Money Market

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Money Market
(Money and Banking)

What is Money?
A financial asset with the following functions:

Medium of exchange:
An asset that individuals acquire for the purpose of trading rather than for their own consumption.

A store of value:
Means of holding purchasing power over time

A measure of value (unit of account):
Measure used to set prices and make economic calculations
2

What is money?
Money is anything that serves as a commonly accepted medium of exchange Money and Income
What we earn is income, not money Money is used to pay the income

Most liquid Currency Transaction deposits Very liquid Saving deposits Short-term securities Money-market funds Less liquid Long-term bonds Equities Real assets

Money Supply
Narrow (Transactions) Money (M1) = Coins and paper currency + Demand Deposits (or Checkable Deposit), Traveler’s Checks, etc.
(‘Other’ deposits with RBI (= deposits of UTI, IDBI etc; deposits of foreign central banks/governments etc.) are also a part of M1; statistically very small)

Broad Money (M3) = M1 + time deposits with banks
(Money supply in India usually refers to M3)

Also:

M2 (Near-Money) = M1 + savings deposits of post office savings bank M4 = M3 + total deposits with post office savings banks

M1: Rs 1253184 crores, March 2009
Currency with the public ‘Other’ deposits with the RBI 1% Demand deposits

46% 53%

5

M3: Rs 4764019 crores, March 2009
Currency with the public Time deposits
0% 14%

Demand deposits ‘Other’ deposits with the RBI

12%

74%

6

Money Stock Measures
(Rs. Billion)

Currency with the Public

Deposit Money of the Public Post Total Office Time Post M1 Saving M2 Deposit M3 M4 Office (5+8) Bank (9+10) s with (9+12) (13+14) Depo Deposit Banks sits s

Circulation Cash ‘Other’ of Notes Deman on Deposit Period in Total d Hand s with Total Circula Rupee Small (1+2 Deposit with Reserve (6+7) -tion Coins Coins +3-4) s with Bank Bank (1) Banks (2) (2) s (3)
1



References: 1. Chapters 12 & 13,‘Principles of Economics’, 8th edn., by Michael Melvin and William Boyes. 2. Chapters 2 & 5, ‘Macroeconomic Policy Environment’ by Shymal Roy. Videos http://www.moneycontrol.com/video/economy/monet ary-tightening-may-not-help-tame-inflationecoadvisor_434618.html http://economictimes.indiatimes.com/Chetan-Ahyareviews-RBI-monetarypolicy/videoshow/5162691.cms http://economictimes.indiatimes.com/Need-tocoordinate-monetary-and-fiscal-policy-DSubbarao/videoshow/4893491.cms Thank You

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