Monetary Policy of India governs Money system in India. From the ancient Barter System to Medieval Token Currency Monetary policy changed according to the political system.
Now, India is the largest democracy in the world. So, it’s Monetary Policy surely will have an influence of the Democratic system. So, guys, here, we will start our journey to the Indian Economy.
Monetary Policy
Money
So, question arises what is Money? 🤔🤑… You guys must reply, Money is everything to get everything. 😂😂😂😅Well, for sure one can buy happiness from Money but one may not feel complete happiness with money (Philosophical one!!!)😅🤭
Okay… silly lines apart…🤗…Money is the commonly accepted medium of exchange. It can be defined as anything that is generally accepted as a means of payment.
Nowadays, It is difficult to think about the world without money. Everybody needs money for various purposes; starting from the day-to-day transactions to saving for the future.
But before the evolution of money in the past barter system exist.
In ancient days when there was no money, people used to exchange goods for goods to satisfy their wants without the use of money.
-Barter System, during Indian Rigvedic Period.
So, the failure of the barter system leads to the evolution of money. Hartley Withers has defined money as,
The stuff with which we buy and sell things.
-Hartley Withers
Functions of Money,
- Money acts as an intermediary for the goods and services in an exchange transaction.
- The value of all goods and services are expressed in terms of money.
- Money serves as the unit in terms of which deferred or future payments are stated.
- wealth can be stored in the form of money.
Indian Monetary Policy System
The Monetary Policy refers to the type and forms of standard money used in the economy. In India, Paper Currency Standard describes Indian Monetary system. The system governing note issue in India is the Minimum Reserve System.
The Reserve Bank of India (RBI) holds a minimum reserve of ₹ 200 crores in the form of gold and foreign securities. Out of which not less than ₹ 115 crores must be in the form of gold.
So, these reserves make sure that RBI can print unlimited currency aginst the backing securities of the Government of India.
RBI has the sole right to issue currency notes, other than one rupee note/coin and lower denomination coins. So, according to the Indian Coinage Act, Government of India issues One rupee note/coin.
So, the RBI conducts circulation of the entire currency.
Money Supply
Money supply refers to the total stock of money (of all types) held by the people of a country at a point of time.
It doesn’t include the money held by the producers and suppliers of money i.e. the government and the banking system.
It has two components,
- Currency component and
- Deposit component.
Measures of Money Supply
So, the key monetary and liquidity measures compiled in India and their definitions are set out in the following table.
Measures of Monetary and Liquidity Aggregate
1) Reserve Money (RM)[M0]
currency with circulation + bankers deposits with the RBI + ‘others’ deposits with the RBI (compiled on the weekly basis)
2) M1
Currency with the public + Demand deposits with the banking system + ‘others’ deposits with the RBI. (It is known as Narrow money)
3) M2
M1 + Time liabilities portion of savings deposits with Banking system + Certificates of Deposit issued by Banks + Term Deposits of residents with a contractual maturity of up to and including one year with the Banking System (Excluding CDS).
4) M3
M2 + Term Deposits of residents with a Contractual maturity of over one year with the Banking system + call Term borrowings from ‘Non- depositary’ financial Corporation by the Banking System (Broad Money).
So, this was about the Indian Monetary Policy. Guys, this was an introductory post, so, in the coming post, we shall discuss the Banking system of India.
Guys, we will precisely read RBI system. So, keep following us.
Thanks and Stay wealthy. 🤑😊
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