Currency in circulation

Currency in circulation

Subject: Economy

Context:

The currency in circulation declined by ₹7,600 crore in the Diwali week, making it the first such incident in two decades according to the report by economists at SBI.

Causes:

Greater reliance on digital payments by people-over the years, the Indian economy, which was cash led, has changed to a smartphone led payment economy.

Implications:

Less currency in circulation is similar to a cut in the cash reserve ratio for the banking system as it results in lower leakage of deposits and will have a positive impact on monetary transmission as well.

Concept:

Currency in Circulation (CiC)

• Currency in Circulation (CiC) refers to currency notes and coins issued by the central bank within a country that is physically used to conduct transactions between consumers and businesses. It is a major liability component of a central bank’s balance sheet. Thus, Currency in circulation comprises of:
  • Currency notes and coins with the public
  • Cash in hand with banks.
    • RBI’s definition, currency with public is arrived at after deducting cash with banks from total currency in circulation (CiC).

The money supply is the total stock of money circulating in an economy. In the most simple language, Money Supply is Currency in Circulation plus Deposits in Commercial Banks.

Monetary supply  aggregates

In the money supply statistics, central bank money is M0 while the commercial bank money is divided up into the M1 and M3 components. M2 and M4 components also include Post-Office deposits as well.

• Reserve Money (M0):-Reserve money is also called central bank money, monetary base, base money, or high-powered money.
  • In the most simple language, Reserve Money is Currency in Circulation plus Deposits of Commercial Banks with RBI.
  • Mo = Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits with the RBI
  • It is the monetary base of the economy.
• M1 (Narrow Money) =Currency with the public + Deposit money of the public (Demand deposits with the banking system + ‘Other’ deposits with the RBI).
• M2=M1 + Savings deposits with Post office savings banks.
• M3 (Broad Money) = M1+ Time deposits with the banking system
• M4 = M3 + All deposits with post office savings banks

A money multiplier is an approach used to demonstrate the maximum amount of broad money that could be created by commercial banks for a given fixed amount of base money and reserve ratio.

The money multiplier, m, is the inverse of the reserve requirement, R:

m=1/R

For example, with the reserve ratio of 20 per cent, this reserve ratio, R, can also be expressed as a fraction:

R=1/5

So then the money multiplier, m, will be calculated as:

m=1/1/5=5