What The Broad Money Growth Tells

Inflation is high compared to last year, Amid trust deficit, holding cash is what people prefer.

In the latest Monetary Policy Statement (MPS) , broad money registered 7.6% growth against the projection of 8.2%. Broad money or M2 consists of currency outside banks,deposits of financial institutions at the central bank, demand deposits and time deposits. Both currency outside banks and time deposits witnessed growth in December 2024 compared to the corresponding month in 2023. Time deposit's growth surpassed all. Riding on this two, overall money supply (M2) saw 7.57% growth.

If we look at the twelve month average inflation, January 2025 inflation( 9.94%) is still higher than January 2024 inflation (9.86%).That means one year on inflation is still in double digit. We have to remember that in the last one year both the current and previous regimes injected huge money into the system ( see "Last Year's Extra Cash" published here on January 10,2025). This to a great extent dampens the contractionary monetary policy mood and prolongs the recovery.

According to the MPS ,deposit growth was 7.4% in December. Earlier years it had been much higher. During the first half of this year, more money remained outside the banking system,translating overall trust deficits in corruption-stricken banks. Latest data show,from November to December, currency outside banks registered a negative growth. But still a significant amount of money remains outside the banking system. People still prefers holding cash.

According to the MPS, redemption of National Savings Certificates (NSCs) increased and people diverted non banking savings to other sources. Time deposit growth hints that things have slowly started to change. Apart from that treasury bond sales are also becoming popular among individual investors. But the size of NPL is growing. This may discourage people again depositing their money at the banks.

Trust deficits resulting from poor governance and political uncertainty still holding back people going to the banks. Government's over reliance on the banking system diverts credit from private to public sector.

In short span of time, the interim govt cannot drastically improve the governance situation. The best it can do is to cut the spending. Fiscal tightening at this time can provide the extra credit for the private sector.

Seasonal commodities like winter vegetables and low oil prices at the international market influenced the inflation. Since curbing the inflation is the priority, govt should focus on how to bring the money outside the system into the banks and arrange credit for the private sector.