Tag: What is reserve money? Why it is important in monetary policy?

Reserve money is the central bank issued money that function as the monetary base of an economy and it mostly includes all of the currency (currency notes, coin and e₹) in circulation, in addition to bank’s deposits with the central bank. Reserve money is also called as high powered money and base money. It depicts the stock of monetary liabilities in the central bank’s balance sheet. What is reserve money? There are different forms of money supply – reserve money, narrow money, broad money etc. But the most important indicator of all these is reserve money. It is also called as high powered money, base money and central bank money. All these name suggests that reserve money represents the base level for money supply or it is the high powered component of money supply. Other forms of money like broad money depends upon the volume of reserve money. Actually, broad money will be a multiple of reserve money. Reserve money is the central bank issued money that function as the monetary base of an economy and it mostly includes all of the currency (currency notes, coin and e₹) in circulation, in addition to bank’s deposits with the central bank. Reserve money is also called as high powered money and base money. To understand reserve money, we have to look into the components of it. Reserve money = Currency in Circulation + Bankers’ Deposits with RBI + ‘Other’ Deposits with RBI Among these components, the most important one is the currency in circulation. It includes notes in circulation, e-rupee, rupee coins and small coins. Currency in circulation constitutes to nearly 77% of the total reserve money. Rupee coins and small coins in the balance sheet of the Reserve Bank of India include ten-rupee coins issued since October 1969, two rupee-coins issued since November 1982 and five-rupee coins issued since November 1985. The e rupee (retail and wholesale) issued from November 2022 on a pilot basis are also included under currency in circulation. Other two components-banker’s deposit with the RBI and Oher deposit with the RBI are relatively small in size. To understand the relative importance of the three components, look into the table shown below. Bankers’ Deposits with the RBI represent balances maintained by banks in the current account with the Reserve Bank mainly for maintaining Cash Reserve Ratio (CRR) and as working funds for clearing adjustments. Other Deposits with the Reserve Bank for the purpose of monetary compilation include deposits from foreign central banks, multilateral institutions, financial institutions etc. Reserve money in India Following is the size of the three components of reserve money as on end March 2023. Total Reserve money is Rs 4386759 crores. Reserve Money Components Outstanding as on March 31, 2023 (Rs crores) (i) Currency in Circulation 3378521 (ii) Bankers' Deposits with RBI 930477 (iii)`Other' Deposits with RBI 77761 Total Reserve Money (i+ii+iii) 4386759 Reserve money holds the topmost position in the RBI’s monetary policy. Since it is mostly currency in circulation with the people , reserve money decides the level of liquidity and price level in the economy. Management of reserve money is thus very important to manage liquidity and price level (inflation). Reserve money in India Reserve money holds the topmost position in the RBI’s monetary policy. Since it is mostly currency in circulation with the people, reserve money decides the level of liquidity and price level in the economy. Management of reserve money is thus very important to manage liquidity and price level (inflation). Various components of reserve money are shown in the table. Importance of Reserve Money The money market dominated by the commercial banks forms the most important factor that transmits the RBI’s monetary policy signals. Policy interventions by the central bank, along with its market operations, influence the decisions of households and firms through the Monetary Policy Transmission Mechanism. The key to this mechanism is the total money issued by the RBI under the monetary base or reserve money or high-power money in the economy. Currency in Circulation (CiC) Currency in circulation (CiC) includes banknotes, coins and e₹, which are in circulation. The table here shows banknotes (or currency notes) in circulation and their share in total value. In addition to bank notes, the coins are also part of CiC (which are not indicated here). As on August 2023, the RBI issues notes in denominations of ₹ 2, ₹ 5, ₹ 10, ₹ 20, ₹ 50, ₹ 100, ₹ 200 and ₹ 500. The ₹ 2ooo are discontinued from September 2023 onwards. It is expected that the ₹ 1000 note may make a reentry in the near future. Coins in circulation comprise 50 paise and 1, 2-, 5-, 10- and 20-rupee denominations. The e Rupee has been issued by the RBI on a pilot basis since November 2022. Here, there are two types of e rupee- for retailers (common people and for daily small value transaction purposes) and wholesalers. Live-pilot issue of e₹-Retail has been launched in denominations of 50 paise, ₹1, ₹2, ₹5, ₹10, ₹20, ₹50, ₹100, ₹200, ₹ 500 and ₹2000, while e₹-Wholesale does not envisage any denomination. In terms of value, banknotes accounted for a major share of the total CiC (around 99 per cent). Total banknotes in circulation amounted to ₹ 33,48,228 lakh crore as of end March 2023. Total coins in circulation were ₹ 30,242 crore and total e₹ in circulation was 16.39 crores as of March 31st, 2023. Hence, the total CiC (bank notes + coins + e-rupee) was ₹ 33,78,486 as of end March 2023. *********

Tag: What is reserve money? Why it is important in monetary policy?

What is reserve money? Why it is important in monetary policy?

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