Money Supply - India

7/31/2019 Money Supply - India

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Money Supply in India


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Monetary policy refer to steps taken by RBI to

regulate cost and supply of money in order to

achieve certain socio Economic objective likeprice stabilization full employment, exchange

regulation and increased economic growth


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There is no unique measure to money aggregate

Money Supply

M : M1 + M2 + M3 + M4


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M1

It consist of Currency notes and coins with public

( excluding cash in hand of all banks)

Demand deposit ( excluding inter bankdeposit)

Deposit held with RBI ( excluding IMF,PF,

guarantee fund & adhoc liabilitiesN A R R O W M O N E Y


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M2

M1 PLUS

Saving deposit with post office savingbank


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M3

M1 PLUS

Time deposit of commercial bank & cooperative

bank ( excluding inter bank deposit) It includes net bank credit to government +bankcredit to commercial sector + net foreignexchange assets + government currency liabilityto the public

B R O A D M O N E Y


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M4

M3 PLUS

Total deposit with post office organization


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The growth in money supply must be higher then the growth inthe real national Income This stems for two reasons

(i) As income grows ,the demand for money as one of thecomponent of saving tends to increase

(ii)An increase in money supply is also necessitated by gradualreduction of the non-mentioned sector of the economy.

In our country, the rate of increase in money supply has

been far excess of the rate of growth in real national income


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1990-91 2001-02

M 1 92,890 4,21,200

Post office savingbank deposit

4,210 5,040

M2 97,100 4,26,240

Time deposit withbanks

1,72,940 10,75,930

M 3 2,65,830 14,97,130

Total post officedeposit

14,680 25,970

M 4 2,80,510 15,23,100

Money stock measure

( Rs crores)


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Money Market

MM is Centre for dealings, mainly of ashort term character, in monetary assets;

it meets the short term requirement of theborrowers and provides liquidity or cash tothe lenders. It is a place where short termsurplus investible funds at the disposal of

the financial and other institution andindividual are bid by borrowers, againcomprising institutions and individual andalso by government


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Function of Money Market

It provides various kind of creditinstrument to augment the money supply

It helps to minimise the gluts andstringencies in money market due toseasonal variations in the flow of and

demand of funds It helps in quick transfer of funds


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Operation in Money Market

Call (overnight) money Notice money

Commercial Bills Treasury Bills Certificate of Deposit Commercial Paper


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MMinstruments

Minimum

Amount per

transaction

Period Secured/Unsecured

Liquidity Participant

182 daystreasury bill

0.25 1-182 days Secured Easy Open to all

Commercialbills

0.50 1-90 days Secured Reasonable Sh. Com.Banks,coop.

Banks, MFetc

Certificate ofdeposit (CD)

0.25 46-365 days Secured Moderate Open to all

CommercialPapers

0.25 90-180 days Unsecured Moderate Open to all

Call Money 1 1 day Unsecured Easy Sh. Com.Banks,coop.

Banks, MFetc

Notice

Money

0.50 2-14 days Unsecured Easy Sh. Com.

Banks,coop.Banks, MF

Features of Investment methods in Money Market


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Call/Notice Money

All categories of bank and financial institutionare allowed to participate in call/notice market.The fund are lent for one day or from Saturday

to Monday or for a period up to 14 days. Boththe borrower and lender have current accountwith the RBI. It is also used by banks to

maintain CRR/SLR level to avoid punitivemeasure by the RBI


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Commercial Bills

One ways the bank extend credit to theircustomer is by discounting their commercial

bills. Such credit bill finance is repayable onmaturity of the bill. The eligibility criteriaprescribed by RBI for rediscounting a billstipulates interaliathat the bill should fall with

90 days from date of discounting. The billdiscounting rate is dictated by the market forc& there is less volatility in interest rate in thisthen call market.


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Certificate of Deposit

RBI introduced CD in 1989. CD is a front endednegotiable instrument, issued at a discount andface value is payable at maturity by the issuing

bank. The CD are short-term depositinstrument for a period ranging from threemonth to one year. The discount rate for the

issue of CD are market driven.


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Commercial Paper

The RBI introduced a scheme of CP inJanuary 1990. CP is a short term

negotiable money market Instrument andis issued by companies in the form of ausance promissory note, redeemable at

par to the holder on maturity. The periodof CP is 15 days to 365 days from date ofissue and is issued at a discount.


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Role of DFHI

Established in 1988,it was established by RBIjointly with PSU banks and all-India

Financial Institution to deal in short term monerymarket instruments. DFHI has branches in Delhi,Calcutta, Chennai, Ahemdabad and Bangalore.

DFHI also provides repos facility ( buy-backand sell-back) to banks, selected financialinstitution and PSUs upto a period of 14 days

at predetermined interest rate.

Money Supply - India

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