CB, Govt. curtail excessive credit growth

Strong policy measures were adopted by the Central Bank and the Government in the early part of the year to curtail excessive credit growth and contain the high import demand thereby arresting the imbalances that were emerging in the economy since the latter part of 2011.

These measures were designed to curtail monetary expansion and possible future demand pressures while the reduction in the trade deficit was expected to dampen pressure on the external sector. At the same time, a one-off increase in headline inflation was anticipated on account of the upward revisions to several administratively determined prices, which were also a part of the overall stabilisation package.

A modest slowing down of economic activity was also anticipated as a result of these demand management policies, which was reflected by the projections for economic growth during the year being revised downward to 6.8 per cent. In the months following the imposition of these measures, a moderation in the money supply has been witnessed, largely on account of the deceleration in credit extended by commercial banks to the private sector. Broad money growth, year-on-year (y-o-y), declined to 18.2 per cent by October 2012 from a peak of 22.9 per cent in April.

The growth of credit obtained by the private sector from commercial banks continued to decelerate, reaching 23.5 per cent (y-o-y), by October, from a high of over 35 per cent prior to March 2012. This growth is expected to decelerate further to around 19 per cent by end 2012. At the same time, in value terms, the drop in expenditure on imports has been greater than the decline in earnings from exports, narrowing the deficit in the trade account.

Accordingly, the trade deficit contracted for the second consecutive month, declining by 1.0 per cent in October 2012, and this trend is expected to continue under the current flexible exchange rate regime.

The Central Bank has been carefully monitoring the developments in the various sectors of the economy vis-à-vis the projections for each of these sectors.

As per current information, a reasonable leeway has emerged between actual credit growth and the ceiling imposed by the Central Bank, indicating a further slowdown in credit utilisation.