Supply of Money

Supply of Money

Money supply means the total amount of money in an economy. It refers to the amount of money which is in circulation in an economy at any given time. Money supply plays a crucial role in the determination of price level and interest rates. Money supply viewed at a given point of time is a stock and over a period of time it is a flow.

Meaning of Money Supply

In India, currency notes are issued by the Reserve Bank of India (RBI) and coins are issued by the Ministry of Finance, Government of India (GOI) . Besides these, the balance is savings, or current account deposits, held by the public in commercial banks is also considered money. The currency notes are also called fiat money and legal tenders.

Money supply is a stock variable. RBI publishes information for four alternative measures of Money supply, namely M₁,M₂,M₃ and M₄.

M₁ = Currency, coins and demand deposits

M₂ = M₁ + Savings deposits with post office savings banks

M₃ = M₂ + Time deposits of all commercial and cooperative banks

M₄ = M₃ + Total deposits with Post offices.

M₁ and M₂ are known as narrow money

M₃ and M₄ are known as broad money

The gradations are in decreasing order of liquidity.

Currency Symbol ₹

The new symbol designed by D.Udaya Kumar, a post graduate of IIT Bombay was finally selected by the Union cabinet on 15th July, 2010. The new symbol, is an amalgamation of Devanagri ‘Ra’ and the Roman ‘R’ without the stem. The symbol of India rupee came into use on 15thJuly,2010. After America, Britain, Japan, Europe Union. India is the 5th country to accept a unique currency symbol.

Determinants of Money Supply

1. Currency Deposit Ratio (CDR); It is the ratio of money held by the public in currency to that they hold in bank deposits.

2. Reserve deposit Ratio (RDR); Reserve Money consists of two things (a) vault cash in banks and (b) deposits of commercial banks with RBI.

3. Cash Reserve Ratio (CRR); It is the fraction of the deposits the banks must keep with RBI.

4. Statutory Liquidity Ratio (SLR); It is the fraction of the total demand and time deposits of the commercial banks in the form of specified liquid assests.