Functions of money

1. Money as a medium of exchange

2. Money as a unit of account

3. Money as a store of value

4. money as a standard of deferred payment

Kinds of Money

1. Coins
2. Currency
3. Bank deposits
4. Plastic money
Some economists even consider financial
instruments and those assets which can be
quickly converted into money as a type of
money
 Measures of money supply
• Supply of money refers to its stock at any
point of time.
• Stock of money always refers to the stock of
money held by the public.
• Till 1967-68, RBI published only a single
measure of money supply (M) defined as the
sum of currency and demand deposit
Money supply in India
• From 1967-68 onwards RBI started
publishing additionally a ‘broader’
money supply called ‘Aggregate Monetary
Resources’ (AMR)
• It was defined as narrow money plus time
deposits
• From 1977 onwards, RBI has been
publishing data on four alternatives on
money supply instead of the earlier two
 Money supply in India continued…
• M1 = Currency + Demand Deposits + other
deposits with the RBI
• M2 = M1 + Savings deposits with Post office
savings banks.
• M3 = M1 + Time deposits with the
banking system
• M4 = M3 + All deposits with Post office
savings banks (excluding National
Savings Certificates).
Determinants of money supply

Two ways to influence determination of

money supply:

1. Exogenously determined by central bank

1. Endogenously by changes in economic

activity
Determinants of money supply
• Determinants of money can be broadly be
described as:
1. Required reserve ratio
2. Level of bank Reserve
3. Public desire to hold currency and
deposits
The last two determinants together are
called the monetary base or higher powered
money(H)
High powered Money (H)
• High powered money is money produced
by the RBI and the Govt. of India and held
by the public and banks. The RBI calls H
‘Reserve Money (M0 )’. High-powered
money is the base for the expansion of
bank deposits and creation of the money
supply. The supply of money directly varies
with changes in monetary base and
inversely with the currency and reserve
ratio
Reserve Money M0
Components
• Currency in circulation
• Bankers deposits with RBI
• Other deposits with RBI
 Money Multiplier
• Money or credit multiplier equation:

• Where

M = supply of money
H = High powered money
Functions of a Central Bank
1. Bank of issue
2. Banker and Adviser to the Government
3. Custodian of cash Reserve of commercial
banks
4. Custodian and management of Foreign
exchange
5. Lender of the last resort
6. Clearing House for transfer and settlement
7. Controller of credit
Methods of credit control
Quantitative controls
1. Bank rate or discount rate policy
2. Open market operations
3. Variable reserve ratio

Selective or qualitative controls

1. Regulation of margin requirements
2. Regulation of consumer credit
continued…

4. Rationing of credit

5. Direct Action

6. Moral suasion

7. Publicity