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Macroeconomic and Monetary Developments in 2005-06
-Announced on the 17th April 2006

Monetary and Liquidity Conditions

Monetary and liquidity conditions remained largely comfortable during 2005-06 although there was some tightness in liquidity conditions during the last four months of 2005-06 reflecting partly the impact of the redemption of India Millennium Deposits (IMDs). The Reserve Bank injected liquidity through unwinding of the Market Stabilisation Scheme (MSS) and repo operations under the liquidity adjustment facility (LAF) along with some private placement of the Central Government securities. As a result, the banking system was able to meet the sustained pick-up in credit demand from the commercial sector.

In the face of the rising demand for commercial credit, banks restricted their incremental investments in Government paper. Strong growth in deposits as well as access to non-deposit sources also enabled the banking system to meet the enhanced demand for commercial credit. Scheduled commercial banks’ non-food credit, on a year-on-year basis, registered a growth of 30.8 per cent as on March 31, 2006 on top of 28.8 per cent a year ago.

Money supply (M3) expanded by 16.2 per cent on a year-on-year basis as on March 31, 2006 as compared with 13.9 per cent a year ago. On a fiscal year basis, M3 expanded by 20.4 per cent during 2005-06 as compared with 12.1 per cent a year ago. In this context, it may be noted that data on fiscal year variation for 2005-06 are not comparable with those of the previous years as the data for 2005-06 include 27 fortnights while usually the data for a year include 26 fortnights. Moreover, the last reporting Friday of 2005-06 coincided with March 31, the closing day for banks’ accounts, thereby giving rise to the phenomenon of year-end bulge in aggregate deposits and credit.

Reserve money expanded by 16.9 per cent on a year-on-year basis as on April 7, 2006 as compared with 15.1 per cent a year ago.

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