To do so more rupee currency is printed by RBI to pay for US dollars purchased by it.In this way more rupee currency (i.e., high-powered money) comes into existence in the economy. The main source of growth in money supply in India is creation of credit by RBI for Government for financing its budget deficit and thus creating high-powered money.Further, though the required currency reserve-deposit ratio of banks can be easily varied by RBI, the actual currency reserve-deposit ratio cannot be so easily varied as reserves maintained by banks not only depend on minimum required cash reserve ratio but also on their willingness to hold excess reserves.Lastly, an important noteworthy point is that though money multiplier does not show much variation in the long run, it can change significantly in the short run causing large variations in money supply. OD = Other … Hence, the dilemma faced by the Central Bank.Sterilization provides a way out of the problem of clash between the goals of external balance and internal balance.
On the basis of small cash reserves of currency, they are able to create a much larger amount of demand deposits through a system called fractional reserve system which will be explained later in detail.In the developed countries such as USA and Great Britain deposit money accounted for over 80 per cent of the total money supply, currency being a relatively small part of it. A healthy growth of an economy requires that there should be neither inflation nor deflation. Lastly an important noteworthy point is that though money multiplier does not show much variation in the long run, it can change significantly in the short run causing large variations in money supply.
The definition of money supply given above represents a narrow measure of money supply and is generally described as MFrom April 1977, the Reserve Bank of India has adopted four concepts of money supply in its analysis of the quantum of and variations in money supply. Let this currency-deposit ratio be devoted by k, Now take equation which defines high powered money (H) as where R represents cash or currency reserves which banks keep as a certain ratio of their deposits and is called cash-reserve ratio and is denoted by r. Thus Now money multiplier is ratio of total money supply to the high powered money, therefore we divide equation (1) by equation (4), to get the value of multiplier, which we denote by m. Thus k = Currency-deposit ratio of the public. The FIIs started selling Indian equity and bonds and converting rupee into US dollars.This led to the increase in demand for dollars resulting in appreciation of US dollar and depreciation of Indian rupee.
36 views. Kept within proper limits it can accelerate economic growth but exceeding of the limits will retard it. This is called sterilization of inflows of foreign exchange.Further, to deal with the problem of excess liquidity of the Indian banks caused by the rise in foreign exchange reserves, and with a view to check rise in inflation rate Reserve Bank of India has in April 2004 entered into an agreement with the Central Government to sterilize the monetary impact of these reserves.With this agreement, Market Stabilisation Scheme (MSS) has been started. When the supply of high-powered money (i.e., reserve money) H increases;2. We thus see that the currency-deposit ratio, which we denote by k, is an important determinant of the actual value of money multiplier.It is important to note that deposit multiplier works both ways, positively when cash reserves with banks increase, and negatively when the cash reserves with the banks decline. 16.2 where the curve DD represents demand curve for foreign exchange (US $) and SS is the supply curve of foreign exchange (US $) at exchange rate (Rs. These demand deposits held by the public are also called bank money or deposit money.