Monetary management in 1995-96 achieved the twin objectives of reducing the
annual inflation rate and providing credit support for production. Money supply (M3)
growth was reduced to 13 per cent in 1995-96 (from 22.3 per cent in 1994-95) taking
March 31, 1995 as the base1. The slower monetary expansion is partly attributable to the
higher base but also to the unusually slow growth in bank deposits and partly to the
decline in reserve money growth to 14.8 per cent (from 22.1 per cent in 1994-95). This
deceleration occurred despite a sharp expansion in net RBI credit to Central Government
by 25.1 per cent. As a result of rising private demand for credit, banks which had an
excess (over SLR requirements) holding of Government and other approved securities,
contributed only Rs.14,766 crores to the market borrowing of the Government compared
to a contribution of Rs.16,323 crores in 1994-95. This necessitated sizable support by the
RBI to market borrowing of the Government, which, in turn, increased the growth of net
RBI credit to the Centre. The resulting growth in reserve money would have been much
higher but for the reduction in net foreign assets of the RBI associated with the $3.8
billion decline in foreign currency reserves in 1995-96.
Slower monetary growth was accompanied by the deceleration in the growth of
bank credit to the commercial sector to 15.7 per cent in 1995-96, compared to 23.1 per
cent in 1994-95. There was a similar deceleration in the growth of scheduled commercial
banks' non-food credit to 21.6 per cent in 1995-96 as compared to 29.8 per cent in the
preceding year. Though non-food credit growth slowed down in 1995-96, it still grew
much faster than nominal GDP and at least as fast as industrial production in rupee value.
The slowdown in non-food bank credit growth in 1995-96 was compounded by a decline
in other sources of finance to industry such as primary issues in the domestic equity
market and GDR issues in Euro markets. Furthermore, the continued high levels of
Government borrowing associated with a large and over-budget fiscal deficit kept credit
markets tight and interest rates high throughout the year.
The credit policy for 1996-97 has targeted a monetary growth of 15.5 per cent to 16
per cent, based on a target inflation of around 6 per cent and a projected GDP growth of
6 per cent. Since CSO is now projecting higher economic growth at 6.6 per cent in 1996-
97, monetary growth targets may need to be revised upwards a little. Monetary growth
during the current financial year has risen gradually, to reach an annual rate of 16.8 per
cent by June 7,1996. This has happened despite a halving of the annual rate of reserve
money growth from 14.8 per cent at the end of 1995-96 to 7 per cent by June 7, 1996.
The reasons for higher monetary growth include a pick up in the growth of bank deposits
and cumulative easing of reserve requirements, including a reduction in CRR from 14 per
cent last year to 13 per cent on May 11, 1996 (partly offset by rationalisation of export
refinance), and further to 12 per cent on July 6, 1996. Non-resident External (Rupee)
Deposits have been exempted from CRR obligations since April, 1996.
The annual rate of inflation (based on the WPI) declined from 10.4 per cent at the
end of 1994-95 to a low of 4.4 per cent at the end of 1995-96. This performance is not
only better than the earlier expectations of an inflation rate of 7 per cent to 8 per cent by
the end of 1995-96, but also lower than the forecast in the Economic Survey of 1995-96
(6 to 7 per cent). The annual rate of inflation has remained low at 4.2 per cent until June
22, 1996. The success in reducing inflation from an annual rate of 12 per cent in January
1995 to below 5 per cent in January 1996 is attributable to a combination of factors
including the deceleration in monetary growth, high levels of open market sales of
foodgrains, a liberal import policy, especially for essential commodities, and the surge in
domestic supply associated with the acceleration of economic growth to 7 per cent. The
delay in adjustment of administered prices also played a role.
The deceleration in growth of prices was seen in all the three sub-groups. Primary
articles showed an increase of 4.1 per cent in 1995-96 which is one third of the 12.7 per
cent rise recorded in the preceding year. Within this sub-group, foodgrain prices rose by
5.6 per cent compared to a substantial rise of 8.6 per cent in the preceding year.
Manufactured product prices increased by 4.8 per cent in 1995-96, less than half of last
year's 10.7 per cent. Prices of fuel, power, light and lubricants, which showed low
increases, will rise sharply in July 1996 as a result of the adjustment in administered
prices of petrol, diesel, LPG, ATF etc. By June 22, 1996 the annual growth rate of prices
had declined to 3 per cent (provisional) for manufactured goods, but had accelerated to
6.3 per cent (provisional) for primary articles. The lower price increase in manufactures
reflects the much smaller proportion of this sector still subject to import-export licensing
and quantitative restrictions and underlines the inflation-controlling potential of a more
liberal import policy. It should also be noted that the consumer price index (industrial
workers) showed an increase of 8.9 per cent in 1995-96, implying an unusually wide
divergence between the wholesale price index and the consumer price index.
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Published by The Government of India, Ministry of Finance,