Money Supply: Predictive Analytics in India

1. Introduction

Money supply is a matter of interest to Central Bankers as also economists. There are economists both inside and outside the Central Banks. Sometimes they agree, sometimes there is discord. But nevertheless, from both the view points of academics and administration, the literatures of monetary economics and monetary policy cannot dispense one with another in the process of

• 1.

  Defining and measuring money supply,

• 2.

  Examining the existing literature on money supply against Indian backdrop,

• 3.

  Ascertaining the mode of determination of money supply,

• 4.

  Examining the econometric tools in understanding the relationship between money, output and prices,

• 5.

  Detecting the endogeneity of money supply, and

• 6.

  Dealing with the emerging issues in forecasting money supply in the post crisis period.

4. Definition And Measures Of Money Supply

Indian economists use the terms ‘money’, ‘money supply’ and ‘money stock’ synonymously. The literature on definition of money supply reflects intellectual discourses and dialogues among economists, which need concrete shapes in the form of measures of money supply, because concrete measures of money supply are more useful than abstract concepts for the purposes of modelling and forecasting.

The Reserve Bank of India (RBI) is following the simple sum procedure of measuring money supply in its compilation of monetary aggregates. The RBI publishes data on M₁, M₂, M₃ and M₄ and not on the Divisia index. Here

• M₁ = currency with public + demand deposits with the banking system + other deposits with RBI;

• M₂ = M₁ + saving deposits with post office savings banks;

• M₃ = M₁ + time deposits with the banking system; and

• M₄ = M₁ + all deposits with post office savings banks excluding National Saving Certificates.