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 : M1 + M2 + M3 + M4

M1
It consist of Currency notes and coins with public ( excluding cash in hand of all banks) Demand deposit ( excluding inter bank deposit) Deposit held with RBI ( excluding IMF,PF, guarantee fund & adhoc liabilities N A RROW MONEY

M2
M1
PLUS

Saving deposit with post office saving

bank

M3
M1
PLUS

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

BROAD MONEY

M4
M3 PLUS
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

Money stock measure

( Rs crores)

1990-91 M1 92,890 Post office saving 4,210 bank deposit M2 97,100 Time deposit with 1,72,940 banks M3 Total post office deposit M4 2,65,830 14,680 2,80,510

2001-02 4,21,200 5,040 4,26,240 10,75,930 14,97,130 25,970 15,23,100

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 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

Operation in Money Market

Call (overnight) money Notice money Commercial Bills Treasury Bills Certificate of Deposit Commercial Paper

Features of Investment methods in Money Market

MM instruments 182 days treasury bill Commercial bills Minimum Amount per transaction 0.25 0.50 Period Secured /Unsecured Secured Secured Liquidity Participant

1-182 days 1-90 days

Easy Reasonable

Open to all Sh. Com. Banks,coop. Banks, MF etc Open to all Open to all Sh. Com. Banks,coop. Banks, MF etc

Certificate of 0.25 deposit (CD) Commercial Papers Call Money 0.25 1

46-365 days 90-180 days 1 day

Secured Unsecured Unsecured

Moderate Moderate Easy

Notice Money

0.50

2-14 days

Unsecured

Easy

Sh. Com. Banks,coop. Banks, MF

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

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 withi 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 1986. 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 1989. 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 1990. 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 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 at predetermined interest rate.