Explanation
Money supply refers to the total stock of money of all types ( currency as well as demand deposits) held by the people of a country at a given point of time.
In India, money supply is measured in several ways among which M1 is a type of measurement that measures the money as a medium of exchange function. According to the new nomenclature by RBI,
M1= C+ DD+ OD
where,
C: It refers to currency held by public in terms of coins and paper notes.
DD: It refers demand deposits of the people with the commercial bank.
OD: These includes other deposits with public financial institution, foreign central banks and international financial institution.
Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. By raising the margin requirement, the borrowing capacity of the borrower reduces as with the same amount of loan borrowed, the value of the loan decreases due to high margin requirement.
True.
Quantitative measures of monetary policy includes those instruments which focus on the overall supply of the money. It influences the total volume of credit in the economy. It includes:
A. Two Policy Rates:
Bank rate is the rate charged on the loans offered by the Central bank to the commercial banks without any collateral. It is increased at the time of inflation to reduce the money supply in the economy and vice versa.
Repo rate is the rate charged on the secured loans offered by the Central bank to the commercial banks that includes collateral. It is increased at the time of inflation to reduce the money supply in the economy and vice versa.
B. Two Policy Ratio:
Statutory Liquidity Ratio (SLR) refers to liquid assets that the commercial banks must hold on daily basis as a percentage of their total deposits. SLR is determined by the central bank and is a legal requirement to be fulfilled by the commercial banks. It is increased at the time of inflation to reduce the money supply in the economy and vice versa.
Cash Reserves Ratio (CRR) refers to the proportion of total deposits of the commercial banks which they must keep as cash reserves with the central bank. The ratio is fixed by the central bank and is varied from time to time to control the supply of money in the economy depending upon the prevailing situation of inflation or deflation.
C. Open Market Operations:
Open market operation (OMO) is a monetary policy by the central bank in which the bank deals in the sale and purchase of securities in the open market to control the supply of money in the economy. By selling the securities, the central bank soaks liquidity from the economy and by buying the securities, the central bank releases liquidity.
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