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Annual numbers game

P. Devarajan

STATISTICS is for bankers what body-enhancing drugs is for sports persons: A good, practical, conning game. At recent meetings with the RBI, bankers have tried to drive home the point that the surge in non-food credit is a numbers gimmick, which is not t o be taken at any value.

Proof that the bankers were on the dot is provided by the RBI Annual Report 1999-2000. Monetary aggregates as at end-March are compiled on the basis of data pertaining to the Reserve Bank as on March 31 (i.e. the last working day of the fiscal year) and scheduled commercial banks as on the last reporting Friday of the year. However, in 1999-2000, with the lag between the last reporting Friday of March (i.e., March 24, 2000) and March 31 widening to one full week, the year-end balance sheet adjustments, such as interest rate applications and credit disbursals, were large.

For instance, scheduled commercial bank deposits increased by Rs. 28,623 crores between March 24-31, 2000, as compared with Rs. 11,526 crores between March 26-31, 1999. ``The year-end bulge in deposits usually results in a degree of over-estimation of mo netary growth, given the fact that a large part of such deposits, especially demand deposits, are in general drained out of the banking system in April and May.

The exclusion of such discrepancies from monetary statistics would provide a more accurate picture of monetary growth. The aberrations that such point estimates could bring about could be somewhat obviated by averaging the monthly year-on-year M3 growth rates in line with the recommendations of the Working Group on Money Supply (1998).

``The monthly average year-on-year M3 (net of RIBs) growth rate worked out to 16.6 per cent in 1999-2000 as compared with 18.2 per cent during 1998-99,'' says the RBI Annual Report. One is tempted to ask why the correction is not being done?

Again, when the stock markets were going through a boom a few months ago and when the SEBI and the Finance Ministry thought it fit to kill the run, everyone said bank funds had been diverted. That does not seem to be true from the RBI Annual Report. It m ay be preferable for a regulator like SEBI to check its facts. Here is the relevant RBI story. ``During 1999-2000, banks' direct investment in the capital market instruments declined sharply. Accommodation provided by the scheduled commercial banks to th e commercial sector through investments in bonds/debentures/preference shares and equity shares (including loans to corporates against shares to meet promoters' contribution) declined to Rs. 11,513 crores during 1999-2000 from Rs. 14,378 crores during th e previous year. Banks' investments in bonds/debentures and preference shares at Rs. 11,071 crores, formed the major portion of investment in capital market instruments,'' says the RBI Annual Report.

During the recent rupee upheaval, the RBI ``continued to align short-term interest rates with the interest rates implied in the forward market premia in order to pre-empt funds from flowing into the foreign exchange market in view of the prevailing exces s demand conditions. This was achieved by modulating discretionary liquidity through export credit refinance to commercial banks and liquidity support to primary dealers (PDs), which resulted in the firming up of call rates. The RBI also continued with i ts policy of accepting private placements/devolvements of Government paper when the domestic conditions were tight and offloading them in the market when the situation ceased.''

For most marketmen, the RBI will continue with its preferences as the rupee-dollar rate is not exactly quiet. The RBI has said it will not raise interest rates. Sure. But neither will interest rates drop. It is futile for India to compare itself with the US. Mr. Alan Greenspan is trying to contain high-speed, efficient growth by marking up interest rates. In India, a similar move will only choke growth.