Description
monetary policy affects the economic activity and effect of monetary policy on real GDP and price level
Money Supply in India
Monetary policy refer to steps taken by RBI to regulate cost and supply of money in order to achieve certain Socio Economic objective like price stabilization full employment, exchange regulation and increased economic growth
Monetary Policy and Economic Activity
RBI orders an expansionary policy Money Supply increases Interest rates fall I, C and NX all increase Real GDP AD curve shifts & price level to the right increase
RBI orders an contractionary policy
Money Supply decreases Interest rates rise
I, C and NX all decrease
Real GDP AD curve shifts & price level to the left fall
•The Effects of Monetary Policy on Real GDP and the Price Level
There is no unique measure to money aggregate
Money Supply M : M1 + M2 + M3 + M4
M1: It consist of • Currency notes and coins with public (excluding cash in hand of all banks) • Demand deposit ( excluding inter bank deposit) • Deposit held with RBI (excluding IMF,PF, guarantee fund & adhoc liabilities) N A RROW MONEY
M2
• M1
PLUS
• Saving deposit with post office saving bank
M3
• M1
PLUS
• Time deposit of commercial bank & cooperative bank ( excluding inter bank deposit) • It includes net bank credit to government +bank credit to commercial sector + net foreign exchange assets + government currency liability to the public
BROAD MONEY
M4
• M3 PLUS
• Total deposit with post office organization
The growth in money supply must be higher then the growth in the real national Income This stems for two reasons (i)As income grows ,the demand for money as one of the component of saving tends to increase (ii)An increase in money supply is also necessitated by gradual reduction of the non-mentioned sector of the economy. In our country, the rate of increase in money supply has been far excess of the rate of growth in real national income
Money stock measure
( Rs crores)
1990-91 2001-02 M1 92,890 4,21,200 Post office saving bank deposit 4,210 5,040 M2 Time deposit with banks M3 Total post office deposit M4 97,100 4,26,240 1,72,940 10,75,930 2,65,830 14,97,130 14,680 25,970 2,80,510 15,23,100
Money Market
MM is “ Centre for dealings, mainly of a short term character, in monetary assets; it meets the short term requirement of the borrowers and provides liquidity or cash to the lenders. It is a place where short term surplus investible funds at the disposal of the financial and other institution and individual are bid by borrowers, again comprising institutions and individual and also by government
Function of Money Market
• It provides various kind of credit instrument to augment the money supply • It helps to minimize the gluts and stringencies in money market due to seasonal variations in the flow of and demand of funds • It helps in quick transfer of funds
Operation in Money Market
• • • • • • Call (overnight) money Notice money Commercial Bills Treasury Bills Certificate of Deposit Commercial Paper
Features of Investment methods in Money Market
MM instruments 182 days treasury bill Commercial bills Period 1-182 days 1-90 days Secured /Unsecured Secured Secured Liquidity Easy Reasonable Participant Open to all Com. Banks,coop. Banks, MF etc
Certificate of deposit (CD)
Commercial Papers Call Money
46-365 days
90-180 days 1 day
Secured
Unsecured Unsecured
Moderate
Moderate Easy
Open to all
Open to all Com. Banks,coop. Banks, MF etc
Notice Money
2-14 days
Unsecured
Easy
Com. Banks,coop. Banks, MF etc
Call/Notice Money
All categories of bank and financial institution are allowed to participate in call/notice market. The fund are lent for one day or from Saturday to Monday or for a period up to 14 days. Both the borrower and lender have current account with the RBI. It is also used by banks to maintain CRR/SLR level to avoid punitive measure by the RBI
Commercial Bills
One ways the bank extend credit to their customer is by discounting their commercial bills. Such credit bill finance is repayable on maturity of the bill. The eligibility criteria prescribed by RBI for rediscounting a bill stipulates interalia that the bill should fall within 90 days from date of discounting. The bill discounting rate is dictated by the market force & there is less volatility in interest rate in this then call market.
182 Days Treasury Bills
This is a short term government debt securities introduced in November 1986. The treasury bill is issued on auction by RBI. It is issued at a discount and on maturity the face value is paid to the holder. Every fortnight ,RBI invites bids for sale of 182 days treasury bills
Certificate of Deposit
RBI introduced CD in 1989. CD is a front ended negotiable instrument, issued at a discount and face value is payable at maturity by the issuing bank. The CD are short-term deposit instrument for a period ranging from three month to one year. The discount rate for the issue of CD are market driven.
Commercial Paper
The RBI introduced a scheme of CP in January 1990. CP is a short term negotiable money market Instrument and is issued by companies in the form of a usance promissory note, redeemable at par to the holder on maturity. The period of CP is 15 days to 365 days from date of issue and is issued at a discount.
Role of DFHI
Established in 1988,it was established by RBI jointly with PSU banks and all-India
Financial Institution to deal in short term monetary market instruments. DFHI has branches in Delhi, Calcutta, Chennai, Ahemdabad and Bangalore. DFHI also provides ‘ repos ’ facility ( buy-back and sellback) to banks, selected financial institution and PSU’s upto a period of 14 days at predetermined interest rate.
doc_536931573.pptx
monetary policy affects the economic activity and effect of monetary policy on real GDP and price level
Money Supply in India
Monetary policy refer to steps taken by RBI to regulate cost and supply of money in order to achieve certain Socio Economic objective like price stabilization full employment, exchange regulation and increased economic growth
Monetary Policy and Economic Activity
RBI orders an expansionary policy Money Supply increases Interest rates fall I, C and NX all increase Real GDP AD curve shifts & price level to the right increase
RBI orders an contractionary policy
Money Supply decreases Interest rates rise
I, C and NX all decrease
Real GDP AD curve shifts & price level to the left fall
•The Effects of Monetary Policy on Real GDP and the Price Level
There is no unique measure to money aggregate
Money Supply M : M1 + M2 + M3 + M4
M1: It consist of • Currency notes and coins with public (excluding cash in hand of all banks) • Demand deposit ( excluding inter bank deposit) • Deposit held with RBI (excluding IMF,PF, guarantee fund & adhoc liabilities) N A RROW MONEY
M2
• M1
PLUS
• Saving deposit with post office saving bank
M3
• M1
PLUS
• Time deposit of commercial bank & cooperative bank ( excluding inter bank deposit) • It includes net bank credit to government +bank credit to commercial sector + net foreign exchange assets + government currency liability to the public
BROAD MONEY
M4
• M3 PLUS
• Total deposit with post office organization
The growth in money supply must be higher then the growth in the real national Income This stems for two reasons (i)As income grows ,the demand for money as one of the component of saving tends to increase (ii)An increase in money supply is also necessitated by gradual reduction of the non-mentioned sector of the economy. In our country, the rate of increase in money supply has been far excess of the rate of growth in real national income
Money stock measure
( Rs crores)
1990-91 2001-02 M1 92,890 4,21,200 Post office saving bank deposit 4,210 5,040 M2 Time deposit with banks M3 Total post office deposit M4 97,100 4,26,240 1,72,940 10,75,930 2,65,830 14,97,130 14,680 25,970 2,80,510 15,23,100
Money Market
MM is “ Centre for dealings, mainly of a short term character, in monetary assets; it meets the short term requirement of the borrowers and provides liquidity or cash to the lenders. It is a place where short term surplus investible funds at the disposal of the financial and other institution and individual are bid by borrowers, again comprising institutions and individual and also by government
Function of Money Market
• It provides various kind of credit instrument to augment the money supply • It helps to minimize the gluts and stringencies in money market due to seasonal variations in the flow of and demand of funds • It helps in quick transfer of funds
Operation in Money Market
• • • • • • Call (overnight) money Notice money Commercial Bills Treasury Bills Certificate of Deposit Commercial Paper
Features of Investment methods in Money Market
MM instruments 182 days treasury bill Commercial bills Period 1-182 days 1-90 days Secured /Unsecured Secured Secured Liquidity Easy Reasonable Participant Open to all Com. Banks,coop. Banks, MF etc
Certificate of deposit (CD)
Commercial Papers Call Money
46-365 days
90-180 days 1 day
Secured
Unsecured Unsecured
Moderate
Moderate Easy
Open to all
Open to all Com. Banks,coop. Banks, MF etc
Notice Money
2-14 days
Unsecured
Easy
Com. Banks,coop. Banks, MF etc
Call/Notice Money
All categories of bank and financial institution are allowed to participate in call/notice market. The fund are lent for one day or from Saturday to Monday or for a period up to 14 days. Both the borrower and lender have current account with the RBI. It is also used by banks to maintain CRR/SLR level to avoid punitive measure by the RBI
Commercial Bills
One ways the bank extend credit to their customer is by discounting their commercial bills. Such credit bill finance is repayable on maturity of the bill. The eligibility criteria prescribed by RBI for rediscounting a bill stipulates interalia that the bill should fall within 90 days from date of discounting. The bill discounting rate is dictated by the market force & there is less volatility in interest rate in this then call market.
182 Days Treasury Bills
This is a short term government debt securities introduced in November 1986. The treasury bill is issued on auction by RBI. It is issued at a discount and on maturity the face value is paid to the holder. Every fortnight ,RBI invites bids for sale of 182 days treasury bills
Certificate of Deposit
RBI introduced CD in 1989. CD is a front ended negotiable instrument, issued at a discount and face value is payable at maturity by the issuing bank. The CD are short-term deposit instrument for a period ranging from three month to one year. The discount rate for the issue of CD are market driven.
Commercial Paper
The RBI introduced a scheme of CP in January 1990. CP is a short term negotiable money market Instrument and is issued by companies in the form of a usance promissory note, redeemable at par to the holder on maturity. The period of CP is 15 days to 365 days from date of issue and is issued at a discount.
Role of DFHI
Established in 1988,it was established by RBI jointly with PSU banks and all-India
Financial Institution to deal in short term monetary market instruments. DFHI has branches in Delhi, Calcutta, Chennai, Ahemdabad and Bangalore. DFHI also provides ‘ repos ’ facility ( buy-back and sellback) to banks, selected financial institution and PSU’s upto a period of 14 days at predetermined interest rate.
doc_536931573.pptx