Money And Banking

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Money supply: The supply of money means that the total stock of all forms of money (paper money, coins and demand deposits of bank) which are held by the public at any point of time.

Mainly, two types of instruments are used by RBI for conducting monetary policy:

1. Quantitative Instruments: It includes Bank rate policy, Open Market Operations, Legal Reserve Ratio (i.e. C.R.R and S.L.R.) etc.
2. Qualitative Instruments: It includes Margin Requirements, Moral suasion, Selective Credit Controls etc. 

Measures of Money Supply:

1. M₁ = C + DD + OD.
    Here C denotes currency held by public, DD stands for demand deposits and OD stands for other deposits in RBI.
2. M₂ = M₁ + Savings deposits with Post Office Saving Banks.
3. M₃ = M₁ + Net Time-deposits of Banks.
4. M₄ = M₃ + Total deposits with Post Office Saving Organisation(excluding NSC).

Narrow Money: M₁ and M₂ are treated as measures of narrow money.
Broad Money: M₃ and M₄ are treated as broad measures of broad money.

Various actions of RBI and Commercial banks, as well as preferences of public for holding cash balance vis-a-vis deposits in banks, affect money supply. These influences on money supply can be summarised by the following key ratios:

1. Currency Deposit Ratio (cdr): It is ratio of currency held by public to their holdings of bank deposits.
      Symbolically:
                
2. Reserve Deposit Ratio (rdr): It is proportion (ratio) of total deposits which commercial banks keep as reserves. 
3. High Powered Money: The total liability of the monetary authority of the country, RBI, is called the monetary base or high powered money.