Week 4: Supply of Money¶

Definition: The total quantity of money available in an economy at a particular point in time1.
Nature: It is a Stock Concept (measured at a specific time, not over a period)2.
Components: Includes physical currency (notes/coins) and liquid assets like bank deposits3.
Sources of Generation:
1. Central Bank (RBI): Issues High-Powered Money (M0) and manages supply via policy tools (interest rates, reserves)4.
2. Commercial Banks: Create money through lending (creating deposits in borrower accounts)5.

M0 (High-Powered Money / Monetary Base):
- Most liquid form; foundation for all other money6.
- Formula: \(H = C + R\) (Currency in Circulation + Commercial Bank Reserves)7.
- Includes excess reserves held by banks8.
M1 (Narrow Money):
- Most liquid forms of money9.
- Includes: Currency in Circulation + Demand Deposits + Other Deposits with Central Bank 10.
M2 (Broad Money):
- Includes M1 + Savings Deposits + Time Deposits + Small Denomination Time Deposits + Money Market Mutual Funds (MMMFs) 11.
M3 (Even Broader Money):
- Includes M2 + Large Time Deposits + Repurchase Agreements (RPs) + Institutional MMMFs 12.
M4 (Extended Money Supply):
- Includes M3 + Post Office Savings13.

Money Multiplier Effect:
- Explains how banks expand money supply via fractional reserve banking14.
- Formula: \(\text{Money Multiplier} = 1 / r\) (where \(r\) is the Required Reserve Ratio)15.
- Inverse Relationship: A lower reserve ratio leads to a higher money multiplier (more money creation)16.
- Example: If Reserve Ratio is 10% (0.10), the Multiplier is 1017.
Determinant Factors:
- Public Preference: Higher preference for Bank Deposits (over cash) increases money supply; holding cash reduces it18.
- Economic Activity: Booms expand supply (more borrowing); Recessions contract it19.
- Balance of Payments: A Trade Surplus (Exports > Imports) increases supply via foreign exchange inflows20.

Definition: Entities that mediate between savers (excess cash) and borrowers (need cash)21212121.
Key Functions:
- Asset Storage: Safe storage of cash/metals; insured by bodies like FDIC22222222.
- Risk Distribution: Spreads lending risk across multiple borrowers to minimize default impact23.
- Economies of Scale: Lower transaction costs via bulk handling24.
- Economies of Scope: Offering specialized services to different customer types25.
Specific Types:
- Venture Capital: Financing for startups with long-term growth potential26.
- Microfinance (MFIs): Small loans for under-served markets27.
- Lease-Financing: Lessor (owner) grants use to Lessee (user) for rent; asset returns to owner at end 28.
- Hire-Purchase: Buyer pays in installments; ownership transfers only after last payment29292929.

Banknotes: Reserve Bank of India (RBI) is the sole authority under Section 22 of the RBI Act30.
Coins: Issued by Government of India under the Coinage Act, 201131.
- Note: RBI only distributes coins; the Govt mints them32.
Design Approval: Central Government approves design/form on recommendations of the Central Board33.
Legal Tender:
- ₹1 Notes: Issued by Govt of India, are legal tender34.
- Demonetization: Pre-2016 ₹500 and ₹1000 notes ceased to be legal tender on Nov 8, 201635.

Bank Note Presses (4 Total):
- SPMCIL (Govt Owned): Located in Dewas (Central India) and Nasik (Western India)36363636.
- BRBNMPL (RBI Subsidiary): Located in Salboni (Eastern India) and Mysuru (Southern India)37373737.
Mints (Coins): Located in Hyderabad, Kolkata, Mumbai, and Noida38.
Small Coin Depots: For distributing coins worth less than ₹139.

First Issue: 1 Rupee Note (1949) featuring the Ashoka Pillar40.
Highest Denomination: ₹10,000 note (printed 1938 & 1954; demonetized 1978)41.
Material: 100% Cotton42.
Language Panel: Displays 15 languages (excluding Hindi on center/English on reverse)43.
Promissory Clause: "I promise to pay the bearer..." indicates RBI's liability under Section 2644444444.

Intaglio (Raised) Printing: Used on ₹100 and above for the RBI seal, Gandhi portrait, and emblem (felt by touch)45.
Color Shifting Ink: On ₹200 and ₹500 notes; numerals change from Green to Blue when tilted 46.
Latent Image: Vertical band showing denomination, visible only when held horizontally47.
Angular Bleed Lines: For visually impaired to identify denomination (e.g., 4 lines = ₹200; 5 lines = ₹500)48.
MANI App: Mobile Aided Note Identifier; offline app for visually impaired to identify notes49.

Adopted: 195650.
Requirement: RBI must keep a minimum reserve of ₹200 Crores51.
- Gold Component: Minimum ₹115 Crores must be in gold52.
- Balance in foreign currency/bullion.