No credit rise effect on prices

Mumbai, Dec. 23: The growth of loans by banks has been slow despite the huge liquidity overhang. Non-food credit grew by 11 per cent year on year as on December 4 as against 26.3 per cent in the same period in 2008.

There has, in fact, been a de-growth both in food and non-food credit year on year. According to the Reserve Bank of India weekly statistical supplement the total bank credit year on year as on December 4, 2009, was Rs 2,77,479 crore compared to Rs 6,27,529 crore on Dec. 4, 2009. Against this the deposits stood at Rs 6,61,064 crore in 2009 over Rs 6,27,529 crore in 2008.

Normally, inflation is fuelled by excess credit growth. But in the case of today’s inflation this has not happened. So, if the RBI does increase CRR or tinkers with interest rates it will only be to signal its concern on inflationary expectations. Mr Dipankar Mitra, economist at Noble group said, “Since food and fuel are critical these inputs may help create inflationary expectations which can then create actual inflation. Even in the food sector, the middle-men will borrow and use the banking system to create artificial food shortage.”

Mr Siddartha Sanyal chief economist at Edelweiss is of the view that any action by the RBI in the January credit policy could only be a “signal to the market.”

Inflation will have to be controlled by fiscal and administrative measures and more efficient distribution of foodstocks, he said.

In the context of food inflation fuelled by hoarding or inefficient distrobution, it was interesting that early this week the activists of the Maharahstra Navnirman Sena had raided a godown in Bhivandi, Maharashtra and found grain worth Rs 1 crore stored there.