Page 119 - DMGT401Business Environment

Business Environment

Notes There are three major changes in the new and old monetary aggregates. New intermediate
monetary aggregate, which is to be referred to as NM , comprises of currency and resident's
2
short-term bank deposits that would stand between narrow money (M , which includes only the
1
non-interest bearing monetary liabilities of the banking sector) and broad money (M ).
3
The new broad money aggregate (referred to as NM for purpose of clarity) in the Monetary
3
Survey would comprise of NM , long-term deposits of residents, and call/term borrowings
2
from non-bank sources which have emerged as an important source of resource mobilisation
for banks. The critical difference between M and NM , essentially, lies in the treatment of
3 3
non-resident repatriable fixed foreign currency liabilities of the banking system in the money
supply compilation.
Post office deposits have been dropped from the new money and thus the old concept of M and
2
M4 concepts have been dropped.

Notes Liquidity Measures
Three liquidity measures have been designed recently which are referred to as L , L , and
1 2
L . These are defined as follows:
3
L = NM + Postal Deposits.
1 3
L = L + Liabilities of the financial institutions.
2 1
L = L + Public deposits with non-bank finance companies.
3 2
5.3 Factors affecting Money Supply in India

There are five sources which contribute to the aggregate monetary resources in the country (M ):
3
1. Net bank credit to the bank
2. Bank credit to the commercial sector
3. Net foreign exchange assets of the banking sector

4. Government currency liabilities to the public
5. Non-monetary liabilities of the banking sector.
1. Net Bank Credit to the Government: There are two types of bank credit to the government:
RBI credit to the Central and State Government and others banks' credit to the Central and
State Government. The government provides its securities and IOUs to the RBI against
which it receives loans from the RBI. The RBI prints and issues currency notes against govt.
securities. This increases money supply in the country and when the government buys
back its securities, it reduces the supply. Similarly, when the government borrows from
commercial banks, it also increases the supply of money with the public.

2. Bank Credit to the Commercial Sector: When banks lend to customers it increases the
supply of money in the hands of the public. Lending by the commercial sector has a
multiplier effect. When banks lend to the customer, they do not hand over currency to
him, but instead allow him the facility of withdrawal by cheque. These cheques come back
to the banking system as fresh deposits. By giving more such loans, banks multiply their
deposits. More bank loans mean more supply of money and more investment.

112 LOVELY PROFESSIONAL UNIVERSITY