Session 1 -Contours of Money, Banking & Monetary Policy-Final

7/25/2019 Session 1 -Contours of Money, Banking & Monetary Policy-Final

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CONTOURSOFMONEY, BANKING

& MONETARYPOLICYSession I


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OUTLINE

Relevance of the Course

Concepts of Money,Banking & MonetaryPolicy

Course Design, Schedules& Evaluation 2

Dr.AmareshSamantaraya


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RELEVANCEOFTHECOURSE

Day-to-day businessdecisions

Short-term decisions

Long-term decisions

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WHATISMONETARYPOLICY

Central Bank(RBI)s decisionon policy rates

Havingimplications forconsumption &

investmentdecisions

Ultimatelyinfluencing real

activity andprices

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HOWMONETARYPOLICYIS

RELEVANTTOTHEECONOMY


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PERCAPITAINCOMEININDIA (LONGTERM)

0

5000

10000

15000

20000

25000

30000

35000

40000


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PERCAPITAINCOMEININDIA (SHORTTERM)

9000

9500

10000

10500

11000

11500

12000

12500


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CONCEPT- MONEY


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CONCEPTOFMONEY

What is Money?

Some people use money to refer income

Some others use it to refer wealth Money is something which is used for payment

for buying goods and services, and settlement of

debt

Money is a Stockconceptmeasured asoutstanding as a particular date

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EVOLUTIONOFMONEY

Commodity moneysea-shells, strings of beads

or precious metals like gold and silver

Fiat moneya paper currency decreed by

government as legal lender

Cheques

Electronic payments

E-money

Credit and debit cards Smart card

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FUNCTIONSOFMONEYMEDIUMOF

EXCHANGE

Barter system and double-coincidence of wants

Requirements

Must be easily standardized, making it simple to

ascertain it value

Must be widely accepted

Must be divisible so that easy to make change

Must be easy to carry

Must not deteriorate quickly

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FUNCTIONSOFMONEYUNITOF

ACCOUNT

Used to measure value of goods and services

In a barter economy,

If there are 3 goods, there will be 3 relative prices3C2

If there are 10 goods, there will be 45 relative prices10C2

If there are 100 goods, there will be 4950 relativeprices100C2

If there are 1000 goods, there will be 4,99,500

relative prices1000C2 Using money as a unit of account reduces

transaction cost by reducing the number ofprices that need to be considered

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FUNCTIONSOFMONEYSTOREOFVALUE

Repository of purchasing powersaving

purchasing power from the time income is

received until the time it is spent

Money is not unique store of valuemany other

forms of wealth like shares, bonds, land,

jewellery

Some have advantages over money as they give

return, while money value depreciates with inflation

Advantage of money vis--vis other assets as astore of value is its liquidityease and speed

with which an asset can be converted into

medium of exchange 14



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MEASURINGMONEY

Aggregate money stock (supply) in an economy

reflects aggregate purchasing power

Behaviour of monetary aggregates reflects

variation in aggregate demand in an economy

Financial sector reforms and institutional

changes necessitates changing the components

which are included in money

Example,

FCNR(B) deposits, Certif. of Deposits, call money

IMF manual - Monetary and Financial Statistics

provides the benchmark for compilation15



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REVISIONOFMONETARYAGGREGATESIN

INDIA

First Working Group on Money Supply (FWG)

1961

Second Working Group on Money Supply (SWG)

1977

Third Working Group on Money Supply:

Analytics and Methodology of Compilation (TWG)

1998(Chairman: Dr. YV Reddy)

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MEASUREMENTOFMONEYININDIA

M3 = Currency with Public + Current Deposits

with Banking System + Saving Deposits with the

Banking System + Certificate of Deposits + Term

Deposits (excluding FCNR(B)) with Banking

System + Call borrowings from Non-depositoryFinancial Corporations by the Banking System +

Other Deposits with RBI

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MAJORSOURCESOFMONEYSUPPLY

Credit to the Government by the banking system

Credit to the commercial sector by the banking

system

Net foreign exchange assets of the banking sector Governments currency liabilities to the public

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Dr.Amare

shSamantaraya


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CONCEPT- BANKING


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BASICBANKING

Banks make profit by selling liabilities with one

set of characteristics (a particular combination of

liquidity, risk, size and returns) & using the

proceeds to buy assets with a different set of

characteristicsasset transformation

Banks borrow short and lend longbanks make

long-term loans and funds them by issuing short-

dated deposits

A securitya claim on issuers future income orassets

They also provide a host of services21

Dr.Amare

shSamantaraya


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BALANCESHEETOFSBI IN2010

Liabilities Assets

Amount Amount

Capital

Reserves & Surplus

DepositsBorrowings

Other liabilities &

provisions

Total

6.3

653.1

8041.21030.1

803.4

10534.1

Cash in Hand

Balances with RBI

Balances with banksMoney at call-short

notice

Bal. with banks abroad

Investments

Advances

Fixed Assets

Other Assets

Total

68.4

544.5

121.5

58.8

168.6

2857.9

6319.1

44.1

351.1

10534.122

Dr.Amare

shSamantaraya


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BANKASAFINANCIALINTERMEDIARY

Asset-liabilitytransformation

Size transformation

Maturitytransformation

Risk diversification

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Dr.Amare

shSamantaraya


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COURSEDESIGN& SCHEDULES

D A h S t


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Module 1

Concepts of money and banking: definition andmeasurement

Role of money and banking in the overall economy

Demand for & supply of money

Module 2

Overall monetary policy framework

Monetary policy strategyInternational perspective

Monetary transmission mechanism

Monetary policy operating procedure

Dr. Amaresh Samantaraya

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D A h S t


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Module 3

Dynamics in determination of bank credit and monetary policyasymmetry

NPAs in BankIssues & Challenges

Inflation targeting as the new monetary policy framework

Monetary policy committee Recent institutional innovation

Module 4

Inflation dynamics in India

Estimation of money-multiplier model of money supply in India

Estimation of money demand function for India

Empirical analysis of monetary transmission mechanism in

India Empirical analysis of current monetary policy operating

procedure in India

Empirical analysis of bank credit behaviour in India


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Dr Amaresh Samantaraya


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SCHEDULE

Lectures/Presentations Date

Classes commence on January 11, 2016

Lectures I - 8 Sessions January 11-14, 2016

Lectures II4 Sessions February 20-21, 2016Lectures III1 Session March 12, 2016

Project Presentations

3 Sessions

March 12-13, 2016


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SCHEDULE

Tests Date

Quiz Test - 1 January 12, 2016

Quiz Test - 2 January 14, 2016

Mid-term Test February 3-6, 2016Quiz Test - 3 February 21, 2016

Due date for Submission of

Project Report

March 15, 2016

End-Semester Test March 24-25, 2016


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PROJECT TOPICS

1. Inflation dynamics in India: Empirical

evidences

2. Empirical analysis of behavior of bank credit in

India

3. Empirical analysis of monetary transmission

mechanism in India

4. Estimating demand for money equation for

India

5. Empirical analysis of current monetary policy

operating procedure in India

6. Empirical verification of money-multiplier

model of money supply in India


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EVALUATION

Mid-termTest (30)

End-termTest (30)

Project

Work (20)Presentation

Write-up

Quiz (15)

CP (5)


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ANYQUERY/SUGGESTION?

Dr.Am

areshSamantaraya

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Documents

Session 1 -Contours of Money, Banking & Monetary Policy-Final