we shall pursue the sources of monetary basewhy? because when monetary base changes, money supply changes and when money supply changesyou know the lm curve shifts. and when lm curve shifts, there are significant consequencesfor the economy, rate of interest may change, output may change, prices may change, employmentmay change, various kinds of changes you can expect.that is why you have monetary policy, which
Offshore Banker Job Description, is trying to control unexpected and undesiredchanges in money supply or any other undesired occurrences in the economy, ylm curve monetary policy is nothing but ylm curvewe are trying to control the economy. so, sources of monetary base is very important,what are the sources from where monetary base is created, and therefore is liable to change,like a river is the source of a river is glacia.
so, anything happens with the glacia willaffect the river, it is very important to know the sources. so, i would pursue the discussionon sources of monetary base, which is started yesterday. so, what did i write sources of m naught.so, i said from the definition that you had recall, that the uses of m naught, how m naughtis being used in economy, was that m naught has the currency with the public you can callthat c plus some bundle of reserves, which consist of i say let us say 2 items ignoreother deposits. so, it has the cash with banks plus the required reserves with the centralbank and other deposits rbi i said ignore that, the other deposits are very insignificancestatistically, numerically very insignificant
number ignore that. so, this is the definitionwe had earlier, currency with the public plus cash with banks, which i call currency incirculation plus bankers deposits with rbi plus other deposits i am saying drop otherdeposits. now, the question is what we are going tolook at though the sources, is how is this c and r getting effected in the economy. now,if you look at the balance sheet of rbi which we do not have here, where all items are recordedlike balance of payments account, all items are recorded when you exchange goods for othercountries and there is a money flow, captive flow between countries, all transactions arerecorded in the balance of payments account. if you look at the balance balance sheet ofrbi will notice certain items, which we would
identify here as the sources of monetary base.the sources of monetary base if you look at the balance sheet of rbi you will see thereare according to my notes, 5 sources mainly 5 items. so, you have an item, like governmentscurrency liability to the public, what does it means. governments currency liability tothe public, 2 why is government currency liability to the public is there, in india the currencysystem we have is a very funny one. the notes, if you remember i was reading outfrom the notes the currency, clearly the rbi governors signature is there and he is sayingsomething and also it is backed, by the central bank backed by the central government. ifyou take a coin, you will not see anything like that, there is no rbi signature one sideit has the ashok stambha and written bharat
in hindi and india and a date calendar year 2008, 2009 when it was manufactured.in a mint they manufactured in a mint, government currency currency you see produce in a factorycalled mint. and on the other hand it is written what thisvalue is of this coin it is written 1 rupee, the value is written 1 rupee, then there isno nothing. now, therefore we have a system where partly it is the rbi guarantying it,currency which are notes and the coins nobody is guarantying it. well that it is writtenbharat and ashok stambha it implies the central government is guarantying it, central governmentthough nobodies signature is there therefore, the currency liability to the public, liabilityis the responsibility to the public. meaning what, why is he liable, if i holda 2 rupee coin, why government is liable to
me was the governments liability, governmentsliability is this should be an authentic currency. and if i use it in an exchange it should beacceptable, that the government should ensure, like a seller which does not happen in india,a seller of goods is liable towards the quality of the good. when he has sold it to you, butindia does not happen seller, as soon as it is sold takes his hands off he say what cani do, if there is a defect often he refuses to replace it, but that is not the case, thatshould not be the case. so, the liability word here basically meansis the responsibility you can say, of the government to ensure that this coin when itis circulating in the indian economic can we used as this for goods worth 2 rupees,clear you understand what i am saying, now.
so, what is governments currency liabilitythese are the coins. coins are guaranteed only by the government, central government.so, all you are talking about here the coins, the notes you clearly see it is written rbigovernor of rbi signature and etcetera. so, the liability of the notes is that ofthe central bank rbi in india, that may not be the case in other country see in indiai am talking about alright. so, governments currency liability to the public will be thecoins and the coins is a very small percentage 1.2, 1.3 percentage something like that ofthe total currency in circulation alright. next, net rbi credit to the central and stategovernments, net rbi credit to the central and state governments
why is it net rbi credit to the central andstate governments, credit is what credit is like loan, what is rbi is loan to government,well government is often in a deficit situation, you take a simple case where governments arenot functioning poorly, but still tax revenues will come in the month of september, tax revenuewill again come at the end of the financial year, march. now, how would government functionwithout money. so, often what government does, it does variousavenues it has one of the avenue is it goes to the central bank and say do i have anydeposit, like savings with you give that to me or if i do not have. can you give me aloan there are various ways to get the loan, one is called treasury bill route sell itis like selling some bills, like bonds, treasury
bills and getting the loan.so, here when you talking about rbi credit to central and state governments; that means,state governments can also do the same thing, take a loan from the rbi and rbi is actinglike a banker to the government, our banker is the commercial bank. say the state bankof india can be my bank when i take a loan, a loan means it will carry an interest, whichgovernment will have to pay it is not a interest free loan. so, it is a proper loan which inbanking literature is known as credit, somebody gives the loan.so, net is what because this year, this much government both central and state governmentstogether has borrowed from the rbi and also have returned some past loans. so, you willnaturally get a net numbers plus and minus
which i have returned. so, the net outstandingloan is this, i have been borrowing last 5 years which have rough returns say 5 months,the 5 years, 5 months, 1 year 1 and half year. now, i am also returning part by part. so,at any point one needs to calculate, what is the outstanding amount of loan which willbe a net amount. so, this is another source of monetary base,why monetary base changes with because when from rbi the money leaves comes to governmentand government starts spending on various things, the money is injected into the system.so, it is expanding the monetary base or when government issues more coins, it is effectingthe monetary base c is directly going to contribute into c alright, this is the source from wheremoney is getting effected and if monetary
base is affected i will show that to you soon,then all monetary aggregates are effected alright.third point, rbi credit to the commercial sector, rbi credit to the commercial sectoris very important, these are things which you do not know, but slowly when the courseproceeds it will become clear. commercial bill, rbi credit can come to the commercialsector, which is a kind of puzzling a little bit, because usually banks gives credit tothe commercial sector, the businesses commercial sector, the businesses why is rbi credit coming. so, i need to explain that rbi credit to thecommercial sector. various ways rbi contributes to the commercial sector, sometimes directly,sometimes indirectly let me give your example,
these nonbanks which are part of the commercialsector, nonbanking institutions idbi, sid b, state financial corporation’s you knowhow they were founded. they were founded with they are founded like a corporate company,which has paid up capital of amount of shares, paid up capital you can open google and findout paid up capital. it is like the amount of shares, it can issueand get a money, shares are what share is a source of revenue to a company. now, thiscommercial sector financial institutions, has often been founded by rbi and the centralgovernment, like idbi. so, paid up capital it never went public, alright in some ratio70 30, 50 50, 40 60 the shares were bought, by the rbi and central government alright.so, here is a loan, given to this idbi etcetera,
which were found when they were founded fromthe commercial sector, nab ad which has become independent now, nab ad was the departmentof rbi nab ad is, national bank for agriculture and rural credit, development rural development,nab ad used to be a department of rbi like mechanical engineering department, electricalengineering department which was later become. so, big it was asked to leave like mechanicalengineering department asked to leave iit kanpur and become a separate institution.nab ad used to a department of rbi once upon a time, if you go to luck now, if anybodyis from luck now is a huge building of nab ad, you will see beside the reserve bank office,massive building i saw that when i went for we were on a ramp, these ramps are there flyover’s and suddenly i saw nab ad i got,
i see this is the regional office, zonal office,massive office just like rbi. nab ad used to be department, that is loanscan come in the form of loans, sometimes there is a financing facility provided, idbi forsome development or na nab ad for some specific issue, rbi would give them a loan and oftenif you refinance it, when the loan has been returned to rbi we go for a re finance, secondterm alright. i give you 100 cores, you use that, after 2 years you return that money,again i give you a refinance, this is how also rbi directly gets into financing business.another way is that there is something called commercial bills, which commercial banks arenot interested, commercial bills are used for payments between companies, i cannot payyou now, i will pay you in future commercial
bill gets created. now, the question is youcannot pay now, but who can pay me i need the money i sold you something, then the bankscome and help them out, often banks are not interested or so that banks can get interestedrbi gives some cash to banks to deal in commercial bills.the commercial bill market in is a very poor, i will talk about that later, business housepeople if they are here their parents would know about commercial bills or father i meanparents means father, if any business community person is here, i will talk about commercialbill later. so, that is various kinds of things that goes on, where rbi directly or indirectlystarts giving loan and as soon as money leaves rbi, rbi is like moon something leaves moontowards earth is an addition to earth.
the economy, does not consider rbi part ofit or government, they are considered to be outside satellites. so, anything comes fromthere to earth, wise then becomes part of earth or effects the earth, that is the economythat is how we thing, government central bank they are all outside agencies. so, this ispart, this is what affects monetary base. so, i have written here separately becausethat used to be huge issue for rural development. now, i have the data will show you i willput them together, that used to be in books traditional books, it used to be separatethis is rbi credit to nab ad. 5 net foreign exchange assets of the rbi thisis most important now, in the modern context, net just you understand what i am saying,how would nab ad function, nab ad takes loan
gives the loan to banks, gives the loan tofarmers sometimes directly for rural development that is all.now, it is doing, so well it does not borrow last 7, 8 years i shown seen data, it doesnot borrow a single pi from rbi or has debt, nab ad is amazing some institutions in thiscountry which is otherwise functioning very poorly is functioning, so well like peopletalk about iit’s functioning very well, compare to general education institutionsin india colleges and universities not functioning well just like that nab ad is functions, sowell last 7 years, 5 years data i have seen, has not taken a does not have a single pi,single paisa debt to rbi. i will show you the data later, next comesnet foreign exchange assets of the rbi. net
foreign exchange assets of the rbi this isvery important and when you, when i will show you the numbers, that will fascinate you whymonetary base is changing in india, what is changing it. net foreign exchange assets isvery simple you are an exporter, you go out and sell something abroad, come back homewith dollar, you can keep dollar at home to show people that you have earned dollar, otherwisedollar has no usefulness. then you go to a foreign exchange dealer,get it converted into rupees that what fattens your bank account. so, foreign exchange thedealers and rbi the central bank. so, every time rbi receives foreign exchange; that means,it has been converted into fresh money into the economy, you be came back home with dollar,then when you exchange what is happening,
the dollar gets deposited with rbi or thedealers and in return you get the rupee, which goes into your account and you start spendingit. so, money gets fresh money gets part of thecountry, monetary base, out of which deposit reserves goes to rbi some currency goes topeople, who starts spending them etcetera. cnr getting effected, source of cnr alrightvery important why net because there is a drain of foreign exchange also, when you arebuying things what happens, you take your fat account money to rbi you are a dealerand telling please sell me dollar. so, the rupee goes to now, reverse process,rupee goes to rbi and dollar comes to him which then leaves the country, for importpurposes goes to saudi arabia from whom we
have bought oil, goes to germany from youwhom you have bought manufactured goods goes to brazil from whom you may have bought sugar,goes to russia from where you may have bought wheat alright. so, net the word net is therenow, monetary base up to this point is real fun monetary base simple 5 items. so, m naught from the source point of view,is simply 1 plus 2 plus 3 plus 4 plus 5 alright 4 plus 5 minus number add you subtract nml,what is nml, nml is net monetary, liabilities ofthe rbi net non monetary liabilities of the rbi what does it mean, any time a currencygoes into the economy is the liability of the rbi and the government, whoever issuesthat, if it is coins it is the liability of
the government, if it is rupee it is liabilityof central bank because the governor signs on it, you take a note out you will see that,liability mons is responsible for that note. if it is a true note, nobody can turn it downduring a transaction refuse it, he is responsible or the institution is responsible. net nonmonetary liabilities, which has a connection with money, but this is not fresh currencythat rbi has pumped into the economy for some reason, that net non monetary liability arisefrom various things suppose, central i can i am trying to explain this, this is not veryclear in the books because rbi site does not carry definitions, so well they carry datait is like a data bank very well x, very well y.now, i am looking for definition, the what
i found is suppose rbi has this amount ofdollar. now, indian currency is depreciating with respect to dollar. so, every dollar costsmore rupee now, that dollar value when it was exchanged against rupee in the past hadan exchange rate, if the exchange rate has detoriated which means more rupee the, detoriationmeans more rupee per dollar 55, 56 rupee as opposite to 47 rupee, 2 years back what itwas or 1 year back then if you calculate the current market price value of that foreignexchange it will show more rupee india me rbi equivalent, but that is not the case.when it was exchanged it was a better exchange rate now, the exchange rate is depreciated.so, the assets got re valued at a higher price it is showing, that you need to deduct thedifference because otherwise the balance sheet
would match, actual currency pumped in is,this equivalent amount dollar etcetera sources, will show of larger amount of current prices,of gold, foreign exchange, all these valuable things they all are included in net foreignexchange i think alright. so, net non monetary liability is that donot think, so much liability rbi has increased just because gold price has gone up, salegold do you understand what i am saying deduct to balance the balance sheet otherwise, thecurrency indian currency that, what it shows and the these the sources, that you are listingon one side wont balance. because, the dollar is showing at you must have pumped more currencythis is what i have understood, net non monetary liability is because of fluctuation in internationalprice of exchange rate, gold etcetera, which
are part of the foreign exchange assets orassets of the rbi which gets converted into rupee etcetera, you understand what i am saying.so, that item is deducted. so, the m naught value that you will get, is it will be exactlymatching with the individual 5 numbers added up minus what rbi is saying is the net nonmonetary liability, will match m naught year to year. if you go directly measuring m naughtthrough uses, which is currency with public plus cash with banks plus bankers depositswith rbi plus other deposits, they will match, if you go adding this up and subtracting,there may be a statistical 0.003 percent error somewhere, but they should exactly match thenumbers. now, i take your question. exactly very good. so, be careful minus andminus which i teach my child, my son minus
outside bracket and within bracket minus 4he is getting totally confused and you can imagine trying to teach this, i mean you,for you for adults is nothing is been seeing it 20 years, for a child i am trying to teachminus bracket minus what you are saying is exactly true, that is what you have to becareful yes. so, i am teaching you something very importanti am going into deeper things of macroeconomics in fact, to some extent, why does money supplychange because monetary base changes, why does monetary base change because of thesereasons. and therefore, money supply changes and then you have the macro economics whichis already talk to you, get into more and more complex models. static, dynamic, whatever.since 2006, 2007 nab ad credit has become
0, all money returned 2006, 2007. 2006, 2007is roughly 5 years. that is part of pa public that internal debtvery good, public means government say for instance baba ramdev public, economics public,public servant means government i am a public servant i work for iit which is a governmentorganization. public service commission, union public service commission upsc, upcs publicservice upsc if you go for ias jobs, you will have your examinations, conducted interviewsheld by union public service commission, public means government. next is credit multiplier,let me talk about now, slowly a connection between money supply and monetary base, iwill slowly get into that, i will start with a very simple multiplier concept. in monetaryeconomics, not macro economics, multiplier
let me explain that to you. credit multiplier. credit multiplier whenbanks give a loan to somebody it creates a multiplied effect on the economic, which weusually do not understand and i need to explain that to you, multiply, tension multiplies,expenditure government spends 100 corers the total impact on the economy, in a simple modelwithout taxes or simple proportional tax 1 over 1 minus t into 1 minus t which is nota fraction, which is a number greater than 1. so, the final impact on the economy is4 fold, 4 and half fold. so, it becomes 400 corers worth of income generated, this wasthe insight, that came from karnes in macro economics. whose parents or fathers or teachersdid not have that, classical model.
now, credit multiply is a fascinating stuffnow, getting into connection between monetary base and money supply with a very simple thingcalled credit multiplier. now, you will understand and what you will see, is that the money supplythat you here in macro economics is actually a multiplied effect of the monetary base,that is why rbi as what is happening to m naught.because, any change in m naught creates, not a ripple, it creates a large tsunami typewave may be, on m naught on monetary aggregates means supply vertical m 1, m 2, m 3, m 4 thatis why they are, so conscious about it. now, i start the discussion the connection, throughcredit multiplier, when bank is at loan it creates a multiplied effect and i will usemish kin, to develop this example. mish kin
begins this explanation of credit multipliedby mentioning, open market operations. and let me explain that because you wouldopen mish kin and you would like to know what would happen, what is open market operation,which is called omo, mish kin opens this start this discussion with open market operation.this is a standard method that open market operation you may have heard in macro economics,that central banks of countries use, to control money supply, either increase or decreasewhat is that, central government and central bank, often participate in selling of bills,government bills which are bonds etcetera treasury bills whatever, when bills they sellmoney flows into rbi. so, the money supply in the economy falls,when they repurchase the bills, they give
cash back to the public, but public here governmentto the people, the economy and the money supply increases in the economy, this act of buyingand selling of bills buying of bills would increase money supply, selling of bills woulddecrease money supply is called open market operation standard method, it is a formalname open market operations. suppose, government conducts an open marketoperation, which is purchasing a bill from a bank, banks often buy government bills,that is gap banks think that is a form of investment, in fact. suppose, government conductsan open market operation, which is open market purchase of some security, say with a witha commercial bank, call that the purchase of security, purchases security from a banksecurity is bill worth, this is mish kin 1000
from a bank, from bank say a.purchases security from bank a, receives a cash of 1000 what happens to the bank, banksuddenly receives 1000 rupees. now, what does bank do with 1000 rupees, bank the cash reservesare will immediately increased by 1000 rupees of banks, what will this do, are will increaseby rupees 1000 cash reserves a banks, will increase by 1000 source effected.so, monetary base has increased by 1000 rupees keeping other things constant inclined m naughthas increased by rupees 1000 keeping other things constant. now, the bank becomes greedygive it as a loan. so, gives that out as a loan to a firm and it leaves the bank, banka and the firm which receives the loan simple example i am giving you, goes to bank b anddeposits that money. now, loan worth rupees
1000 given to a firm. firm deposits it in bank b, and it will use,what does bank b do bank b sees that loan, bank b deducts since, it is a loan it hascome through a savings account crr at the rate 10 percent. so, it deducts how much rupees100 and 900 is still there alright. and this is what bank business is, i am simplifyingit, it will again deduct a cash which the person can withdraw from or a loan, alrightand then whatever remains it starts gambling with it, i am eliminating that cash the bankwill keep on a simple 1000 loan. so, bank b gives rupees 900 as loan to another firm.1000 of the total deposit is hardly anything, so it gives out 900 part of a loan to someother firm, that firm takes 900 deposits it
in his bank, whatever bank it has, it is getsit through narbada or whatever some some somewhere he deposits, some bank where bank sees deposithas increased by 900 deducts again 100 percent which is crr applicable to all banks, samecrr because it is a central bank regulation. it is not you bank pays crr and his bank paysanother crr. so, out of 910 percent 90 rupees is deported810 remains which then bank sees, is the cash available and gives out as a short term loanmay be, to somebody. so, the money which leaves the first bank 1000 rupees gets smaller andsmaller because of deduction of crr, but goes through the economy by the financial systeminto the public. so, what basically happens, this is the last line and you can go home.the total increase in deposits delta d, where
d is the total deposits in banks, the totalincrease in deposits, will be, the total the change in reserves, that has taken place,in the first round change in reserves is 1000 and the second round the change in reservesthat takes place because of bank deposit is delta r into 1 minus r, where r is crr cashreserve ratio plus delta r into 1 minus r of that design in finance series. reserveschanged by 1000 rupees when central bank conducts an open market purchase.i give that as a loan entire amount delta r which is 1000, second bank when it goes,it does not give out loan as 1000 it deducts the crr and gives that out as a loan to somebodyelse, the third person, second person deposits in a second bank, from where it goes out toa third person and gives out 1 minus r of
that is taken out as a loan, it becomes geometricseries which when you add what will you get. delta d is equal to 1 over r into delta rthis, 1 over r is the simple credit multiplier, if you know crr value is very simple to calculatethe credit multiplier crr is 7 percent. so, 0.7 percent is 0.7 no 0.07. so, 1 over 0.07is the credit multiply, in the simple world, the world is not that simple i will explainthat it is much more complex, but in a simple world well there is no excess cash reservesheld, otherwise more amounts will be deducted just that r, 1 minus r minus something willalso be deducted and then that loan will be given out, when the bank receives some moneythrough a deposit account crr is deducted, but something more is also deducted, bankkeeps some money for your with drawl purposes,
they know your habits. average habits of individualsin kanpur how much money they withdraw per month from the accounts. so, they do a wholelot of average calculations and then the balance amount they give out calculated basis as loan.
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