Central University Of South Bihar

Assignment of Money and Banking

Submitted to Dr. Rikil Chyrmang

Submitted by Prabhat Kumar

Programme - M.A Economics

(First Semester)

Enrollment No CUSB1801212019

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Introduction

Money is a medium of exchange for goods and services another way we can say that money is
accepted material even a piece of paper, marking a promise which is used. Money is historically
an emergent market phenomenon establishing commodity money, but nearly all contemporary
money systems are based on fiat money. Fiat money, like any check or note of debt, is without
use value as a physical commodity. It derives its value by being declared by a government to
be legal tender; that is, it must be accepted as a form of payment within the boundaries of the
country, for "all debts, public and private”. Counterfeit money can cause good money to lose
its value.

FUNCTIONS OF MONEY

1) Money is a medium of exchange.

2) It is a store of value, sometime specified as a temporary store of value or temporary bode of

purchasing power.

3) It is standard of deferred payments.

4) It is a unit of account.

Narrow Money (M1)

At any point of time, the money held with the public has two most liquid components

 Currency Component: This consists of all the coins and notes in the circulation
 Demand Deposit Component: Demand Deposit component is the money of the general
public with the banks, which can be withdrawn by them using cheques, withdrawals
and ATMs.

The above two components i.e. currency component and demand deposit component of the
public money is called Narrow Money and is denoted by the RBI as M1.

Thus, M1 = Currency with the public + Demand Deposits of public in Banks. When a third
component viz. Post office Savings Deposits is also added to M1, it becomes M2.

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Growth Rate of narrow money (M1)

Growth rate of Narrow Money = (current Yr. M1- Base Yr. M1/Base Yr. M1)*100

Growth in narrow money

30.00
25.00 Growth in narrow
20.00 money

15.00 Linear (Growth in

narrow money)
10.00
5.00
0.00
1950-51

1971-72

1992-93

2013-14
1953-54
1956-57
1959-60
1962-63
1965-66
1968-69

1974-75
1977-78
1980-81
1983-84
1986-87
1989-90

1995-96
1998-99
2001-02
2004-05
2007-08
2010-11

2016-17
-5.00
-10.00
-15.00

Analysis of Growth rate of Narrow Money

As we have data since 1951-2018 the condition of India was not good after independence .in
the financial year 1950-51 the narrow money of India was 20.21 billion rupees. After that in
the financial year 1951-52the narrow money of India was 13.57 billion and the growth rate of
narrow money was -10.34 % which was very bad for the economy during that period there
was lack of financial inclusion. In the financial year1955-56 both foreign exchange reserve and
india’s external credit was very high for easy availability of required investment. There were
increase pressure on RBI to provide credit to the government.

In the financial year 1977 -78the narrow money of India was 143.88 billion and the growth
rate of narrow money -10.21% the economic condition of India was not healthy due to
demonetisation of high denomination notes rs1000, rs5000 and rs10000 effected. but in the
financial year 1979-80 the narrow money of India was 200 billion and the growth rate of narrow
money 20.18% in this year GDP growth rate was increased because this year witnessed a
turbulent phase for the Indian economy. Adverse weather condition caused record downfall in
foodgrains production.

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In the financial year 2016-17 the narrow money of India was 19004.85 billion rupees and the
growth rate of narrow money was 3.05% which was very bad for the economy due to
demonetisationd of rs1000, rs500 ceased to be a legal tender with effect from November
9,2016.

Since we know narrow money is the appropriate measure of money supply. It does not use the
term money for assets other than currency. In above chart we see that there are certain important
changes in their behaviour. During 1970- 1978 Indian was not healthy which is due to
continuously Decrease In percentage of circulation of narrow money.

Conclusion

Trend line narrow money is upward sloping.

Broad money M3

Broad money (M3) = Narrow money + Time Deposits of public with banks

Narrow money is the most liquid part of the money supply because the demand deposits can
be withdrawn anytime during the banking hours. Time deposits on the other hand have a fixed
maturity period and hence cannot be withdrawn before expiry of this period. When we add the
time despots into the narrow money, we get the broad money, which is denoted by M3.

M3 is a measure of broad money and includes currency with the public and deposits. The
Reserve Money factor shows the reserve money and includes required reserve and the excess
reserves of the banking system. If the reserve requirement as stipulated by the RBI increases,
the Reserve Money value will increase and the multiplier will fall. Similarly, if banks keep
more money as excess reserves, it will have an adverse effect on the money multiplier.

It is dependent on two variables, namely currency deposit ratio and reserve deposit ratio.

The major difference between the M1 and M3 is “Treatment of deposits with the banks”. If we
go a little deep, the M3 is the treatment of “Time Deposits” of the public, since demand deposits
are available against cheques and ATMs. When We add the Post Office Savings money also
into the M3, it becomes M4.

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Currently, Narrow Money (M1) and Broad Money (M3) are relevant indicators of money
supply in India. The RBI in all its policy documents, monthly Bulletins and other documents
shows these aggregates.

Growth Rate of Broad Money (M3)

Growth Rate = (M3 of current year – M3 Of Base Year/M3 of Base Year)*100

Growth in Broad Money Growth in Broad

Money
30.00 Linear (Growth in
Broad Money)
25.00

20.00

15.00

10.00

5.00

0.00
2010-11
1950-51
1953-54
1956-57
1959-60
1962-63
1965-66
1968-69
1971-72
1974-75
1977-78
1980-81
1983-84
1986-87
1989-90
1992-93
1995-96
1998-99
2001-02
2004-05
2007-08

2013-14
2016-17

-5.00

-10.00

-15.00

Analysis of broad money

In the financial year 1950-51 thee broad money was 23.52 billion rupees. But in the financial
year 1951-52 the broad money of India was 21.32 billion and the growth rate of broad money
was -9.14% .during that time the economic condition of India was….

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After that growth rate of broad money was continuously increased to till 1975 at 23.58% .
Firstly, from 1955 to 1970 below the potential line. And 1970 to 81 above the potential line
(trend line). And further in the period of 1981 to 1996 it increases and fluctuates over potential
line.

In the financial year 2016-17 the broad money of India was 12719.40 billion rupees and the
growth rate was 10.11% which was not good for economy due to demonetisation…...

Conclusion

Trend line of broad money is upward sloping.

Reserve Money (M0)

The other name of the Reserve Money is “High Powered Money” and also “Monetary Base”.
Reserve Money is all the Cash in the economy and denoted by M0. This has the following
components:

 Currency with the Public

 Other Deposits with the RBI
 Cash Reserves of the banks held with themselves
 Cash Reserves of the Banks held with RBI

We know that Cash Reserves are also of two types .

1) Required Reserves (RR) and

2) Excess Reserves (ER).

Required Reserves- RR are those reserves which the banks are statutorily required to keep
with the RBI. At present the Banks are required to keep 4.25% CRR (Cash Reserve Ratio) of
their total time and demand liabilities. All reserves excess of RR are called Excess Reserves.

Excess Reserves - ER are held with the Banks while RR is held with RBI. Banks hold the ER
to meet their currency drains i.e. withdrawal of currency by depositors.

Growth rate of Reserve Money (RM)

Gr. Rate of RM = (RM of Current Year – RM Of base year /RM Of Base Year)*100

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40.00
Growth in reserve money
30.00

20.00 Growth in reserve money

10.00
Linear (Growth in reserve
0.00 money)
1950-51
1953-54
1956-57
1959-60
1962-63
1965-66
1968-69
1971-72
1974-75
1977-78
1980-81
1983-84
1986-87
1989-90
1992-93
1995-96
1998-99
2001-02
2004-05
2007-08
2010-11
2013-14
2016-17
-10.00

-20.00

Analysis of Reserve money

We have data from 1950-2018 on the money supply. Source of data is RBI . in the financial
year 1950-51 the reserve money of India was 14.94 billion rupees. in the next year 1951-52 the
reserve money decreased by -9.17% and total value of reserve money was 13.57 billion
rupees.in the financial year 1952-53 the reserve money of India was 13.34and the growth rate
of reserve money increased by -1.69% .in the financial year 1955-56 the reserve money was
16.76 billion rupees and the growth rate of reserve money was increased by 13.86%. In 1956-
57 the reserve money was 17.34 billion rupees but the growth rate of reserve money was
suddenly fall by 3.46%.

In the year 1957-72 reserve money was increased (18.04 billion rupees to 53.82 billion rupees)
during this year growth rate of reserve money was decreasing and increasing at slowly rate but
in the financial year 1973-74 reserve money was 72.73 billion dollar and the growth rate of
reserve money was 20.55% due to selective credit control was followed as remedies to
overcome a dilemma of controlling inflationary pressure and need for financing development
expenditure and nationalisation of banks were increased.14 banks were nationalised.

In the financial year 1976-77 the reserve money of India was 97.98 billion rupees and the
growth rate of reserve money 25.49% but in the financial year 1977-78 the reserve money was
109.41 billion rupees and the growth rate of reserve money was fall which was 11.67% .in the
financial year 1978-79 the reserve money was140.82 billion rupees and the growth rate of
reserve money was increased by 28.71% .in the financial year 1996-97 the reserve money of
India was 1999.85 billion rupees and the growth rate of reserve money was 2.84% which was
very bad for the economy during this year there were several crisis in the economy.

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In the financial year 2007-08 the reserve money of India was 9282.75 and the growth Rate of
reserve money was 30.95 which was the highest growth rate of economy and GDP also
increased.

In the financial year 2011-12 and 2012-13 the reserve money of India was 14263.44 and
15148.86 billion rupees and the growth rate of reserve money of India was decreased 3.60% &
6.21% during this year saving bank deposite interest rate for resident Indians deregulated from
October25,2011. New category of NBFC-MFI introduced under the regulatory preview of RBI.

In the financial year 2016-17 the reserve money of India was 19004.85 billion rupees and the
growth rate of reserve money was 19004.85 billion and the growth rate of reserve money was
-12.85 % during this year growth rate was very low by demonetisation.

But in year 2017-18 reserve money of India was 24187.79, which was very high since 1951 to
till 2018 and the growth rate also increased in this year due to implementation of GST.

Conclusion

The trend line of growth rate of the reserve money is upward sloping and its value varies from
5 to 15

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Analysis of Table 2

RBI controls money supply in the market through various tools and measures.

Cash reserve ratio- THE CRR IS AN EFFECTIVE INSTRUMENT OF CREDIT

CONTROL . IT refers to the cash which bank have to maintain with the RBI as a certain
percentage of their demand and the time liabilities under the RBI Act 1962 the RBI is
empowered to determine CRR for the commercial bank in the range of 3 per cent to 15
per cent for the aggregate demand and time liabilities.

A high CRR implies less money to lend, thus contraction in money supply and A high CRR
implies less money to lend, thus contraction in money supply.

 CRR - Cash Reserve Ratio is the proportion of total deposits that the banks are
required to maintain with the RBI has reserves. By changing this ratio RBI can
influence the amount of cash that is available for the banks to lend. A high CRR
implies less money to lend, thus contraction in money supply. A high CRR implies
less money to lend, thus contraction in money supply. Thus, expanding the money
supply.

Analysis
According to data the highest cash reserve Ratio (CRR) is 11 % in 29 April, 1998.
The lowest value of CRR is 2% in 1935.

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 Open Market Operation - It is the sale/purchase of the government bonds and
securities in the market to adjust the rupee liquidity. For example, when RBI sells
government bonds/securities, people buy them against money (say cash) this leads
to a contraction in money supply as money moves from public to RBI. In case of
purchases, money supply expands.

 Repo Rate - It is the rate at which the central bank (RBI) lends money to
commercial banks. If RBI increases this repo rate, it becomes costlier for the
commercial banks to borrow money from RBI. They are left with lesser amount
of money to lend to the general public. Thus the money supply contracts. A low
repo rate helps commercial bank avail loans at cheaper prices, thus expanding the
money supply.

 Statutory Liquidity Ratio - The percentage of total deposits that have to be

present as liquid cash within the banks. If the banks fail to maintain this, there
would be a penalty on them.

 Bank Rate - When banks want to borrow long term funds from RBI, it is the
interest rate which RBI charges from them. Current Bank rate is 7% w e f from
June 2016. The bank rate is not used to control money supply these days although
it provides the basis of arriving at lending and deposit rates. However, if a bank
fails to keep SLR or CRR then RBI will impose penalty & it will be 300 basis
points above bank rate.

Analysis
Bank Rate was 3.50% in July 5,1935 and reduced to 3 % in 28/11/1935. This
reduction entails to increase in money Supply. Again Bank rate change takes place
in 15/07/1951. It was then 3.5%. Highest bank rate was 12% in the year 1991 and
remain same for long period

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35.00 Growth Rate of Reserve Money ,narrow money
Growth in reserve money
30.00
25.00 Growth in narrow money
20.00
15.00 Growth in Broad Money
10.00
Linear (Growth in reserve
5.00
money)
0.00
Linear (Growth in narrow
-5.00

1983-84
1950-51
1953-54
1956-57
1959-60
1962-63
1965-66
1968-69
1971-72
1974-75
1977-78
1980-81

1986-87
1989-90
1992-93
1995-96
1998-99
2001-02
2004-05
2007-08
2010-11
2013-14
2016-17
money)
-10.00 Linear (Growth in Broad
-15.00 Money)

-20.00

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