Window dressing is a usual practice that bankers adopt in days close to year end to make books healthier. In days of rising currency in circulation; the problem compounds as the deposit pie shrinks. 2016 end is a blatant demonstration of this practice.
In 25 weeks from Jul 1 to Dec 23, the banking deposits increase was Rs201 billion. All of the sudden in the very last week of the year it grew by Rs420 billion - more than double of last 25-weeks flow. On the assets side, the counter entry is mainly in credit to private sector - it increased by Rs231 billion in the last week while the flow in previous 25 weeks was mere Rs146 billion. The window dressing was there in June as well; but it was not that big (see chart).
What triggered the private sector loans that has in turn created fresh deposits and the money multiplied? Did bankers find a magic wand all of sudden? Well; that’s window dressing. But to surprise a few, this last week case is at a higher quantum than is usual.
The apparent story behind this last week surge is that banks have requested their corporate and high net worth clients to consume their credit lines to the full limit for a short time. And in return, they offered deposits rates marginally higher than their cost of borrowing. It would dent banks a bit; but the targets are met by regions.
Some credit goes to genuine seekers as currency in circulation fell by 77 billion in the last week as against the surge of Rs156 billion in the previous 25 weeks.
The 1HFY17 monetary number are looking much better than what they would be after a month. The M2 growth for last 12 months is 15 percent; and similar is the private sector growth. The statistics are misleading for economists and analysts to make predictions and policy makers to make decisions.
Monetary policy is due to in January; and the minutes released of November's review shows that there were four votes for 25 bps cut against six for status quo. While in September, there were only two proponent of rate cut. With inflation in Dec below census; the inflated private credit numbers could encourage doves to dominate in upcoming review.
Fiscal policy is already expansionary with rebates and tax breaks in the offing for exporters and other manufacturers. Commodity prices cycle is back on its upward journey; with oil prices threatening balance of payment. Current account is already stressed with Nov deficit being the highest since September 2011.
The foreign exchange reserves declined by almost a billion dollar in the last two months. The currency is kept at appreciated levels; so better hawks stay put in monetary policy committee.
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