I’m going to repeat this chart (see last time) as there are interesting things we are seeing. I’ll repeat the chart’s description:
Reserve Money is the base money of our banking system, a level before the banks come in an multiply it with credit. It consists of the money RBI prints (“currency with the public”), the reserves banks keep with the RBI (which is a factor of how much they lend out) and some riff-raff. Typically, a growth in reserve money is useful because it helps keep prices stable as productivity increases in the system. But when you have serious inflation, the money growth needs to slow to control it.
Any slowing of the reserve money will appear in inflation and broader money supply (“M3”) only with a lag.
As bond yields up themselves to 8.8%, the Reserve Money at the RBI is showing signs of coming down:
Reserve money is at the lowest level since Jan 2010, and if it goes below 10% we should see money supply growth slowing as well.
This does not augur well for banks – for whom this means a squeeze in liquidity (which has been ample till now) and they will need to up their deposit rates to make up. But it is good for the country because it will squeeze inflation out. (Reserve money needs to grow, in my opinion, at 9% or less).