Money supply is just an economic term. It is consolidated form of money which has been in circulation within specified legislative area of the state and it should be used for exchange of goods and commodities as well as it is used to measure and point the value of commodities in given point of time. In actual money is a member of paper. If it is not denoted properly, then it has value less. What is the proper guarantee and proof of a piece of paper, being considered as the proper value of exchange of objects and services.
In earlier time exchange value of money is being reviewed and taken in the form of gold and silver and other precious metals. High priced value items have been taken into consideration as it limits the creation of such papers otherwise with unlimited creation of money and paper the value and stronger base of a developing economy. That is why the value corresponds to metal and value is being strongly controlled so that exchange value of money remains intact within specified economic area of the nation.
In modern economy, entire flow of money is strongly backed by the central bank of a nation. Most times, the credibility of the central bank is supreme in deciding strongest factor related with money. The credibility of the central bank always determines how stronger the money of the nation is so as this credibility determines how a nation is constantly being built with the strongest possible economic presentation. It is very different from nation to nation. Most of developed as well as emerging developing nation does have the strongest form of central bank policy to back how money flows into the market segment.
Minimum reserve system:
India is one of the strongest economic nation of the world. It is a developing economy and rapidly moving towards the state of a developed economy. With a vast array of human resources as well as the strongest possible presentation of the economy in a market segment of one of the most richer middle class the exchange of money in determining economic processes determines how an economy works as a consolidate unit.
In India, central bank is Reserve Bank of India (RBI) and it follows the principle of minimum reserve system, which is minimum part of stock of gold is being kept as exchange of money and the rest part of money which is inside market is being backed by government securities. There are various sources of money supply in the market which is being constantly in vigil by RBI through various governmental agencies. Currency, bank credits, foreign exchange reserve (FOREX), bank credits to commercial sector as well as to individuals, and non-monetary liabilities of RBI and other banks.
Slowly, it relates with the increase of demand deposits which slowly builds. In the case of creating deposits, borrowers create an account and keep that money within than account. Borrowers do not immediately spend money and that also part of circulation of money within the economy. Thus credit of banks plays the role of an important factor in determining the positive and practical approach for circulation of money.
All these transactions are being constantly watched out by RBI through specified government agencies. They constantly keep a vigil into it and continue to create a safer transaction processes all over out there. Most of the strong economy have various safeguards and common practices and that creates a safer transactions rules for the nation.
Reserve Bank of India always creates various suitable monetary policies and that creates a specified and predetermined rules for complete and stronger transactions of money flow within various market segments of the country. It is the duty of the central bank to keep a close eye of price stability and growth of the nation. It is supplementary as most times. Price stability and growth of the nation are correlated. When the rate of inflation moves towards high points than RBI moves to reduce the flow of money or supply of money in order to create one of tighter money supply mechanisms. In this period, the prime motive of the central bank is to find out various ways to stabilise the price mechanism of exchange money.
When there is no such inflation and the economy flows nicely, monetary policy of RBI looks towards the state of absolute growth and strengthening of economy so that in the future whenever there is instances of reduction of growth or inflations then economy can stay afloat within these specified financial conditions. RBI or central bank play a pivotal role in determining how an economy performs and how an economy going its growth rate chart within specified time limits.
Another policy which determines the flow of money into the economy is a cash reserve ratio. It is the minimum amount the bank has to keep within RBI so that the bank never becomes bankrupt. Most of times during the crisis of the economy some central bank minimised cash reserve ratio in order to provide larger flow of money into the market. This is not advisable as in the state of crisis if such banks become bankrupt then also there should not be any such huge amount left within the central bank of nations.
Even during the state of crisis it is not advisable to release such flow of money into the open market in terms of providing a larger market share but it is not advisable as it can ruin the market of revival even during the state of extreme crisis. Whatever be the supply of money, the state of the money supply depends largely upon monetary policies of the nation. It affects the economy, and it acts in terms of growth and inflation. Sometimes the changes in policies may affect electric supply limit and some other times, it can work as supply capacities which cannot act within certain specified money supply limits.
Rise in price of the nation need to be controlled as it can affect the state of exports as well as state of imports. Within rising export prices, business of nations remains affected, and that is why a well balanced economy remains to balance price of commodities, as in the long term it has been seen the relation between money supply and growth of nation especially of India is mediumly related with growth. It has been seen India have stronger economic presence as it is mostly unaffected by state of the economy of the world. It is the domestic market which guarantees growth and it continuously move for positive and negative aspects, of supply factors dealing with inflations, agricultural production and supply chain management. Proper infrastructure, full capacity utilisation with proper and continuous money flow within market creates suitable presentation state of the economy within specified economy.