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)
M1
1990-91
2001-02
92,890
4,21,200
Post office saving 4,210
bank deposit
5,040
M2
4,26,240
97,100
Time deposit with 1,72,940
banks
10,75,930
M3
2,65,830
14,97,130
Total post office
deposit
14,680
25,970
M4
2,80,510
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
Minimum
Amount per
transaction
Period
Secured
/Unsecured
Liquidity
Participant
182 days
treasury bill
0.25
1-182 days
Secured
Easy
Open to all
Commercial
bills
0.50
1-90 days
Secured
Reasonable
Sh. Com.
Banks,coop.
Banks, MF
etc
Certificate of 0.25
deposit (CD)
46-365 days
Secured
Moderate
Open to all
Commercial
Papers
0.25
90-180 days
Unsecured
Moderate
Open to all
Call Money
1
1 day
Unsecured
Easy
Sh. Com.
Banks,coop.
Banks, MF
etc
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 PSU’s upto a period of 14 days
at predetermined interest rate.