Wednesday, June 13, 2018

MONETARY SYSTEM P2


HIGH POWER MONEY/RESERVE MONEY/PRIMARY MONEY

Current accounts cannot be opened in
Post Offices

Types of accounts that can be opened are:-
o  Savings account
o  Fixed Deposit
o  Recurring deposit




TD + DD = Total Bank Deposits




Government had appointed a committee for revising the measures of Money Supply

Committee was known as working group for the revision of Monetary Aggregates. The Chairman of the committee was Mr Y.V. Reddy



   It is denoted by H or M0
   In simple terms it is currency held by public and banks
   It is called reserve money as banks have to keep reserves with RBI and this is the reserve money
   It is known as primary money as currency is called primary money and deposit is called secondary money. H includes currency only.



H or M0 is the total amount of money held by public and banks. Only the money held by government is excluded here.



H = C + R + OD R = Cash reserves of Banks
Monetary System in India

   In India currency is printed as per the provisions of Minimum Reserve
System.
   RBI has to maintain reserves of 200 crore in the form of
o Gold                                  -             has to be at least 115 crore
o Foreign Securities.          -             No minimum requirement
   RBI can print unlimited currency against the backing of Gold, Foreign
Securities and Government Securities
   Till date RBI has printed 14.2 lakh crore
   Government borrows from RBI due to Deficit Financing.





Relation between Money Supply
& High Powered Money

Money Supply = M x H

M = Money Multiplier
Its value depends on credit creation of banks means the more credit the bank can create more will be the money multiplier.

Credit Creation Capacity depends on:- o Banking habits of the Public o Monetary Policy





   If government prints more money, amount of physical goods will not increase but increase in money will lead to increase in prices of the goods which will result in Inflation.

Reserve Bank of India

   RBI is the Central Bank of the Country
   RBI was Established in 1 April 1935 under (RBI ACT 1934)
   Government Established RBI Recommendation of Hilton Young
Committee
   RBI was Nationalised on 1 January 1949
   Governor is the Head of RBI
   Financial of RBI is 1st July to 30th  June

Foreign Securities are any kind of financial assets. In India we maintain four currencies as Foreign Securities. These are:-
o USA Dollar
o UK Pound
o Japanese Yen
o Euro





Why is the financial year of RBI from


Functions of RBI

1st

July to 30th

June?




• It is the only currency authority in India.

o The financial year of all the


• It is the Government’s Bank
• All financial transactions of the government are undertaken

banks is from 1st
Mar.

Apr to 30th


through the RBI
• It is Bankers Bank – Commercial banks have to keep reserves in RBI
and RBI lends money to banks
• RBI is known as lender of the Last Resort
• It provides clearing house facility to banks – settlements of claims of one bank on other banks is done by RBI by the means of following facilities:-
o NEFT (National Electronic Funds Transfer)
o RTGS (Real Time Gross Settlement System)
• Supervisor of Banks and Non-banking finance institutions
• Custodian of Foreign Exchange reserves



Monetary Policy

o If RBIs financial year is also the
same, it will not able to monitor
and check the accounts of the banks.





Lower Denominations values of `1 and less are printed by the Finance Ministry, Government of India


   It is the Component of Economic Policy through Which Central Bank regulates Money Supply in an
Economy
   It is the method through which the Central Bank regulates money supply in the market

Instruments of Monetary Policy


•    Also known as Credit Control measures or Monetary Policy
Measure
•    Broadly classified into two types:-
o Quantitative or General Measures
o Qualitative or Selective Measures

Quantitative Measures

1.   Cash Reserve Ratio (CRR)
o Percentage of bank deposits which the bank has to keep with RBI



Difference between Quantitative and Qualitative measures

1.   Quantitative measures regulate the quantity of money supply
2.   Qualitative measures are sector specific


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