{"id":7080,"date":"2020-03-12T16:08:44","date_gmt":"2020-03-12T10:38:44","guid":{"rendered":"https:\/\/triumphias.com\/blog\/?p=7080"},"modified":"2020-03-12T16:08:44","modified_gmt":"2020-03-12T10:38:44","slug":"indian-banking-system-basics","status":"publish","type":"post","link":"https:\/\/triumphias.com\/blog\/indian-banking-system-basics\/","title":{"rendered":"INDIAN BANKING SYSTEM: BASICS"},"content":{"rendered":"<p><span style=\"color: #0000ff;\"><strong>Relevance: Prelims: Economy: Indian Banking System<\/strong><\/span><\/p>\n<p>\u25ba<span style=\"text-decoration: underline; color: #ff0000;\"><em><strong>MONEY DEMAND<\/strong><\/em><\/span><\/p>\n<p>Money demand (also known as liquidity preference) refers to <strong>holding money in hand for the purpose of exchange<\/strong>. It arises mainly to serve two motives:<\/p>\n<ol>\n<li><strong>a) Transactions motive<\/strong>: Holding money to carry out transactions. Higher the transaction is made, higher the demand for money in hand (and vice versa).<\/li>\n<li><strong>b) Speculative motive<\/strong>: Holding money in the form of bonds\/assets to earn interest. Higher the interest offered by bonds, lesser the demand for money in hand (and vice versa).<\/li>\n<\/ol>\n<ul>\n<li>Change in money demand influences the level of interest rates in the economy. An increase in money demand keeping money supply constant will lead to rise in interest rates <em>(rise in money demand\u2192demand for bonds is<\/em> <em>low\u2192price of bonds will fall\u2192interest rates will increase)<\/em>.<\/li>\n<\/ul>\n<p>\u25ba<span style=\"text-decoration: underline; color: #ff0000;\"><em><strong>MONEY SUPPLY<\/strong><\/em><\/span><\/p>\n<ul>\n<li>Money supply refers to the stock of money at a point of time in the economy.<\/li>\n<li>It includes the currency notes and coins issued by the central bank (RBI) as well as the stock of deposits held by public in commercial banks.<\/li>\n<li>Note that, <strong>since money supply is a stock concept, it is usually considered to be fixed\/given.<\/strong><\/li>\n<li>A policy induced increase in money supply will lead to a rise in general price level in the economy <em>(rise in money<\/em> <em>supply\u2192increase in aggregate demand\u2192prices will increase).<\/em><\/li>\n<\/ul>\n<p>\u25ba<span style=\"color: #ff0000;\"><strong><span style=\"text-decoration: underline;\"><em>QUANTITY THEORY OF MONEY<\/em><\/span><\/strong><\/span><\/p>\n<ul>\n<li>Quantity theory of money states that there is a <strong>direct relationship between the quantity of money in the economy and the level of prices of goods and services sold<\/strong>.<\/li>\n<li>According to this theory, if the amount of money in an economy doubles, price levels also double causing inflation.<\/li>\n<\/ul>\n<p>\u25ba<span style=\"text-decoration: underline; color: #ff0000;\"><em><strong>MONETARY AGGREGATES<\/strong><\/em><\/span><\/p>\n<ul>\n<li>It is closely related to the concept of \u201cmoney supply\u201d \u2022 Monetary aggregates are measures of money supply released by the RBI in decreasing (highest to lowest) order of liquidity<\/li>\n<\/ul>\n<p>Liquidity: ability to be converted to cash\/currency).<\/p>\n<ul>\n<li>Based on the recommendations of <strong>YV Reddy\u2019s Working<\/strong><\/li>\n<\/ul>\n<p><strong>Group on Money Supply: Analytics and methodology of compilation (1998), the monetary aggregates are:<\/strong><\/p>\n<p><strong>M0 <\/strong>(Reserve money\/monetary base) = Currency in circulation+ banker\u2019s deposits with RBI+ other deposits with RBI<\/p>\n<p><strong>M1 (Narrow money) <\/strong>= Currency with the public+ Demand deposits with the banking system+ Other deposits with RBI<\/p>\n<p><strong>M2 <\/strong>= M1+ Saving deposits of Post Offices<\/p>\n<p><strong>M3 (Broad money) <\/strong>= M1+Time deposits with the banking system<\/p>\n<p><strong>M4 <\/strong>= M3+All deposits with Post Offices (excluding National Saving Certificates)<\/p>\n<ul>\n<li>Money supply in the economy can be increased\/decreased through various instruments of monetary policy.<\/li>\n<\/ul>\n<p><span style=\"color: #0000ff;\"><strong>For more such notes, Articles, News &amp; Views Join our Telegram Channel.<\/strong><\/span><\/p>\n<p><a title=\"Telegram Link\" href=\"https:\/\/t.me\/triumphias\" target=\"_blank\"><span style=\"color: #ff0000;\"><strong>https:\/\/t.me\/triumphias<\/strong><\/span><\/a><\/p>\n<p><span style=\"color: #0000ff;\"><strong>Click the link below to see the details about the UPSC \u2013Civils courses offered by Triumph IAS.<\/strong> <\/span><span style=\"color: #ff0000;\"><strong><a style=\"color: #ff0000;\" title=\"Courses available\" href=\"https:\/\/triumphias.com\/pages-all-courses.php\">https:\/\/triumphias.com\/pages-all-courses.php<\/a><\/strong><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Relevance: Prelims: Economy: Indian Banking System \u25baMONEY DEMAND Money demand (also known as liquidity preference) refers to holding money in<\/p>\n","protected":false},"author":1,"featured_media":6714,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[230],"tags":[392],"class_list":["post-7080","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-quick-revision-prelims-economy","tag-union-public-service-commission-upsc"],"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/7080","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/comments?post=7080"}],"version-history":[{"count":1,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/7080\/revisions"}],"predecessor-version":[{"id":7081,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/7080\/revisions\/7081"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/media\/6714"}],"wp:attachment":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/media?parent=7080"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/categories?post=7080"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/tags?post=7080"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}