Money

Functions of money : Medium of exchange Unit of account A standard of deferred payments A store of Value To influence the economy of the dynamic function of money

Money Supply and Monetary Policy

In economics, the money supply or money stock, is the total amount of money available in an economy at a particular point in time

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

NM1

Currency with the public + Demand deposits with the banking system + Other deposits with the RBI. NM1 + Short-term time deposits of residents (including and up to the contractual maturity of one year). NM2 + Long-term time deposits of residents + Call/Term funding from financial institutions.

NM2

NM3

Liquidity Aggregates
L1 NM3 + All deposits with the post office savings banks (excluding National Savings Certificates). L1 +Term deposits with term lending institutions and refinancing institutions (FIs) + Term borrowing by FIs + Certificates of deposit issued by FIs. L2 + Public deposits of nonbanking financial companies

L2

L3

Determinants of money supply

There are two types of money M= Ordinary money H= High powered money or base money M= C+ DD +OC H= C + R + OD The difference between R and DD can be explained with the concept of credit creation by banks .

Determinants of Money Supply

Ms= m.H Where Ms = Money Supply m=money multiplier H= High powered money

Credit creation by commercial banks Assumption Currency deposit ratio =c=.5 Required reserve ratio = r =0.1 Assets of banks are only loans given by them Banks offer only demand deposits

Process
Public comes in possession of H worth Rs 60 crores . Public keep Rs 20 crores in currency and Rs 40 crores in bank deposits . Banks have Reseves of Rs 40 crores.As r is .1 banks keep Rs 4 crores in cash and rest of the money the lend .

Deposits

Currency 20 12 7.2 Total =50

Reserves 4 2.4 1.44 Total=10

Derivative deposits 36 21.6 12.96 Total=90 N ROUNDS OF CREDIT CREATION Ist round of credit creation Second round credit creation

40 24 14.4 Total = 100

Various multipliers
Deposit multiplier = 1/(c+r)=1.667 Bank credit multiplier = 1- r/(c+r)=1.5 Money multiplier = 1+c/(c+r) =2.5

Determinants of money supply

H C r

NUMERICALS

Study the information given in the Balance Sheet of a Central Bank Particulars Million Units of Currency (MUC) Credit to Govt. 1650 Credit to Banks 520 Govt. Deposits 80 Deposits of Banks 130 Credit to Commercial Sector 140 Foreign Exchange Assets 25 Other Assets 15 Other non-monetary liabilities 10 Net Worth 350

Given are the Govt. Money as 25 MUC, Currency deposit ratio as 20 % and the Reserve ratio as 15 %. Compute the total money supply in the economy

Answer
Money supply in the economy MS = High powered money x money multiplier Money Multiplier mm =1 +c / c + r =1 +.20 / .20 + .15 mm =1.20 / .35 =3.4 High powered Money = Credit to govt. + Credit to banks + Credit to Commercial Sector + Foreign Exchange assets +Other Assets Govt. Deposits Net worth Other Non Monetary liabilities =1650 +520 +140 +25 +15 -80 -350 -10 =1910 High powered Money =1910 +25 (govt. money) =1935 Money Supply =1935 x 3.4 = 6579 Money Supply = 6579 MUC

The following balances have been taken from the balance sheet of the Central Bank of an economy
Million Unit of Currency

Credit to Government Credit to Bank Government Deposits Net worth Other None-monetary Liabilities Credit to Commercial Sector Foreign Exchange Assets Other Assets

650 400 15 375 5 65 20 55

The currency/deposit ratio is 0.35 and the Central Bank imposes a reserve ratio of 6%. The government money in the economy is negligible and can be ignored. a. Calculate the money supply in the economy.

b. The country is about receive a foreign aid to the tune of 100 million unit of Currency. What should be the new reserve ratio to sterilize the effect of the aid on the money supply of the economy? c. If the Central Bank wishes to sterilize the effect of aid only to the extent of 50%, what should be the new reserve ratio?

Answer
A. 2618 B.r= 0.1115 or 11.15% C. 0.084 or 8.4%

Monetary policy
The monetary policy of any country refers to the regulatory policy , whereby the monetary authority maintains its control over (i) the supply of money ii) availability of money, and (iii) cost of money or rate of interest for the realization of general economic goals such as stability of employment, and prices , economic growth , and balance in international payments .

Types of monetary policy

Expansionary or Cheap or easy monetary policy Contractionary policy ,dear or tight monetary policy

Instruments of Monetary policy

Quantitative Tools

Open Mark et Requi reme nts

Bank Rate

CRR

Secondary Reserve Requiremen ts

Repo Rate , Rever se Repo Rates

Qualitative Tools

Rationi ng of Credit

Changes in Margin Requirem ents

Regulation Of Consumer Credit

Moral Suasion

Direct Action

Monetary Policy in Developing Economy

The objective of the Monetary policy is growth with equity . But the monetary policy is not effective due to existence of Large organize sector , time lags in the monetary policy .

Conclusion
Monetary and fiscal policies are interdependent . For example if the government adopts the deficit financing than RBI can adopt a tight money policy. The objective of the Monetary policy is growth with stability . But the monetary policy is not effective due to existence of Large unorganized sector , time lags in the monetary policy .

Current Rates
Bank Rate : 6 % Repo Rate :8.5 Reverse Repo Rate :7.5% CRR: 6% SLR:24% Base Rate : 10.00-10.75% Saving BANK Rate : 4% Deposit Rate 8.5-9.5% Call Rates : 7.0- 9.75% Marginal Standing Facility Rate : 9.5%

Monetary Policy in India

Current ates
Bank Rate : 6 % Repo Rate :8.5 Reverse Repo Rate :7.5% CRR: 6% SLR:24% Base Rate : 10.00-10.75% Saving BANK Rate : 4% Deposit Rate 8.5-9.5% Call Rates : 7.0- 9.75% Marginal Standing Facility Rate : 9.5%