Indian Economy
Money Supply and Monetary Policy
Definition
Money supply refers to the total amount of money in circulation in an economy at a given time. Monetary policy is the process by which a central bank controls the money supply to achieve macroeconomic objectives like controlling inflation, consumption, growth, and liquidity.
Overview
## Money Supply and Monetary Policy in India
Money supply represents the total stock of money circulating in an economy, measured through various aggregates (M1, M2, M3, M4). The Reserve Bank of India (RBI) manages India's monetary policy to maintain price stability while supporting economic growth.
### Key Components
Money Supply Measures:
• M1 (Narrow Money): Currency + Demand deposits
• M3 (Broad Money): M1 + Time deposits with banks
• M4: M3 + Post office savings deposits
Policy Instruments:
The RBI uses multiple tools to control money supply:
• Repo Rate: Primary policy rate for short-term lending to banks
• Cash Reserve Ratio (CRR): Mandatory reserves with RBI
• Statutory Liquidity Ratio (SLR): Investment in government securities
• Open Market Operations: Buying/selling government securities
### Institutional Framework
Since 2016, the Monetary Policy Committee (MPC) comprising six members decides policy rates through majority voting. The framework follows flexible inflation targeting with a 4% consumer price index target (±2% tolerance).
### Contemporary Relevance
Monetary policy has evolved significantly, especially post-2016 reforms and during the COVID-19 pandemic. The transmission mechanism—how policy changes affect the broader economy—remains a key challenge. Recent focus areas include digital currency exploration, financial inclusion, and coordinating with fiscal policy for optimal economic outcomes.
Money supply represents the total stock of money circulating in an economy, measured through various aggregates (M1, M2, M3, M4). The Reserve Bank of India (RBI) manages India's monetary policy to maintain price stability while supporting economic growth.
### Key Components
Money Supply Measures:
• M1 (Narrow Money): Currency + Demand deposits
• M3 (Broad Money): M1 + Time deposits with banks
• M4: M3 + Post office savings deposits
Policy Instruments:
The RBI uses multiple tools to control money supply:
• Repo Rate: Primary policy rate for short-term lending to banks
• Cash Reserve Ratio (CRR): Mandatory reserves with RBI
• Statutory Liquidity Ratio (SLR): Investment in government securities
• Open Market Operations: Buying/selling government securities
### Institutional Framework
Since 2016, the Monetary Policy Committee (MPC) comprising six members decides policy rates through majority voting. The framework follows flexible inflation targeting with a 4% consumer price index target (±2% tolerance).
### Contemporary Relevance
Monetary policy has evolved significantly, especially post-2016 reforms and during the COVID-19 pandemic. The transmission mechanism—how policy changes affect the broader economy—remains a key challenge. Recent focus areas include digital currency exploration, financial inclusion, and coordinating with fiscal policy for optimal economic outcomes.