Money Supply and Rate of Interest

8/2/2019 Money Supply and Rate of Interest

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` Money supply refers to the total sum of money

available to the public in economy at given point

of time.

` Money supply is stock concept whereas national

income is flow concept in terms of goods and

services produced per unit of time in a year.


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` Money held by the Public includes-

` Households

` Firms and institutions (other than banks andgovernment)

` A per Third working Group of RBI,which has given the report in 1998, there

are four different Measures of moneysupply which are based on varyingdegree of liquidity. Money aggregatesare:


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` M0 (Reserve money) :

` Currency in circulation + Bankers Deposits

with the RBI

` + Other deposits with the RBI.

Four Measures of Money Supply


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.M1 : = C+DD+OD

` C= Currency (Paper currency +coins) held by the

public.

` DD = + Demand deposits with the public in the

commercial and cooperative banks.

` OD = Other deposits held by the public with RBI.

(Deposits of institution such as-

` UTI,IDBI,IFCI,NABARD etc.


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Characteristics of M1 :

` M1 is conventionally known as narrow money.

` M1 represents the highest degree of liquidity.

` M1 is more important than M3 for credit budgeting

because it is always possible to predict the growthof time deposit and total deposit on the basis ofgrowth of M1 and reserve money.


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2. M2 : M1 + Post office saving deposits.

` M2 supply measure is distinguished fromM1 because M2 deposits are not that liquid

as demand deposits are with commercial

and cooperative banks they are not as

chequable accounts.


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M3 : M1 +Time deposits of Banks

` Characteristics of M3 :

` M3 is known as Broader money.

` For credit creation total deposits are

considered to be more relevant than merely

the demand deposits. Therefore, M3 is more

important than M1 in credit creation


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` Reserve money also called Base moneyor High Powered money.

` H = C+R

C=Currency held by the publicR =Cash reserves with the central

Bank and with other banks


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` R : has two components :

` Statuary Reserve Ratio based on:

` Cash Reserve maintained by

commercial banks with RBI.

` Excess Reserve needs to maintain

as Cash in hand or cash in vaults.


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` Changing CRR is the concept of

disposable high powered money which is

often called adjusted high powered

money.

` Changes in CRR affect the amount of

disposable high powered money availableto the public and bank.


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When the CRR is raised , some reservesof commercial banks are impounded by

the Reserve Bank and thus the amount

of disposable high powered money isreduced.

When CRR is lowered, some reserves

are released which in turn cause anincrease in the amount of disposable

high powered money.


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Item

Amount in Rupeescrore

Outstanding

Variation

2005-06 2006-07

as on March 31, 2007 Amount Amount

Reserve Money (M0) 7,08,950 83,922 1,35,892

Narrow Money (M1)9,59,875 1,43,825 1,33,497

Broad Money (M3):32,96,919 3,96,881 5,67,372

a) Currency with the

Public

4,84,171 58,248 71,052

b) Aggregate Deposits: 28,05,261 3,38,081 4,95,704

i) Demand Deposits 4,68,216 85,025 61,829

ii) Time Deposits

Source : RBI

23,37,045 2,53,056 4,33,875

Money Supply and Rate of Interest

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