Search for notes by fellow students, in your own course and all over the country.
Browse our notes for titles which look like what you need, you can preview any of the notes via a sample of the contents. After you're happy these are the notes you're after simply pop them into your shopping cart.
Document Preview
Extracts from the notes are below, to see the PDF you'll receive please use the links above
Money and Money supply
Definition
• Money is the set of assets in the economy that people regularly use to buy goods and services
from other people
...
A
...
’ This definition explains the functions
performed by money namely medium of exchange, measure of value, unit of account etc
...
e
...
” — Prof
...
This
definition covers its basic characteristic, namely general acceptability
...
• Characteristics/Features of Money:
1) General Acceptability
2) Divisibility
3) Durability
4) Portability
5) Liquidity
Components of Money
Currency and Coins:
The word currency is derived from the Middle English term curraunt meaning in circulation
...
The RBI prints the
currency notes of all denominations from Rs
...
500; except one rupee note (printed by the
Ministry of Finance)
...
Example: USA- Dollars
...
Credit:
Any future monetary claim against an individual that can be used to buy goods and services is
known as Credit money or bank money
...
Bank credit includes all types
of credit facilities such as cash credit, overdrafts, term loans, bills discounted/ purchased
...
Credit cards are new form of credit facility offered by banks
...
The
evolution of money has brought us to where we are today
...
Barter is an economic system in which the members trade goods and services for other goods and
services without using a medium of exchange
...
Commodity Money
Later, Commodity money is an economic good that acts as money
...
Metallic Money
Metals such as gold, silver, and copper were used instead of commodity money
...
Paper Money
These are Government-issued notes for transactions, widely accepted, representing a value
...
Credit Money
Any future monetary claim against an individual that can be used to buy goods and services is
known as Credit money or bank money
...
Credit money refers to the money
who’s intrinsic (commodity) value is less than its face value
Electronic Money
Electronic money is money that is stored electronically and can be accessed through devices to
complete transactions
...
New
form of electronic money in modern economies is cryptocurrencies
...
RBI controls the circulation of money through its monetary policy
...
However, since
1977, four measures of money supply have evolved in the economy, i
...
, M1, M2, M3, and M4
...
It is also called as narrow money or
transaction money
...
Components of M1
1) C= Currency and Coins with Public: The first component of transaction money includes coins
and paper notes held by the public of a country
...
2) DD= Demand Deposits of Commercial Banks: The second component of M1 includes the
demand deposits of the public with the commercial banks
...
However, only net demand deposits are
included in M1
...
3) OD= Other Deposits with Reserve Bank of India: The last component of M1 includes the
deposits held by the Reserve Bank of India on behalf of foreign governments and banks, IMF,
World Bank, Public Financial Institutions, etc
...
M2
Like regular banks, Post office also offers their time savings account, recurring deposit account,
time deposit account
...
Here we count the Post office savings
...
One cannot withdraw Savings Deposits with Post Office Saving
Bank through cheque; therefore, it cannot be included in demand deposits with the bank,
resulting in the evolution of M2
...
M2 = M1 + Savings Deposits with Post Office Saving Bank
M3
The third measure of the money supply is M3 and is a broader concept as compared to M1
...
Time deposits serves as store of value and
represent savings of people and are not liquid as they cannot be withdrawn through drawing
cheque on them
...
It is known
as broader money
...
It includes M3 and Total Deposits with Post Office Saving Bank, but does not include NSC (National
Saving Certificate)
...
In liquidity, M2 ranks before M4
...
The bank was nationalised
with effect from January 1, 1949 and its entire ownership remains with the Government of
India
...
Role
1) Controlling inflation and deflation: RBI regulates the money supply in the economy by
controlling the reserve ratios, open market operations, and discount rates
...
2) Maintaining exchange rate stability: It does so by managing the foreign exchange reserves
and regulating the foreign exchange market
...
3) Economic Growth: Maintaining an appropriate money supply is crucial for economic growth
...
4) Liquidity Control: Central banks use control of the money supply to manage the liquidity in
the banking system
...
Instruments of Credit Control/Control of Money Supply: -Quantitative/General and
Qualitative
Quantitative credit controls regulate the volume of total credit
...
During inflationary pressures, RBI increases the Bank rate due to which borrowing from
the central bank becomes costly
...
Hence, demand for credit falls in the economy
...
This in turn helps to control inflation
...
2) Open Market Operations
It means buying & selling of government securities (bonds, debentures) by the RBI in the open
market
...
Commercial banks and private individuals buy these securities
...
Hence commercial banks can give less credit
...
On the other hand, during
deflation, RBI buys government securities in the market from the commercial banks, there is a
transfer of cash from RBI to the commercial banks
...
Cash Reserve Ratio (CRR)
According the RBI Act, 1934, Commercial Bank has to keep some percentage of their total deposits
with the RBI
...
It is prescribed by the RBI from time to
time
...
When RBI increases CRR, banks have to keep more money
with the RBI and less money remains with the banks which can be given in the form of loan
...
During inflationary pressures CRR is increased & during
deflationary pressures, CRR is decreased
...
This is
known as SLR
...
This ensures that banks always have enough
liquidity (cash and cash equivalents) to pay depositors their money, on demand and that banks
do not lend away all their funds
...
SLR is reduced during deflation
...
LAF are conducted by way of repos and reverse repos: Repos Rate
Repo rate refers to the rate at which commercial banks borrow money from the RBI in case of
shortage of funds
...
In return, RBI gives one day or overnight loan to the bank
...
Banks repays the loan after one day and repurchases the security they gave as
collateral
...
On the other hand, RBI decreases Repo Rate during the time of deflation
...
Commercial banks keep their
surplus funds with the RBI and earn interest (reverse repo rate)
...
As a result, banks keep more money with the RBI
...
This reduces money supply and
purchasing power in the economy
...
They are
used to reduce the flow of credit in some undesirable directions and to encourage it in desired
directions
...
The RBI sends letters and conducts meetings of the
Board of Directors of banks
...
It is an appeal made by RBI to commercial banks to take appropriate action benefitting the
economy
...
2) Margin Requirements
The term margin implies a part of the loan amount which cannot be borrowed from the bank
...
Generally, the commercial
banks do not give loan up to the full amount of value of the security but gives loan less than its
value
...
During inflation, higher margin is kept and during deflation lower margin is kept
...
2 crores on Karnataka Bank for not following the central bank’s
directions
...
Above are the examples of direct action
...
RBI may refuse to give credit facilities, denies licence to open new branches, cancel the licences of
such banks, impose lending restrictions on the banks etc
...
on instalment basis by
arranging finance from the banks
...
This can be done by regulating the total amount of
credit that may be given for purchasing specific durable good, regulating the number of
instalments, deciding the minimum down payment on specific goods, changing the rate of interest
etc
...
The opposite is followed during deflation
...
The RBI publishes facts and
figures about the various economic and monetary conditions of the economy
...
6) Issue of Directives
The RBI issues instructions to the commercial banks from time to time
...
7) Rationing of Credit
The apex bank of the country limits the flow of credit to the consumers
...
For e
...
, commercial banks have to give at least 40 per cent of Adjusted Net Bank
Credit to priority sectors of the economy such as agriculture, small industries, artisans, education,
housing etc