The fourth quarter of 2005-06 saw a repeat of the credit history of the past several months, though it was in a contrasting backdrop.
Liquidity conditions had turned during tight January-March 2006 and banks were stressed for resources, but there was no let up in the demand for credit, particularly for home loans.
The pre-emptive 25 basis points hike in the reverse repo rate in January failed to check the unbridled growth in credit.
Reddy had identified three factors threatening to pose further risks of potential inflationary pressures - step-up in credit growth; movement in asset prices and growth in monetary aggregates.
These factors continue to exist and pose risks to inflationary pressures. Demand deposits have grown faster than time deposits and certificate of deposits have become an important source of funding for some banks.
These developments warrant continuous and careful monitoring by RBI so as to be on guard against the incipient build-up of potential demand pressures.
Since the January review, only inflation has remained benign. Global environment has turned adverse as the anticipated long pause by the FOMC is balanced by possibility of further rate rises in Eurozone and a move away from zero interest rate policy in Japan.
RBI's commitment to price and financial stability will require continuous and careful monitoring of global developments, in particular, movements in international interest rates and the ongoing adjustments of global imbalances, the international oil price scenario, the booming levels of credit and asset market activity in India and the rising trade and current account deficits.
Analysts have been pitching for a rate hike. For instance, ICICI Securities feels that since asset prices and credit boom picked up momentum after the January review in the face of unanticipated tightness in money markets, a status quo may send out the wrong signal to banks and financial markets.
Micro-regulation of banks' investments may succeed in reining in credit growth in the short-run but do nothing to resolve worries about banks' ability to price credit in the long-term RBI's pre-emptive tightening in January was not a great success despite the liquidity squeeze.
This has made money markets to think the 2006-07 policy will certainly have a hawkish undertone even if it refrains for hiking the rate right now.
In his last annual credit policy for fiscal year 2006, Reserve Bank of India Governor Y V Reddy had fixed the target for the inflation rate in the range of 5-5.5 per cent. Consistent with this, the projected expansion of money supply (M3) was 14.5 per cent.
Finally, in tune with this money supply growth, the rise in banking system's deposit liability was set at Rs 2,60,000 crore (Rs 2600 billion) or 15 per cent, and the non-food credit was projected to increase by 19 per cent. On all these four counts, the RBI projections have gone wide off the mark even there was no systemic implications.
The money supply growth as on March 24 was 16.5 per cent. Despite that, the RBI has been able to contain the average inflation rate for the year at a little over 4 per cent, much below its target. The deposit growth as on March 31 has been Rs 3,87,471 crore (Rs 3874.71 billion) or 22.8 per cent, while the credit grew by Rs 3,96,045 crore (Rs 3960.45 billion), about 36 per cent.
Irrespective of the stance of the monetary policy, central bank will surely try to make more realistic projections this time.
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