Monetary Policy

Monetary policy refer to steps taken by RBI to

regulate cost and supply of money in order to

achieve certain socio Economic objective like

price stabilization full employment, exchange

regulation and increased economic growth

.

Components of Money Supply and measures of Aggregate Money.

A)Traditional Approach(Narrow Concept):

a)Currency Moneyb)Bank Money.

B)Modern Approach (broad concept):

a)Money: i)currency ii)bank money

B) Near money:

a)Time depositsb)Deposits with non banking financial intermediaries c)Deposits with post offices,saving bank d)UTIe)Deposits with building, societiesf)Bills

There is no unique measure to money aggregate

Money Supply

M = M1 + M2 + M3 + M4

M1

It consist of Currency notes and coins with public

( excluding cash in hand of all banks) Demand deposit ( excluding inter bank

deposit) Deposit held with RBI ( excluding IMF,PF,

guarantee fund & adhoc liabilities

N A R R O W M O N E Y

M2

M1 PLUS

Saving deposit with post office saving bank

M3

M1 PLUS

Time deposit of commercial bank & cooperative bank ( excluding inter bank deposit)

It includes net bank credit to government +bank credit to commercial sector + net foreign exchange assets + government currency liability to the public

B R O A D M O N E Y

M4

M3 PLUS

Total deposit with post office organization

The growth in money supply must be higher then the growth in the real national Income This stems for two reasons

(i)As income grows ,the demand for money as one of the component of saving tends to increase

(ii)An increase in money supply is also necessitated by gradual reduction of the non-mentioned sector of the economy.

(iii) In our country, the rate of increase in money supply has been far excess of the rate of growth in real national income

COMPONENTS COMPONENTS

2003-042003-04 2006-072006-07

CURRENCY IN CURRENCY IN CIRCULATIONCIRCULATION

327028327028 504225504225

RESERVE RESERVE MONEY (M0)MONEY (M0)

390736390736 617486617486

NARROW NARROW MONEY(M1)MONEY(M1)

514660514660 857312857312

BROAD BROAD MONEY(M3)MONEY(M3)

18616041861604 29575102957510

Money Stock Measure

( Rs crores)

Determinants of Money Supply:i) Communities choice ii) Cash Reserve Ratio iii) Extent of Monetization iv) Currency system v) Bank policy vi) Government policy vii) Volume of tradeviii) Credit Creation by Banksix) Banking Habits

Velocity of money:

Average number of times money circulates from one hand to another hands over a period of time.

Money multiplier theory:This is based on the supply of and demand for high powered of money.

mm=M/Hwhereas, mm=money multiplier, M = stock of money supplyand H = high powered money.

High powered money (reserve money):

It consist of currency (notes and coins) issued by the government and RBI and demand deposits with commercial banks.

Money Supply in India

and Ideal Supply of

Money.