Money Supply Measures (RBI Classification)
$$M_1 = \text{Currency with Public (C)} + \text{Demand Deposits with Banks (DD)} + \text{Other Deposits with RBI}$$
- $M_1$ is the most liquid measure of money supply.
Credit Creation by Commercial Banks
Commercial banks create multiple credit deposits from initial primary deposits:
$$\text{Total Money Creation} = \text{Primary Deposit} \times \frac{1}{\text{Legal Reserve Ratio (LRR)}}$$
Where $\text{LRR} = \text{Cash Reserve Ratio (CRR)} + \text{Statutory Liquidity Ratio (SLR)}$.
Monetary Policy Instruments of Central Bank (RBI)
- Quantitative Instruments:
- Repo Rate: Interest rate at which RBI lends short-term funds to commercial banks against government securities. Raising repo rate reduces money supply.
- Cash Reserve Ratio (CRR): Percentage of total deposits commercial banks must keep in cash reserves with RBI.
- Open Market Operations (OMO): Buying/selling government bonds in open market.
- Qualitative Instruments: Margin requirements, moral suasion, selective credit control.
