Money and Banking
Money and Banking tests money measures, RBI functions, CRR/SLR and credit creation.
Money and banking
Money’s functions: medium of exchange, unit of account, store of value, standard of deferred payment. Measures: M1=currency + demand deposits + other deposits with RBI; M2=M1+savings deposits with post offices; M3=M2+time deposits; M4=M3+total post office deposits. RBI is the central bank: issues currency, is banker to the government and banks, manages foreign exchange and controls credit.
Commercial banks accept deposits and lend, creating credit. Credit multiplier = 1/reserve ratio. If CRR is 10%, a new deposit of ₹1,000 can create total deposits up to ₹10,000. CRR is cash held with RBI; SLR is liquid assets held by banks. RBI tools: repo/reverse repo, bank rate, open market operations, CRR, SLR, margin requirements.
Worked example
A bank receives a ₹1,000 deposit. With CRR 10%, it keeps ₹100 and lends ₹900. The borrower’s spending returns as a deposit; the next bank keeps ₹90 and lends ₹810. Total deposits = 1,000×1/0.10=₹10,000; total credit creation is ₹9,000 beyond the initial deposit. If CRR rises to 20%, the multiplier falls to 5 and total deposits fall to ₹5,000.
Traps
CRR is not SLR. Bank deposits are liabilities of banks but money for the public. The multiplier is an upper limit; currency leakage and excess reserves reduce it. RBI does not directly fix all lending rates in a deregulated system. Do not confuse repo (RBI lends) with reverse repo (RBI borrows).