MONEY SUPPLY IN INDIA

In economics, the money supply or money stock, is the total amount of monetary assets available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions). Money supply data are recorded and published, usually by the government or the central bank of the country. Public and private sector analysts have long monitored changes in money supply because of its effects on the price level, inflation, the exchange rate and the business cycle. That relation between money and prices is historically associated with the quantity theory of money. There is strong empirical evidence of a direct relation between money-supply growth and long-term price inflation, at least for rapid increases in the amount of money in the economy. That is, a country such as Zimbabwe which saw rapid increases in its money supply also saw rapid increases in prices (hyperinflation). This is one reason for the reliance on monetary policy as a means of controlling inflation. The nature of this causal chain is the subject of contention. Some heterodox economists argue that the money supply is endogenous (determined by the workings of the economy, not by the central bank) and that the sources of inflation must be found in the distributional structure of the economy. In addition, those economists seeing the central bank's control over the money supply as feeble say that there are two weak links between the growth of the money supply and the inflation rate. First, in the aftermath of a recession, when many resources are underutilized, an increase in the money supply can cause a sustained increase in real production instead of inflation. Second, if the velocity of money, i.e., the ratio between nominal GDP and money supply, changes, an

increase in the money supply could have either no effect, an exaggerated effect, or an unpredictable effect on the growth of nominal GDP.

COMPONENTS OF MONEY SUPPLY

Components of the money supply of India in Billions of Rupee for 19502013 The Reserve Bank of India defines the monetary aggregates as:] Reserve Money (M0): Currency in circulation + Bankers deposits with the RBI + Other deposits with the RBI = Net RBI credit to the Government + RBI credit to the commercial sector + RBIs claims on banks + RBIs net foreign assets + Governments currency liabilities to the public RBIs net non-monetary liabilities. M1: Currency with the public + Deposit money of the public (Demand deposits with the banking system + Other deposits with the RBI). M2: M1 + Savings deposits with Post office savings banks. M3: M2+ Time deposits with the banking system = Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange assets of the banking sector + Governments currency liabilities to the public Net non-monetary liabilities of the banking sector (Other than Time Deposits). M4: M3 + All deposits with post office savings banks (excluding National Savings
Certificates).

Fractional-reserve banking
The different forms of money in government money supply statistics arise from the practice of fractional-reserve banking. Whenever a bank gives out a loan in a fractionalreserve banking system, a new sum of money is created. This new type of money is

what makes up the non-M0 components in the M1-M3 statistics. In short, there are two types of money in a fractional-reserve banking system: Central bank money (obligations of a central bank, including currency and central bank depository accounts) Commercial bank money (obligations of commercial banks, including checking accounts and savings accounts) In the money supply statistics, central bank money is MB while the commercial bank money is divided up into the M1-M3 components. Generally, the types of commercial bank money that tend to be valued at lower amounts are classified in the narrow category of M1 while the types of commercial bank money that tend to exist in larger amounts are categorized in M2 and M3, withM3 having the largest. A reserve requirement is a ratio a bank must maintain between deposits and reserves. Reserve requirements do not apply to the amount of money a bank may lend

out.

INDIA MONEY SUPPLY M3

Money Supply M3 in India increased to 87567.88 INR Billion in July of 2013 from 85930 INR Billion in June of 2013. Money Supply M3 in India is reported by the Reserve Bank of India. India Money Supply M3 averaged 13850.82 INR Billion from 1972 until 2013, reaching an all time high of 87567.88 INR Billion in July of 2013 and a record low of 123.52 INR Billion in January of 1972. India Money Supply M3 includes M2 plus long-term time deposits in banks. This page contains - India Money Supply M3 - actual values, historical data, forecast, chart, statistics, economic calendar and news.

M ON E Y

L AS T

PREVIOUS

HIGHEST

LOWEST

FORECAST

UNIT

TR E N D

FOREIGN EXCHANGE RESERVES

15102.00

2013-07-31

14760.70

15102.00

23.86

15130.25

2013-08-31

INR BILLION

INTERBANK RATE

7.48

2013-06-15

7.31

12.97

3.10

7.25

2013-07-31

PERCENT

MONEY SUPPLY M1

19298.70

2013-07-31

19197.30

19298.70

80.15

19202.14

2013-08-31

INR BILLION

MONEY SUPPLY M2

19349.17

2013-07-31

19247.67

19349.17

1127.49

19323.00

2013-08-31

INR BILLION

MONEY SUPPLY M3

87567.88

2013-07-31

85930.00

87567.88

123.52

88879.83

2013-08-31

INR BILLION

INTEREST RATE

7.25

2013-07-30

7.25

14.50

4.25

7.50

2013-08-31

PERCENT

Notes
Money Supply is the aggregate amount of monetary assets available in a country at a specific time. According to the Financial Times, Money Supply M0 and M1, also known as narrow money, includes coins and notes in circulation and other assets that are easily convertible into cash. Money Supply M2 includes M1 plus short-term time deposits in banks. Money Supply M3 includes M2 plus longer-term time deposits. Money Supply includes M3 plus other deposits. And the term broad money is used to describe Money Supply M2, M3 or M4.

INDIA MONEY SUPPLY M1

Money Supply M1 in India increased to 19298.70 INR Billion in July of 2013 from 19197.30 INR Billion in June of 2013. Money Supply M1 in India is reported by the Reserve Bank Of India. India Money Supply M1 averaged 3691.20 INR Billion from 1972 until 2013, reaching an all time high of 19298.70 INR Billion in July of 2013 and a record low of 80.15 INR Billion in January of 1972. This page contains - India Money Supply M1 - actual values, historical data, forecast, chart, statistics, economic calendar and news. 2013-08-11

M ON E Y FOREIGN EXCHANGE RESERVES INTERBANK RATE MONEY SUPPLY M1 MONEY SUPPLY M2 MONEY SUPPLY M3 INTEREST RATE

L AS T 15102.00 7.48 19298.70 19349.17 87567.88 7.25

2013-07-31 2013-06-15 2013-07-31 2013-07-31 2013-07-31 2013-07-30

PREVIOUS 14760.70 7.31 19197.30 19247.67 85930.00 7.25

HIGHEST 15102.00 12.97 19298.70 19349.17 87567.88 14.50

LOWEST 23.86 3.10 80.15 1127.49 123.52 4.25

FORECAST 15130.25 7.25 19202.14 19323.00 88879.83 7.50

2013-08-31 2013-07-31 2013-08-31 2013-08-31 2013-08-31 2013-08-31

UNIT
INR BILLION PERCENT INR BILLION INR BILLION INR BILLION PERCENT

TR E N D

VIEW MORE INDICATORS

Notes
Money Supply is the aggregate amount of monetary assets available in a country at a specific time. According to the Financial Times, Money Supply M0 and M1, also known as narrow money, includes coins and notes in circulation and other assets that are easily convertible into cash. Money Supply M2 includes M1 plus short-term time deposits in banks. Money Supply M3 includes M2 plus longer-term time deposits. Money Supply includes M3 plus other deposits. And the term broad money is used to describe Money Supply M2, M3 or M4.

DIFFERENT MEASURES OF MONEY SUPPLY

Money as defined above yields the most narrowly defined measure of money supply known as Ml. This Ml measure of money supply most closely corresponds to the ordinary definition of money (i.e., something that is commonly accepted in payment of goods and services).

THE M1 MEASURE OF MONEY SUPPLY.

As pointed out earlier, Ml is the narrowest measure of money supply and closely corresponds to the common definition of money. M1 monetary aggregate can be defined as follows: Currency simply consists of notes (bills of different denominations) and coins. Currency currently accounts for less than one-third of the M1 money supply in the United States. Checkable deposits make up nearly two-thirds of the M1 money supply. The checkable deposits category itself is normally split into demand deposits and other checkable deposits. While both these components of checkable deposits can be used to write checks to make payments for goods and services, there is an important distinction between demand and non-demand checkable deposits. Demand deposits are normally maintained by businesses and carry no interest payments. They are termed demand deposits because the entire amount in a demand deposit is payable to the deposit holder or a designated person on demand. Moreover, some banks charge a service fee from

holders of demand deposits, fees that are often waived if the amount in a demand deposit exceeds a certain level. The category "other checkable deposits" includes different kinds of checkable deposits that pay interest to the deposit holdersNOW (negotiated order of withdrawal) accounts, super-NOW accounts and ATS (automatic transfer from savings) accounts. Therefore, if non-demand checkable deposits can be used both to write checks and to earn interest, why maintain checkable deposits in the demand deposit form? The answer lies in a restriction associated with non-demand checkable depositswhile balances in demand deposits are payable on demand, checks written on balances in non-demand checkable deposits are negotiated orders of withdrawal. That is, the payment may be delayed for a while, depending on the amount of withdrawal. Even though most people have never experienced this delay in payments from an interest bearing non-demand checking account, it can happen in extreme circumstances. Because businesses deal in larger amounts of money, they cannot entertain this uncertainty and have to maintain demand deposits. Traveler's checks constitute a very small fraction of the M1 money supplyless than 1 percent of the total Ml. Traveler's checks can be used to make payments even outside one's home country, as the issuer of the traveler's checks guarantees payments to the individual or business that receives them (so long as they are properly signed). One can thus consider traveler's checks as checks with added features designed to increase widespread acceptance. One can now see how all three components of the M1 measure of money supply currency, checkable deposits and traveler's checksare clearly money in the ordinary sense of the term, as they can be directly used in payment of goods and services. One warning about money as it is defined aboveit is not universally acceptable (especially beyond a nation's borders). To make the currency universally acceptable within a country, the government of that country usually provides its currency with legal backing. In the United States, for example, every denomination of paper currency carries the following notice: "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE." Thus, declining to accept a genuine Federal Reserve note is literally in violation of the federal law. However, this doesn't mean that U.S. currency would automatically have value in foreign countries, nor does it mean that the currency of

other nations is valid in the United States. In fact, stores in U.S. cities bordering Canada often state that Canadian money is not accepted without violating any rules.

THE M3 MEASURE OF MONEY SUPPLY

The M3 measure of money supply further broadens the M2 monetary aggregate by adding additional assets that are less liquid than those included in Ml and M2. Formally, M3 is defined as follows: Many of the items that are added to the M2 measure of money supply to arrive at the M3 monetary aggregate are similar in name to those added to the Ml measure to arrive at the M2 measure, except that the maturity periods associated with the Ml measures are shorter. The four items that are added to the M2 measure to arrive at the M3 measure are briefly discussed below.

MONEY MARKET MUTUAL FUND SHARES (INSTITUTIONAL).

Money market mutual fund shares that are added to M2 to arrive at M3 are the same as those that are added to the Ml measure to arrive at the M2, with a minor difference. Money market mutual fund shares held by institutions also are included when the M3 measure of money supply is calculated, whereas only money market mutual fund shares held by noninstitutional investors were included when the M2 measure of money supply was constructed.

CONSOLIDATION ADJUSTMENT.
An adjustment, similar to that made to the M2 measure of money supply, is made to the M3 monetary aggregate to avoid double counting. In sum, one can consider the M3 monetary aggregate to be lower on the liquidity scale than the M2 measure, when all components of M3 are considered together.

WHICH MONETARY AGGREGATE DOES THE FED USE?

As was discussed above, the M2 and M3 measures of money supply are successively lower on the liquidity scale than M1. While M1 closely corresponds to the ordinary notion of money, M2 and M3 capture "moneyness" not included in Ml. To monitor the supply of money in the economy, the Federal Reserve looks at all three measures of the money supply but tends to focus on the M2 measure. There is a considerable debate among economists regarding the value of the Fed's emphasis on the M2 monetary aggregate. While growth rates of all three measures of money supply do have a tendency to move together, there also exist some glaring discrepancies in the movements of these monetary aggregates. For example, according to the Ml measure, the growth rate of money supply did not accelerate between 1968 and 1971. However, if the M2 and M3 measures are used as the guide, a different story emergesthey show a significant acceleration in the growth rate of the money supply. Because of this kind of divergent behavior, the battle to find the true measure of money supply continues. Often a weighted average of monetary aggregatesone that captures the moneyness in all assets included in M2 and M3 (remember, Ml is already money in the strict sense of the term)has been suggested to arrive at the true measure of the money supply.

Sources and Deployments of Money Supply in India

As I posted a while back, it is useful to look at money supply in various ways. I had looked at relationship between M1 and M3 andmoney multiplier. But where does money supply come from?And where does it go? These are all important issues to understand. First which measure of money supply RBI follows? As I said, there are 4 measures: M1: Currency with the public + 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). RBI reports both M1 and M3. As M3 is broader in scope, it is taken as measure of money supply in India. Now let us look at components and deployments of M3. Components of Money Supply: If we see the components of money supply, we can see bank deposits form bulk of the money supply. Within deposits, it is time deposits which form around 3/4th of the money supply. The share of time deposits has declined from 74.7% in Oct Dec 09 to 74% on 9 April 2010. The share of demand deposits has risen from 11.3% in Oct Dec 09 to 12% on 9 April 2010. The percentage contributions of each item in components of money supply do not change much in the year. Components of Money Supply (in %) As on April 09 July 09 Oct 09 Jan 10Apr 9, June 09 Sep 09 Dec 09 Mar 10 2010 Currency with the public 14.1 Demand deposits with banks Other deposits with RBI 11.4 13.6 11.6 13.9 11.3 12.0 0.2 0.1 74.7 100.0 0.1 74.7 100.0 0.1 74.2 100.0 12.0 0.1 74.0 100.0 14.0 13.9

Time deposits with banks 74.3 Money Supply 100.0

As both demand and time deposits form around 85% of money supply, whatever the growth in deposits, is also the growth in money supply. RBI changes both these targets together and keeps them near similar.

Deployments of Money Supply: There are 5 categories of money supply deployments: 1. Net bank credit to government (A): It is further divided into two categories: RBIs credit to government: RBI lends to government for short-term expenditure management. Other banks credit to government This represents the total of commercial and cooperative banks investments in government securities, including treasury bills. 2. Bank credit to commercial sector (B): It is also divided into two categories RBIs credit to commercial sector: This is the aggregate of RBI investments in shares, bonds of financial institutions like ARDC, DICGC, debentures of land mortgage banks, loans and advances to financial institutions like IDBI, IFCI and state financial corporations, and internal bills purchased and discounted. Other banks credit to commercial sector: Loans given by commercial and cooperative banks to commercial sector. Also includes investments by banks in securities (shares, bonds etc) issued by commercial sector 3. Net foreign exchange assets of banking sector (C): Sum of RBIs foreign exchange and foreign assets held by commercial and cooperative banks. The percentage of foreign assets held by banks is very small. RBI holds majority of the foreign assets as part of its forex reserve. 4. Governments currency liabilities to the public (D): These comprise the holdings of one rupee notes, rupee coins and small coins with the public. 5. Banking sectors net non-monetary liabilities other than time deposits (E): This includes capital and reserves, branch adjustments, and bills payables; the liabilities are net of investments in fixed assets, and branch adjustments. This item is subtracted from the sum of the above 4 items Let us see how the money supply adds up using these five categories.

Deployments of Money Supply (in %) Apr 09 Jul 09 Oct 09 Jan 10 Jun Sep 09 Dec 09 Mar10 09 Net bank credit to government (A) of which RBIs net credit to government Other banks credit to government 0.9 26.5 0.6 27.7 1.1 27.4 2.3 26.8 2.3 27.0 27.6 28.3 28.4 29.1 As on Apr 9, 2010

29.3

Bank credit to commercial sector 61.2 (B) Net foreign exchange assets of banking sector (C) 27.1

60.8

60.7

61.7

61.8

27.2

26.0

24.2

22.3

Governments currency liabilities 0.2 to the public (D) Banking sectors net nonmonetary liabilities other than time deposits (E) Money Supply (A+B+C+D-E) 16.1

0.2

0.2

0.2

0.2

16.5

15.3

15.3

13.6

100

100

100.0

100.0

100

If we analyse where money supply is going, around 60% goes as credit to commercial sector. The percentage of bank credit to commercial sector declines from 61% in Apr-Jun 09 to 60.7% in Oct-Dec 09. However, it has improved steadily since then with figure increasing to 61.8% on 9 April 2010. This is in line with growth in credit which started picking up from Nov-09 onwards. With Indian economy expected to grow, the share of this category is likely to increase.

Another trend we see is the persistent increase of Net bank credit to government. Within this category, the other banks credit to government has declined but RBIs credit to government has increased. Contribution of other Banks credit to government increased from 26.5% in Apr-Jul 09 to 27.7% in Jul-Sep 09. This was because of record fiscal deficit in FY 2009-10. The government had front loaded its borrowing program hence we see a rise in banks credit to government in Jul-Sep 09. The percentage then declines to 26.8% in Jan-Mar 10. As bulk of the borrowing was completed in H1 2009-10, there was not much stress on monetary sources in the second half. It has again increased to 27.0% on 9 April 2010 as again the borrowing program is front-loaded in first half of 2010-11. RBIs credit to government has increased from 0.6% in Jul- Sep 09 to 2.3% on 9 April 2010. Therefore, the total funds used by government have risen from 27.6% in Apr-Jun 09 to 29.3% on 9 April 2010. The government continues to use higher percentage of financial resources available in the economy in every quarter. Therefore, it will be interesting to see the deployments of money supply between government and private sector. In 2009-10, because of the global crisis private sector was not as aggressive in credit. In 2010-11, the situation is likely to change with high growth expected in Indian economy. As government borrowing program is still large and front loaded in first half 2010-11, banking funds to private sector could be constrained.