Recent move by GOI on 500 and 1000 notes, how is it going to impact the inflation?
Before we go on to understand the impact of above, let us first go through money supply
Money Supply equation gets defined by MV = PT where
M Money supply
V velocity of money
P Price of Goods
T Transactions
As established by many researchers,money supply has direct relation with Price of goods hence inflation.
In Indian context, money supply is defined as total circulation of notes and time/savings deposit in the banking system, Number for Oct28,2016 is INR 124 Lakh Crore - https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=38538
Total Currency is 17 Lakh Crore and Deposits are close to 107 Lakh crore, making the overall money supply in the market to be 124Lakh Crore. With cash reserve ratio of 4% - total currency of 17 Lakh Crore can in fact create money supply of 1000 Lakh crore but SLR keeps this in check.
Now if GOI reduces the currency notes in circulation, i don't think this will have much impact until unless they reduce the amount by big margin and don't change SLR & CRR.
We will need to wait until RBI publishes the next data !!
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