concepts of money supply with reference to India-

In this article we have Explained various concepts of money supply with reference to India

Introduction:

Money supply is the total amount of money in circulation in an economy at a given point in time. It is an important economic indicator, as it affects various economic variables such as inflation, interest rates, and economic growth. In India, various committees have been formed over the years to study the concept of money supply and make recommendations for its management. This essay will discuss the various concepts of money supply put forward by these committees and their relevance to the Indian economy.

M1, M2, and M3:

The first concept of money supply was introduced by the Reserve Bank of India (RBI) in 1977. The RBI classified the money supply into three categories: M1, M2, and M3. M1 is the narrowest measure of the money supply, which includes currency in circulation, demand deposits, and other deposits with the RBI. M2 includes M1 and time deposits with banks, while M3 includes M2 and all other deposits with the RBI.

The M1 measure of money supply is often used as an indicator of the liquidity in the economy, while M3 is used to gauge the overall size of the money supply. The RBI uses these measures to monitor and manage the money supply in the economy.

The Working Group on Money Supply:

In 1982, the RBI set up a working group on money supply to review the existing concepts of money supply and recommend changes, if necessary. The group recommended a shift from the M1, M2, and M3 measures to a new concept of money supply called "adjusted net bank credit (ANBC)."

ANBC includes all credit extended by banks to the government, public sector undertakings, and the private sector, excluding certain categories of non-banking financial institutions. This measure provides a more comprehensive picture of the credit extended by banks in the economy.

The Sodhani Committee:

The Sodhani Committee was formed in 1994 to review the existing concepts of money supply and recommend changes, if necessary. The committee recommended a shift from the ANBC measure to a new concept called "reserve money."

Reserve money includes currency in circulation, deposits of the government with the RBI, and other deposits with the RBI. This measure provides a more accurate picture of the money supply in the economy, as it includes all the components of the money supply that are directly controlled by the RBI.

The Reddy Committee:

The Reddy Committee was formed in 2004 to review the existing concepts of money supply and recommend changes, if necessary. The committee recommended a shift from the reserve money measure to a new concept called "monetary aggregates."

Monetary aggregates include currency in circulation, demand deposits, time deposits, and other deposits with the banking system. This measure provides a more comprehensive picture of the money supply in the economy, as it includes all the components of the money supply that are relevant for monetary policy.

The Sub-Committee on Monetary Aggregates:

The Sub-Committee on Monetary Aggregates was formed in 2010 to review the existing concepts of monetary aggregates and recommend changes, if necessary. The committee recommended a shift from the existing concept of monetary aggregates to a new concept called "liquidity aggregates."

Liquidity aggregates include currency in circulation, deposits with the RBI, and other deposits with banks. This measure provides a more comprehensive picture of the liquidity in the economy, as it includes all the components of the money supply that are relevant for liquidity management.

Conclusion:

In conclusion, the concept of money supply is an important economic indicator that affects various economic variables. In India, various committees have been formed over the years to study the concept of money supply and make recommendations for its management. These committees have recommended various measures of money supply, including (M1, M2, and M3), adjusted net bank credit (ANBC), reserve money, monetary aggregates, and liquidity aggregates. Each of these measures provides a different perspective on the money supply in the economy and is used for different purposes.

The shift in the concepts of money supply over the years reflects the changing needs of the Indian economy and the evolving understanding of the nature of money. The current concept of liquidity aggregates reflects the need for a more comprehensive measure of the money supply that is relevant for both monetary policy and liquidity management.

Overall, the management of the money supply is a critical function of the RBI, and the use of appropriate measures of money supply is essential for effective policymaking. The various committees on money supply have played a vital role in developing a deeper understanding of the nature of money and providing recommendations for its management in the Indian economy.