Has there been a slowdown in money supply after inflation targeting?

Global economy continues to hog the limelight with geopolitical uncertainty looming large with the recent escalation of hostilities. Fortunately, India's financial sector is resilient with asset quality in a robust shape. Financial stability however assumes paramount importance in the current context with gyrations in asset classes across the spectrum likely becoming the norm.

- SOUMYA KANTI GHOSH

Against this background, repeated apprehensions have been expressed in public domain of a marked slowdown in money supply (M3) on the back of an inadequate reserve money (RM) expansion and this could play a role in growth slowdown of India coupled with global uncertainties. Since global uncertainties are exogenous the logical corollary squarely derived is that the RBI should augment base (reserve) money so that it can lead to higher broad money expansion. While this line of reasoning could obviously have some takers, this argument escapes the logic, understanding and appreciation of the riveting aspects of monetary economics. Let us explain why.

First, there is no denying of the fact that RM growth has slowed down since the pandemic. From 18.8 per cent in pandemic year FY21, it decelerated to 5.6 per cent in FY24, and further to 3.9 per cent in September 2024, a decline of 15 percentage points, of which 74 per cent is because of a deceleration in currency in circulation (CiC).

Such a large decline in CiC over the three-year period is attributed to a significant surge in retail digital payments/ 31 times CiC growth. In fact, 77 per cent of such retail digital payments was attributed by UPI transactions. Thus it is clear that the decline in CiC growth since the pandemic is amidst increasing adoption of digital mode of payments. In fact, if we look at the combined share of retail digital and currency to total transactions, the share of retail digital is now a whopping 89 per cent, while that of CiC is 11 per cent.