ASSIGNMENT 1

SCHOOL OF ECONOMICS
(University of Hderabad)

Course - EC-456(Money, Banking and Finance)

MA Economics
Submitted to -
Dr. Debashis Acharya

Submitted by -
PRATEEK KUMAR PANDEY
20SEMA69
Email - 20sema69@uohyd.ac.in
 TABLE OF CONTENTS

1. Titles
2. Contents
3. Abstract
4. Introduction
5. Historical evolution of money supply in India
5.1. The working group (1961)
5.2. The second working group (1977)
5.3. The third working group (1998)
6. Analysis of money stock and its components from (1968-
2020)
7. Conclusion

ABSTRACT
In today’s world money plays very vital role in our daily life . Money acts as an
lubricant in the economy . It facilitates the daily transaction and provides us as a
medium of exchange. The money different functions that are -
I) medium of exchange
II) units of accounts
III) store of value
The present work is divided in different sections that presented the different
component of work .The topic is introduced by defining the concept of money
supply .The 2nd section is about historical development in the definition of money
supply in India . The third section deals with the present monetary aggregates in
the context of India. The fourth section deals with analysis of money supply and its
trends and components from (1968-2020 ) . Finally , summary of work is
presented .

INTRODUCTION

An appropriate definition of money is one of the controversial issues in economics.

Economic theory has not provided a clear , complete answer to this issue. Money
being an invention ,as all invention is subject to change over a period of time,
money is not an exception to it in fact it is concept keeps on changing with
evolution of different types of economies . money also evolved to medium of
exchange to store of value . As classical view it as transaction purpose and Keynes
viewed it as store of value and different motives like precautionary and
speculative.

The money supply is regarded as all the currency and other liquid instruments in a
country's economy at the particular time. The money supply (narrowly) includes
both cash and deposits that can be used almost as easily as cash.
RBI has the long tradition of compiling the monetary aggregates . The rationale
and analytical foundations behind the compilation of monetary aggregates have
been provided to the public through various reports, especially through the reports
of the various working groups. Monetary aggregates are published on a regular
basis in most of the major publications of RBI, such as Bank’s Annual Report,
Report on Currency and Finance, Handbook of Statistics, RBI Bulletin, Weekly
Statistical Supplement, etc.

Historical development of money supply in India

In India,economic thoughts in this directions have originated mainly .from the
works of two working groups on money supply appointed by the Reserve Bank of
India [RBI]
.
The First Working Group [1961] regarded "narrow" money as the appropriate
measure. It did not use
The term money for assets other than currency, demand deposits and other
deposits, which it rightly called as near money assets in order to distinguish them
from money.These other assets are
Included in the measure of quasi money.

M = C + DD + OD
Where
C = Currency held by the public
DD =net demand deposit of banks
OD = other deposits of the RBI
The Second Working Group [1977] followed a new approach in this
direction.While it thought that "the hardcore of monetary aggregates should
basically continue to be those assets possessing the quality of superior liquidity
arising from the conception of money as a medium of exchange and the most
generally accepted means of payment available for the mediation of transaction
and final settlement of claims
,the group also accepted that the use of single measure of money stock for
monetary analysis and policy
Would be inadequate and mislead ing. It, therefore proposed four measures of
money. The four measures
Of money stock are defined below. Broadly ,the main characterstics which separate
one measure from the other is the varying degree of its liquidy, the measures
being specified in the decending order of liquidity -
M1 Consists of :
i]
Currency notes and coins with the public
ii]
Demand deposits of all Commercial and Co-operative Banks
iii]
Other deposits held by the Reserve Bank of India

M2 Consists of :
i]
M1
ii]
Saving deposits with Post Office Savings Banks.

M3 Consists of :
i]
M1 and
ii]
Time deposits of all Commercial and Co-operative Banks.

M4 Consists of :
i]
M3 and
ii]
Total deposits with the post office Saving Organisation.

The “Working Group on Money Supply: Analytics and Methodology of

Compilation” under the Chairmanship of Dr. Y.V. Reddy in June, 1998. It went to
revisited the monetary aggregates . they come up with three new monetary
aggregates , that is , NM1 , NM2 and NM3. These aggregates come up to solve
certain issues .
1. Residency
2. Distinction between very long term and relatively short term time deposit .

Definition of new monetary aggregates

NM1 includes the :

i) Currency with the public

ii) Demand deposit of residents with banks
iii) Other deposits with RBI

The number of NM1 and M1 doesnot have any significant difference .

NM2 includes the

i) NM1
ii) Short term time deposit of residents with banks
(including and upto contractual maturity of 1 year)

NM3 includes
i) NM2
ii) Log term time deposit of residents with banks
iii) Call/term funding from financial institution

MONETARY BASE / RESERVE MONEY/ HIGH POWERED MONEY

(M0)
Monetary base is the foundation of monetary aggregates . we define monetary
aggregates in two ways , i) Use ii) source of monetary base. Definition of M0
from “use” side is –
M0 includes :
 i) Currency with public
ii) Cash with banks
iii) Banker’s deposit with RBI
iv) Other deposit with RBI

From source side :

M0 includes:
i) Government currency liabilities to the public
ii) Net RBI credit to the central and state government (loans from RBI)
iii) RBI credit to the commercial secto
iv) RBI credit to NABARD
v) Net foreign exchange assets to RBI
vi) Net non monetary liabilities of RBI

Money stock (M1 - Narrow money )

Currency with public

The graph below shows that the over the period of time there is upward trend in the
currency with public . this means the currency with the public increases over the
time . After 2000 , we can she the sharp increase in currency holding with public .
But in the year 2016 there is decline in the currency with public .

currency with public

2500000
2000000
1500000
1000000
500000
0
67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18
66- 69- 72- 75- 78- 81- 84- 87- 90- 93- 96- 99- 02- 05- 08- 11- 14- 17-
19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20

years

Fig -1 currency held by publicfrom (1968-2020)

Demand deposit

Demand deposit also shows the increasing trend over the period of time.
 Demand Deposits
2000000
1800000
1600000
demand deposit in lakh crore

1400000
1200000
1000000
800000
600000
400000
200000
0
7 0 3 6 9 2 5 8 1 4 7 0 3 6 9 2 5 8
6 -6 9-7 2-7 5-7 8-7 1-8 4-8 7-8 0-9 3-9 6-9 9-0 2-0 5-0 8-0 1-1 4-1 7-1
6 6 7 7 7 8 8 8 9 9 9 9 0 0 0 1 1 1
19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20

Fig - 2 Demand deposit from (1968-2020)

Others deposit with RBI

The fig 3 shows the trend of others deposits with rbi over the period of time and it
show increase in it till 2008 and after that it declined till the 2014. and after that it
again starts increasing rapidly .

'Other' Deposits with the RBI

45000
40000
35000
30000
25000
20000
15000
10000
5000
0
67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18
66- 69- 72- 75- 78- 81- 84- 87- 90- 93- 96- 99- 02- 05- 08- 11- 14- 17-
19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20
 Fig-3 (others deposit with RBI from 1968-2020)

M1 also show the constant increasing trend when analysed over the period of time
as its components .

varition over the years

4500000
4000000
3500000
3000000
2500000
2000000
1500000
1000000
500000
0
7 0 3 6 9 2 5 8 1 4 7 0 3 6 9 2 5 8
-6 - 7 - 7 -7 -7 - 8 - 8 -8 -9 -9 - 9 - 0 - 0 -0 -0 - 1 - 1 - 1
966 969 972 975 978 981 984 987 990 993 996 999 002 005 008 011 014 017
1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2

currency with public 'Other' Deposits with the RBI

Demand Deposits Narrow Money M1
Linear (Narrow Money M1)
Fig - variation over the years (M1, currency withpublic ,demand deposit , others deposit
with RBI

Annual variation of M1 over the years

It is very inconvenient to study the variation by absolute number of money
growth , that is why , it is converted into percentage to see the fluctuation in M1 .
Here also its trend is upward that with the high fluctuations. This shows that M1
in 1977-79 become negative growth means declined. But after that it shows no
such negative growth .
 annual variation of M1
0.25

0.20

0.15

f(x) = 0 x + 0.1
0.10

0.05

0.00
67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
66- 68- 70- 72- 74- 76- 78- 80- 82- 84- 86- 88- 90- 92- 94- 96- 98- 00- 02- 04- 06- 08- 10- 12- 14- 16- 18-
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20
(0.05)

(0.10)

(0.15)

M3 ( BROAD MONEY)

M3 shows the very different variation . In the beginning it increases then slowly
declined over the period of showing downward trendline . this means that
increase in the broad money has become stable with nearly in range of 0.10 to
0.15 .
annual variation of M3
0.25

0.20
annual variation in M3

0.15

0.10

0.05

0.00
67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18
66- 69- 72- 75- 78- 81- 84- 87- 90- 93- 96- 99- 02- 05- 08- 11- 14- 17-
19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20

years