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| CA FOUNDATION | BUSINESS ECONOMICS | MONEY MARKET | CMA SHYAM | — Transcript

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0:00Hi guys. Hi sir.
0:03>> Okay. So today we are going to
0:05completely revise chapter 8. What is
0:07chapter 8?
0:09>> Money market. Okay. In the last chapter
0:12we had discussed about
0:15>> public finance that is fiscal policy. In
0:17this chapter we are going to discuss
0:18about monetary policy.
0:21And here we have totally three units.
0:23Unit one, unit two and unit three. Unit
0:25one is completely about
0:28money demand. Unit two is completely
0:30about and unit three monetary policy. So
0:34let's start the unit one the concept of
0:37money's demand and some important
0:40theories. Totally we are going to learn
0:42six theories in this concept. So first
0:45one what are the functions of money?
0:46Next one
0:48>> demand for money theory of demand for
0:51money and postian development theories.
0:54Okay first one about money. What is
0:57money?
1:00Money is what money does.
1:03And then what is money?
1:07So first
1:12so why
1:14before the introduction of money there
1:16is a
1:18barter system. So what is barter system?
1:23>> Exchange of goods and services for goods
1:26and services. So goods and services
1:30goods and services but we are facing
1:33some difficulties there
1:36invisibility is the biggest drawback of
1:40the B system. What is meant by that?
1:46We cannot divide the goods. For example,
1:49the worth of pen is not equal to the
1:51worth of bench. Butches
1:56but value. But can I know the what is
1:59value of this? No. But that's why we
2:02introduce the concept of money. Next
2:05having to find specific people to trade
2:08with the with makes it very difficult.
2:11What is meant by that?
2:28So these are the difficulties under
2:30barter system. That why we introduce the
2:32concept of money. It refers to the
2:34assets which are completely used and
2:38accepted as what's the first one?
2:41>> Store of value. Money will store the
2:44value. Next
2:47unit of account provides a common base
2:50for prices money price of the pen and
2:54price of the bench.
2:58Next medium of so medium of exchange
3:03something that people can use to buy and
3:06sell from another person. So
3:17money acts as a medium of exchange
3:19between the persons. So what are the
3:21three characteristics of money? Store of
3:23value, unit of and medium of exchange.
3:27Done. Clear. Next.
3:30Fiat money. What is meant by this fiat
3:32money?
3:34>> There will be no intrinsic value. What
3:37is meant by intrinsic value? Material
3:40value. For example, gold coins, silver
3:43coins.
3:46material value
3:50500,000
3:54government authorized value material.
3:58No fiat money means where the type of
4:00money that has no intrinsic value but it
4:04is accepted as money because the
4:07government declare it as a legal tender.
4:10Done. Clear. And what are the general
4:12characteristics of money?
4:14Generally, acceptable. That means it
4:17will be acceptable by all people. Next,
4:21durability. It can be used number of
4:23times. Next, easily recognizable and
4:27difficult to counterfeit. What is meant
4:30by counterfeit here? Produce. All the
4:34people cannot produce the money. Only
4:36the central bank, RBI will produce the
4:39money. Next, relatively scarce but with
4:42elastic supply. That means RBI cannot
4:45produce
4:46unlimited money. Limited in supply and
4:51elastic supply means it can change the
4:53supply. It can increase the money supply
4:56and it can decrease the money supply
4:58using
5:00RBI will use monetary policy. Government
5:03will use fiscal policy. Done. Clear.
5:07Next. Portable that means it is easy to
5:11carry and uniform means same value and
5:15appearance for all units like we have
5:19note
5:21Gandhi
5:23Gandhi
5:27currency. So generally
5:33so all the units should be uniform. And
5:36the last one is divisible. Money can be
5:39broken into small units. That means then
5:43it can be divisible. For example 500
5:48not 50 that is money can be divisible.
5:53So these are the general characteristics
5:54of money.
5:57Next, the demand for money. What is
6:00meant by demand for money?
6:04Demand for money.
6:07The desire people have to hold on cash
6:11for buying things and access to real
6:14goods and services. That means how much
6:17money I want to hold in cash to spend on
6:20goods and services. Goods and services.
6:24That is nothing but demand for money and
6:27it will be based on income, prices,
6:31interest rates and financial
6:33innovations. Income income increase
6:39that means it is positively related with
6:41the income. Correct. Next increase.
6:49So that is also positively related with
6:51the
6:53demand for money. Next interest rates.
6:57Interest rates means
7:00the rate of interest which I am going to
7:02invest or save.
7:05increase
7:10that means the amount I'm spending will
7:12be decreased
7:15interest rate increase for money
7:18decrease interest rate decrease the
7:20demand for money
7:22that means it is having negative or
7:25inverse relationship with the demand for
7:27money next financial innovations what is
7:31meant by innovation creating a new thing
7:33So innovations increase like online
7:37stock market, online investment, online
7:39savings in sorry
7:46that means the money we are spending on
7:47goods and services will
7:50decrease.
7:52So financial innovations increase money
7:55which will be held by people decrease.
7:59So on this basis demand for money will
8:02be always depending on what are those
8:04income
8:05>> prices interest rates and financial
8:08innovations. Done. Now coming to the
8:11theories of demand for money. So first
8:15we are going to discuss three theories.
8:18>> Quantity theory or classical theory.
8:21Next one Cambridge approach or cash
8:25balance approach. Next kinesian theory
8:28of demand for money. Okay. So for
8:31example let's take three peoples A, B
8:34and C and each are having 100 rupees as
8:38their income and
8:39>> 100 rupees. A what is A doing? 100
8:43rupees spending on goods and services.
8:47Okay. B. What is B doing?
8:51>> He is spending 90 on goods and services
8:54and 10
8:56saving cash in hand. Done. Next. See in
9:01this 180 is spending on goods and
9:05services and rupees 10 is savings and
9:09rupees 10 is investment. That means a is
9:14using his 100% money for the transaction
9:18motive. What is meant by transaction
9:20motive?
9:22spending money on goods and services.
9:26Done. Next. B is using his money on both
9:30transaction motive on precautionary
9:34motive. Precautionary motive is also
9:36known as savings. That means savings for
9:39future emergencies.
9:42Next
9:44C. What C is doing?
9:48transaction motive, precautionary motive
9:51and 10 rupees he is investing that is
9:53nothing but speculative motive or
9:56investment motive. Clear? And here the
9:59main thing is transaction motive and
10:02precautionary motive will completely
10:04based on
10:06income of the individual.
10:10increase
10:19income increase investments increase.
10:22Answer is partially no because
10:25investments is also based on interest
10:28rates.
10:29Interest rates increase.
10:32Investments increase interest decrease.
10:35Investments decrease
10:37that means speculative motive is based
10:39on
10:41interest rates. Done. Now we are
10:44discussing three theories based on three
10:46concepts. Transaction motive,
10:48precautionary motive and speculative
10:50motive. First one
10:54transaction and it is given by Fisher
10:57who
10:59>> quantity theory of money or classical
11:02theory or Fisher's theory. It was
11:05propounded by Sir Irving Fisher of Yale
11:09University and the book written by him
11:11is the purchasing power of money and
11:14published in
11:16>> 1911. 1911 that means it is the one of
11:19the oldest theories in economics and it
11:22is also known as equation of exchange or
11:25transaction approach. Now do you
11:28remember transaction motive? What is
11:29meant by that?
11:31Total money is spending on only goods
11:34and services. That means what fisher is
11:37telling here?
11:42Goods and services may spent that means
11:44money demand should be equals to money
11:47supply. Money demand should be equals to
11:51money supply. Here on demand side we
11:53have P into T. P into T. P means
11:59>> price. T means
12:01>> T means transactions. Let's say 10.
12:05Price of the good. And number of
12:06transactions also 10. That means the
12:09money available in the economy is also
12:13>> 100 10 into here 10 into 10 means
12:18m into v that means how much money is
12:23available and v means at what speed it
12:26is circulating that is nothing but
12:28multiplier
12:30multiplier concept in second unit. So
12:34money's supply should be equals to
12:37money's demand. MV should be equals to P
12:40into T. Clear? Done. Okay. So it is the
12:45equation derived by FER. That means 100%
12:48money should be spent on only goods and
12:50services. There are no savings and there
12:52are no investments. Done. And here M
12:57means
12:58quantity of money in circulation. V
13:01means velocity.
13:03>> V means velocity of circulation. That
13:06means at what speed it is circulating.
13:08Done. And P means price level. T means
13:12total number of transaction. Velocity
13:14means how many times money changes in a
13:19hands in an economy. Done. That means
13:21the speed. Clear till now. And here we
13:24have two assumptions. Enter. V and T are
13:27always constant. And that means the
13:29variables are
13:31M and P. What is the relation between M
13:35and P? We already know this money supply
13:38price. When money supply increases,
13:43prices will increases leads to
13:46inflation. Correct? And when money
13:49supply decreases, prices decrease leads
13:52to deflation. Done.
13:56So the relation between M and P is
13:59proportional or direct relationship.
14:01When money supply increases, prices also
14:04increases. When money supply decreases,
14:06prices also.
14:08So relation between quantity of money
14:10and P that is sorry M and M and P that
14:15is direct relationship. If M increases,
14:18P also increases. If M decreases, P also
14:22decreases. Direct relation between money
14:25supply and price. Relation between price
14:28level and value of money. What is meant
14:31by this? We know price level means price
14:34value of money means
14:36>> purchasing capacity. What is meant by
14:38that? Purchasing.
14:40>> For example, if I am holding 100 rupees,
14:43how much?
14:44>> Initially the price is 20.
14:47Now how many goods I can purchase?
14:51>> Five. Five is my purchasing capacity.
14:54Now the price increased to 25.
14:58Now how many goods I can purchase? Four.
15:00That means my purchasing capacity
15:02reduced from five to four. That means
15:05when the price increases.
15:08>> Purchasing capacity or value of money is
15:12>> decreasing. When the price is
15:13decreasing, value of money is
15:16increasing. That means there is a
15:18inverse relation between the price level
15:22and
15:23>> value of money. When the price level
15:26rises, value of money falls. When the
15:28price level falls, value of money rises.
15:31This is the relationship between price
15:32and
15:34value of money. Done. Now the relation
15:37between quantity of money and value of
15:40money. Here there is a mediator between
15:42these two. Ever price. When quantity of
15:46money is nothing but money supply, when
15:49money supply increases, what will
15:51happen?
15:52>> Price will increase. When price is
15:55increased,
15:57>> value of money is decreased. When money
16:00supply decreases, prices decreases. When
16:02price decreasing,
16:05>> value of money increases. Now, we want
16:08the relation between money supply and
16:11value of money. When money supply
16:13increases, value of money decreases.
16:15When money supply decreases, value of
16:17money increases. Now can we tell it is
16:20the inverse relation between these two
16:23done? So since when money supply
16:25increases, price level increases when
16:27price level increases value of money.
16:30That means between money supply and
16:32value of money there is inverse
16:35relationship. Done. So this is the table
16:38representing the relation between
16:39quantity of money, price level and value
16:43of money. Done? Clear? So this is all
16:46about
16:48FER's equation. And here we have
16:50extended equation. What is this extended
16:53equation? Till now we are discussed
16:55about only actual money. Now we are
16:59discussing about credit money. What is
17:02meant by credit money? the money which
17:05are multiplied by the banks commercial
17:08banks.
17:11So that means MV plus
17:14M bar V bar equals to PT M bar means
17:19total quantity of credit money V bar
17:22means velocity of the credit money done
17:26so that means money supply should be
17:28equals to money's demand done clear so
17:32external equation and normal equation
17:33normal equation MV equals to PT external
17:36equation
17:39MV + M bar V bar should be equals to
17:43>> and in the last exam they have
17:45questioned what is the FER's extended
17:47equation okay done
17:50so done with Fer's approach now we are
17:53discussing about Cambridge approach or
17:56cash balance approach so what is meant
17:59by this till now we had discussed only
18:03transaction approach or transaction
18:05motive now we are going to discuss about
18:07both transaction motive and
18:10Precautionary motive precaution that is
18:12nothing but savings for future
18:15emergencies
18:17clear so in the early 1900s Cambridge
18:21economies who are they Alfred Marshall
18:24ACO
18:26DH Robertson and John Maynard Kees put
18:29forward fundamentally different approach
18:32to quantity theory known as
18:34neocclassical theory or cash balance
18:37approach. What is the other names of
18:39cash Cambridge approach?
18:42>> Neocclassical theory or cash balance
18:45approach. And here he had highlighted
18:47the motive of precautionary.
18:50And what is the equation here?
18:52MD money demands equals to
18:55>> K P Y. What is meant by K? Proportion of
19:00savings. For example, in the example A B
19:04C B B B B B B B B B B B B B B B B B B B
19:05B B B B B B B B B B B B B B B B B B B B
19:05B B is holding 100 rupees and he is
19:08spending 90 on goods and services and 10
19:11rupees is savings.
19:14Now K means 90 or 10
19:18how much? 10 the proportion of savings
19:22done clear? And P Y is nothing but
19:26income. What is income?
19:28What is income? 100 that means K is 10%,
19:33PY is 100. Now money demand equals to
19:3710. How much money I want to keep in
19:41hand for the future emergencies? That is
19:43nothing but savings. Clear? He is
19:46completely dominating the purpose of
19:48savings here. Done.
19:51Clear till now. And here the K is
19:54nothing but Cambridge K. And who are the
19:57four economies?
19:59Alfred Marshall AC Pigo Robertson and
20:03>> JM Ke done
20:06okay and what's the difference between
20:08quantity theory and Cambridge theory
20:13here mainly it is focusing on
20:15transaction motive here transaction and
20:18precautionary motive and more relevance
20:19is for precautionary motive and here
20:22money as a flow concept that means all
20:25money is flowing in the economy for
20:27purchasing goods % services but here
20:30there is a stock concept we are not
20:33spending 100%. Some money we are keeping
20:35as stock that is nothing but savings.
20:38Done. And here it is completely based on
20:41money supply MV MAR V bar. Done. And
20:44here it is money's demand MD equals to K
20:49into P Y. Clear? Done. So this is all
20:53about Cambridge's approach. And next one
20:58Kenian theory of demand for money. What
21:01is meant by this?
21:03Till now we had discussed transaction
21:05motive and precautionary motive. Now he
21:08introduced the
21:10>> speculative motive. What is meant by
21:12that?
21:15>> Some money can be invested based on
21:19interest rates. Based on interest rates.
21:22Okay. So K's theory of demand for money
21:24is also known as liquidity preference
21:27theory. and liquidity preference a term
21:30which was coined by
21:32JM Kes in his master book the book
21:36the general theory of employment
21:38interest and money in 1936 this book
21:42name already covered in national income
21:44chapter
21:47and three motives transaction motive
21:50precautionary motive and speculative
21:52motive transaction motive money need for
21:55the daytoday transaction that is nothing
21:58but goods and services and precautionary
22:01motive. Money used to hold cash for the
22:03future emergencies. This is nothing but
22:06savings.
22:08And last one, speculative people wish to
22:11hold money for future so they can invest
22:14in.
22:16Okay. Speculative motive motive. What is
22:19meant by demand? Demand for money.
22:28future low interest rate
22:33for example
22:52based on interest rates. Okay. So when
22:56the interest rates increases, what will
22:59happen to demand for money? What will
23:01happen to demand for money decreases?
23:04When the interest rate increases, I'll
23:06try to invest the money and my money
23:08reserves will be decreased.
23:11And when interest rate decreases, demand
23:14for money will be increased. I won't
23:17invest now. Clear? So there is a inverse
23:20relationship between the
23:23interest rates and demand for money in
23:28kinesian theory. Speculative motive
23:31done. So speculative motive means
23:34reflects people desire to hold on cash
23:37in order to be equipped to exploit any
23:40attractive investment opportunity
23:43requiring cash expenditure. Future
23:4710 minutes
23:50done. And what are the assumptions here?
23:54The expected returns on bonds are of two
23:57types. One is interest payment and
23:59expected rate of capital gain
24:04only interest. No. And capital gain. For
24:08example, 100 rupees I have invested in
24:11stock market. Then
24:14stock market. Okay. div
24:17is nothing but return for examp
24:30let's say 120 increase the stock price
24:34what is my total benefit here
24:38what is my total benefit is it only 10
24:42it is 30 30 means 10 that is interest or
24:46dividend plus 20 is the capital gain. So
24:52investment
24:55capital gain clear done. Okay. So what's
24:58the relationship here? When the interest
24:59rate increases
25:01speculative demand for money decreases
25:04when the interest rate decreases
25:05speculative demand for money increases.
25:08Clear? Done. And transaction motive
25:11precautionary motive is completely based
25:13on income. Speculative motive is
25:16completely based on interest rate. And
25:19here had specified transaction demand,
25:22precautionary demand and speculative
25:25demand is the total demand for money.
25:28Clear? Done. Done till now. And this is
25:33how the demand curve for the speculative
25:35demand will be. That is nothing but
25:37inverse relationship between the
25:39interest rates and demand for money.
25:42When one thing increases other thing
25:44decreases that means negative relation
25:46and the slope will be downwards from
25:50left to right. Done. So three motives
25:53transaction motive, precautionary
25:55motive, speculative motive and fish
25:57theory is completely about transaction
26:00motive money's demand should be equals
26:02to money supply MV equals to PT and
26:05Cambridge motive Cambridge theory
26:09transaction motive and precautionary
26:11motive and what what is the equation MD
26:13equals to K into P into Y that is
26:16nothing but he specifying savings
26:19and the last
26:22Canian theory.
26:25So
26:27three things transaction precautionary
26:29and speculation. Here the main concept
26:31is on speculation related with the
26:34interest rates. What the relation
26:37inverse relation done? Clear.
26:41Next. Liquidity trap. What is meant by
26:45this
26:47liquidity trap? The state where interest
26:50rates are too low near to zero interest
26:56no
26:59either we'll spend on goods and services
27:01remaining money will be holding cash
27:06in no development
27:09economy growth no so that is the phase
27:11of liquidity trap so example Japan in
27:161993 Countries where the interest rates
27:18are near to 0% people and bank held cash
27:22instead of lending or investing lending
27:25investing
27:28whole so it is called as the last decade
27:32of Japan clear done so it is always
27:36based on interest rates
27:39and now we have post kinesian theories
27:43first one is inventory approach to the
27:46transaction ction balances given by Bow
27:49and developed by Bowal in 1952 later
27:54Tobin in 1956.
27:57Here money should be treated like
27:59inventory that means there is a concept
28:01of stock
28:03inventory stock. What is meant by that?
28:07Some money will be invested, some money
28:10will be held in cash.
28:13For example, if I have 100 rupees, how
28:15much in this 50 rupees is held by me in
28:19cash? And 50 rupees is invested or for
28:24other purpose I am trans transactions.
28:27So general
28:35income
28:3750
28:41interest anything which is forgone is
28:44nothing but opportunity cost. So 50
28:50opportunity cost
28:57transaction charges like commission
29:00brokerage.
29:02Soction
29:12costaction
29:16cost
29:20I have to maintain the balance between
29:22the money I should invest and the money
29:24I should hold in cash.
29:28So using the formula square root rule
29:30what is that? C equals to
29:33square root of 2 B Y /
29:37done clear
29:43opportunity costaction
29:46motive. So people
29:51done. So e formula
29:54optimum cash balance how much should be
29:58held in cash remaining money spend
30:02clear
30:04done and what are the implications
30:07higher the transaction cost
30:10transaction cost
30:14so holding money will be increased hold
30:17more money and higher the interest rate
30:22interest
30:28less money. Now people should choose a
30:30mix of money and interestbearing assets
30:33to minimize the total cost. Here total
30:36cost includes two costs. One is
30:38opportunity cost and transaction cost.
30:42Done. Done. Next one.
30:46>> Fried rice restaurant. Enter the
30:50>> fried man's restatement of the quantity
30:54theory famously known as fried rice
30:57restaurant.
31:03So it was proposed by Milton fried man
31:06in 19. Now what he is telling treat the
31:10demand for money like a asset
31:13asset like inventory. Now asset like any
31:19capital asset treat the demand for
31:21money. So
31:23now the concepts of time value of money
31:26will come value of money.
31:32No.
31:36No. So
31:41future
31:44that means here we have the concepts of
31:46present value, future value, interest
31:50rates.
31:52So generally in the time value of money
31:54you know this formula present value
31:57equals to
31:59future value divided by 1 + r power n.
32:04So
32:06PV = 1 + R power sorry 1 + r n +
32:13into future value.
32:15So
32:17divided by 1 + r power n. So that means
32:21here future value will be always based
32:24on interest rates
32:27interest rates. So
32:36fried man done and here
32:40current value of total wealth is nothing
32:42but present value permanent income
32:46future value discounted is nothing but 1
32:49plus r power n is nothing but number of
32:52years what is that number of years
32:56clear? Done.
33:03Okay. Done. Next one. The last theory.
33:06Demand for money as a behavior towards
33:09risk which was given by James Tobin in
33:131958.
33:14That means here now what is meant by
33:17risk?
33:19risk.
33:31Okay.
33:33So risk means uncertainity. What is
33:35meant by that uncertaintity
33:38future?
33:40Now we have some money. Either
33:45we'll invest or hold in cash
33:51there will be no risk risk. Okay.
34:01That means no risk and no return. No
34:04risk and no risk. Next
34:08investment.
34:12So but 50 sorry 50 and 50 let's assume
34:1750
34:21maybe
34:24uncertainity risk
34:38that is based on portfolio the
34:40diversified portfolio. Here we have
34:43totally four types of portfolio. What's
34:45the first one? Combination of safe and
34:48risky assets. That means some amount
34:51holding cash some amount invest in the
34:54risky assets.
34:56Next less risk to the more risk. Try to
35:00invest in less risky assets more then go
35:03for more risky assets. Next more risk to
35:08the
35:14more risky assets later less risky
35:18assets and last one
35:22zero risk that means whole 100% in cash
35:26done clear so this theory is given by
35:29Tobin in 1958
35:33done so these are the theories is about
35:38theory of demand for money. So done with
35:41the first unit. Clear? Done. Done. Next
35:45one. Unit two. What is this? The concept
35:48of money supply. Till now we have
35:50discussed about only money is demand.
35:53Now we are going to discuss about money
35:55supply. What is meant by money supply?
35:59Total money
36:02available with the people available in
36:04the economy available in the so money
36:08supply refers to the total quantity of
36:11money available to the people in a
36:14economy that means money supply
36:19banks and so that's why we have defined
36:21what is public what is government and
36:24what is banking system do you remember
36:27the things here done. So here we have
36:29two aspects. One is stock variable and
36:32flow variable. What is meant by that
36:34stock variable?
36:37At a point of time what is the money
36:39available? For example, it is 100. Okay.
36:43100 rupees on the economy 100 rupees
36:45people some money may be with the banks
36:49or with the government. That means the
36:52money which is flowing or flowable. Flow
36:55variable is nothing but the money with
36:57the
36:58people or public. For example, 10 rupees
37:03with the government, 10 rupees with the
37:06banks and remaining 80 with the
37:09>> public that means it including stock
37:11variable that means the money which is
37:14not flowing in the economy and 80 rupees
37:16is flowing in the economy with the
37:20public.
37:22So what is meant by public?
37:26What is meant by public? Public contain
37:30what are the exclusions to the public
37:35expect the except the producers of
37:39money. So generally producers of money
37:44RBI but there are two producers of
37:46money.
37:49RBI and commercial banks. How RBI will
37:53produce? It will print money. It will
37:58print currency. How commercial banks are
38:00going to produce the money? By way of
38:03taking the deposits and lending the
38:05money. It is multiplying the money.
38:08Clear? Okay. So, who are the producers
38:11here? Government and the banking system.
38:14That means you have to reduce two things
38:16here. Interview interbank deposits that
38:19means the money with the banks.
38:23Next money held by the government and
38:26the banking system are not included in
38:28the definition of public. Remaining all
38:31things will be included in the
38:33definition of public. And coming to
38:35government, what is meant by government?
38:38Fiscal, federalism. What is meant by
38:41government?
38:42State government, central government and
38:45local governments. Banking system
38:47comprises of two types of banks. Central
38:50bank and commercial banks. Central bank
38:52means RBI and commercial bank. Banks
38:56means all banks accepting the demand
38:59deposits. Here we have two types of
39:01deposits. Demand deposits and term or
39:04time deposits also known as fixed
39:08deposits. Enter fixed deposits. What are
39:11meant by demand deposits?
39:14For example,
39:20on our demand, we can withdraw the money
39:22at any time. So that is the concept of
39:26demand deposits. What is meant by term
39:28deposit or fixed deposit?
39:31Enter definitely it will be a
39:35fixed time and fixed amount. So
39:41difference and it is important in
39:44classification of measurements M1, M2,
39:47M3 and M4. So done clear. Now
39:53next one
39:55sources of money supply. In this chapter
39:58we are going to learn about the sources
40:00of money supply and measurements of
40:03money supply. M1, M2, M3 and M4. And
40:08determinance of money supply. Who will
40:10determine the money supply?
40:13Central bank, commercial bank and public
40:17CB, CB and P. Next concept of money
40:22multiplier. And the first one is the
40:24source of money supply. Two producers.
40:29One is currency issued by the central
40:33bank. What's the central bank? RBI. It
40:36will issue the fiat money. What is meant
40:38by fiat money?
40:40>> The money which has no
40:43>> material value or intrinsic value. That
40:47means the money which we are using at
40:48present. Done. Next. Commercial banks.
40:51They create money and lend it to the
40:54people. This money created by the bank
40:56is called credit money. Also called
40:59commercial money. Clear? So fiscal money
41:03and credit money. Fiscal money created
41:05by the RBI. Commercial money created by
41:08the
41:10two producers. Done.
41:12Next. What are the other points? As the
41:14technology advances, technology
41:16increasing day by day and the demand for
41:18digital currency is also increasing.
41:22Example, central bank digital currencies
41:25like e rupees done. And however
41:29cryptocurrencies are not recognized as
41:32legal currency in India. Cryptocurrency
41:35is not a legal currency because it is
41:38legally uncertain.
41:47So that's why it is not as legal money.
41:50Done. Clear. And coming to the
41:53measurements of money supply. What are
41:55the four measurements? M1,
41:58M_sub_2, M3 and M4. Okay. And this
42:02classification is based on liquidity.
42:06Enter the liquidity. The things which
42:08can be easily converted into cash will
42:12be in M1. And next things M2 and later
42:16M3 and last one is M4. We know M1 is
42:19known as
42:21>> narrow money. M1 is narrow money and M3
42:26is
42:27>> broad money. Okay. Who classified these
42:30things?
42:32Who classified these things? RBI.
42:36RBI. In India, RBI keeps the track of
42:39different measures of money supply.
42:42These measures show how money how the
42:45money is circulating in the economy and
42:47initially it is only calculated the
42:50measure of M1 also known as narrow money
42:54and later it includes the currency and
42:57demand deposits held by the public after
42:59they introduced the broad measure. What
43:00is meant by that? Aggregate monetary
43:03resources M3 in 1967
43:08to 68
43:10and
43:12data from 1977.
43:16RBI has been publishing data on four
43:20different measures M1, M2, M3 and M4
43:23along with reserve money. What is meant
43:26by reserve money?
43:28The money published and printed by the
43:31RBI also known as central bank money
43:35base money and high powered money also
43:38known as monetary base into the monetary
43:42base. Clear? Done. And reserve money is
43:46nothing but currency in the circulation.
43:49And that means currency with the public
43:52plus deposits with the RBI and other
43:55deposits with the RBI that is nothing
43:58but money with the banking system.
44:01Clear? Done. So RBI money public no some
44:06money will be with the RBI. The sum of
44:09those all totals is nothing but reserve
44:11money. Done. Now important thing M1, M2,
44:15M3 and M4, M1 the things which will be
44:18easily converted into cash liquid cash.
44:22So M1 includes
44:26currency notes and coins with the people
44:30that is nothing but currency in
44:32circulation plus demand deposits with
44:35the banking system. That means the
44:38deposits which can be easily
44:40withdrawable
44:42and other deposits with the RBI. This is
44:46nothing but M1 M2.
44:50M1 plus saving deposits with the post
44:53office savings bank. Here we have two
44:56types of banking systems. One is normal
44:58banking system and post office banking
45:01system. In M1 we had only deposits with
45:04the banking system. In M2
45:08saving deposits that means demand
45:10deposits with the post office banks done
45:14in M3 M1 plus time deposits with the
45:18banking system that means in M3 M1 also
45:21there right
45:23M1 already demand deposits with the
45:26banking system M3 time deposits that
45:30means total deposits with the banking
45:33system in M3 M3 and M4. M3 plus total
45:39deposits with the post office saving
45:42organization. That means all demand
45:44deposits and time deposits in normal
45:48banking system and post office banks
45:51excluding national savings certificates.
45:55Done. Okay. If you have any doubts
45:57regarding this, you can check this
45:58table. In M1 we have
46:02currency demand deposits with the
46:05banking system and other deposits. M2
46:08includes
46:10M1 and M2
46:12M3 includes that means here also it will
46:16include all these things. M4 includes
46:20M3. M3 includes M1 that means in all the
46:24things currency demand deposits and
46:27other deposits will with RBI will be
46:29there and in M2 one more thing is adding
46:33what is that saving deposits or demand
46:36deposits with the post office. Correct?
46:39And in M3 there is no demand deposit
46:42with the post office but time deposits
46:45with the
46:46>> that means all deposits with the banking
46:49system. In M4 we have to include all the
46:52things. Done. And M1 is considered as
46:55narrow measure and M3 is considered as
47:00>> broad measure. Done. Clear with M1, M2,
47:03M3 and M4. Done. Next you have to
47:07calculate these things.
47:08Calculate currency with the public from
47:10the following data. You have notes in
47:13circulation,
47:14calculation of sorry circulation of
47:17rupee coins, circulation of small coins
47:19and cash on hand with the banks.
47:25can calculate
47:26currency with the public. That means add
47:30all the things and reduce the currency
47:31with the banks.
47:47What's the answer?
47:5020
47:52four lakhs. 24,000
47:54>> 24,000
47:57>> 620
47:58>> That means not in circulation plus
48:02circulation of rupee coins plus
48:04circulation of small coins and exclude
48:08the cash on hand with the banks. Done.
48:11So the that is how we have to calculate
48:13the currency with the public. Reduce the
48:17money with the banks. Done. Next
48:21calculate narrow money. What is narrow
48:22money? M1 from the following data
48:26narrow money M1 includes
48:30>> currency with the public right 90,000
48:33crores next demand deposits with the
48:35banking system
48:38that means
48:40here add these two and time deposits
48:43will it be there no other deposits yes
48:47saving deposits of post so post office
48:50saving banks no so what's the Answer.
48:53Add these three things. How much?
48:57>> Five lakhs.
48:58>> 70,000.
49:00>> 70,000 is the answer. M1 equals to 5
49:03lakh. 70,000. Done.
49:07Next. M again. M1. Again the three
49:11things. Currency with the public. Add
49:14this one. Time deposits. No. Demand
49:17deposits. Demand deposits. Yes. Post
49:21office saving deposits.
49:23No. Other deposits with RBI. Yes.
49:28Add the three things.
49:34How much?
49:37>> Three lakh 76,000
49:39>> 76,000
49:4049
49:42>> 400
49:43>> 19.4
49:45>> 19.4
49:46Done. Clear. Next
49:50M4. Compute M4.
49:55M4 include all the things except
50:00national savings certificates. That
50:03means should we have to reduce this?
50:06Reduce just exclude it.
50:30Relax
50:3270
50:36five lakhs five lakhs
50:3973,000
50:41>> 79
50:44five done easy calculations
50:47measure Measurements question either M1,
50:49M2, M3 or M4. You have to calculate it.
50:52Done.
50:54Next one. Determinance of money supply.
50:58What are the determinance of money
51:00supply? Here we have two types. One is
51:02exogenous. That means completely
51:04depending on the RBI. Central banks
51:08means RBI. Endogenous means other than
51:12RBI. So money supply depends on economic
51:16activities. Interest rate and public
51:19desire to hold cash that is nothing but
51:22interest rate is completely based on
51:26completely based on commercial banks
51:29and public desire to hold the money is
51:31based on public economic activities also
51:34based on public done so that means here
51:38the determinants are three things CB CB
51:42and central bank commercial bank and
51:45public. Okay. Now let's discuss about
51:49the concept of money multiplier. What is
51:52meant by money multiplier?
51:57Here I told you two producers
52:01RBI and commercial banks. Okay. RBI
52:06initially
52:08print the money it is one of the
52:10producer and later
52:12that money is multiplied by the
52:16commercial banks that means multiplier
52:19is nothing but
52:21how many times reserved money is going
52:24to multiplied
52:26clear so let's take an example here is
52:29the
52:31100 cr injected who is injected this
52:33money RB B I RB I and 500 crores
52:39increase in the money supply. Originally
52:41the money injected is just 100 crores
52:44but later it was supplied 500 crores.
52:48That means who increased this money?
52:52>> Commercial banks by
52:56depositing and lending it. That means
52:59how many times the money got multiplied?
53:02How many times here?
53:04500 divided by 100 how many types?
53:08>> So multiplier is nothing but five. So
53:11that is nothing but money supply equals
53:14to
53:16multiplier into monetary base. Here
53:19monetary base is nothing but the money
53:21printed by the
53:22>> how much? 100 crores. Multiplier is and
53:27final money supply is 500 crores.
53:31Clearly done. How many times high
53:33powered money or the reserved money is
53:35going to multiply in the economy to
53:38create the money supply? Done. And from
53:42this formula, can I tell what is the
53:44formula to derive? M means multiplier.
53:49Money supply divided by monetary base.
53:52Monetary base the money printed by RBI.
53:56RBI.
53:57And here we have two important
53:59assumptions. Banks do not hold excess
54:02reserves. First thing excess reserves
54:05means you have to know one thing. Triple
54:06R.
54:09What is meant by triple R?
54:12>> Required reserve ratio. For example, 100
54:16crores is deposited in the bank. Okay.
54:20Now there will be required reserve
54:23ratio. What is meant by that?
54:26So let's take 10% is the reserve ratio
54:30that means bank should not give all the
54:34100 crores it have to keep aside
54:37>> 10% how much 10 crores remaining 90
54:41crores can be lended
54:44again in this 90
54:4610% will be kept aside that means 80
54:50what sorry 90% and remaining 10% that
54:53means 9 so
54:56ratio
55:01reserve ratio
55:07money supply.
55:09So let's take here increase it to 20%.
55:1320%, that means now commercial bank
55:15should kept aside 20% that means 20
55:18crores and the require sorry available
55:20money is just 80% or 80 crores. So
55:25reserve ratio
55:33banks does not hold excess reserves and
55:36public and firms do not hold excess
55:39currency. That means what is meant by
55:41that?
55:49So that means banks does not hold any
55:51excess resource and publican forms does
55:53not hold any excess currencies. Done.
55:58And another formula for multiplier. What
56:00is what is that? M = 1 / r required
56:05reserve ratio. And what is the relation
56:07between these two?
56:09Inverse relation. And that means when
56:11reserve ratio is increased,
56:14money multiplier will be decreased,
56:16money supply will be decreased. So see
56:20this example when r is 10%. 1 divided by
56:240.1 10% 0.1
56:27how much?
56:28>> 10 m equals to 10. When r is 5% 0.05 05
56:34that is 20. That means when R decreased
56:37multiplier increased. Now money supply
56:40also increases. When R increased
56:43multiplier decreased money supply
56:47money supply decreases. That is the
56:49relation between
56:52reserve ratio multiplier and money
56:54supply. Inverse relation between
56:58reserve ratio and multiplier. Positive
57:00relation between multiplier and money
57:03supply. Done. Done guys. Till now. So
57:07relation between reserve ratio and money
57:09multiplier is lower the reserve ratio,
57:11higher the multiplier, higher the
57:13reserve ratio, lower the multiplier.
57:16Clear? Next factors affecting the
57:19multiplier. So high reserve ratio.
57:22Excess reserve ratio. What will happen?
57:25Banks will lend less money leads to
57:28smaller multiplier and more currency
57:32held by the public. Deposits will reduce
57:33now. So less deposit expansion leads to
57:37the smaller multiplier. Negative
57:40effects. Negative effects. Done.
57:44Next multiplier approach to the money
57:48supply. And here it is based on again
57:50three things. CB CB and
57:53CB CB and P commercial bank, central
57:57bank, commercial bank and public. How
58:00sir? High powered money created by
58:04>> RBI. It is completely based on RBI. If
58:07the high power money increases, money
58:09supply increases, done. Next, reserve
58:13ratio. Reserve ratio is nothing but
58:15reserves divided by deposit ratio.
58:19inversely related.
58:23Reserve ratio increase.
58:29Money supply increase currency deposit
58:32ratio is completely derived by the
58:35public
58:41clear. It is also inversely related with
58:44the money supply. Done. So they are
58:47telling that money supply is the
58:49functional behavior of central bank,
58:51commercial bank and public. Central bank
58:54controls the high powered money and it
58:56is directly proportional with the money
58:59supply money supply and commercial bank
59:03create credit and expand deposit and it
59:06is based on reserve ratio. Higher
59:08reserve ratio bank lends less money
59:12supply decreases and lower reser ratio
59:16more lending and sorry more lending and
59:19more money supply that means
59:21relationship
59:23negative or inverse relationship done
59:26and next one third public behavior
59:28depending on currency deposit ratio how
59:32much currency we are holding how much
59:33currency we are deposit so it is also
59:36inversely related and it is based on
59:40banking habits and economic activity.
59:43Done. And it is based on interest rates.
59:47Done. And another formula when we have
59:51currency ratio, excess reserve ratio and
59:54reserve ratio. What is the formula?
59:58>> M equals to
1:00:001 + c divided by r + e + c. Okay. And
1:00:06here we have one more problem regarding
1:00:08that chain.
1:00:52done anyone.
1:00:57So what are the requirements here? We
1:00:59need to get what is R, what is E and
1:01:01what is C. What is R here? 10% directly
1:01:06they give 0.1.
1:01:08What is E?
1:01:11Excess reserves
1:01:14excess reserves are so read the
1:01:16information here r equal to 10% that is
1:01:18equal 0.1 currency is 400 billion and
1:01:23deposits are 800 billion excess reserves
1:01:26are 08 billion 0.8 million means 800
1:01:31million excess reserve ratio that means
1:01:35excess reserves divided by deposits
1:01:380.8 8 billion divided by 800 billion how
1:01:43much?
1:01:45So R equals to 0.1 equals to
1:01:50>> 0.001.
1:01:52Okay. Next one. C C by D currency
1:01:55divided by deposits how much?
1:01:58>> 0.5.
1:02:00So with this data can we do this easy?
1:02:04How much? 15
1:02:07>> 150
1:02:10is the m done clear.
1:02:15Next if the reserve ratio is increased
1:02:17to 15% though the value of money
1:02:22multiplier will be
1:02:25now instead of 0.1
1:02:27you have to take
1:02:3005
1:02:33and then
1:02:36how much
1:02:40>> 10
1:02:42m = 1050 50. Okay. So that means when
1:02:47reserve ratio is 10, M is 15.50.
1:02:51When reserve ratio is 15, M is 10 point.
1:02:55When reserve ratio increased, money
1:02:57multiplier
1:02:59>> decreased. Inverse relationship. Done.
1:03:02Clear.
1:03:05Next one. Monetary policy and money
1:03:09supply. Now we are going to discuss
1:03:11about open market operations.
1:03:14Open market operation. What are meant by
1:03:16open market operations?
1:03:19It is the tool of RBI to control the
1:03:23money supply through
1:03:26government securities.
1:03:29Government securities. Government
1:03:31securities.
1:03:33Government.
1:03:35Government purchase.
1:03:40When the government is purchasing, what
1:03:43is happening?
1:03:45>> Money is paid by the government and
1:03:48money is received by the public. Money
1:03:50supply increases. Government securities
1:03:54purchase means money supply increases.
1:03:57When government security is issued or
1:03:59sold,
1:04:02>> money supply decreases because now money
1:04:05is paid by the public taken by the
1:04:08government. Done. So using the
1:04:10government securities how the RBI is
1:04:14changing the money supply is nothing but
1:04:16the concept of open market operations.
1:04:20When the central bank buy government
1:04:22securities is it injects the high
1:04:25powered money into the system and it
1:04:28will lead to the increase in money
1:04:30supply when it sells it withdraws the
1:04:33reserves. Money supply decreases. Done.
1:04:36And [clears throat] see the formula.
1:04:39Deltams equals to 1x r into delta
1:04:43reserves. Change in money supply equals
1:04:45to 1x r. What is meant by 1x r?
1:04:49multiplier M. So can I write this? M S
1:04:54equals to M into MB monetary base.
1:04:59Monetary base is also known as reserve
1:05:00money.
1:05:02So now change in money supply equals to
1:05:05M into change in monetary base. Monetary
1:05:09base is nothing but change in reserves.
1:05:12M is nothing but 1 divided by
1:05:15>> change in money supply. Done. Same
1:05:18formula derived that the original
1:05:20formula done clear. And now effect of
1:05:24government expenditure on money supply.
1:05:27What is meant by that? Government
1:05:29expendure money supply increase
1:05:35yesterday discussed already increase or
1:05:37decrease
1:05:39government expenditure that means
1:05:41expenditure for the government income to
1:05:44the public. Now what public will do?
1:05:48They will spend on goods and services
1:05:50and they will invest in the banks.
1:05:53Now the deposits will increase that
1:05:56means money supply increases credit
1:05:59money increases.
1:06:01So what they are telling when the
1:06:02government cash balance is low the RB
1:06:06lends through ways and means advances or
1:06:10overdrafts. What are meant by ways and
1:06:12means advances?
1:06:14short-term loans given by RBI to the
1:06:18government or wall draft. So what is
1:06:20meant by OD?
1:06:22They can use additional money
1:06:25additional money and additional money
1:06:29penalty that means interest.
1:06:32Okay.
1:06:34RB
1:06:36government will spend on public example
1:06:40salaries and purchases then money goes
1:06:43into the bank deposits raising reserves
1:06:46further. That means these excess money
1:06:49allows banks to lend more increasing
1:06:52money supply through the money
1:06:54multiplier process. Done. Expenditure
1:07:00public again investing in the banks.
1:07:03Banks deprec.
1:07:12The last one is credit multiplier. What
1:07:16is meant by credit multiplier?
1:07:21What is meant by credit multiplier?
1:07:25Same as money multiplier. Same as money
1:07:28multiplier. Again the formula is 1
1:07:30divided by triple R.
1:07:32What is meant by triple R
1:07:34>> required reserve ratio. So what they are
1:07:37telling the credit multiplier shows how
1:07:39much additional money commercial banks
1:07:42can create through lending and based on
1:07:45their reserves. It is always based on
1:07:48reserve ratio.
1:07:50So additional money generates the
1:07:53additional money and
1:07:56except initial money. Initial money is
1:07:58given by RBI later money is multiplied
1:08:03by the commercial banks. How much money
1:08:06is created by the commercial banks is
1:08:09nothing but credit multiplier. So 1
1:08:12divided by R r. So if the reserve ratio
1:08:16is 20% that means 0 2 then the credit
1:08:20multiplier will be 1 divided by r 1
1:08:23divided by 0.2 Two. That means how many
1:08:25times the money is getting multiplied
1:08:27now? Five times. Same example in the 100
1:08:30crores. 500 crores multiplier is five.
1:08:34That money multiplier is nothing but
1:08:36credit multiplier. Done. Done.
1:08:41Now do this two.
1:08:49What will be the total credit created by
1:08:51the commercial banking system for an
1:08:53initial deposit of 3,000 at a required
1:08:57reserve ratio of 0.05 and 08
1:09:01respectively. So 0.05 is nothing but 5%.
1:09:050.08 is nothing but 8%.
1:09:10So initial deposit 3,000 what is the
1:09:14multip and what is the total credit
1:09:17money?
1:09:20So what's the answer here?
1:09:23What is the answer?
1:09:261 divided by So here we have two cases
1:09:28five and 8 1 divided by 0.05 how many
1:09:32times?
1:09:3420
1:09:360.08 08
1:09:3912 point okay so that means 3,000 is
1:09:43multiplied 20 times by the commercial
1:09:46banks so total value is
1:09:49>> 60,000 here 3,000 into 12.5 the total
1:09:54value is
1:09:56>> 30
1:09:59okay higher the reserve ratio lower the
1:10:03money supply lower the reserve ratio
1:10:05higher the money Supply done again. Same
1:10:09question but the numbers are changed.
1:10:11Done. No need to do same question.
1:10:14Changes are just numbers.
1:10:17Clear. And sometimes they may ask what
1:10:20is the secondary money supply? That
1:10:23means take out the initial deposit. The
1:10:25remaining money 57,000 in this case will
1:10:28be secondary deposit because 3,000
1:10:33producers are RBI 57,000 producers are
1:10:38commercial banks done
1:10:41clear.
1:10:48Now the last unit what is this
1:10:52>> monetary policy? Here we are going to
1:10:54discuss about the monetary policy
1:10:57framework and the organizational
1:10:59structure for monetary policy decisions.
1:11:03Clear? And what is monetary policy?
1:11:09It is the tool of RBI to control
1:11:14inflation and deflation by
1:11:18changing the interest rates. Interest
1:11:21rates are also known as policy rates.
1:11:23Entering policy rates. So we know we'll
1:11:26control the inflation and deflation
1:11:29through fiscal policy and monetary
1:11:31policy. Fiscal policy already done in
1:11:33seventh chapter. Now we are discussing
1:11:34about the monetary policy. The Reserve
1:11:37Bank of India manipulates the policy
1:11:40rates. What is nothing? What is meant by
1:11:42manipulation of policy rates here?
1:11:44Change in interest rates to manage
1:11:47liquidity and economic stability done.
1:11:51And how these things will be done in
1:11:54inflation and deflation. We know fiscal
1:11:59policy and monetary policy. Fiscal
1:12:02policy
1:12:05government expenditure [clears throat]
1:12:06and taxes usage.
1:12:09But what we'll do with the monetary
1:12:11policy interest rates inflation
1:12:14already money supply
1:12:17money supply
1:12:19no
1:12:24increase
1:12:27no they will invest in the banks.
1:12:31So now increase the interest rate in
1:12:34inflation and decrease the interest rate
1:12:36in deflation. Done. So lower interest
1:12:40rates to control the deflation, higher
1:12:43interest rates to control control the
1:12:45inflation. Done. Clear till now. And we
1:12:49know about open market operations buying
1:12:52and selling securities. Which
1:12:54securities? Government securities by
1:12:56government to public. Done.
1:13:01And monetary policy framework includes
1:13:04three components. First one is
1:13:06objectives. Next one analytics already
1:13:09we discussed what is that analytics
1:13:11transmission channels saving channel
1:13:14investment channel assets channel
1:13:16exchange rate channel done. So interest
1:13:18rate change the other things.
1:13:21Next operating procedures quantitative
1:13:24techniques qualitative techniques
1:13:26discussed right. Okay. So what are the
1:13:29objectives of monetary policy?
1:13:32Objectives of monetary policy. Regulate
1:13:35issue of
1:13:38one minute.
1:13:40Regulate issue of bank notes and
1:13:43reserves. That means nothing but
1:13:44creation of
1:13:47fiscal money high money.
1:13:50RBI maintain monetary stability and
1:13:54credit control that means control
1:13:55inflation and deflation and achieve
1:13:58price stability and economic growth.
1:14:01price stability and economic growth is
1:14:03the common function of fiscal policy and
1:14:08monetary policy and we have other key
1:14:10objectives you can learn them
1:14:14next transmission of the monetary
1:14:18policy. So what is meant by
1:14:20transmission? How the interest rate
1:14:22changes will affect the other factors.
1:14:25So here totally we have four channels in
1:14:29>> saving end investment channel cash flow
1:14:32channel asset price end wealth channel
1:14:35and the last one is exchange rate
1:14:37channel. So interest rates savings and
1:14:42investment effect. First one interest
1:14:45rate is decreasing interest rate and
1:14:49both lending interest rate and deposit
1:14:52interest rate
1:15:00decrease
1:15:07on goods and services that means savings
1:15:10will decrease borrowings will increase.
1:15:15interesting
1:15:25consumption
1:15:27investment.
1:15:30So savings
1:15:34increase
1:15:36in
1:15:38So this is how the interest rate affects
1:15:40the savings and investments. Next one.
1:15:44Cash flow channel interest rate
1:15:47decreasing. What will happen in the cash
1:15:49flow?
1:15:52For example, 100 rupees loan this 100
1:15:57and interest rate is 10%, now interest
1:16:01rate is decreased let's say to the 5%.
1:16:05That means
1:16:1110
1:16:14rupees. So interest payments
1:16:17decrease from 10 to five and
1:16:24disposable
1:16:25increase.
1:16:29Socrease
1:16:39clear. Done. Next.
1:16:44Next one. Asset price and wealth
1:16:47channel. What is meant by this? Asset
1:16:50pricing and wealth. So interest rate.
1:16:53What is happening to interest rates?
1:16:55>> Decreases. As we know interest rate
1:16:57increase decreases, savings willcrease,
1:17:00savings will decrease. Savings decrease
1:17:04no
1:17:07assets.
1:17:09So assets
1:17:11assets
1:17:13increase.
1:17:18So assets price will get increases.
1:17:21Wealth and collateral also increases.
1:17:28Wealth and collateral also increases and
1:17:31now borrowing and spending what will
1:17:33happen?
1:17:34>> Why interest rate decreased? Now more
1:17:37people will take the borrowings.
1:17:38Borrowings will increase and spending
1:17:41also increases.
1:17:55and
1:17:58increase
1:18:00clear. Next rate channel again is
1:18:05decreasing interest rate now
1:18:11because Indian interest rates are
1:18:13decreasing foreign
1:18:16currency foreign currency. Now I'll go
1:18:19for foreign currency. Foreign currency
1:18:21demand will increase. Foreign currency
1:18:24value will increase and currency sorry
1:18:27demand for the Indian currency will
1:18:29decrease leads to the fall in rupee
1:18:32value. Rupee value. Rupee value exports
1:18:36import
1:18:41goods.
1:18:50Exports will increase. Imports
1:18:58foreign currency
1:19:02increase
1:19:08because every country wants more exports
1:19:12than imports.
1:19:14So this is how interest rates will
1:19:16affect the savings and investment
1:19:19channel, cash flow channel, asset and
1:19:22wealth channel and exchange rate
1:19:24channel. Done. Done.
1:19:27Next one operating procedures and
1:19:31instruments am
1:19:34here we have
1:19:36quantitative tools and qualitative
1:19:40tools. What are those? Quantitative and
1:19:42qualitative tools. Coming to
1:19:44quantitative here we have open market
1:19:47operations and reserve ratio. First
1:19:51we'll talk about open market operations.
1:19:53We know what is meant by open market
1:19:54operations. What is meant by that?
1:19:57>> Buying and selling of government
1:19:59securities to influence the money supply
1:20:02may be increased or decreased. Done. And
1:20:05next one reserve ratio. Reserve ratio
1:20:08also we know required reserve ratio that
1:20:11means bank has to keep certain amount
1:20:13aside.
1:20:15So in this we have two two things and
1:20:17cash reserve ratio and statutory
1:20:20liquidity ratio. So what's the
1:20:23difference sir? C RR and S LR. What is
1:20:27meant by CR R
1:20:30cash reserve ratio that means this money
1:20:33should be held in
1:20:35>> cash only and this can be held in
1:20:39assets. Enter assets which can be turned
1:20:42into cash liquid assets
1:20:45and
1:20:47C RR will be held with RBI but SLR banks
1:20:54can help them
1:20:56and no interest related to the CR and
1:21:00they can expect interest but the
1:21:02percentage is low.
1:21:05So CR means banks are required to set
1:21:07aside this portion in
1:21:10>> cash with the RBI. The bank can neither
1:21:14lend to anyone nor can
1:21:18earn any interest rate or profit on the
1:21:21CRR. Done. Next. SLR. Banks are required
1:21:26to set aside this portion in liquid
1:21:29assets. They can maintain in liquid
1:21:31assets not only cash. Example, gold or
1:21:35RBI approved securities such as
1:21:37government securities. Now banks are
1:21:40allowed to earn interest. That is the
1:21:43difference between SLR and CRR. Done.
1:21:47Next. Open market operations. Done.
1:21:49Quantitative tools. Qualitative tools.
1:21:52First one is margin requirements or
1:21:55marginal requirements. What is meant by
1:21:57this?
1:21:59Collateral. What is meant by this?
1:22:00Collateral. What is meant by collateral?
1:22:04security for example loans
1:22:08banks banks
1:22:13no
1:22:15security
1:22:18okay security for example
1:22:21is having 100 crores worth of land
1:22:25100 crores rich
1:22:30100 crores land
1:22:33100
1:22:35no
1:22:37marginal requirements let's take 10%
1:22:4110% that means bank will only give 90%
1:22:45that is 90 cr
1:22:49marginal requirements
1:22:51loan capacity
1:22:54for example it is increased to 20% now
1:22:57bank will only lend 80
1:23:10So using these things they can change
1:23:11the money supply. Done. Next moral
1:23:16situation. RBI convinces banks to keep
1:23:18money in government securities to
1:23:21promote the GC market. Discussed in
1:23:24earlier chapter. GCE market. RBI
1:23:27promotes the GC market retail RBI retail
1:23:32online application.
1:23:34So generally RBI convinces other
1:23:37commercial banks
1:23:38commercial banks
1:23:42there will be no benefit
1:23:45invest in government securities. I'll
1:23:47give you money
1:23:50supply increase done. Next selective
1:23:54credit control that means
1:24:02commercial banks. So controlling credit
1:24:06by not lending to the selective
1:24:08industries or speculative business. Here
1:24:11speculative business is trading or
1:24:13online stock market
1:24:16and selective indies for example
1:24:18gambling
1:24:21loan
1:24:23RBA to the commercial banks and the last
1:24:27one in the qualitative tools market
1:24:29stabilization scheme. What is this
1:24:32market stabilization scheme? It is
1:24:34nothing but
1:24:37open market operations but in
1:24:41>> short run. So market stabilization
1:24:44scheme is a monetary policy tool used by
1:24:46the Reserve Bank of India to absorb
1:24:50excess liquidity from the market by
1:24:53issuing short-term government
1:24:56securities. Again RBA using the same
1:24:59tool using government securities but the
1:25:02thing is here short-term and open market
1:25:05operations for long-term done clear
1:25:10and now policy rates
1:25:13>> what are meant by this policy rates
1:25:16interest rates we'll discuss different
1:25:18types of interest rates here done and
1:25:21first one bank rate important thing LF
1:25:24liquidity adjustment facility What is
1:25:27meant by LAF fund? It is the tool used
1:25:29by the RBI to manage liquidity. Here we
1:25:32have report rate, reverse repor rate and
1:25:36marginal standing facility. And the core
1:25:39concept to understand these things is
1:25:41repor rate. Done. So what is meant by
1:25:44repor rate?
1:25:46>> The rate of interest who will borrow.
1:25:50>> Banks will borrow from the RBI. rate of
1:25:55interest which banks borrow from RBI
1:25:58against government securities
1:26:02securities. Okay. RBI
1:26:06commercial banks
1:26:09rate exact opposite reverse repo. So
1:26:13RBI
1:26:16commercial banks that rate of interest
1:26:19is nothing but reverse repo rate always
1:26:23rate will be greater than reverse repo
1:26:25rate because both are regulated by the
1:26:28RBI. So
1:26:36that is nothing but rate will be greater
1:26:39than reverse repo rate. So the formula
1:26:42is rep equals to
1:26:45sorry reverse repo equals to repo minus
1:26:481. So
1:26:50directly
1:26:52meaning it will be less than repo rate
1:26:57and marginal standing facility means
1:27:00what is meant by that
1:27:03again it is refers to the rate
1:27:05onlyerally
1:27:14banks
1:27:17there will be some limit
1:27:23penalty
1:27:24penalty will be always greater than
1:27:29marginal standing facility it will be
1:27:31always greater than repo rate that means
1:27:34repo rate plus one done clear and the
1:27:39last one bank rate what is meant by bank
1:27:41rate
1:27:44nothing but report rate but for the
1:27:46long-term term funds
1:27:49long-term funds. Now long-term funds
1:27:53completely transactions are on basis of
1:27:55the repo rate and used as penalty if
1:27:59banks fail to maintain SLR or CR R
1:28:04liquid sorry
1:28:16bank rate which will be decided by the
1:28:18RBI Done. Clear? So these are the
1:28:22different types of policy rates. Repo
1:28:24rate means
1:28:27the rate at which commercial banks
1:28:29borrow from the RBI. Reverse repo. RBI
1:28:33borrows from the commercial bank which
1:28:35will be higher. Repo will be higher.
1:28:38Reverse repo will be lower. Reverse repo
1:28:40equals to repo rate minus one. And MSF
1:28:44marginal standing facility. It is the
1:28:46penalty rate that means it will be more
1:28:48than repo rate MSF equals to repo plus
1:28:54done clear.
1:28:59Now organizational structure for
1:29:02monetary policy decisions. What is meant
1:29:04by this? What is the structure and what
1:29:07is the framework and what are the
1:29:09agreements regarding to the inflation?
1:29:12So first one legal framework. It was
1:29:14based on RBI act 194. You have to
1:29:18remember these things. RBI actu
1:29:221934
1:29:24RBI established
1:29:271935
1:29:29RBI nationalized
1:29:331949
1:29:34may be or may not be
1:29:38introduced monetary policy framework
1:29:40agreement. So agreement inflation
1:29:44targeting
1:29:46inflation targeting. What is meant by
1:29:49inflation targeting?
1:30:01If there is 0% inflation
1:30:07inflation
1:30:11grow
1:30:13so that means minimum inflation.
1:30:18So what is the tolerance band they gave
1:30:20us? 2%, that means minimum inflation
1:30:24should be 2%, and it should not cross
1:30:286%. That means on an average we have to
1:30:31target for 4% and is based on CPI
1:30:35consumer price index inflation.
1:30:39It will reflect the cost of living more
1:30:42accurately when compared to other sens.
1:30:46Okay. Okay. So what's the target here?
1:30:484% because minimum is 2% maximum is 6%.
1:30:53Okay. Achieve and target
1:30:57failure. Failure
1:31:00inflation above 6% for three consecutive
1:31:05quarters. What is meant by quarter?
1:31:08>> Not that quarter. A quarter.
1:31:12>> Yearly, monthly, quarterly. What is
1:31:14meant by quarter? 3 months 3/4 means 9
1:31:18months continuous 9 months 6%
1:31:23failure
1:31:259 months
1:31:27failure done clear next one monetary
1:31:32policy committee and framework it is a
1:31:36six member committee which will decide
1:31:38the policy rate that is nothing but
1:31:41report rate policy rate report rate same
1:31:43short-term and long-term to achieve the
1:31:46inflation target how much 4% because the
1:31:50range is between 2 to six and monetary
1:31:53policy framework agreement between
1:31:57government and RBI then to target the
1:32:02inflation between the range of 2% to
1:32:06>> 6% and why complexity of policy
1:32:10decisions monetary policy choices are
1:32:13complex due to economic
1:32:15Uncertaint
1:32:26next RBI must balance between the growth
1:32:29and inflation control. So done. This is
1:32:34the complete chapter of money market. We
1:32:38had discussed three units. Money's
1:32:40demand, money supply and monetary
1:32:42policy. Done guys. Clear. And we can
1:32:46expect more than 10 marks from this
1:32:49chapter in the final examination. Done.
1:32:52So totally done with all A+ category
1:32:55concepts. What are those?
1:32:59Markets, national income, theory of
1:33:02demand and supply, theory of production
1:33:05and theory of cost. Next
1:33:09national income. National
1:33:11Public Finance and money markets. Done.
1:33:15What are the B category topics?
1:33:19Nature and scope, business cycle and
1:33:23international trade. Done.
1:33:26Clear. Done.

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