TuBoM C.

UNIT I
MONEY AND MONEY SUPPLY
MEANING OF MONEY:
Money is an asset which is generally accepted as a means of payment in the sale and purchase of
products and other asses and for borrowing and lending transactions. The use of money enables
products and assets to be priced in terms of the monetary units of the country for example pence and
pounds in the UK, paisa and rupee in India,etc. whereas Bater System may be defined as a money
less transaction. The wordmoney is derived from the Latin word 'Moneta', the surname of the
Roman goddess Juno in whose temple coins were made.
Definition of Monev
According to Prof. A. Walker "Money is what money does"" which means that money is a kind of
commodity that fulfils three functions: it serves as (i) a medium of exchange, (i) a unit of sccount,
and (ii) a store of value.
According to Crowther, 'Money is anything that is generally acceptable as a means ofexchange and
which at the same tùme acts as a measure and store of value'
In short, money can be anything that can serve as a store of value, which means people can save it
and use it later smoothing their purchases over time;unit of account, that is, provide a common base
for prices; or medium of exchange, something that people can use to buy and sell from one another
Professor Seligmen defines money as "Money as one thing which has general acceptability. This is
based on general flexibility of money".
Features/ Characteristics of Money

i. Durability: Durability of money is when it can be used over and over.again and is.still able to
maintain to be undamaged and usable after along term of usage. Durabilityis crucial for monëy
to be able toperform the functions of medium of exchange and store of value. Coins and paper
bills are made to perform and to act a_ the çurrency.Nowadays, money is manufactured with the
materials such as paper, metal and plastics, which results to along lasting medium.
2. Portability: Portability means that. money can be moyable from place, to plaçe to be used as a
monetary transaction to be exchanged for goods and services, Porability also means that
consumers are now able to carry, money. along with, themito be used in transaçtion_ for goods and
services. In modern days, money is carried convenjently from;one location. to änother without
needing much effort.
-3. Divisibility: Divisibility is acharacteristic which means the money into can be broken down into
smaller denominations and that it can be usedin exchange for goods and services. As to function
as the medium of exchange, as it is divisible, it can be used to purchase all kinds of goods
services with different values, and
4. Uniformity: Uniformity of money means standardization, of money so. that they are easily
recognizable. It is a characteristicto perform the function of.standard of
e.9ther Words, all,the currency, will o9k the same, have thee same, weight deferred
and the,
payments. h
same size and
hence can, be casly recongnised.
ino#tMi its: i
ops1,ua"i:
5. Limited supply: Limited SUpply is acharacteristie which helps, in
n storng the value.of money. It
means that.çonstraints on the, amount.of money in the monetary
value of the money overtime. Currently most ofthe, respectiveçirculation nsures that it holds
responsibility to control money supply based on market with their coåntry's. goyerniment, has the
expansionary monetary policy and contractionary monetary policy. monetary policies, such as
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reates Advantageous why
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cheapest money
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the rieconomy.
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in money is a If item
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facilities, deflation: its form, great that have. form a
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 I Cash reserve ratio: Cash reserve ratio is the percentage of bank depositsbanks need to
keep
with
the RBI.Under this system the Central Bank controls credit by changing the Cash Reserves Ratio
Currently,the CRR is 4per cent thoughthe range of permissible CRR is between 3and 1Sper cent.
For example
During inflation, the Central bank will raise Cash Reserve Ratio which the Commercial Banks
are required to maintain with the Central Bank. This will force the Commercial Banks to
Curtail the creation of credit in the economy and in this way the Central Bank will be able to
put an effective check on the inflationary expansion of credit in the economy.
Similarly, in situations of deflation when the Central Bank desires that the Commercial Banks
should increase the volume of credit in order to bring about an economic revival in the
country. The Central Bank will lower down the Cash Reserve ratio with a view to expand the
cash reserves of the Commercial Banks. With this, the Commercial Banks will now be in a
position to create more credit than what they were doing before.
Limitations of CRR
At the timeof inflation the central bank may increase the
CRR to reduce the flow in the economy
to make available less funds for credit in the economy
butifborrowers borrow from
financial institutions then the flow of credit will not be reduced andRBI will not non-banking
be able to control
inflation.
i. In order to encourage boirowings and
investments at the time of depression the RBI may reduce
the CRR. Thereby making more fund available for oredit but if the
demand for credit is inelastic,
under these. circumstances, the reduction of CRR may not lead to
increase the credit flow in the
cconomy.
ii. Frequent changes in the CRR may cause
inconvenience to the regular borrowers. They may not
te face any issues when CRR is reduced but when
CRR increased there m©y be lesser fund available
with the bankto provide as loans.
II* Statütory Liquidity Ratio: Statutory liquidity ratio is the
percentage of funds
maintain in the form of liquid assetsiein the form of goveriment securities, banksneed to
bonds or precious
metalslike gold and aotin the form,of cash.
lnYCurréhtly'theSERiS 19:5Sper ceht. Thesefuhds áre largely investcd in govenment securities.
During inflation, SLR will.behigh, bankshaveless money to. lend out, thus home
rates rise, this leads to less demand and therefore brings stability. loan interest
During
3o sse nat h i lowimilarly, hone loah interest tites arëlikelý to fatr "his
Notee Both
therCRRsandetheSLRiihflu°encá theextent to which commercial banks can1,lb!
lend out money to home buýei21afrIISVOg ni i9Vi Q iüin Bts trtsleax
. with
esep

II. Repo Rate: Rep0 rate is the rate at which the RBI lends to commercial banks, against government
securities.
For example
To curb inflation, the RBI raises the repo rate, it becomes more expensive for banks to borrow
from the central bank. Banks pass on the increased costs to the customers, this makes
borrowing experisive. This leads to lower demand for loans and inflation ís controlled.
To fight against deflation, the RBI slashes the repo rate (for eg by 25 basis points), it becomes
cheaper for commercial banks to borrow from the RBI this leads to availability of loans at
lower rate thus demand increases, this lead to revival of the economy.
Therefore, when the RBI raises the repo rate, home loan interest rates úusually rise and when
the RBI cuts the repo rate, home loan interest rates usually fall
But, this is not necessarily true because in certain phases, commercial banks have adequate
cash, and they do not rely on the RBI toreceive money.

IV. Reverse Repo Rate:

Reverse repo rate is the rate banks charge on funds they invest in government securities with the
it
RBI. When the reverse repo rate rises, banks may raise home loan interest rates, because
becomes more profitable for commercial banks to invest in low-risk government securities instead
of lending to people investing in property in India. When the reverse repo rate falls, home loan
nterest rates may fall.

ADVANTAGES OF QUANTITATIVE CREDIT CONTROL

The quantitative eredit control instruments are flexible or elastic in nature, the government
can bring about changes in these instruments keeping in mind the needs of the economy
Or the circumstances the economy faces.
When the commercial banks maintain CRR with the RBI, the RBI provides them
assurance that their financial needs will be satisfied by the RBI whenever the commercial
banks fall short of fund the RBI will provide them assistance.
ii. The quantitative control instruments can be used to achieve exchange rate stability
specially aeficit in balane öf payments can becörected with help of these instrurments.
For examnple: if the deficit is c£üsed by higher imports due to more demand for imported
commodities thereby increasing thebànk rátepeople can bemotivated to save insteadof
spending money on consumption.
iy With the help of quentitative credit control instruments like the bank rate, the RBI can
promote certain activities &discourage certain activities by reducing the interestrate: For
instance, on productive,investment.like.agriculture grjndustges, theseacivities, can be
encouraged. Similarly, by increasing the, rate of interest çonsumption loans these
açtivities can be
 the
direction
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to
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are A which
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