k v k tiwari

1. Money Supply
Money is anything which is generally acceptable as
means of exchange and at the same time acts as a
measure of value and as a store of value.
Money supply refers to total quantity or stock of
money available in the economy at a particular point
of time.
MONEY
It is the total stock of all the forms of money which are
held by the public at a particular point of time and ID
net demand deposits held by the commercial bank.

2. Functions Of Central Bank
It is an apex institution which operates, controls,
direct and regulate the monetary and banking structure
of a country India's central bank is Reserve Bank Of
India.
CENTRAL BANK

3. • Acts as a banker, agent and financial advisor of the
government
• Carries out all the banking business of the
government
• Accepts receives and makes payments for the
government
• Provides short term credit to the government
• Conducts sale and purchase of the government
securities and also manages the public debt and
foreign debt
• As advisor to the government
Banker To The Government

4. • Sole authority of issue the currency in the country
• Legal tender money
• Keep reserve in the form of foreign currencies
government securities other securities and metallic
reserves like gold against the notes issued by it
• RBI issues all the currency notes in India from
rupees 2 and above that's why there is uniformity in
the currency
• It can restrict and expand the supply of money
• It can maintain stability in the internal and external
value of currency
Currency Authority (Issue of Currency)

5. • Custodian of the cash reserves of commercial
banks
• Lender of last resort
• Clearance settlements and transfer
• Supervisors, regulate and controls commercial
banks
Bankers Bank And Supervisor

6. • In case of crisis central bank stands by the
commercial banks
• Central bank lends money to the commercial
banks
• Fulfills all reasonable demand of funds by
commercial banks
• Borrow against eligible securities
Lender Of Last Resort

7. • Custodian of the nation’s gold and foreign
exchange reserves
• Buy and sell foreign currencies in the market
Custodian of nations reserves of foreign exchange

8. • It holds the cash reserves of a commercial
banks
• All the banks have their accounts with the
central bank
• Settle the claims of the commercial banks
with the minimum use of cash
• It helps the commercial banks to create
credit on a large scale
Clearing House Function

9. Credit Control Measures
Controller Of Money Supply And Credit
Quantitative Measures:-
Bank Rate
• The rate of interest at which central bank
lends funds to commercial banks
• During excess demand central bank
increases the bank rate
• During deficient demand central bank
decreases the bank rate

10. Open Market Operations
Refers to the buying and selling of government
securities and bonds by the central bank from
and to the general public and banks.
• During inflation the central bank start selling
of government securities.
• During deficient demand the central bank
starts purchasing securities.

11. Cash Reserve Ratio
The part of deposits which a bank has to keep
with the central bank
• During inflation the central bank increases
the CRR.
• During deflation the central bank decreases
the CRR.

12. Statutory Liquidity Ratio
Ratio of demand deposits of a commercial bank
which it has to keep in the form of special liquid
assets
• During inflation the central bank increases
the SLR
• During deflation the central bank decreases
the SLR

13. Repo Rate And Reverse Repo Rate
• Repo rate is the rate at which Commercial
Banks borrow money from Central Bank.
• Reverse repo rate refers to the rate of
interest paid by the central bank on deposits
made by the commercial banks.
• During inflation the central bank increases
the these rates.
• During deflation the central bank decreases
these rates.

14. Quantitative Measures Or Direct Measures
Of Credit Control
Margin Requirements
Difference between the amount of the loan and
market value of the security offered by the
borrowers against the loan (mortgage)
• High margin requirement decreases the
money supply
• Low margin requirement increases the
money supply

15. Rationing Of Credit
• Fixation of credit quotas for different sectors
of the economy.
Moral Pressure
• Written or oral advices given by central bank
to commercial banks to restrict or expand
credit.

16. Other Functions
• Agricultural credits
• International monetary conferences
• Return to torn notes
• Money and will markets

17. Money creation by the commercial banking system:-
• Commercial banks accept deposits from the public.
• The banks use the money in these deposits to grant loans.
• These functions of the commercial banks are the basis of
deposit creation.
• Money Creation is also known as Deposit Creation and
Credit Creation.
• It is a process of expansion of credit through Derivative
Deposits and Cash Deposit.
• It is done by the commercial banks with the motive of
earning interest income.

18. Money creation or deposit creation by the bank is
determined by:-
• The amount of initial fresh deposit
• The Legal Reserve Ratio (LRR)
It is the minimum ratio of deposits legally required by
the commercial bank to be kept as cash it has two
components-
Cash Reserve Ratio is a part of LRR to be kept with
the central bank
Statutory Liquidity Ratio is a part of LRR to be kept
by commercial banks with themselves for daily
transactions.

19. PROCESS :-
• Suppose LRR is 20% and the fresh deposit is 10000 `
• As LRR is 20% so the bank will keep ` 2,000 cash and
lend remaining ` 8000.
• Those who borrow will use their money for making
payments.
• As per assumption, those who receive payments put the
money back in the banks, in this way bank receive fresh
deposit of ` 8000.
• The bank again keep 20% that is ` 1600 as cash and land `
6400 which is also 80% of the last deposit.
• The money again comes back to the bank, leading to a
fresh deposit of ` 6400.
• The money goes on multiplying in this way and ultimately,
total money creation is ` 50,000

20. Total Money Creation=initial Deposit X 1/LRR%
Rounds Deposits (`) Loans (`) LRR (20%)
Initial 10,000 8,000 2,000
Round I 8,000 6,400 1,600
Round II 6,400 5,120 1,280
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Total 50,000 40,000 10,000

21. Money Multiplier
• Money multiplier measures how many times the total
deposit would be of the initial deposit which is determined
by the LRR.
• Money multiplier = 1/LRR%