money_supply1

8/7/2019 money_supply1

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Money Supply


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Money Supply- Narrow money, broad money

Factors affecting money supply in the Indian economy

Behaviour of money supply

Reserve money

Money multiplier (Broad and narrow)

Monetary aggregates and liquidity aggregates.

Monetary policy transmission channels


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What is money supply

What is narrow money?

Narrow money includes currency with the public,demand deposits and

other deposits with the RBI.

What is broad money?

Broad money is Narrow money plus the time deposits.

Narrow money is concerned with the price level of goods and services

whereas the broad money is concerned with prices of various financial and

stock market assets.

The currency with the public is the monetary liability of the monetary

authorities, consisting of the Government and the RBI. The bank deposits

are the monetary liabilities of the banks.


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Currency with the public consists of coins and currency notes

issued by the Central bank which are in circulation

Deposit money consists of deposits of the general public with

banks which they can withdraw through bank cheques and ATM

cards .

RBI has two types of deposits one is the deposits commercial

banks keep with the RBI and the other is the deposits kept by

certain individuals with the RBI like the ex-Governors of the RBIwho are permitted to use RBI like any other commercial banks . In

deposit money we include demand deposits of the People with

commercial bank and with the RBI.


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What is Reserve Money?

1. Currency in circulation: I.e the total amount of notes and coins

issued and circulated by the RBI less the amount held by banks

as cash on hand.(C)

2. Deposits of some people with RBI (DD)

3. Cash Reserves which are actually composed of two parts (I)

Cash Reserves kept by the banks with themselves (ii) Bankers

deposits with the RBI.(CR)

4.

RM=

C+DD

+CR


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Comparison between Reserve money and common money

M1=C+DD+OD

RM=C+OD+CR

The difference is between CR and DD.

CR: Cash Reserves of banks held partly in their premises and

partly held by the RBI underCR

DD: demand deposits of the general public.

Relationship between CR and DD is as follows:

TheC

ash reserves of banks is the actual base of the totaldeposit structure of the banking system.


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Growth ofReserve Money


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Demand deposits

Includes all banks deposits repayable on demand.

Includes all demand deposits of the non-bank sectors.

Credit balances in overdrafts,

cash credit accounts

deposits payable at call,

overdue deposits, inoperative

current accounts, matured time deposits and cash

certificates, etc. are to be included under this category


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Time deposits

Time deposits consist of (i) fixed deposits, (ii) cash certificates, (iii)

cumulative and recurring deposits, (iv) time liabilities portion of saving bankdeposits, (v) staff security deposits, (vi) margins held against letters of credit if

not payable on demand, (vii) fixed deposits held as securities for advances and

(viii) India Development Bonds and Resurgent India Bonds

Other Deposits with the RBI: deposits from the central banks of other

countries, surplus earmarked for transfer to government


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Net RBI credit to the Government

Loans and advances to the central government

Investment in treasury bills

Investment in dated government securities- G-Secs for a tenure

of more than one year.

rupee coins

(minus) deposits of the central government

Regarding State Governments, net RBI credit refers to

variation in loans and advances given to them by the RBI net oftheir incremental deposits with the RBI, for the State

Governments having accounts with the RBI.


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The Net Foreign Exchange Assets (NFEA) of the banking sector

consists of the net foreign exchange assets of the RBI and thenet foreign currency assets of the banking system. The net

foreign currency assets exclude

(a) Overseas foreign currency borrowings

(b) foreign currency repatriable foreign currency fixed liabilities

with the banking system such as the FCNR and the RIB

(Resurgent India bonds).


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Broad money multiplier is the ratio of M3 or broad money to reserve money.

Narrow money multiplier is the ratio of M1 to reserve money. By regulating the

reserves ratio, the RBI can vary the money multiplier.

When prices are rising or expected to be rising, the RBI can raise the reserves

ratio and reduce the money multiplier.

If commodity supplies are abundant or expected to become abundant in relation

to the money stock, the RBI may reduce the reserves ratio and thus augment

money stock and prevent prices from falling.

C= currency deposit ratio, r= reserves deposit ratio

Money supply=

What is broad money multiplier and a Narrrow money

multiplier.(Money supply determination,)

Hrc

*)1)(1(1

1


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NM3 =This introduces the residency concept in M3. NM3 is based on the

residency concept and hence do not directly reckon non-resident foreigncurrency repatriable fixed deposits in the form ofFCNR(B) deposits,

Resurgent India Bonds (RIBs) and India Millennium Deposits (IMDs).

L1=NM3+postal deposits

L2= L1+ Term deposits+term borrowings ofFIs+ certificates ofdeposits issued by the financial institutions)

(IDBI,IFCI,ICICI,EXIM bank,SIDBI, NHB)

L3= L2+public deposits of NBFCs


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The banking system's credit to the commercial sector would comprise

accommodation in the form of

i) loans, cash credit and overdrafts in both rupees as well as in foreign

currency,

ii) inland and foreign bills purchased and discounted (which together

constitute what is commonly known as bank credit),

iii) investment in all securities other than government securities and

iv) net lending to primary dealers (PDs).

In addition, investments of banks in non SLR securities like commercial papers,

units of UTI and other mutual funds, shares,debentures, bonds of the publicand private non bank sector has also to be included in the bank credit to

the commercial sector.

BankCredit to the commercial sector


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Net non-monetary liabilities (NNML) of the banking sector presently include

i) capital and reserves, -contingency reserve, asset development reserve ,

ii) Balances parked abroad in IMF account no .1, The No. 1 Account is used

for IMF transactions and operations, including subscription payments,

purchases, repurchases, repayment of borrowing, and sales of the members

currency.(iii) illiquid provisions such as employees provident funds.

(iv) other net liabilities such as, net branch adjustments and other sundry items

Net Non Monetary liabililites of the banking sector


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Monetary transmission channels

(a) Market rates

(b) Asset prices

(c) Expectations/Confidence

(d) Exchange rate


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Objectives of monetary policy

Price stability

provision of adequate credit to production sectors of theeconomy to support aggregate demand and ensure sustained

growth


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inflation targeting may not be appropriate for India for the following reasons

First, unlike many other developing countries we have had a record

of moderate inflation, with double digit inflation being the exception, and largely socially

unacceptable. Second, adoption of inflation targeting requires the existence of an

efficient monetary transmission mechanism through the operation of efficient financial

markets and absence of interest rate distortions. In India, although the money market,

government debt and forex markets have indeed developed in recent years, they still have

some way to go, whereas the corporate debt market is still to develop.

Third, inflationary pressures still often emanate from significant supply shocks

related to the effect of the monsoon on agriculture, where monetary policy action may

have little role. Finally, in an economy as large as that of India, with various regional

differences, and continued existence of market imperfections in factor and product

markets between regions, the choice of a universally acceptable measure of inflation is

also difficult (Mohan, 2006b).

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