money_supply1
TRANSCRIPT
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Money Supply
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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
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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.
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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 RBIwho 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
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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 underCR
DD: demand deposits of the general public.
Relationship between CR and DD is as follows:
TheC
ash reserves of banks is the actual base of the totaldeposit structure of the banking system.
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Growth ofReserve 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 bankdeposits, (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 oftheir 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 thenet 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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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=
What is broad money multiplier and a Narrrow money
multiplier.(Money supply determination,)
Hrc
*)1)(1(1
1
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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 foreigncurrency repatriable fixed deposits in the form ofFCNR(B) deposits,
Resurgent India Bonds (RIBs) and India Millennium Deposits (IMDs).
L1=NM3+postal deposits
L2= L1+ Term deposits+term borrowings ofFIs+ certificates ofdeposits issued by the financial institutions)
(IDBI,IFCI,ICICI,EXIM bank,SIDBI, NHB)
L3= L2+public deposits of NBFCs
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The banking system's credit to the commercial sector would comprise
accommodation in the form of
i) loans, cash credit and overdrafts in both rupees as well as in foreign
currency,
ii) 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 publicand private non bank sector has also to be included in the bank credit to
the commercial sector.
BankCredit to the commercial sector
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Net non-monetary liabilities (NNML) of the banking sector presently include
i) capital and reserves, -contingency reserve, asset development reserve ,
ii) 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
Net Non Monetary liabililites of the banking sector
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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 theeconomy 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).