Despite the Reserve Bank’s persistent efforts to squeeze excess liquidity out of the system, non-food credit grew by 1.7 per cent and total accommodation by 1.4 per cent up to the fortnight ended July 6 this fiscal. This figure is significantly higher than the negative growth of 0.7 per cent and 0.9 per cent over the same period 2006-07.

According to the ‘Economic Outlook 2008-09’ report released by the Prime Minister’s Economic Advisory Council (EAC), the day-to-day borrowings of banks from the central bank have not seen any significant decline in this period and banks are “consistently borrowing at the repo window to the extent of Rs 30,000 to 40,000 crore on a daily basis”.

Considering that the RBI has raised the repo rate — its key policy rate at which it lends to commercial banks — by 100 basis points over the past one year, it was expected that bank's borrowings would have taken a bad hit. The inter-bank borrowing rates or the call money rates have also more or less remained in a narrow band around the repo rate indicating that this market too has been consistently tight. The pace at which banks borrow is an indication of the pace at which they lend, which further indicates the pace at which consumption demand is growing. This is especially true considering that overall bank lending to the commercial sector decelerated from a growth rate 32.2 per cent in 2005-06 to 25.4 in the last fiscal. The broad money supply grew at stable rate of 21 per cent, which was in tandem with those in the preceding years. The report attributed the stable rise in part to the 42 per cent rise in net foreign exchange assets of the banking sector.

... contd.