Money supply makes the case for some price cooling easier – Reuters

Money supply growth in the economy has slowed in recent months, a sign that August’s pivot to monetary tightening has caused some setback on the rapid pace at which money supply has grown since the start of the pandemic. .

According to First Capital Research (FCR) analysis of the monthly change in money supply in the economy, in the three months since August’s policy rate hike, monthly growth actually fell into negative territory in September and November, while the annual growth rate also decreased quite noticeably.

However, it remains to be seen whether the current pace is sufficient or whether more needs to be done to contain the hotter prices, which have engulfed the entire economy, as there is a substantial element of inflation from the constraints of the supply side rather than the demand side. pressures.

There is also no guarantee that the pace of money supply growth will continue on the current decelerating path given the massive fiscal aids offered by the government without careful thought and analysis.

According to the data, the money supply measured by Broad Money (M2b), which has currency in circulation, demand deposits in commercial banks and domestic and offshore banking assets with commercial banks, increased by 15.4%. in the year to November 2021. , decelerating 17.3% in the year to October.

In November 2020, the broad money supply increased to a high of 22.3% as the Central Bank cut rates to record lows and released liquidity at a level not seen since the start of the pandemic to revive the economy. economy beset by virus restrictions.

But as the excesses emerged in the areas of exchange rates and prices around the middle of last year, the Central Bank raised its policy rates by 50 basis points on August 19 to signal to markets that it was ending the pandemic-era political support.

This has significantly slowed the pace of credit growth to the private sector and created a massive liquidity shortage in the overnight money market, which last week stood at 460 billion rupees.

The Central Bank is funding the shortage through its 6.00% standing lending facility and these overnight liquidity injections amounted to Rs 514 billion on 13 January. Economists point to the increase in liquidity injections as a sign that money is flowing out of the country through foreign currency payments.

In the first monetary policy announcement for the year yesterday, the Central Bank raised policy rates a further 50 basis points.

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