Money Supply: Predictive Analytics in India

Money Supply: Predictive Analytics in India

Rituparna Das (University Jodhpur, India)
DOI: 10.4018/978-1-4666-6268-1.ch023


Money supply is nowadays expected to contain precise, comprehensive, and real-time information about the macroeconomic system to facilitate decision making of the Central Bank. Because money supply, as driver or driven, is linked from time to time to several other variables like inflation, it touches every lair of civil society and politics. An important aspect of understanding such information is to identify other variables and their interrelations with money supply and the models to quantify and predict the same. This chapter covers various facets and issues of modeling and forecasting money supply in India in a comparative tone between pre- and post-crisis periods.
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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.

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