Money supply is the entire stock of currency and other
liquid instruments circulating in a country’s economy as of a particular
time. It includes safe assets such
as cash and coins and savings account that
businesses and individuals can use to make payments or hold as short-term
economy, money is created through
two main sources. The first
one is RBI can issue new notes and other by Banks who create credit which
adds to money supply. Economists analyses’
money supply and develop policies by controlling
interest rates and increasing or decreasing the amount of money flowing in the economy.
to 1968, RBI in its
publications published only a single measure of money supply (M1). It was hence called the narrow measure of money supply. After 1968, the RBI started publishing a ‘broader’ measure of money supply.
The various types of money in
the money supply are classified as Ms,
such as M0, M1, M2. These are differentiated according
to the type and size of the account in which the instrument is kept where
M0 and M1, are called narrow money and include coins and notes that are in circulation
and other money equivalents that are easily convertible into cash.
M2 includes M1 and short-term time
deposits in banks and certain money market funds.
M3 includes M2 in addition to long-term deposits. (It is no longer included in the reporting by
the Federal Reserve)
MZM, or money zero maturity, is a measure
that includes financial assets with zero
maturity and that are immediately redeemable at par. The Federal Reserve
relies heavily on MZM data because its velocity is a proven indicator of
However, since 2000, relationships between these measures have become
unstable which has reduced their reliability as a guide for monetary policy.
Monetary policy in our economy from
1991 can be reviewed as
policy 1991-92, The growth of money supply in the economy increased by
15.3% leading to a rise in inflation rate to 16.7%. Moreover, growth of the
economy slowed down to 0.9% because of a
slowdown in agriculture and deceleration in industrial growth.
In financial year 1992-93, although the
economic crisis of mid-1991 had been contained and Industrial growth was
picking up slowly, Inflation was still running high. However, Money supply has
slowed down in this year with a growth of 12.3% (remained higher than the
targeted level of around 10.5%) leading to reduction in fiscal deficit & the
budgetary deficit. Reserve money witnessed a growth by 8.5%.
year 1993-94 saw some fruits of the initial array of reforms. The second kind of
borrowing from the RBI fuelled the growth of reserve money in the economy which
increased by 16.9% in the year. The growth in money supply was 14.1%. The
slower growth of money supply as compared to reserve money was due to the
unusually large increase in currency held by the public.
1994-95 saw fastest economic
growth 0f 4.3%, the growth of Ms was 18.6%. The main reason for this uptrend
was a sharp rise in the growth of reserve money.
Policy year 1995-96 can be highlighted in area of
economic developments as the continued high real GDP growth of 7.1%, decline in
the inflation rate to a 154 single digit level, deceleration in growth rate of
aggregate deposits to 12.1% & deceleration in growth rate of bank credit to
20.1 per cent leading to a lower Ms expansion at 13.2%.
The year 1996-97 didn’t witnessed any major reform
but still the Ms expansion has been higher during the year at 10.6% which was
primarily due to increase in bank deposits by 17.4%.
In the year 1997-98, Indian economy performed remarkably
well in terms of output growth, price stability, banking sector performance
& BOP position. The Ms expansion was higher at 17.6%. This increase was due
to increase in Bank deposit by 19.4%, growth in time deposits & increase in
both domestic credit and net foreign exchange assets of the banking sector.
Policy year 1998-99 witnessed sharp upturn in GDP growth
to 6.8% from 5% in previous year. The restoration of stability in the Indian
currency market was the reason behind this growth in GDP.
The year 1999-2000 was
characterized by low inflation hence, a comfortable supply of most items of
daily consumption. The annual growth rate of Ms was 16.6% but Reserve money
growth during this period grew by only 1.3% compared to 13.4% in previous year
due to the much lower growth in net RBI credit to Government.
The financial year 2000-01 saw no major fluctuations in economy
except for growth of Ms supply which was 15.8% this year.
The growth of Ms supply fallen down
to 14.4% in the monetary policy year 2001-02. This sharp decline was a result
of expansion in volume of broad money and among various other components, only
currency with the public registered a higher rate of growth in the year.
The monetary policy of the year
2002-03 saw the
growth in Ms amounted just to 12.8%. But instead of this slower growth, the
year was characterized by easy liquidity conditions.
The year 2003-04 witnessed a growth in Ms supply at increased
rate after a long time. M3 grew by 16.4% which was higher than targeted growth
of 14% mentioned in the annual monetary and credit policy reflecting higher GDP
growth achieved during the year.
The policy year 2004-05 saw a rise in Ms supply by 9.5% which was the
lowest of the 5 consecutive year with no other major fluctuations whereas
policy year 2005-06 saw a small Growth in Ms at 12.2% which was lower
than projected by the RBI. Price stability during year testified to the
Investment – driven nature of the credit growth and the monetary policy year
2007-08 saw cumulative increase in the stock of Ms which was 13.3%.
In the year 2008-09, there was a
deceleration in M0 because of the decline in net foreign exchange assets due to
reduced capital inflows. On the other hand, the net domestic credit (NDC) of
the RBI expanded due to an increase in net RBI credit to the Central Government
whereas 2009-10 saw a major growth in Ms to 16.5% and it has remained
below the indicated growth projection for the period.
This growth of broad money supply by
RBI remained near to the level of what it was in financial year 2009-10 for
some years until DEMONETISATION by the Indian government on 8th
November 2016. This
disruption of demonetisation caused a major disturbance in India’s money supply
with M1 falling to its lowest of -18.7% in end-December 2016. The average
growth of money fell to 9% in the financial year 2016-17.
The reasons discussed above were the
causes of the shape of curves of various monetary measures.