Trends in Monetary Aggregates in 2010–11

The year 2010–11 was a significant period in India’s monetary and financial history, reflecting a phase of post-crisis recovery, monetary tightening, and controlled liquidity management by the Reserve Bank of India (RBI). The trends in monetary aggregates during this year mirrored the evolving balance between the objectives of economic growth, price stability, and financial stability in the aftermath of the global financial crisis (2008–09).
During this period, the RBI’s monetary policy focused on containing inflationary pressures, which had intensified due to supply constraints and rising commodity prices, while ensuring that monetary conditions remained conducive to sustaining economic recovery.

Overview of Monetary Policy Context

In 2010–11, India’s economy was in the midst of a strong rebound, with GDP growth estimated at around 8.6%, following the slowdown caused by the global financial crisis. However, inflation emerged as a serious macroeconomic challenge, primarily driven by food and fuel prices.
The RBI’s monetary stance shifted decisively from the accommodative policies of 2008–09 towards a tightening phase, involving:

• Increases in the Cash Reserve Ratio (CRR) and policy interest rates (repo and reverse repo).
• Absorption of excess liquidity from the banking system.
• Moderation in the growth of money supply and credit.

Understanding Monetary Aggregates

The monetary aggregates, as classified by the RBI, include:

• M1 (Narrow Money): Currency with the public + demand deposits with banks + other deposits with the RBI.
• M2: M1 + savings deposits with post office savings banks.
• M3 (Broad Money): M1 + time deposits with banks.
• M4: M3 + total post office deposits (excluding National Savings Certificates).

Among these, M3 (broad money) serves as the principal indicator for monetary analysis and policy formulation.

Trends in Monetary Aggregates, 2010–11

The overall expansion in monetary aggregates in 2010–11 reflected tight liquidity conditions, policy restraint, and a gradual slowdown in money supply growth compared to the previous year.

1. Growth of Broad Money (M3):

• The year-on-year growth of M3 stood at approximately 16.0% as of March 2011, slightly lower than 16.8% recorded in 2009–10.
• This moderation was consistent with the RBI’s policy of managing inflation by curbing excess liquidity.
• The slower expansion was due to subdued growth in both currency with the public and deposits with banks.

2. Currency with the Public (Component of M1):

• Currency with the public grew by around 17% in 2010–11, marginally lower than the 18% growth recorded a year earlier.
• The continued preference for currency holdings reflected robust consumer spending and rural demand, supported by government welfare schemes such as MGNREGA and higher nominal incomes.

3. Demand and Time Deposits:

• Demand deposits grew moderately due to slower industrial activity in some sectors.
• Time deposits (which constitute nearly three-fourths of M3) rose by about 15.5%, compared to 17.4% in 2009–10, reflecting the tightening of monetary conditions and higher interest rates on term deposits.

4. Reserve Money (High-Powered Money):

• Reserve money (M0) growth decelerated during 2010–11 due to the RBI’s liquidity management operations.
• The growth of M0 was around 14%, compared to 16% in 2009–10.
• Net foreign exchange assets of the RBI increased modestly, while domestic credit expansion (particularly to the government) slowed.

5. Money Multiplier:

• The money multiplier remained stable around 5.3, indicating that the transmission of reserve money into the broader money supply was relatively efficient despite liquidity tightening.

Factors Influencing Monetary Trends

Several macroeconomic and policy factors influenced the behaviour of monetary aggregates during 2010–11:

1. Monetary Policy Tightening:
   • The RBI raised the repo rate and reverse repo rate multiple times during the year to contain inflation.
   • CRR was also maintained at relatively high levels, reducing the banking system’s lendable resources.
2. Inflationary Pressures:
   • Headline inflation, driven by food and fuel prices, averaged around 9%, prompting the RBI to restrain money supply growth.
3. Fiscal Conditions:
   • The government’s borrowing programme was lower compared to 2009–10 due to fiscal consolidation efforts, thereby moderating monetisation of deficit and expansion in reserve money.
4. Credit Growth:
   • Non-food credit growth accelerated moderately to around 21%, reflecting recovery in investment and consumer spending but restrained by higher interest rates.
5. Liquidity Conditions:
   • Persistent frictional liquidity shortages led to greater reliance on the Liquidity Adjustment Facility (LAF) window.
   • The banking system remained in a deficit mode for much of the year, reflecting tight liquidity.

Comparison with Previous Years

This data shows a transition from expansionary to controlled monetary growth, indicating the RBI’s successful attempt to calibrate money supply to align with inflation and growth objectives.

Implications of Monetary Trends

1. Controlled Inflationary Expectations: The moderation in monetary expansion contributed to stabilising inflation over the medium term, though price pressures persisted.
2. Balanced Growth: The cautious monetary stance ensured that credit to productive sectors was maintained without overheating the economy.
3. Strengthening of Financial Stability: By maintaining liquidity discipline and avoiding excessive monetary expansion, the RBI preserved the stability of the banking system.
4. Improved Policy Transmission: The gradual increase in policy rates and the moderation of deposit growth improved the transmission of monetary policy through the financial system.