tried to explain definition, constituents. Factor determining supply of money and RBI's measure of money supply

1. Supply of Money
By
Dr. Sunil Chandanshive
Assistant Professor, Dept. of Economics
K.J. Somaiya College of Arts and Commerce
Vidyavihar, Mumbai

2. What is money?
Money as “Anything which is widely accepted in
payment for goods & services
Money can be in various forms, such as notes,
coins, credit and debit cards, and bank checks.
What is money supply?
Money supply refers to the total sum of money
available to the public in the economy at a point of
time
Money supply always refers to the amount of
money held by the public. In the term public are
included households, firms and institutions other
than banks and the government.
Money supply refers to the stock of money held by
the people in spendable form.

3. Constitute of Money
Supply
Traditional Measures
(Narrow Money)
Currency (Coins and
notes)
Demand Deposit
Modern Measure
(Broad Money)
Currency & Demand
Deposit
Saving Deposit in Post
Office
Time Deposit
Government
Securities
Credit

4. Traditional Approach
• Money is medium of exchange
• Currency & Notes
RBI has sole right to issue currency notes of
various denominations except one rupee notes.
The One Rupee note is issued by Ministry of
Finance and it bears the signatures of Finance
Secretary, while other notes bear the signature
of Governor RBI
• Demand Deposit

5. Modern Approach
• Traditional Approach +
• Saaving Deposit in Post Office
• Time Deposit
• Government Securities (Bonds, treasury bills and any
other financial instuments)
• Credit (all debt of domestic non financial sectors in the
from of mortgages, bonds ect.)

6. Milton Friedman
Milton Friedman have extended the definition of money
including three more concepts, namely, currency, checkable
demand deposits, and time deposits. Because Time D. can be
made available for spending purpose with limited cost, People
can get loan on FD
Gurley- Shaw
Gurley and Shaw further widened the scope of money supply by
including in its constituents currency plus demand and time
deposits of banks plus the liabilities of non-banking
intermediaries. The liabilities of non-banking intermediaries
cover saving bank deposits, shares, bonds, etc. and are close
substitutes to money.

7. Radcliff Committee
Radcliffe Committee approach or liquidity approach provides
much wider view of the concept of money supply.
According to this approach, money supply includes cash, all
kinds of bank deposits, deposits with other institutions, near-
money assets and the borrowing facilities available to the people.
Near/ Liquid money include bonds, money markets, savings
accounts and widely traded foreign currencies, bank deposits,
certificates of deposit and Treasury Bills.
Borrowing facilities available to the people includes overdraft
services, deferred payment plans, lines of credit, revolving credit,
term loans, letters of credit, and swingline loans

8. Money supply does not include
1. Cash balances held by Central and State Govt.
with RBI because such money is not in
circulation
2. Time Deposit
3. Overdraft: until they are used by concern
individual An overdraft facility is a credit agreement made
with a bank that allows an account holder to use or withdraw
more money than what they have in their account up to the
approved limit.
4. Monetory gold held in reserve by RBI Because it
is not in cirrculation
5. Cash balances: CRR and SLR

9. Determinants of Money Supply
1. Community choice to hold currency: Indirect R
2. Veloity of Circulation: Direct Relationship
It is influenced by saving, price, payment habits ect
3. Fiscal Policy : Public Exp increase MS
Deficit Financing increase MS DF is done three ways; 1. Printing new currency notes
2. Borrowing from internal sources (RBI, General Public, Ad-hoc Treasury Bills & government bonds
etc.) 3. Borrowing from External Sources (like borrowing from developed countries and International
institutions like World Bank, IMF, etc.)
Taxation reduces MS
Deficit Financing increase MS
Public borrowing reduces MS
4. Monetary Policy : a) Cheap Money Policy
b) Tight Money Policy
5. Liquidity Preference: inverse
6. High powered money
7. Money Multiplier

10. High power money is the base of money supply
expansion in the economy.
H= C + R+ OD
C = Currency with the public (Paper Money +Coins)
R = reserves of Commercial banks
OD = Other Deposits with RBI
i) Deposits of Institutions such as UTI, IDBI, IFCI, NABARD etc.
ii) Demand deposits of foreign Central Banks and Foreign
Govt. iii) Demand deposits of IMF and World Bank
All the componant of H are the creation of RBI and not by
banks.
DD is depends on R

11. Money Multiplier:
The money multiplier is the ratio of deposits to reserves in the
banking system Money multiplier (m) has positive influence upon
the money supply.
The Money Multiplier refers to how an initial deposit can lead to a
bigger final increase in the total money supply.
For example, if the commercial banks gain deposits of 1000 and this
leads to a final money supply of 10000. The money multiplier is 10.
Credit
Creation
process

12. Value of multiplier is determined by
1. Currency of deposit ratio: The preference by the
public between currency and demand deposit
2. Reserve Ratio: The total quantity of money received by banks
is their reserve money(R). Reserve of banks devided by two types
a) Required Reserve: CRR
b) Excess Reserve (ER) are voluntarily held by banks
a) Currency drain: to meet net withdrawal of cash by
depositors
b) Clearing drain: to meet cross-clearing of cheques among
banks

13. Actual money multiplier is significantly smaller than the theoretically possible
money multiplier.
• Import spending. If consumers buy imports the money leaves the economy
• Taxes. A percentage of income will be taken in taxes.
• Currency Drain Ratio. This is the % of banknotes that individual consumers
keep in cash, rather than depositing in banks. If consumers deposited all their
cash in banks, there would be a bigger money multiplier. But, if people keep
funds in cash then the banks cannot lend more
• Bad loans. A bank may lend out $90 but the company goes bankrupt and so
this is never deposited bank into the banking system.
• Safety reserve ratio. This is the % of deposits a bank may like to keep above
the statutory reserve ratio. i.e. the required reserve ratio may be 5%, but
banks may like to keep 5.2%.
• It might not be possible to lend more money out. Just because banks could
lend 95% of their deposits doesn’t mean they can, even if they wanted to. In a
recession, people may not want to borrow, but they prefer to save.
• Banks may not want to lend Also, at various times, the banks may not want to
lend, e.g. during a recession they feel firms and individuals more likely to
default. Therefore, the banks end up with a higher reserve ratio.

14. 1+k r=Reserve ratio
mm=------- k=currency deposit Ratio
r+k
1+0.40
mm=----------- =2.33
0.40+0.20
Smaller the ratio , higher is the value of multiplier
If H is 10,000 billion & MM is 2.33 then Money supply is
equal to
10,000*2.33= 23,300 billion

15. Velocity of Circulation of Money
Velocity of circulation is the amount of units of money circulated in the economy during
a given period of time.
Types of Velocity of money
Transaction Veocity: It is the ratio of annual vaume of transaction to the stock of money.
It is the speed at which money moves ‘ around the circle of payments, from income to
payment for Goods and services and again to income.
Suppose
V= 1,00,000 / 5000 =20
It means 1 rupee perfors the function of 20 rupee

16. Factor influencing transaction velocity
• Volume of tranction: direct
• Saving: inverse
• Changes in price level: direct
• Institutiona arrangements like deferred
payment
• Regularity and certainty of income receipts:
direct

17. Income veocity of money
• It refers to the average number of time a unit
of money is used for making payment for fina
goods and services
• It is the ratio of GNP to money stock
• If GNP-10,000 and money stock is 5000 crore
the Income velocity of money is 5

18. Factors determining Income veocity
• Growth in GNP
• Demand for Idle cash
• Quantity of money suppy

19. RBI’s Measures of Money supply
• M1 (Narrow Money)
M1 = CC + DD + Other Deposits with the RBI (Current deposit
of foreign banks, IDBI, IFCI, UTI, NABARD, deposit from
foreign govt., DD of IMF and Word bank)
• M2
M2 = M1 + Savings Deposits of Post Office Savings banks
Post Office Savings Account​​, National Savings Recurring Deposit Account, ​
National Savings Time Deposit Account, National Savings Monthly Income Account,
Senior Citizens Savings Scheme Account
Reserve Money (M0)/ High Powered Money/monetary base/base
money etc.
M0 = Currency in Circulation + Bankers’ Deposits with RBI (balances
maintained by banks in current account with RBI for mainting CRR
and working fund to adjust clearing ) + other deposits with RBI
(deposit from foreign central bank, multilateral institutions, financial
institutions sudry deposit net of IMF)

20. • M3 (Broad Money)
M3 = M1 + time deposits of all banks.
A time deposit / certificate of deposit (CD). The deposited funds must
remain in the account for the fixed term to receive the stated interest
rate. Time deposits are an alternative to the standard savings account,
and will usually pay a higher rate of interest.
• M4 (Widest Measure of money suppy)
M4 = M3 + All deposit with Post office savings
banks (Post office saving account, time deposit, Reecurring deposit, Public
provident fund, Sukanya Samrudhi Yojna, Senior citizen saving scheeme, Kisan
Vikas Patra Account, )
(Excuding national Saving Certificate)
The National Savings Certificate is a fixed income investment scheme that you can
open with any post office. this scheme too is a secure and low-risk product. The
certificates earn a fixed interest, which is currently at a rate of 8% per annum.

21. The Working Group on Money Supply: Analytics and
Methodology of Compilation (Chairman: Dr. Y.V.
Reddy), set up to examine the analytical aspects of
the monetary survey, submitted its report in June
1998.
The Working Group recommended that the
proposed monetary aggregates and liquidity
aggregates should be disseminated from fiscal 1999-
2000

22. New Monetary Aggregate
NM1 = M1
NM2 = NM1 + Short term time deposit of residents
(up to maturity period 1 year)
NM3 = NM2 + Long term time deposit of residents +
Call / Term funding from financial institution
Liquidity Aggregate
L1 = NM3 + All deposit with the post office saving banks
(excluding National Saving Certificate)
L2 = L1 + term deposit with term lending institutions and
refinancing institution + term borrowing ny Fis +
Certificate of deposit issued by FIs
L3 = L2 + Public deposit of NBFCs

23. Aditya Birla Finance LtdTata Capital Financial Services Ltd
HDB Finance Services
Muthoot Finance Ltd
Mahindra & Mahindra Financial Services Limited
Bajaj Finance Limited
Shriram Transport Finance Company Limited
Power Finance Corporation Limited
Top NBFCs

24. References
1. Johnson, Mascarenhas, & Chatterjee (2013), Bisiness Economics-II, Manan Prakashan
Mumbai 400 057
2. https://www.toppr.com/guides/general-awareness/money-and-money-
market/measures-of-money-supply-in-india/
3. https://economictimes.indiatimes.com/wealth/borrow/five-smart-things-to-know-
about-overdraft-facility/articleshow/47745124.cms?from=mdr

25. Thank You