SSC CGL Economics · Money, Banking and Public Finance
Money, the RBI and Monetary Policy
The functions and measures of money, Fisher's equation and the demand for money, and how the RBI was set up and controls credit with the bank rate, CRR and SLR.
Why this matters
Twenty-one questions in the bank: nine from the 2023 shifts, eight from the 2024 shifts and four from the 2025 shifts. Most test one definition or one direction (a rate goes up, so credit goes down), so learn which way each tool pushes.
Concept 1 of 2: Money: functions, measures and demand
Definition
Functions: medium of exchange, measure of value, store of value, standard of deferred payments. In barter, goods themselves are the medium of exchange.
Measures (the RBI's older set):
- M1 = currency with the public + demand deposits + other deposits with the RBI.
- M2 = M1 + post office savings deposits.
- M3 = M1 + net time deposits of banks: broad money, or aggregate monetary resources.
- M4 = M3 + all post office deposits (not National Savings Certificates).
- The Y. V. Reddy Working Group (1998) proposed the new aggregates NM0 to NM3, including NM2.
- Money supply is a stock: measured at a point in time.
Demand: the interest rate is the cost of holding cash, so demand for money moves inversely with the interest rate.
Fisher's equation of exchange
- Money supply
- Velocity of circulation
- Price level
- Volume of transactions
Worked example
Practise this conceptself-check · 3 quick reps
The same idea in a real exam question:
Example 1 · Money, Banking and Public Finance · Money, the RBI and Monetary Policy
M2 is post office, M3 is banks
Concept 2 of 2: The RBI and credit control
Definition
The RBI:
- Recommended by the Hilton Young Commission (1926); set up under the RBI Act, 1934.
- The lender of the last resort to banks in trouble.
- Flexible inflation targeting came with the 2016 amendment of the RBI Act: a CPI target of 4%, band 2% to 6%, set by the Monetary Policy Committee.
Credit tools:
- To discourage credit: raise the bank rate, raise CRR or SLR, sell securities.
- CRR: a share of deposits kept with the RBI. SLR: a share of total demand and time deposits held in liquid assets. Both reduce what banks can lend.
- Money multiplier = (1 + c) / (c + r), where c is the public's cash-deposit ratio and r the reserve ratio. More cash with the public or higher reserves lower it.
- Banks and other intermediaries pass policy rates on to borrowers.
On a bank's books, assets above liabilities are its net worth.
Practise this conceptself-check · 3 quick reps
The same idea in a real exam question:
Example 2 · Money, Banking and Public Finance · Money, the RBI and Monetary Policy
CRR and SLR cut lending
Summary — formulas & gotchas at a glance
A revision cheat-sheet for the formulas and gotchas above. Click any concept name to jump back to its full explanation.
Formulas (1)
- Money: functions, measures and demand
Fisher's equation of exchange
Reference tables (1)
Watch out for (2)
- M2 is post office, M3 is banks→ Money: functions, measures and demand
- CRR and SLR cut lending→ The RBI and credit control
Test yourself on Money, Banking and Public Finance
20 past SSC CGL questions from this chapter, timed at 12 minutes and marked the way the exam marks it. You see your score and every answer the moment you finish. Free to start.