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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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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
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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
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shSamantaraya
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BANKASAFINANCIALINTERMEDIARY
Asset-liabilitytransformation
Size transformation
Maturitytransformation
Risk diversification
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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
Dr. Amaresh Samantaraya
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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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