Money Supply in India

Monetary policy refer to steps taken by RBI to regulate cost and supply of money in order to achieve certain socio Economic objective like price stabilization full employment, exchange regulation and increased economic growth

There is no unique measure to money aggregate Money Supply M : M 1 + M 2 + M 3 + M 4

M1M1M1M1 It consist of Currency notes and coins with public Currency notes and coins with public ( excluding cash in hand of all banks) ( excluding cash in hand of all banks) Demand deposit ( excluding inter bank deposit) Demand deposit ( excluding inter bank deposit) Deposit held with RBI ( excluding IMF,PF, guarantee fund & adhoc liabilities Deposit held with RBI ( excluding IMF,PF, guarantee fund & adhoc liabilities N A R R O W M O N E Y N A R R O W M O N E Y

M2M2M2M2 M 1 PLUS M 1 PLUS Saving deposit with post office saving bank Saving deposit with post office saving bank

M3M3M3M3 M 1 PLUS M 1 PLUS Time deposit of commercial bank & cooperative bank ( excluding inter bank deposit) Time deposit of commercial bank & cooperative bank ( excluding inter bank deposit) It includes net bank credit to government +bank credit to commercial sector + net foreign exchange assets + government currency liability to the public It includes net bank credit to government +bank credit to commercial sector + net foreign exchange assets + government currency liability to the public B R O A D M O N E Y B R O A D M O N E Y

M4M4M4M4 M 3 PLUS M 3 PLUS Total deposit with post office organization Total deposit with post office organization

The growth in money supply must be higher then the growth in the real national Income This stems for two reasons (i)As income grows,the demand for money as one of the component of saving tends to increase (ii)An increase in money supply is also necessitated by gradual reduction 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

M 1 92,8904,21,200 Post office saving bank deposit 4,2105,040 M297,1004,26,240 Time deposit with banks 1,72,94010,75,930 M 3 2,65,83014,97,130 Total post office deposit 14,68025,970 M 4 2,80,51015,23,100 Money stock measure ( Rs crores)

Money Market MM is Centre for dealings, mainly of a short term character, in monetary assets; it meets the short term requirement of the borrowers and provides liquidity or cash to the lenders. It is a place where short term surplus investible funds at the disposal of the financial and other institution and individual are bid by borrowers, again comprising institutions and individual and also by government

Function of Money Market It provides various kind of credit instrument to augment the money supply It provides various kind of credit instrument to augment the money supply It helps to minimise the gluts and stringencies in money market due to seasonal variations in the flow of and demand of funds It helps to minimise the gluts and stringencies in money market due to seasonal variations in the flow of and demand of funds It helps in quick transfer of funds It helps in quick transfer of funds

Operation in Money Market Call (overnight) money Call (overnight) money Notice money Notice money Commercial Bills Commercial Bills Treasury Bills Treasury Bills Certificate of Deposit Certificate of Deposit Commercial Paper Commercial Paper

MM instruments Minimum Amount per transaction Period Secured /Unsecured LiquidityParticipant 182 days treasury bill days SecuredEasy Open to all Commercial bills days SecuredReasonable Sh. Com. Banks,coop. Banks, MF etc Certificate of deposit (CD) days SecuredModerate Open to all Commercial Papers days UnsecuredModerate Open to all Call Money 1 1 day UnsecuredEasy Sh. Com. Banks,coop. Banks, MF etc Notice Money days UnsecuredEasy Sh. Com. Banks,coop. Banks, MF etc Features of Investment methods in Money Market

Call/Notice Money All categories of bank and financial institution are 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. Both the borrower and lender have current account with the RBI. It is also used by banks to maintain CRR/SLR level to avoid punitive measure by the RBI All categories of bank and financial institution are 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. Both the borrower and lender have current account with the RBI. It is also used by banks to maintain CRR/SLR level to avoid punitive measure by the RBI

Commercial Bills One ways the bank extend credit to their customer is by discounting their commercial bills. Such credit bill finance is repayable on maturity of the bill. The eligibility criteria prescribed by RBI for rediscounting a bill stipulates interalia that the bill should fall within 90 days from date of discounting. The bill discounting rate is dictated by the market force & there is less volatility in interest rate in this then call market.

182 Days Treasury Bills This is a short term government debt securities introduced in November The treasury bill is issued on auction by RBI. It is issued at a discount and on maturity the face value is paid to the holder. Every fortnight,RBI invites bids for sale of 182 days treasury bills This is a short term government debt securities introduced in November The treasury bill is issued on auction by RBI. It is issued at a discount and on maturity the face value is paid to the holder. Every fortnight,RBI invites bids for sale of 182 days treasury bills

Certificate of Deposit RBI introduced CD in CD is a front ended negotiable instrument, issued at a discount and face value is payable at maturity by the issuing bank. The CD are short-term deposit instrument for a period ranging from three month to one year. The discount rate for the issue of CD are market driven. RBI introduced CD in CD is a front ended negotiable instrument, issued at a discount and face value is payable at maturity by the issuing bank. The CD are short-term deposit instrument for a period ranging from three month to one year. The discount rate for the issue of CD are market driven.

Commercial Paper The RBI introduced a scheme of CP in January CP is a short term negotiable money market Instrument and is issued by companies in the form of a usance promissory note, redeemable at par to the holder on maturity. The period of CP is 15 days to 365 days from date of issue and is issued at a discount.

Role of DFHI Established in 1988,it was established by RBI jointly with PSU banks and all-India Established in 1988,it was established by RBI jointly with PSU banks and all-India Financial Institution to deal in short term monery market instruments. DFHI has branches in Delhi, Calcutta, Chennai, Ahemdabad and Bangalore. Financial Institution to deal in short term monery market instruments. DFHI has branches in Delhi, Calcutta, Chennai, Ahemdabad and Bangalore. DFHI also provides repos facility ( buy-back and sell-back) to banks, selected financial institution and PSUs upto a period of 14 days DFHI also provides repos facility ( buy-back and sell-back) to banks, selected financial institution and PSUs upto a period of 14 days at predetermined interest rate. at predetermined interest rate.