Till 1967-68 Measure of money supply

Till 1967-68, the R.B.I, used to publish only a single measure of money supply. From 1967-68 the R.B.I. started publishing additionally a broader measure of money supply, called aggregate monetary resources, (A.M.R.). It was explained as M plus the time deposits of banks held by the public. R.B.I. has been publishing data on four alternative measures of money supply in place of the earlier two. The new measures are represented by M,, M2, M3, and M4. The earlier two measures were represented by M and AMR. The respective empirical definitions of these measures have been discussed below;

Initial Empirical Measure of Money Supply

Till 1967-68, R.B.I, used to publish only a single measure 01 money supply known as M. Its components were as follows: (i) C = Currency held by the public (notes and coins). This does not include currency held by the banks. (ii) DD = Net demand deposits of banks. This includes only demand deposits of commercial and co-operative banks. As discussed earlier, this does not include inter banks' demand deposits.

Initial Empirical Measure of Money Supply

(iii) OD = other deposits of the R.B.I. This does not include the deposits by the government (the central and state governments) and co-operative banks. It only includes the deposits by quasi-government institutions (like the IDBI, foreign central banks and governments, IMF and World Bank, etc). These (other deposits by the R.B.I.) constitute a very small proportion (less than 1%) of the total money supply and hence these are generally ignored while discussing main trends of growth of money supply. Therefore, in the form of an equation; M - C + DD + OD

Measures of Money Supply since 1967-68:

Since 1967-68, the R.B.I., besides M started publishing another measure of money supply known as Aggregate Monetary Resources (AMR) under which i broad measure of money supply was provided. AMR includes M (narrow measure of money supply) plus time deposits of the public with the banks. In the form of an equation. AMR - M + Time deposits

MEASURES OF MONEY SUPPLY IN INDIA

The Reserve Bank of India defines the monetary aggregates as: Reserve Money (M0): Currency in circulation + Bankers' deposits with the RBI + 'Other' deposits with the RBI = Net RBI credit to the Government + RBI credit to the commercial sector + RBI's claims on banks + RBI's net foreign assets + Government's currency liabilities to the public RBI's net non-monetary liabilities.

 M1: Currency with the public + Deposit money of the public (Demand deposits with the banking system + 'Other' deposits with the RBI).
M2: M1 + Savings deposits with Post office savings banks. M3: M1+ Time deposits with the banking system = Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange assets of the banking sector + Government's currency liabilities to the public - Net non-monetary liabilities of the banking sector (Other than Time Deposits).

M4: M3 + All deposits with post office savings banks (excluding National Savings Certificates).

New Measures of Money supply

The Third Working Group 1998 (TWG)

Narrow money perfectly satisfies transactions demand for money. The constituents of narrow money are limited to the central bank and the central government and depository corporations such as commercial and co-operative banks. The banking sector issues money. Banking sector in India comprises RBI, The State Bank of India and its subsidiaries, Nationalized banks, Regional rural banks, Private sectors Including foreign banks, and Co-operative banks and Financial institution notified by government of India1

The TWG definition of financial institutions

The TWG defined financial institutions to include Banking sector, Development financial institutions (DFIs), Insurance corporations, Mutual funds and Non-banking financial companies accepting deposits from public.

Primary dealers in financial corporations are treated as non-banks. Households, non-financial commercial sector and non-depository financial corporations hold money. Financial corporations include central bank, other depository corporations, insurance corporations and pension funds, other financial intermediaries and financial auxiliaries.

 While constructing monetary aggregates the essential guideline should be that only the central bank and depository corporations in the sense of being capable of creating money should be considered. Accordingly the group proposed compilation of following Four measures of monetary aggregates: Weekly compilation M0 = currency in circulation + bankers deposits with RBI + other deposits with RBI. M0 is essentially the monetary base, i.e. reserve money. It is mainly compiled from RBIs balance sheet.

 Fortnightly compilation M1 = currency with public + demand deposits with the banking system + other deposits with RBI = currency with public + current deposits with the banking system + demand liability portion of saving deposits with the banking system + other deposits with RBI. M1 = C + DD + OD M1 reflects the banking sectors non-interest bearing monetary liabilities.

 M2 = M1 + Time Liabilities Portion of Savings Deposits with the Banking System + Certificates of Deposit issued by Banks + Term Deposits of residents with a contractual maturity of up to and including one year with the Banking System (excluding CDs).
= Currency with the Public + Current Deposits with the Banking System + Savings Deposits with the Banking System + Certificates of Deposit issued by Banks + Term Deposits of residents with a contractual maturity up to and including one year with the Banking System (excluding CDs) + 'Other Deposits with the RBI

 M3 = M2 + Term Deposits of residents with a contractual maturity of over one year with the Banking System + Call/Term borrowings from 'Non-depository Financial Corporations by the Banking System.

 In addition, the TWG proposed two liquidity measures as substitutes of broad money and inclusive of a range of instruments that may be empirically related to overall economic activities: Monthly compilation L1 = M3 + all deposits with post office savings bank except NSC L2 = L1 + term deposits with Term Lending Institutions and Refinancing Institutions (FIs) + term borrowing by FIs and Certificates of Deposits issued by FIs Quarterly compilation L3 = L2 + public deposits of non banking financial companies

 Ordinary Money: M= C + DD. High-Powered Money: H = C +R.

Cd = c.DD I Rd = r. D II TDd = t. DD III D = (1+t) DD IV Rd = r (1+t) DD V Hd = Hs VI

(Rd = r. D)

 Recalling that Hd = Cd + Rd from I and V Hd = [c + r (1+ t)] DD VII Thus Hd has been expressed as a function of DD and three behavioural ratios c, t, and r. The market for H will be in equilibrium when Hd = Hs , or from VI and VII [c + r (1+ t)] DD = H The above Equ. Can be solved DD = 1/[c + r (1+ t)] * H VIII

 Next, from M = C + DD M = c.DD + DD So M = (1 + c)DD. M = (1 + c)/[c + r (1+ t)] * H Or

(Cd = c.DD)

(DD = 1/[c + r (1+ t)] * H)