RESERVE MONEY IN INDIA AND ITS IMPLICATIONS FOR THE BANKING SYSTEM: AN ANALYSIS OF ITS
Keywords:
reserve money, currency in circulation, bankers’deposits with RBI, net foreign exchange assets, bankingsystem liquidity, monetary transmissionAbstract
Reserve money is a key monetary aggregatethat reflects the liquidity position of the economy and the reserve base of thebanking system. The present study examines reserve money in India with special reference to its trend, composition, majorsources, and implications for the banking system. It is based on secondary time-series data and adopts a quantitative andanalytical research design. Variables such as reserve money, currency in circulation, bankers’deposits with RBI, otherdeposits, RBI claims on government, net foreign exchange assets, andnet non-monetary liabilities were analyzed usingdescriptive statistics, trend analysis, percentage analysis, and correlation analysis. The findings reveal that reserve moneyincreased significantly during the study period, indicating a substantial expansion in the monetary base. Currency incirculation remained the dominant component of reserve money and its share increased over time, whereas bankers’deposits with RBI, despite rising in absolute terms, declined in relative share. On the source side, netforeign exchangeassets of RBI emerged as the most important contributor, followed by RBI claims on government and net non-monetaryliabilities. Correlation analysis further showed a strong positive association between reserve money and its majorcomponent-side and source-side variables. The study concludes that reserve money in India has been shaped by bothdomestic and external monetary factors and continues to hold important implications for banking system liquidity andmonetary management.
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