RS283 billion so far, while it grew by Rs83 billion in the same period last year. On the flipside, NDA almost doubled in 9MFY17 to Rs1,064 billion.

The deteriorating NFA to NDA ratio is inflationary in nature - demand pull inflation is in its full swing. Sooner or later, it will translate into numbers as well. Low foreign assets also explain the burgeoning current account deficit. Domestic money is creating demand, and that is fueling imports and not enough foreign savings is coming home to fill the void.

Net government borrowing, as usually, has the highest share but unlike last year, it is no more the lion’s share. The number stood at Rs600 billion - 60 percent of NDA in 9MFY17 as against Rs460 billion which was 85 percent of NDA in 9MFY16.  Although, the government borrowing is relatively higher, but the pie is getting bigger, creating room for private credit.  This is despite the fact the foreign assets stock is thinning.  The prime reason for opening up of private credit room, apart from low CIC, is that, right after exiting the IMF, government reverted to central bank borrowing which has increased by Rs801 billion in 9MFY17 as against the decline of Rs507 billion in the corresponding period last year. That is another indication of resurgence of demand pull inflation. However, its impact is somewhat nullified by partial reversal of OMO injection. Still the injections are to the tune of a trillion rupees, suggesting persistent gap in liquidity.

The government has not retired much of commercial banking lending; but that incremental trend is arrested for the time being. Credit to non-government sector doubled to Rs640 billion in 9MFY17. The public sector entities are back in action, having borrowed Rs172 billion. Credit to private sector increased by a half to reach Rs463 billion in 9MFY17. That is an encouraging trend and fixed investment borrowings are higher than finance to meet working capital needs.

This implies the industries are expanding to meet growing demand.  Yet, the consumer demand is growing at higher pace and the private sector credit needs further push.