Money Supply

 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

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.

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 RBI who 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

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 under CR DD: demand deposits of the general public. Relationship between CR and DD is as follows: The Cash reserves of banks is the actual base of the total deposit structure of the banking system.

Growth of Reserve 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 bank deposits, (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 of their 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 the net 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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What is broad money multiplier and a Narrrow money multiplier.(Money supply determination,)
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=
1 *H 1  (1  c)(1  r )

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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 foreign currency repatriable fixed deposits in the form of FCNR(B) deposits, Resurgent India Bonds (RIBs) and India Millennium Deposits (IMDs).

L1=NM3+postal deposits L2= L1+ Term deposits+term borrowings of FIs+ certificates of deposits issued by the financial institutions) (IDBI,IFCI,ICICI,EXIM bank,SIDBI, NHB) L3= L2+public deposits of NBFCs

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Bank Credit to the commercial sector

The banking system's credit to the commercial sector would comprise accommodation in the form of i) ii) loans, cash credit and overdrafts in both rupees as well as in foreign currency, 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 public and private non bank sector has also to be included in the bank credit to the commercial sector.

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Net Non Monetary liabililites of the banking sector

Net non-monetary liabilities (NNML) of the banking sector presently include i) ii) capital and reserves, -contingency reserve, asset development reserve , 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

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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 the economy 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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