What are the measures of money stock and Explain instruments of monetary policy with reference to India
Measures of Money Stock/Extent of Money :
Before
initiating measures for expansion or contraction of money supply The RBI
generally measures the extent of money and credit available in the economy at a
given time. The following indices are generally used for the purpose.
M-This represents money supply with the public. M has two components: (a) currency with the public and (b) deposits of the public with the banks.
Currency with the public is the sum total of notes in circulation and circulation of Rupee coins and small coins minus die cash OR hand with banks.
Deposits
of the public with bank is the sum total of demand deposits
with banks and
'other' deposits of the public with the RBI.
M₂-This
represents the total of M₂ and the time deposits with banks.
M4-This
represents M3 plus total post office deposits M, is called "narrow
money" while M3 is called "broad money". M3 represents the
aggregate monetary resources or the money stock of the entire banking sector.
Representative source of Ms. Are -
(1) Net
foreign exchange assets of the banking sector,
(2) Bank
credit to the Commercial sector.
(3) The
net bank credit to Government.
(4) Government's
currency liabilities to the public.
Tools and Instruments of Monetary Policy:
The
statutory basis for the regulation of credit in India is embodied in the
Reserve Bank of India Act and the banking regulation act. The former Act
confers on the bank the usual powers available TO central banks generally,
while the latter provides special powers of direct regulation of the operations
of commercial and Co-operative banks.
General
Quantitative credit controls.
Selective
Quantitative credit control.
General Quantitative credit controls –
There are following three general quantitative
instruments of credit control -
(1)Open
Market Operations.
(2)Statutory
Liquidity Ratio (SLR).
(3)The
Bank Rate or Rediscount Rate.
Open market operations:
During
the period of expansions, the Central Bank sells the Government bonds and
securities to the public. The sale of securities depresses their price, on the
one hand, and results in withdrawal of money from the public. The extent the
Government securities are purchased through the transfer of bank deposits to
the Central Bank account. It reduces the credit creation capacity of the
Commercial Banks.
If
(a) Government
securities are popular
(b) people
have a good deal of banking habit, and
(c) banking
system is fairly developed, the sale of public bonds results in monetary
contraction. During the period of depression, the Central Bank buys the
Government securities. Its impact on money supply with the public is just
reserve to the sale of securities.
Statutory Liquidity Ratio:
When
the Central Bank wants to reduce the credit creation capacity of the Commercial
Banks, it increases the ratio of their demand and time deposits to be held as
reserve with the Central Bank and vice-versa. Therefore, an anti-inflationary
monetary policy requires increasing the liquidity ratios and anti-deflationary
policy requires lowering the liquidity ratio. When the Central Bank changes the
SLR, the deposits which form the basis of credit creation are affected and it
affects bank's capacity to create credit.
Selective Quantitative Credit Control:
Selective
credit controls affect particular sectors of the economy and include such
measures as
(1) Fixing
a ceiling on the amounts of credit for certain purposes.
(2) Charging
discriminatory rates of interest on certain types of advances.
(3) Direct
action, and
(4) Moral
suasion.
(5) Insisting
on minimum margins for lending against specific securities. Direct action may
involve refusal by the Reserve Bank to rediscount bills of a particular
Commercial Bank which has failed to comply with the directives of the former.
It may, in the extreme case, involve collection of licensee of an erring bank.
Direct action is too severe and is, therefore, rarely followed. Under moral
suasion, the RBI addresses periodical letters to banks urging them to exercise
control over credit in general or advances against particular commodities or
unsecured advances. Periodic discussions are also held by the governor of the
Reserve Bank with the authorities of Commercial Banks urging them to restrain
from lending liberally.