Money

VINOD SOLANKISTD = X

ROLL NO = 43DUNNES INSTITUTE

Money is a token or item which acts as a medium of exchange that has both legal and social acceptance with regards to making payment for buying commodities or receiving services, as well as repayment of loans.

Types of Money – Commodity money, Representative money, Fiat money, Commercial Bank money.

Functions Store of value Medium of exchange Standard of payments

- Currency refers to physical objects generally accepted as a medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply.

- Currency has value only by government order. The government declares the fiat to be legal tender, making it unlawful to not accept the fiat currency as a means of repayment for all debts, public and private.

Money and Currency

Components of MoneyThe Reserve Bank of India defines the monetary aggregates as

Reserve Money (M0) : Currency in circulation + Bankers’ deposits with RBI + other deposits with RBI = Net RBI Credit to the Govt. + RBI Credit to the commercial sector + RBI’s claims on banks + RBI’s net foreign assets + Govt.’s currency liabilities to the public – RBI’s net non-monetary liabilities. M1 : Currency with the public + Deposit money of the public (Demand deposits with the banking system + Other deposits with the RBI) M2 : M1 + Savings deposits with post office savings banks M3 : M1 + Time deposits with the banking system = Net bank credit to the Govt. + Bank credit to the commercial sector + Net foreign exchange assets of the banking system + Govt.’s currency liabilities to the public - Net non-monetary liabilities of the banking sector (Other than time deposits). M4 : M3 + All deposits with savings bank post offices (excluding NSCs)

Notes Coins

Money flow Cycle

Chest Branches

RBI Offices

Presses

Public

4 Mints

Mint linked offices

Chest Branches & RBI Offices

In India, RBI in Conjunction with finance ministry decides how much money should be printed.Printing of Paper currency is the responsibility of RBI as per the Reserve Bank of India Act, 1934.

The responsibility for Coinage vests with Government of India on the basis of the Coinage Act, 1906

Factors Affecting Printing of Money

Usually RBI estimates the need for printing of money based on the below factors :

Incremental needs Replacement needs Reserve needs Statistical Analysis and other Demand forecast techniques

Who decides when & how much money is to be printed

Two methods are followed : I Method : Demand is estimated based on the below factors

-- Income or its proxy

-- Price levels

-- Opportunity Cost of holding cash

Here the problem is income levels are usually not available beyond quarterly

frequency II Method : Univariate time series analysis

Future demands in currency levels are estimated using historical growth rates of currency demand. Statistical and other forecasting techniques are used.

Though the method can be applied to any frequencies, the main problem with high frequencies is the specification of intra-month variation in demand levels which change from month to month and hence is difficult to estimate with precision

Estimation of Demand

I -Payment Habits of the economy

Significant amount of wages and salaries in India is paid ( in cash ) at the beginning of every month. Therefore, currency in circulation increases at the beginning of a month. As the public buys goods and services with them, the currency first flows to the corporate sector and from there to the banking sector.

II -Spending Habits of the public

Currency demand in India typically follows a V-shape pattern. The demand for currency is high during April–June, bottoms out during July–September and picks up again during October–March.

The high currency demand during April–June emanates from the realization of proceeds from the wheat harvest. The entire quantum of wheat procurement in India takes place during this period. On the other hand, the high transactions demand during October–March is because of festivals, rice procurement and pick-up in agro-based industrial activities.

General Considerations

The bank note printing in India started in 1928 with the establishment of India Security Press at Nashik by Government of India.

Until the commissioning of Nashik Press the Indian Currency Notes were got printed from Thomas De La Rue Giori of United Kingdom.

The second bank note printing press was established in Dewas (Madhya Pradesh) in 1975 by Government of India.

With the growth in population and economic activity, the demand for bank notes has been steadily increasing. To bridge the demand and supply gap, the Government of India decided to establish two new bank note printing presses one at Mysore (Karnataka) and the other at Salboni (West Bengal)

Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) was established by Reserve Bank of India (RBI) as its wholly owned subsidiary on 3rd February 1995 with a view to augmenting the production of bank notes in India to enable the RBI to bridge the gap between the supply and demand for bank notes in the country.

The BRBNMPL has been registered as a Private Limited Company under the Companies Act 1956 with its Registered and Corporate Office situated at Bangalore.

Currency Printing Centers

The company manages 2 Presses one at Mysore in Karnataka and the other at Salboni in West Bengal. The present capacity for both the presses is 16 billion note pieces per year on a 2-shift basis.

Printing Capacity Notes Total Annual capacity of the presses currently is 18 billion

pieces Can produce up to 28 billion pieces in two shifts.

Coins

Total minting capacity is 4700 million.

RBI’s annual requirements are usually 12000 million notes and 5000 million coins. There is a gap in the demand supply of coins in the country since 1990s.

Initially Indian currency was based on silver. Later on, towards the end of the British Rule, India shifted to Gold

standard. Currently the Reserve Bank decides upon the volume and value

of bank notes to be printed based on the annual increase in bank notes required for circulation purposes, replacement of soiled notes and reserve requirements.

The Reserve Bank estimates the demand for bank notes on the basis of the growth rate of the economy, the replacement demand and reserve requirements by using statistical models.

Also, contrary to public view, currency cannot be exchanged for Gold from RBI. The Reserve Bank will not pay gold in any circumstances in exchange for currency.

Most of the economies in the world have done away with the Gold standard.

Is India still on Gold Standard ?

Monetary policy is the process by which the central bank of a country controls the supply of money in its economy by exercising its control over interest rates in order to maintain price stability and to achieve high economic growth.

Functions Price stability Controlled expansion of credit Promotion of investment Desired distribution of credit Equitable distribution of credit Promoting Efficiency

Monetary Policy

Open Market OperationsAn open market operation is an instrument of monetary policy which involves

buying or selling of government securities from or to the public and banks

Cash Reserve ratioCash Reserve Ratio is a certain percentage of bank deposits which banks are

required

to keep with RBI in the form of reserves or balances

Statutory liquidity ratioEvery financial institute have to maintain a certain amount of liquid assets from

their

time and demand liabilities with the RBI. These liquid assets can be cash, precious

metals, approved securities like bonds etc. The ratio of the liquid assets to time and

demand liabilities is termed as Statutory Liquidity Ratio.

How does it perform those functions ?

Bank rate policyBank rate is the rate of interest charged by the RBI for

providing funds

or loans to the banking system.

Credit ceilingRBI issues prior information or direction to the banking system

that

loans should be given up to a certain limit

Repo rateRepo rate is the rate at which RBI lends to commercial banks

generally

against government securities.

Reverse Repo rate

It is the rate which the RBI pays to the banks for depositing their surplus money.

Growth of an economy increases the standard of living and the income levels of the public. Hence the spending also increases.

As there is more and more money in circulation, the price levels of commodities increase and in turn, the value of the currency falls. This is because there is more amount of money in the system than is demanded. This phenomenon is called “Inflation”.

RBI will check this situation through its monetary policy by increasing the lending rates and thus reducing the easy availability of money in the system. This will help check the fall in value of the money.

However ,this will reduce the credit availability and hence the industrial output decreases and as a result the economy slows down. GDP will fall.

When the inflationary situation is under control, then RBI will reduce the interest rates, which in turn increases the credit availability and hence powers the economy.

Hence Money supply, Inflation, Interest rates and the GDP form a critical sequence of macro economic environment of a country.

Money <–> Inflation <-> GDP

Fake Currency

Source Allegations about involvement of ISI, Pakistan

and other anti social elements. RBI Estimates of Fake notes of about 3 to

6 pieces per million.

Channels• Fake currency operators in Dubai search the

laborers from India who are in need of money to return to India and are made to carry the packages with fake currency.

• Sending photo albums packed neatly with Indian fake currency and sealed with polythene bags.

Measures to control and prevent Fake Currency

• The law enforcing agencies such as Customs, Immigrations and Airport Security Authorities help to keep check.

• Identifying and keeping watch on suspicious people frequently visiting to countries such as UAE, Nepal etc.

• Installation of note sorting machine in phased manner at banks.

• As per the recommendations from RBI Committee, the promotion of use of electronic means and plastic cards is under consideration.

• Security features are constantly upgraded and educating public to identify fake notes.

Money vs Currency

Main concepts

1. Money is unreal, imaginary and intangible.

2. Money must only represent the value of human labor (including services) and the natural resources.

3. Currency is printed, not money.

4. Currency is not money, but merely represents money.

5. Money is created, not printed.

Exchange Rates and Fluctuations

Exchange rate

How much one currency is worth in terms of another currency. 

India has Floating Exchange Rate System.

Rupee Appreciation Currency gaining Strength.

Rupee Depreciation Currency getting weaker.

Factors causing fluctuation

- Interest Rate

- Inflation Rate

- Export-Import imbalances

- Trading in currencies in the Forex market

Impacts of Fluctuations in Exchange Rates

Economy : Economy strengthens with appreciation of rupee and vice versa.

Foreign Investors : Foreign Investors earn profit on investments with

appreciation of rupee and vice versa.

Industry/Company :

Thanks

VINOD SOLANKI