How RBI controls and regulates money flow in India
M1 = Currency with the public + Net demand deposits of banks
+ other deposits with RBI
M2 = M1 + Savings
M3 = M2 + Net Time Deposits
Price Stability
Controlled Expansion Of Bank Credit
Promotion of Exports and Food Procurement Operations
Desired Distribution of Credit
To Promote Efficiency
Reducing the Rigidity
Monetary policy as an arm of public policy has set
objectives and priorities. These objectives are derived from the respective
mandates of central banks. It ranges from a single objective of price
stability, considered to be the dominant objective of monetary policy, to
multiple objectives that include growth and financial stability as well.
Money supply is the amount of money in circulation in the
economy at any point of time. It not
only includes the currency & coins in circulation, but it also includes
demand & time deposits of banks, post office deposits & the things like
that.
Market liquidity
Market liquidity refers to how readily one can buy or sell a
financial asset at short notice, at low cost and large quantity, without
causing a significant movement in its price. Market liquidity is measured in
terms such as the bid-ask spread, the volume and frequency of transactions per
unit of time, the turnover ratio and the price impact of a trade. A liquid
market is necessary for effective monetary policy transmission.
The RBI can purchase government bonds from or sell the same
to the public. When RBI buys them, excess money is infused in the economy
thereby increase the money supply. The RBI is also responsible to maintain
stability of foreign exchange and to hold the foreign exchange reserve.
monetary policies of
The RBI that are directed to controlling inflation may, at times, interfere
with the economic growth of the country.
Since advances made by commercial
banks play a vital role in industrial development, any monetary policy that
hinders the circulation of money will bring the industry to a momentary halt.
Moreover, most of the economic agents that play active roles in forming the
market are beyond the jurisdiction of The RBI.
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