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Errol D’Souza

Table 2.2: Central Bank Balance Sheet

ASSETS LIABILITIES + CAPITAL
Currency in Circulation
= Currency with public (CP)
Credit to government +
The = Holdings of government debt Currency with banks
R
Money less government deposits (Gb/CB)
E
Supply Deposits held by comm- S
and the ercial banks E
R
Central Credit to commercial banks (a) Required reserves
V
Bank (b) Excess reserves
E
S
(excluding cash
with banks)
Advances (Credit) to commercial Net Non-monetary Liabilities of
Indian Institute of private sector (ACB) Central Bank (NMLCB)
Advanced Study
Rashtrapati Niwas
Shimla Turin School
of Development
The monetary liabilities are referred to as base money, high
powered money, or reserve money.

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Errol D’Souza Errol D’Souza

The main asset of the RBI in a closed economy is the credit Table 2.3 A: RBI’s Balance Sheet
given to the government. This asset is created through ASSETS LIABILITIES
open market operations .
Purchase of government Excess reserves held
The purchase of existing government securities by the securities by commercial bank
+ INR x + INR x
RBI is called an open market purchase and the sale
of government securities by the RBI is called an open
market sale.
Table2.3 B: Commercial Bank’s Balance Sheet
We consider the open market purchase of government
ASSETS LIABILITIES
securities by the RBI of the amount ₹ x —

Sale of government
- INR x
securities
Excess reserves at central + INR x
bank

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Errol D’Souza Errol D’Souza

Apart from the outright sale and purchase of government

If the commercial bank resorts to cash in the cheque of the securities the central bank is also engaged in the purchase
RBI for currency when there is a OMO purchase of ₹ x : and sale of government securities through transactions
that are self-reversing. Such temporary transactions are
Table 2.4 A: RBI’s Balance Sheet called reverse repo and repo agreements.
ASSETS LIABILITIES
They are resorted to in order to address temporary short-
Purchase of government ages or surpluses of liquidity at commercial banks.
securities Currency with
+ INR x + INR x
banks
Table 2.4 B: Commercial Bank’s Balance Sheet
ASSETS LIABILITIES

Sale of government
- INR x
securities
Currency with banks
(Vault cash)
+ INR x

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Errol D’Souza Errol D’Souza

Table 2.2: Central Bank Balance Sheet

Apart from the outright sale and purchase of government
securities the central bank is also engaged in the purchase
and sale of government securities through transactions
that are self-reversing. Such temporary transactions are
called reverse repo and repo agreements.
They are resorted to in order to address temporary short-
ages or surpluses of liquidity at commercial banks.
In a reverse repo the RBI sells government securities and the
buyer agrees to sell them back to the RBI in a short period
of time. In India this period is usually a day.
In a repo or repurchase agreement the RBI purchases govern-
ment securities with an agreement that the seller will
repurchase them overnight.
ASSETS LIABILITIES + CAPITAL
Credit to commercial banks
Commercial banks with acute shortages of liquidity are allowed
to borrow from the central bank at very short maturities
(usually overnight). Unlike an open market operation that
the central bank controls through its purchase or sale of
the amount of bonds, in this transaction the initiative is
with commercial banks.
Banks that have frictional liquidity mismatches such as sud-
den increases in depositor withdrawals or an unanticipated
demand for a good loan with minimal credit risk know that
apart from the interbank money market from which they
can borrow for such purposes they also have assured acc-
ess to central bank liquidity of up to a limit of 1 per cent
of their deposits

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Errol D’Souza Errol D’Souza

Table 2.2: Central Bank Balance Sheet
ASSETS LIABILITIES + CAPITAL
Currency in Circulation Table 2.6: Components of Reserve Money (₹ billion)
= Currency with public (CP)
+ R
Year Currency Required Cash Excess Reserve
Currency with banks
E with the reserves with reserves Money
S Public Banks (excluding 𝑀0
Deposits held by comm-
ercial banks
E
cash with
R
(a) Required reserves
V
banks)
(b) Excess reserves 2016-
E
(excluding cash
with banks) S 17 12,641.25 3,458.34 711.42 2,193.84 19,004.85
2017-
18 17,597.13 3,660.86 696.35 2,233.45 24,187.79
Exhibit on Reserve Money
2018-

Reserves held as deposits by 19 20,522.09 4,013.96 845.61 2,323.15 27,704.81

Currency in commercial banks with 2019-
Circulation the central bank 20 23,497.49 4,335.06 975.63 1,488.89 30,297.07
2020-
Currency Cash Excess reserves Required 21 27,518.28 6,437.10 1,019.35 1,025.08 35,999.81
Reserve Money = with the + with + (excluding cash + reserves 2021-
public banks with banks) 22 30,356.89 7,856.12 980.28 1,495.58 40,688.87

Excess reserves

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Errol D’Souza Errol D’Souza

Balance Sheet of Commercial Banks

Table 2.7: Commercial Banks’ Balance Sheet Deposits of commercial banks are broadly classified as
ASSETS LIABILITIES + CAPITAL demand deposits and time deposits.
Deposits with central bank
(a) Required reserves A demand deposit is a bank account that allows the
R
(b) Excess reserves
E owner of the deposit to write cheques as means of
S final settlement of dues with respect to a transaction.
(excluding Cash E Deposits
with banks) These were 13 per cent of bank deposits in 2021-22.
R
V
Cash with banks E Time deposits such as fixed deposits which are a major
(Vault cash) S source of bank funds are non-transaction deposits
and cannot be used to settle dues. These were
Commercial bank credit to Loans from central bank
87 per cent of bank deposits in 2021-22.
government (net) (Gb/B)
Advances (Credits) to commercial Net non-monetary liabilities of
private sector (AB) commercial banks (NMLB)

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Errol D’Souza
Consolidated Bank Balance Sheet
Table 2.8 A: Central Bank Balance Sheet
ASSETS LIABILITIES + CAPITAL
Commercial banks in India are mandated to hold a certain Currency in Circulation
= Currency with public (CP)
fraction of their deposit liabilities in the form of cash, Credit to government
= Holdings of government debt
+
Currency with banks
gold, and government securities — this is known as less government deposits
(Gb/CB)
R
E
the statutory liquidity ratio (SLR). Deposits held by comm-
ercial banks
S
E
R
(a) Required reserves
V
Credit to commercial banks
Mostly banks keep them in the form of government (b) Excess reserves
E
S
(excluding cash
securities as they earn interest on such holdings. with banks)
Advances (Credit) to commercial Net Non-monetary Liabilities of
private sec (ACB) Central Bank (NMLCB)
The SLR is set at 18 per cent of bank deposit (demand Table 2.8 B: Commercial Banks’ Balance Sheet
and time) liabilities. Banks almost always maintain ASSETS
Deposits with central bank
LIABILITIES + CAPITAL

a larger fraction of government securities over the (a) Required reserves

R
SLR requirement as these securities can be used as (b) Excess reserves
E
S
(excluding Cash Deposits (D)
collateral to borrow funds when there is a liquidity with banks)
E
R
requirement. Cash with banks
V
E
(Vault cash) S

Commercial bank credit to Loans from central bank

government (Gb/B)
Advances (Credits) to commercial Net non-monetary liabilities of
private sector (AB) commercial banks (NMLB)

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Errol D’Souza
Table 2.9 A: Additional Items on Central Bank Balance Sheet in an
Open Economy
ASSETS LIABILITIES + CAPITAL
Table 2.8 C: Consolidated Balance Sheet of Banking System Foreign Exchange Assets
ASSETS LIABILITIES + CAPITAL (including gold holding)
( FECB )
Bank credit to Government Currency in Circulation with
(Gb = Gb/CB + Gb/B ) Public (CP)
Table 2.9 B: Additional Items on Commercial Bank Balance Sheet in
Advances (Credits) to Deposits an Open Economy
commercial private sector (D) ASSETS LIABILITIES + CAPITAL
( A = ACB + AB ) Net non-monetary liabilities Advances (Credits) in Foreign Deposits (claims on banks) in
(NML = NMLCB + NMLB) Currency foreign currency
( AFE ) ( DFE)

Net Foreign exchange Currency

We now examine the change in the balance sheet when the Assets of Banks
economy is open to international transactions — (FEB)

Adding these balance sheet items we obtain the additional

items on the consolidated balance sheet – the Foreign
exchange assets (net) of the banking sector (FE). —

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Errol D’Souza Errol D’Souza

Adding the Foreign Exchange Assets (net) of the banking

Table 2.9 C: Additional Items on Consolidated Bank Balance Sheet system to the other assets of the consolidate banking
in an Open Economy system we obtain the consolidated balance sheet of
ASSETS LIABILITIES + CAPITAL the banking system in an open economy.
Foreign Exchange Assets (Net) of
Banking Sector
( FE ) Table 2.10 : Consolidated Balance Sheet of Banking System in an
FE = FECB + FEB + (AFE – DFE) Open Economy
ASSETS LIABILITIES + CAPITAL
Bank credit to Government Currency in Circulation with
(Gb = Gb/CB + Gb/B ) Public (CP)

Advances (Credits) to Deposits

commercial private sector
( A = ACB + AB )
Foreign Exchange Assets (Net)
of Banking Sector
(FE = FECB + FEB + (AFE – DFE))
(D)
Net non-monetary liabilities
(NML = NMLCB + NMLB)

CP + D = Gb + A+ FE - NML
or, Money Supply = MS = CP + D = Gb+ A + FE - NML

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Errol D’Souza Errol D’Souza

Table 2.11: Sources of Money Stock (₹ billion ) Table 2.12: Applications of Money Stock (₹ billion)
Year Net Bank Net Bank Net Net Non- Money Year Currency Demand Time Narrow Broad
Credit to Credit to Foreign Monetary Supply with the Deposits Deposits Money Money
Government Commercial Exchange Liabilities (MS) Public (B) (C) (M1) (M3)
(Gb) Sector (A) Assets (A) (NML) (A)
2016-
2016-
17 17 12,641.24 14,178.33 101,099.83 26,819.57 127,919.40
16 38,816.92 84,114.92 25,582.32 20,594.76 127,919.40 2017-
2017- 18 17,597.12 15,076.19 106,952.55 32,673.31 139,625.87
18 40,270.51 92,137.16 29,222.95 22,004.75 139,625.87 2018-
2018- 19 20,522.09 16,582.54 117,216.03 37,104.64 154,320.67
19 44,143.77 103,827.19 30,708.41 24,358.70 154,320.67 2019-
2019- 20 23,497.48 17,762.00 126,740.16 41,259.48 167,999.63
20 49,867.10 110,386.44 38,010.36 30,264.27 167,999.63 2020-
2020- 21 27,518.28 20,424.71 140,502.78 47,942.99 188,445.78
2021-
21 58,772.87 116,684.66 45,788.46 32,800.21 188,445.78 22 30,356.89 22,714.36 151,866.05 53,071.25 204,937.29
2021-
22 65,056.42 126,165.20 48,540.63 34,824.96 204,937.29 N.B.: Other Deposits with RBI are included as part of Demand Deposits
N.B.: Government’s currency liabilities to the public have been added to Net Bank M1 = (A) + (B)
credit to Government (Gb). M3 = (A) + (B) + (C)
Source: Reserve Bank of India, Database on Indian Economy Source: Reserve Bank of India, Database on Indian Economy

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The money supply in India as read out of the balance sheets

of the banking system is referred to as broad money or M 3.

A narrower definition of money is M1 or narrow money.

This includes only the demand deposits of the banking
system in the definition of money and leaves out time
deposits.

Money Stock Measures

M0 = Currency in Circulation + Deposits held by commercial banks
at the central bank
M1 = Currency in Circulation with the Public + Demand Deposits

M2 = M1 + Time Deposits with maturity of less than a year (Post office

savings bank deposits)
M3 = M2 + Time Deposits with maturity of 1 year and more

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