The Reserve Bank of India’s (RBI’s) balance sheet has increased by about Rs 9.5 lakh crore since mid-February when the first-long term repo operation (LTRO) was conducted to Rs 54 lakh crore, Motilal Oswal Financial Services said.
This has led the annual growth rate to more than double — from 14 per cent in early 2020 to more than 30 per cent currently, according to its Ecoscope report.
Consequently, the banking system’s net surplus has increased from Rs 3 lakh crore or 2.2 per cent of net demand and time liabilities (NDTLs) in the early 2020s to Rs 4.3 lakh crore or about 3 per cent of NDTL currently.
Almost half of the expansion in the RBI’s balance sheet is attributed to foreign currency assets (including gold coins and bullion), another 30 per cent by LTROs and the remaining 20 per cent by the purchase of domestic securities.
Further, the annual growth in broad money supply or the M3 also picked up to 12.4 per cent year-on-year — the highest in the past six years — supported almost entirely by the high fiscal deficit (or net credit to the government).
Since end-FY20, M3 increased by Rs 7.4 lakh crore and the net credit to the government rose by Rs 7.3 lakh crore. The net credit to the private sector actually declined by Rs 0.9 lakh crore and forex assets (adjusted for nonmonetary liabilities) increased by Rs 1 lakh crore.
Still, Motilal Oswal Financial Services said it does not believe it to be inflationary because the credit-deposit ratio (wherein the numerator includes net credit of the RBI and the banking sector to the government and the private or commercial sector) is currently at 111 per cent — similar to the levels in the past two years.
Besides, the government has resisted massive fiscal stimulus which implies that unless commercial lending picks up quickly (which is not our base case), the broad money supply will taper off in coming months.
Going forward, while fiscal deficit will start softening, commercial lending may remain stressed in the foreseeable future which will help taper M3 growth.
“Therefore, while the higher broad money supply is seen as a harbinger of higher inflation by some sections, we believe that this is a temporary phenomenon, which is unlikely to create higher inflation on a sustainable basis.”
Finally, while it is still hoped that the RBI will intervene in the treasury market to support bond yields, it will be an extremely difficult task to achieve, especially if foreign capital inflows remain strong, said Motilal Oswal Financial Services.