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- Money is anything that serves as a commonly accepted medium of exchange. Money also acts as a unit of value and a store of value. In past, commodities such as salt and oxen were used as money but they failed to serve the purpose well. Latter, they were replaced by precious metals such as gold, silver, etc. However, they too did not serve the purpose well. All these were replaced by paper money as it has the basic features of good money, i.e. portability, divisibility, durability, uniformity and storability.
- Determining what should be included in the money supply is not as easy as it appears. Money is sometimes defined as anything generally acceptable as a medium of exchange. Four definitions of money are commonly used — Ml to M4. Ml (known as narrow money) is made up of currency with the public plus demand deposits with the banking system plus other deposits with the RBI. M2 holds Ml plus post office savings bank deposits. M3 (known as broad money) includes Ml plus time deposits with the banking system. And finally M4 includes M3 + total post office deposits (excluding national savings certificates).
- The Reserve Bank of India (RBI) issues money in the form of Ovo rupee notes and above. The central government also issues money in the form of one-rupee notes, coins and small coins. The RBI currency plus the Government money constitutes the monetary base, which is known as High Powered Money. The RBI currency together with the Government money with the commercial banks is treated as Vault Cash. The deposits of the commercial banks comprise of the balances maintained by the banks with the RBI, This is to ensure that the commercial banks can meet all demands for withdrawals on the part of their depositors. The banks may also choose to hold reserves over and above the statutory minimum, known as the sexcess reserves', The cornmercial banks are required to maintain with the RBI a minimum of Cash Reserve Ratio (CRR) as specified by the RBI on a fortnightly basis.
- Commercial banks have the ability to multiple the money supply. The money supply multiplier depends on the Cash Reserve Ratio (CRR) specified by the RBI and deposit ratio. CRR specifies the percentage of deposits that every commercial bank must keep on deposit with the Reserve Bank of India. In its simplest form, the money multiplier approach is based on Ms = m. H equation, where m is the money multiplier and Ms is the broad money (MB) and H is the high-powered money. However, m is equal to c + l/c + r where c is the currency deposit ratio and r is the reserve ratio, Currency deposit ratio depends on the attitude of the people. But, reserve requirement is at the control of the RBI. Thus, RBI changes the reserve ratio in order to manipulate the money supply in the economy.
- ???????????????The money supply in an economy is determined by the behavior of public in depositing their income with the bank, the lending behavior of commercial banks, reserve ratio specified by the RBI and some other factors. The supply of and demand for money combinely determine the equilibrium of money markets. The money markets will be in equilibrium when the quantity of real balances demanded equals the quantity supplied.
- ???????A well-developed financial system is very essential for the smooth functioning of any economy. One set of important statistical indicators that is used to look at the financial development of a country is financial development ratios. These ratios are (i) Finance ratio, (ii) Financial interrelations ratio, (iii) New issue ratio, and (iv) Intermediation ratio. Finance ratio is the ratio of total financial claims issued during the year to national income of that year. Financial interrelation ratio is the ratio of financial claims issued to net physical capital formation. New issue ratio is the ratio of primary (new) issues by the non-financial sector to the net physical capital formation. And intermediation ratio is the ratio of secondary issues to primary issues.