CONTOURS OF MONEY, BANKING

& MONETARY POLICY

Session I

OUTLINE

Dr. Amaresh Samantaraya

Relevance of the Course

Concepts of Money,
Banking & Monetary
Policy
Course Design, Schedules
& Evaluation

RELEVANCE OF THE COURSE

Dr. Amaresh Samantaraya

Day-to-day business
decisions
Short-term decisions
Long-term decisions
3

WHAT IS MONETARY POLICY?

WHAT IS MONETARY POLICY

Dr. Amaresh Samantaraya

Central Bank
(RBI)s decision
on policy rates

Having
implications for
consumption &
investment
decisions

Ultimately
influencing real
activity and
prices

HOW MONETARY POLICY IS

RELEVANT TO THE ECONOMY

PER CAPITA INCOME IN INDIA

40000

35000

30000

25000

20000

15000

10000

5000

(LONG TERM)

PER CAPITA INCOME IN INDIA

12500

12000

11500

11000

10500

10000

9500

9000

(SHORT TERM)

CONCEPT - MONEY

CONCEPT OF MONEY
What

is Money?
Dr. Amaresh Samantaraya

Some people use money to refer income

Some others use it to refer wealth
Money is something which is used for payment
for buying goods and services, and settlement of
debt
Money is a Stock concept measured as
outstanding as a particular date

10

EVOLUTION OF MONEY
Commodity money sea-shells, strings of beads
or precious metals like gold and silver
Fiat money a paper currency decreed by
government as legal lender
Cheques
Electronic payments
E-money

Dr. Amaresh Samantaraya

Credit and debit cards

Smart card
11

FUNCTIONS OF MONEY MEDIUM OF

EXCHANGE
Barter system and double-coincidence of wants
Requirements

Must be easily standardized, making it simple to

ascertain it value
Must be widely accepted
Must be divisible so that easy to make change
Must be easy to carry
Must not deteriorate quickly

Dr. Amaresh Samantaraya

12

FUNCTIONS OF MONEY UNIT OF

ACCOUNT
Used to measure value of goods and services
In a barter economy,

Using money as a unit of account reduces

transaction cost by reducing the number of
prices that need to be considered

Dr. Amaresh Samantaraya

If there are 3 goods, there will be 3 relative prices

3C
2
If there are 10 goods, there will be 45 relative prices
10C
2
If there are 100 goods, there will be 4950 relative
prices 100C2
If there are 1000 goods, there will be 4,99,500
relative prices 1000C2

13

FUNCTIONS OF MONEY STORE OF VALUE

Repository of purchasing power saving
purchasing power from the time income is
received until the time it is spent
Money is not unique store of value many other
forms of wealth like shares, bonds, land,
jewellery

Some have advantages over money as they give

return, while money value depreciates with inflation

Advantage of money vis--vis other assets as a

store of value is its liquidity ease and speed
with which an asset can be converted into
medium of exchange

Dr. Amaresh Samantaraya

14

MEASURING MONEY
Aggregate money stock (supply) in an economy
reflects aggregate purchasing power
Behaviour of monetary aggregates reflects
variation in aggregate demand in an economy
Financial sector reforms and institutional
changes necessitates changing the components
which are included in money
Example,

Dr. Amaresh Samantaraya

FCNR(B) deposits, Certif. of Deposits, call money

IMF manual - Monetary and Financial Statistics

provides the benchmark for compilation

15

REVISION OF MONETARY AGGREGATES IN

INDIA
First Working Group on Money Supply (FWG)
1961
Second Working Group on Money Supply (SWG)
1977
Third Working Group on Money Supply:
Analytics and Methodology of Compilation (TWG)
1998 (Chairman: Dr. YV Reddy)

Dr. Amaresh Samantaraya

16

MEASUREMENT OF MONEY IN INDIA

M0 = Currency in Circulation + Bankers Deposits

with RBI + Other Deposits with RBI Reserve money

M1 = Currency with Public + Current Deposits with

Banking System + Demand Liabilities Portion of
Saving Deposits with the Banking System + Other
Deposits with RBI

M2 = Currency with Public + Current Deposits with

Banking System + Saving Deposits with the Banking
System + Certificate of Deposits + Term Deposits
(excluding FCNR(B)) with maturity upto 1-year with
banking system + Other Deposits with RBI

Dr. Amaresh Samantaraya

17

MEASUREMENT OF MONEY IN INDIA

Dr. Amaresh Samantaraya

M3 = Currency with Public + Current Deposits

with Banking System + Saving Deposits with the
Banking System + Certificate of Deposits + Term
Deposits (excluding FCNR(B)) with Banking
System + Call borrowings from Non-depository
Financial Corporations by the Banking System +
Other Deposits with RBI

18

MAJOR SOURCES OF MONEY SUPPLY

Credit to the Government by the banking system
Credit to the commercial sector by the banking
system
Net foreign exchange assets of the banking sector
Governments currency liabilities to the public

Dr. Amaresh Samantaraya

19

CONCEPT - BANKING

BASIC BANKING
Banks make profit by selling liabilities with one
set of characteristics (a particular combination of
liquidity, risk, size and returns) & using the
proceeds to buy assets with a different set of
characteristics asset transformation
Banks borrow short and lend long banks make
long-term loans and funds them by issuing shortdated deposits
A security a claim on issuers future income or
assets
They also provide a host of services

Dr. Amaresh Samantaraya

21

BALANCE SHEET OF SBI IN 2010

Liabilities

Assets
Amount

Amount

6.3
653.1
8041.2
1030.1

Total

10534.1 Total

803.4

Cash in Hand
Balances with RBI
Balances with banks
Money at call-short
notice
Bal. with banks abroad
Investments
Advances
Fixed Assets
Other Assets

68.4
544.5
121.5

Dr. Amaresh Samantaraya

Capital
Reserves & Surplus
Deposits
Borrowings
Other liabilities &
provisions

58.8
168.6
2857.9
6319.1
44.1
351.1
10534.1
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BANK AS A FINANCIAL INTERMEDIARY

Size transformation
Maturity
transformation

Dr. Amaresh Samantaraya

Asset-liability
transformation

Risk diversification
23

COURSE DESIGN & SCHEDULES

Dr. Amaresh Samantaraya

Module 1

Concepts of money and banking: definition and

measurement
Role of money and banking in the overall economy
Demand for & supply of money

Module 2

Overall monetary policy framework

Monetary policy strategy International perspective
Monetary transmission mechanism
Monetary policy operating procedure

25

Dr. Amaresh Samantaraya

Module 3

Module 4

Dynamics in determination of bank credit and monetary policy

asymmetry
NPAs in Bank Issues & Challenges
Inflation targeting as the new monetary policy framework
Monetary policy committee Recent institutional innovation

Inflation dynamics in India

Estimation of money-multiplier model of money supply in India
Estimation of money demand function for India
Empirical analysis of monetary transmission mechanism in
India
Empirical analysis of current monetary policy operating
procedure in India
Empirical analysis of bank credit behaviour in India
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Dr. Amaresh Samantaraya

SCHEDULE
Lectures/Presentations

Date

Classes commence on
Lectures I - 8 Sessions
Lectures II 4 Sessions

January 11, 2016

January 11-14, 2016
February 20-21, 2016

Lectures III 1 Session

Project Presentations
3 Sessions

March 12, 2016

March 12-13, 2016

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Dr. Amaresh Samantaraya

SCHEDULE
Tests

Date

Quiz Test - 1
Quiz Test - 2
Mid-term Test

January 12, 2016

January 14, 2016
February 3-6, 2016

Quiz Test - 3
Due date for Submission of
Project Report

February 21, 2016

March 15, 2016

End-Semester Test

March 24-25, 2016

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Dr. Amaresh Samantaraya

PROJECT
1.

2.

3.

4.

5.

6.

TOPICS

Inflation dynamics in India: Empirical

evidences
Empirical analysis of behavior of bank credit in
India
Empirical analysis of monetary transmission
mechanism in India
Estimating demand for money equation for
India
Empirical analysis of current monetary policy
operating procedure in India
Empirical verification of money-multiplier
model of money supply in India

29

Dr. Amaresh Samantaraya

EVALUATION

Mid-term
Test (30)
End-term
Test (30)

Project
Work (20)
Presentation
Write-up

Quiz (15)
CP (5)

30

31

Dr. Amaresh Samantaraya

ANY QUERY/SUGGESTION?