money-supply-surge-signals-uncertainty-amid-a-pandemic

Context: Heightened uncertainty in India caused by the coronavirus pandemic has led to a surge in the Money supply.

Current Scenario: 

  • Currency in circulation is increased as people are hoarding money in cash to protect them from future job losses or pay cuts.
  • Growth in currency notes held by the public was much higher than the deposits made in banks.
    • Since the end of March, currency held by the public rose 8.2% compared with a 4.1% increase in term deposits,
  • The M3 money supply rose 6.7% in the first five months compared with the same period last year which is the highest growth in seven years as per RBI data.
  • Gross capital formation, or total investments toward fixed capital, fell 7% in the March quarter, hitting a seven-year low.

Analysis of Data:

  • A rise in money supply usually is seen as evidence of growth in consumption and business investments, but the scenario is different this time owing to the COVID pandemic.
  • People are increasing cash holdings just to fight the daunting and uncertain future.
  • While lenders are restraining from lending on the presumption of reduced economic demand in the future.

The increase in the money supply will not translate into higher returns unless normal returns after the pandemic.

Money Supply:

  • The money supply is all the currency and other liquid instruments in a country's economy on the date measured.
  • There are different variables named M0, M1, M2, M3 and M4.
  • M0 = Currency in Circulation + Bankers’ Deposits with RBI + Other deposits with RBI 
    • It is the total amount of currency in general circulation or in the commercial bank deposits held in the central bank's reserves.
    • It is called the Monetary Base of an economy.
  • M1 = Currency in held by public + DD(Demand Deposits) + OD (Other Deposits with RBI)
    • It is a narrow concept of ascertaining money supply in which only those components are included which are highly liquid. 
  • M2 = M1 + Savings Deposit of post office savings bank
  • M3 = M1 + Time Deposits with Banks
    • It is the most common measure of the money supply
    • It is a more broader and less liquid definition which includes Fixed Deposits and Time liabilities of Savings accounts.
  • M4 = M3 + Total deposits with the post office.

Source:

https://www.thehindu.com/business/Economy/money-supply-surge-signals-uncertainty-amid-pandemic/article31901104.ece

Image Source: The Hindu