RBI seen missing its monetary targets

24 Apr 2009, ET Bureau

One of the important aspects of monetary policy, closely watched by money market participants, is RBI’s projections of growth in monetary aggregates such as money supply (M3), credit and deposits. The targets have been set at 17% and 20%, respectively, for growth in M3 and credit for FY10 against actual growth of 18.7% and 17.3% in FY09. Whether or not these targets are achieved during the fiscal, remains to be seen, as RBI has failed to meet its monetary targets over the past few years.

There was a wide deviation between targeted rates and the actual growth rates. For instance, growth rate of money supply was expected at 14%, 15% and 17-17.5% for FY06, FY07 and FY08, respectively. But actual growth in money supply was above 20% in each of these years. While growth for bank credit was anticipated around 20% in FY06 and FY07, bank credit actually recorded a growth around 30% in both the financial years.

When the target was revised to 25% in FY08 and FY09, bank credit grew merely 22% and 17%, respectively. Even growth in deposits surpassed projections. A deviation up to 5% from the projections is acceptable. But such an extensive departure raised doubts regarding the effectiveness of monetary policy.

Money supply growth was targeted by monetary policy, prior to the early 90s. However, with most economies taking the globalisation route, central banks by and large don’t target monetary aggregates. However, there are a few central banks that still follow this traditional exercise and RBI is one of them.