>[!summary]- Table of Contents: Reserve Money > - [[Reserve Money#**COMPONENTS**|Components of Reserve Money]] > - [[Reserve Money#1.1 Currency in Circulation|1.1 Currency in Circulation]] > - [[Reserve Money#**1.2 Bankers’ Deposits with the RBI/Deposits with RBI by Banks**|1.2 Bankers’ Deposits with the RBI/Deposits with RBI by Banks]] > - [[Reserve Money#**1.3 Other Deposits” with the RBI**|1.3 Other Deposits” with the RBI]] > - [[Reserve Money#**SOURCES**|Sources of Reserve Money]] > - [[Reserve Money#2.1 Net Reserve Bank credit to Government|2.1 Net Reserve Bank credit to Government]] > - [[Reserve Money#2.2 RBI Credit to the Banks & Commercial Sector|2.2 RBI Credit to the Banks & Commercial Sector]] > - [[Reserve Money#2.3 Net Foreign Exchange Assets of RBI|2.3 Net Foreign Exchange Assets of RBI]] > - [[Reserve Money#2.4 Government's Currency Liabilities to the Public|2.4 Government's Currency Liabilities to the Public]] > - [[Reserve Money#2.5. Net non-monetary liabilities of RBI|2.5 Net non-monetary liabilities of RBI]] One of the key tables published in WSS is Reserve Money: Components and Sources. Here's a table published on April 17, 2020 showing data as on 10-Apr-2020. ^6cf04a ![[RBI_Press Release_WSS_April 17 2020.png|700]] **The data tables that will be needed as reference to understand the above table of WSS are:** >1. “Statement of Liabilities and Assets of RBI” in the Weekly Statistical Supplement (WSS) >2. Money Market Operations press release by RB >3. Reserve Money : Components and Sources in WSS >4. [Foreign Exchange Reserves](https://www.rbi.org.in/Scripts/WSSView.aspx?Id=23689) in WSS >5. Annual Report of RBI ## COMPONENTS **Reserve Money is how RBI changes (increases and decreases) the money supply.** It can do so by changing currency in circulation and increasing reserve requirements by banks or if deposits with RBI by other institutions change. *Thus, it sum of three variables:* \=Currency in circulation \+ Bankers' Deposits with RBI \+ Deposits with RBI by Others Here RBI *mainly controls* money supply by currency in circulation and by reserve requirements on the banks. ==Data on Reserve Money can be found [here]([https://rbi.org.in/Scripts/Data\_ReserveMoney.aspx)==^2e0fb8 >[!faq]- Reserve Money = Currency in Circulation + Deposits with RBI by Banks + ~~Governments' Cash Balances with RBI~~ + Deposits by Others with RBI *It does not include the governments' (Central+State) cash balances with RBI as they have been included in Net RBI credit to Government ### 1.1 Currency in Circulation where, **Currency in circulation = Total currency** [(notes, coins and e₹ )](Currency%20Management.md) **held outside RBI** = Total notes issued by RBI +\ Total [coins](https://www.rbi.org.in/commonperson/English/Scripts/FAQs.aspx?Id=3158#:~:text=F)issued by Govt. of India \- Any cash (notes and coins) held by the banking department (BD) of the RBI \= Paper notes issued by the RBI \+ [Digital Currency](Central%20Bank%20Digital%20Currency%20(CBDC).md) issued by the RBI (CBDC-W, [[Central Bank Digital Currency (CBDC)|Digital Rupee OPEN]] -Wholesale, e₹-W \+ CBDC-R, Digital Rupee - Retail, e₹-R) \+ Coins issued on behalf of Govt. of India (1 Rupee Note, Coins). They are Govt.'s currency liabilities to the public. \- Any cash, viz. Notes, Rupee Coin, Small Coin held by the banking department of the RBI. On balance sheet, it is an asset of the Banking Department. > On RBI's balance sheet, let us find currency in circulation (outside RBI) as a following break-up: > = Notes outside RBI (A) + Coins outside RBI (B) > > where: > A = Paper notes in circulation + [Digital Currency](Central%20Bank%20Digital%20Currency%20(CBDC).md) > A can be found in Schedule 5 of the balance sheet: > The term "Notes" in the [header](https://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1412#:~:text=Schedule%205%3A-,Notes%20Issued,-(i)%20Notes%20held) of Schedule 5 refers to paper notes as well as [digital currency](Central%20Bank%20Digital%20Currency%20(CBDC).md) > Notes (Paper +Digital) issued = paper notes (banknotes) in circulation + paper notes (banknotes) held with the banking department of the RBI + central bank digital currency ([CBDC](Central%20Bank%20Digital%20Currency%20(CBDC).md)) issued. > > Thus A = Notes (Paper +Digital) issued \- paper notes held with the banking department of the RBI > > B = Total coins issued, viz. 1 Rupee Note, Coins, which are Govt.'s currency liabilities to the public issued (C) - Coins with RBI (D) > C = 'Reserve Money' report published in the Weekly Statistical Supplement by RBI. > D = Schedule 6 of the balance sheet Currency in circulation can be also be seen as currency with public \+ cash in hand (notes and coins held by banks in their vaults for their expenses and ATMs). **\= This is the total banknotes, rupee coins and small coins outside RBI and hence in the system.** **So how does the RBI inject cash money?** 1. The Banking Department (BD) and the Issue Department (ID) are two distinct departments of RBI. The issue department issues and manages the currency in the system and all other tasks is undertaken by the banking department. So, if RBI needs to issue notes, it has to purchase (backed the notes by) with those notes assets like 1. Gold coin, gold bullion, 2. Central and state govt. securities, 3. Domestic bills of exchange and other commercial papers, 4. Coins (1 Rupee Note and Coins) from Govt. of India 5. Foreign securities like foreign exchange, govt. securities, etc. 2. But the issue department does not engage in the transactions itself. It is the banking department that purchases the assets for the issue department and thereby circulates this currency throughout the economy along with performing other tasks like liquidity management, and implementing monetary policy. In other words, the banking department manages the actual task of putting currency into circulation and its withdrawal from circulation. >[Currency Demand in India](RBI_Annual%20Report_2016.pdf#page=42&selection=4,0,5,24) in RBI's Annual Report 2016 ### 1.2 Bankers’ Deposits with the RBI/Deposits with RBI by Banks **Deposits with RBI by Banks \= Bank Reserves = CRR reserves + any extra reserves (fund balances for inter-bank settlements).** 1. On RBI's balance sheet, these deposits are categorized into deposits by: 1. Scheduled Commercial Banks 2. Scheduled State Co-operative Banks 3. Other Scheduled Co-operative Banks 4. Non-Scheduled State Co-operative Banks 5. Other Banks 2. In other words, the current accounts of banks with RBI are mainly to 1. maintain CRR - fulfill the statutory reserve requirements mandated by the central bank, 2. surplus/extra reserves or fund balances - for participation in centralized (RTGS/NEFT) and decentralized payment systems and are used for settling inter-bank obligations, such as clearing transactions or clearing money market transactions between two banks, buying and selling securities and foreign currencies, currency chest operations, etc. On RBI's balance sheet, it is under Schedule 2:b ### 1.3 Other Deposits with the RBI **Deposits with RBI by Others** 1. It is equal to Deposits from foreign central banks and governments, international agencies such as the International Monetary Fund (IMF), multilateral institutions, mutual funds, financial institutions, balances in MAF (Medical Assistance Fund), Payments Infrastructure Development Fund (PIDF fund), Depositor Education and Awareness (DEA) fund, mutual funds, provident, gratuity and guarantee funds of the Reserve Bank staff, sundry deposits, excluding the balance in IMF Account No. 1. (less the quota fees) . 2. These 'other deposits' are mainly deposits by entities on whom RBI does not impose any legal requirements to maintain reserves with RBI. 3. On RBI's balance sheet, it is schedule:2d with exclusions like 1. 'Others' in 2d also has funds borrowed by RBI under LAF/Reverse Repo and SDF, sundry deposits net of IMF account No.1 4. It is maintained with the Deposit Accounts Department (DAD) of the RBI, which operate at regional offices, under the Bank Accounts Division, Department of Government and Bank Accounts (DGBA) at RBI's central office in Mumbai. ‘Other’ Deposits with RBI in this table of Reserve Money will not be equal to “Others Deposits” in the Statement of Accounts of RBI All the monetary liabilities in Deposits/Others would be part of 'Other Deposits with the RBI'. *RBI mainly controls money supply by currency in circulation and by reserve requirements on the banks.* ## SOURCES ^21a148 This section is the asset side of the reserve money equation. So it tells us the ways/sources for RBI to put money into system ### 2.1 Net Reserve Bank credit to Government Government securities are issued by both central and state governments. They are also referred to Rupee securities on RBI's balance sheet. Central Government = Dated G-secs/bonds (tenor > 5 years), T-bills, CMBs and [special securities](https://www.rbi.org.in/commonperson/English/Scripts/FAQs.aspx?Id=711#1:~:text=Special%20Securities%20%2D) like oil bonds. State Government = bonds/dated securities called the State Development Loans (SDLs). **\=Net RBI credit to Government** \=Net RBI credit to Central Government (A) \+ Net RBI credit to State Government (B) where, A \= Holdings of central govt. securities (Net Holdings through OMOs + ~~devolvement+private placement with RBI+conversion of special securities to dated securities~~) *(The primary auctions become fully market determined with withdrawal of RBI from auction with effect from April 1, 2006 on implementation of FRBM Act.)* \+ Loans and Advances to Centre (by Ways and Means Advances-WMA, Overdraft-OD) \+ Others (Only the RBI's holdings of Rupee Coins & Small Coins) **\-** \[Deposits of Central Govt./Cash balance of Central Govt. with RBI \+ any balance in Market Stabilisation Scheme fund (a balance represents the liquidity/funds absorbed to sterilize capital flows by issue of MSS bond, and is credit by Govt. to RBI, which is not used by the govt.)\] and, B= Holdings of state government securities (SDLs) \+ Loans and Advances to State (by WMA, OD and SDF as per section 17 (5) of RBI Act, 1934\) \- Deposits of state government with RBI **The table below shows how, as on 31-March-2023, the Net Credit to Government in the table on [Reserve Money in WSS](https://rbi.org.in/Scripts/WSSView.aspx?Id=26799) is Rs 14,51,126 crore.** | **As on end of March 31, 2023** | **Centre** | **State** | **Centre** | **State** | **Source 1** | **Source 2** | | ------------------------------------------------------------------------------- | ----------:| ---------:| -------------------------------------------- | --------------- |:--------------------------------------- | ------------------------------- | | Holdings of Rupee Securities | 14,06,423 | 0.0 | Dated G-Secs, T-bills and special securities | SDL | WSS-Statement of assets and liabilities | RBI's balance sheet for FY22-23 | | Loans and Advances | 48,677.0 | 792.0 | Ways and Means Advances-WMA, Overdraft-OD | WMA, OD and SDF | WSS-Statement of assets and liabilities | RBI's balance sheet for FY22-23 | | Others - Only the holdings of Rupee Coins & Small Coins held by issue dept. RBI | 277.3 | | | | RBI balance sheet | | | Cash balance of Govt. with RBI + any balance in MSS fund | -5,000.9 | -42.5 | | | WSS-Statement of assets and liabilities | RBI's balance sheet for FY22-23 | | Net RBI Credit to Centre+State | 14,50,376 | 749.5 | | | | | | Net RBI Credit to Government | | | | | 14,51,126 | | All figures in ₹ (Crore). **Source:** 1. WSS - Reserve Bank of India - [Liabilities and Assets](https://rbi.org.in/Scripts/WSSView.aspx?Id=26793), as on 31-March-2023. 2. [Statement of Accounts-RBI-2022-2023](https://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1383) 3. [Reserve Money in WSS](https://rbi.org.in/Scripts/WSSView.aspx?Id=26799) - The RBI increases money supply when it purchases government bonds (through Open Market Operations ([OMOs](Open%20Market%20Operations%20(OMOs).md)) or primary auctions) or provides short-term funding to the government via Ways and Means Advances ([WMA](Ways%20and%20Means%20(WMA).md)), Overdraft (OD), or by purchasing coins from the government. - The RBI decreases money supply when it sells government securities in the secondary market (through OMOs) or redeems maturing securities. - RBI’s holdings of government securities fluctuate due to **liquidity management operations** like OMOs and **LAF (Liquidity Adjustment Facility)** operations like repos, reverse repos, and the Marginal Standing Facility (MSF)**. OMOs/change in CRR help RBI manage lasting or durable liquidity whereas LAF operations address frictional or short-term liquidity mismatches in the banking system, helping banks manage temporary surpluses or deficits of funds rather than creating an impact on overall liquidity levels on more permanent basis. Note that these bonds are mostly held by the banking department and hence the holdings of the issue department in G-secs is mostly nil. **Related Notes** 1. [[Budget Deficit, Monetised Deficit, Primary Subscriptions|3 concepts]]: Budget Deficit, monetised deficit or the net RBI credit to the Government and RBI's support in primary issues of Central Government securities. 2. [Secondary Market in G-Secs](G-Secs-Secondary%20Market.md) ### 2.2 RBI Credit to the Banks & Commercial Sector =Net RBI's credit to banks/RBI's Net Claims on Banks $+$ RBI's Credit to the Commercial Sector \=funds lent to banks $-$ funds lent by banks to RBI under [Liquidity Adjustment Facility (LAF)](Liquidity%20Adjustment%20Facility%20(LAF).md) $+$ funds lent to commercial sector (*standalone primary dealers*) We will calculate this as follows: >\[funds lent to banks+ funds lent to commercial sector\] (A) - funds borrowed from banks by the RBI under LAF through Reverse Repo and SDF (B) **Now A =** 'Loans and advances' as shown in Schedule 10:b of the RBI's balance sheet and 'Investment in Subsidiaries/Associates' as shown in Schedule 11. *Banks \= Loans and advances to Commercial and Co-operative Banks *(Banks)* *Commercial Sector* \+ Loans and advances to NABARD \+ Loans and advances to Others (like NHB, SIDBI, Exim Bank and Primary Dealers (PDs)) \+ Loans and Advances to Financial Institutions Outside India \+ and Investment in Subsidiaries/Associates like: 1. Deposit Insurance and Credit Guarantee Corporation (DICGC), 2. Bharatiya Reserve Bank Note Mudran (P) Ltd. (BRBNMPL), 3. Reserve Bank Information Technology (P) Ltd. (ReBIT), 4. National Centre for Financial Education (NCFE), 5. Indian Financial Technology & Allied Services, 6. Reserve Bank Innovation Hub (RBIH) So RBI's credit to commercial sector = Loans and Advances to: NABARD + Others (Primary Dealers) + Financial Institutions Outside IndiaInvestment in Subsidiaries/Associates **For B**, viz. funds borrowed or received by RBI under Reverse Repo and SDF, we will refer to Money Market Operations data, which is published daily and add total amount outstanding under LAF/Reverse Repo + SDF. 1. Effective July 11, 2014, RBI's Net Claims on Banks is equal to the amount provided by RBI under repo, term repo and MSF to banks is treated as ‘Loans and advances to banks’ and is included as *RBI’s Net Claims on Banks* , and the collateral provided by banks as collaterals are now excluded from the Net RBI credit to Government, as it continues to be part of Banks' investment in govt. securities. **Method 2:** 1. (A) can also be calculated from “Statement of Liabilities and Assets of RBI” in the Weekly Statistical Supplement (WSS). 2. But there will be variation if we calculate, Net RBI credit to Banks = funds lent to banks - funds borrowed from banks by RBI under LAF/Reverse Repo and SDF, by using [[Money Market Operations (MMO)]]. 1. This is because, in the daily money market operations report, we can find total funds borrowed by RBI but total funds lent to banks will have variation. SLFs includes refinance facility to banks like refinance against eligible export credit outstanding and also loans to non-banks like mutual funds, etc. If we wish to just find Total Credit to Banks by RBI knowing Net RBI Credit to Banks + Commercial sector, we can use ' RBI credit to commercial sector' in the monthly report on 'Sources of Money Stock (M3)' in RBI's bulletin. *A negative amount indicates RBI is a net borrower from Banks+Commercial Sector.* ==The above two assets (2.1+2.2) can be combined as Net Domestic Assets of RBI = Net RBI credit to Government + RBI credit to Banks (net claims of RBI on banks) & Commercial Sector== **Related Notes** 1. [Liquidity Adjustment Facility (LAF)](Liquidity%20Adjustment%20Facility%20(LAF).md) 2. [Money Market Operations (MMO)](Money%20Market%20Operations%20(MMO).md) 3. [Marginal Standing Facility (MSF), 2011](Marginal%20Standing%20Facility%20(MSF),%202011.md) 4. [Standing Deposit Facility (SDF), 2018](Standing%20Deposit%20Facility%20(SDF),%202018.md) ### 2.3 Net Foreign Exchange Assets of RBI - NFA Third way is when RBI purchases foreign exchange assets. \=FCA \+ Gold \+ Investment in bonds issued by IIFC (UK) – (Any foreign exchange liability of RBI) \= From REF 4 \+ REF 5 \=Rs 33,59,313 \+ 2,37,531+13797(approx.) \=Rs 36.10 lakh crore(approx.) Net foreign exchange assets of RBI \= This includes holdings of foreign currency assets (FCA) and the Gold reserves. Gold reserves are maintained with Issue department of RBI. **Valuation of Gold:** From October 17, 1990, gold holdings are valued at the end of the month at 90% of daily average price quoted at London for the month. To convert it into rupees, exchange rate prevailing on the last business day of the month is considered). Unrealized gains/losses are adjusted to CGRA account. >[!normal] >**In earlier days, the net RBI credit to the government was a major source of reserve money/major tool to meet demand for reserve money/cash needs of the economy. Now, it is the changes in net foreign exchange assets.** >Similarly, in times of outflows, RBI could use only one instrument, viz., OMO purchases, to create reserves/reserve money/permanent reserves/print notes. ^981e2b **The table below exhibits the 'Assets and Liabilities' of the issue department as on March 31, 2024** | **Liabilities** | **Amount** | **Assets** | **Amount** | **%** | |-----------------|------------|--------------------------------------------------------|------------|--------| | Notes Issued | 34,78,040 | Gold-ID | 1,64,605 | 4.73% | | | | Rupee Coin | 458.5 | 0.01% | | | | Investments-Foreign-ID | 33,12,976 | 95.25% | | | | Investments-Domestic-ID | 0.0 | 0.00% | | | | Domestic Bills of Exchange and other Commercial Papers | 0.0 | 0.00% | [Source: Statement of Accounts for 2023-2024](https://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1412#:~:text=RESERVE%20BANK%20OF%20INDIA%0ABALANCE%20SHEET%20AS%20ON%20MARCH%2031%2C%202024) > The above table shows that issuance of currency is mainly backed by foreign securities and gold, and some coins **Does it mean RBI does not buy government securities?** It does buy G-secs as part of its monetary policy operations, while allowing RBI flexibility in managing liquidity and interest rates. It does not primarily print money to buy gov. secs but buys it from the reserves maintained by banks and others with the RBI and the realized income from the its assets of both the departments. Hence, the holdings of domestic securities like gov. secs by the issue department is nil on RBI's balance sheet. ==For the banking department, the holdings of Government securities = Devolvement on RBI + private placement on RBI (*discontinued*) + Securities bought/sold in OMOs + Net of LAF operations (repo+MSF-reverse repo). In case of extreme liquidity tightness, RBI may intervene in primary auctions to support the yields.== The first banknote issued by independent India was the one rupee note issued in 1949. ### 2.4 Government's Currency Liabilities to the Public When RBI buys [coins](https://www.rbi.org.in/commonperson/English/Scripts/FAQs.aspx?Id=3158) from the SPMCIL's mints, it increases money supply as it pays in notes for the coins purchased. 1. Coins up to 50 paise are called 'small coins' and coins of 1 Rupee (and 1 Rupee note) and above are called 'Rupee Coins'. 2. *Coins are regulated by the [Coinage Act 2011](https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/COIN281114.pdf) 3. Both these types of coins are minted/issued by the government. But, it’s RBI that **distributes** or puts it into the system on behalf of the govt. It takes these coins and exchanges them with notes. Hence they form a loan to the government or an asset of the RBI. 4. The "Net RBI Credit to Govt." include RBI's holdings of Coins in the reserve money. Hence this component is equal to coins held outside the RBI. <div style="background-color:#f1ffae; display:inline-block; padding:2px 6px; border-radius:4px;"> This <a data-href="Currency Management" href="Currency Management">section</a> has notes on history of notes, and management of currency notes. </div> The total value of outstanding “Rupee coin and small coin” is Rs 33,432 crore as on 31-March-2024. > *Coins are minted at four mints of Govt. owned corporation, SPMCIL. They are only distributed by RBI in terms of Section 38 of the RBI Act. Coins of Rupee one and above are called Rupee Coin and Coins of up to 50 paise are called Small Coins).The Issue department accepts Rupee coins and provides notes to the Banking Department in return. Thus, coins become a backing for the notes issued by RBI. The money printed to buy coins is RBI's liability but the coins are govt.'s currency liabilities.* >[!info] Subhash Chandra Garg in his book *The Ten Trillion Dream Dented: The State of the Indian Economy and Reforms in Modi 2.0 (2019-2024)*, published by 'Penguin Random House India Private Limited'. >In the first year of the Modi government’s second term, the indent was marginally reduced to 25.10 billion pieces. The big push-down came thereafter. The RBI reduced the coin indent to only 3 billion coins in 2020–21, 0.8 billion in 2021–22 and 1 billion in 2022–23. Clearly, the RBI seemed to be closing the tap for minting new coins. >As a result of this squeeze on new minting of coins, the coins in circulation increased to only 132.35 billion pieces at the end of 2023–24 with the monetary value of Rs 33,389 crore. The government/SPMCIL has four mints—at Kolkata, Noida, Mumbai and Hyderabad—with the largest mint at Noida having the biggest minting capacity. >With RBI indents getting reduced to a trickle, the SPMCIL had to close down some of the mints as they were left with no work. > ### 2.5. Net non-monetary liabilities of RBI Liabilities of RBI can be divided into monetary liabilities + non-monetary liabilities of RBI. ==Total monetary liabilities of RBI $=$ Only notes and [digital currency](Central%20Bank%20Digital%20Currency%20(CBDC).md) issued $+$ All deposits with RBI (A) (Bankers' Deposit+Other Deposits)== where, A on balance sheet, Schedule 2:Deposits - Deposits/Others/(i)Administrators of RBI Employee PF A/c A = There will be still a very small over-estimation in the total monetary liabilities if we add all the 'Deposits' on the balance sheet as Deposits/Others also include non-monetary liabilities like sundry deposits, etc. All the other liabilities are non-monetary in nature. They do not create any monetary impact. They are not part of the money supply calculations but are just custodial funds, reserved for specific purposes. They are: \+ Paid-up capital \+ Reserve Fund \+ Other reserves (contributions to LTO funds like National Industrial Credit-Long Term Operations (NIC-LTO) fund , National Housing Credit-Long Term Operations (NHC-LTO) Fund, NRC(LTO) and NAC-SF have been discontinued) 1. *Funds maintained by NABARD* - With the establishment of NABARD in 1982, two funds, that is, National Agricultural Credit-Long Term Operations NRC(LTO) and National Agricultural Credit-Stabilisation (NRC-SF) Fund which were maintained with RBI, were transferred to NABARD and renamed as National Rural Credit-Long Term Operation (NRC-LTO) Fund and National Rural Credit-Stabilisation (NRC-SF) Fund. 2. Before 1992–93, RBI set aside a portion of its annual surplus (roughly 8–9% on average) by making contributions to the 3 Long-Term Operations (LTO) funds and one Special Fund, before transferring the remaining surplus to Government. From NIC-LTO and NHB-LTO, it provided loans or invested into the bonds from the industrial and agricultural financial institutions like IDBI, EXIM Bank, IIBI, and SIDBI. 3. This practice was discontinued subsequent to an announcement made in the Union Budget for 1992-93. 4. Therefore, no new allocation was made to these institutions out of NIC (LTO) Fund and to NHB out of NHC (LTO) Fund in 1992-93. 5. From the year 1992-93, the Reserve Bank has been making only token contributions (₹1 crore each) to these 4 funds. 6. Also, in 2019, RBI sold its entire entire stake held in National Housing Bank (NHB), the regulator for housing finance companies, and National Bank for Agriculture and Rural Development (NABARD) but it still sets aside Rs 1 crore every year. \+ Deposits/Others/Administrators of RBI Employee PF A/c \+ Risk provisions - Contingency Fund and Asset Development Fund \+ Revaluation accounts \+ Other Liabilities/Schedule 4 \+ *Deposits/Others/sundry deposits or deposits like DEA Fund/MAF, PIDF OR balances under IMF Account No. 1 after netting the IMF quota subscription and other payments, etc.* **(B)** \- Other assets of RBI (fixed assets, accrued income, amount spent on projects pending completion and staff advances)/Schedule 12 As we cannot find (B) on RBI's balance sheet, there will be some under-estimation in calculation of Net Non-Monetary Liabilities of RBI by balance sheet when compared with Net Non-Monetary Liabilities in Reserve Money table in WSS. ## Drivers of Base Money >[!important] Drivers of base/primary money creation in the economy >**A note on how OMOs and forex operations both can modulate each other** >1. Reserve money = Currency in Circulation (notes and coins with the public and with banks) + Required Reserves+Excess Reserves (including rupee deposits of foreign central banks) = NDA \+ NFA \+ Coins \- Net Non-Monetary Liabilities >2. If we assume value of Coins and Net Non-Monetary Liabilities=0 and most of the 'Net Reserve Bank Credit to Banks & Commercial Sector' of short-term, we get drivers base/primary creation in the economy, which is > >==Reserve money/Base money (M₀ or MB) ≈ NFA + NDA== > >1. During periods when the Reserve Bank purchases significant foreign assets through forex interventions, the size of domestic assets may have to reduce through open market sale of domestic bonds for sterilization (for instance, 2017-18). >2. When there is a sale of foreign assets, the size of domestic assets may have to rise through OMO purchase operations (for instance, 2018-19. >3. In other words, OMOs in form of outright purchase/sale of securities issued by the government through which Net Domestic Assets (NDA) are adjusted and forex operations which affect Net Foreign Assets (NFA) both modulate each other. >$ΔMB \approx \Delta NFA + \Delta NDA$ > >3. In 2006-07 and 2007-08, that is, in the times of surges of capital inflows exerting a strong influence on the balance of payments and exchange rate, RBI has intervened and leading to additions to foreign currency assets and net earnings from deployment of such foreign currency assets. [^1]. In other words, NFA of the RBI increased sharply following capital flows. > 1. Hence, the RBI had to resort to sterilisation by reducing NDA to contain liquidity, i.e., reserve money. It then sold domestic assets through OMOs to absorb excess liquidity. In other words, sterilisation of intervention can be done, i.e., addition to money supply brought about by addition to foreign currency assets through intervention can be neutralised by selling Government Securities in exchange for money. > 2. Thus a substitution of domestic assets with foreign currency assets, happens to the extent there is corresponding sale through Open Market Operations (OMO). > 3. From the point of view of balance-sheet, substitution of domestic assets with foreign assets impacts the income, *since returns may be dissimilar and the rupee value of foreign security may also vary.* >4. In contrast, in 2009-10, during the aftermath of the global financial crisis, when there was foreign exchange outflow following the global financial crisis, the RBI had to expand NDA to maintain an adequate level of rupee liquidity. But the reserve money rose at a slower rate than in earlier years, managing liquidity and targeting inflation >5. The year 2010-11 provides a more balanced picture with a mix of NFA and NDA contributing to desired liquidity expansion >6. Increase in NFA in 2014-15 was higher than the actual increase in RM (consistent with the annual increase in nominal GDP), necessitating open market operations (OMO) (sales) to absorb excess durable surplus liquidity (Table 3). >7. In contrast, in 2013-14 and 2015-16, the actual increase in RM was significantly higher than the increase in NFA, which necessitated OMO (purchases) by the Reserve Bank for injecting durable liquidity. >8. The year 2016-17 was an exceptional year as the problem of large surplus liquidity post-demonetisation was exacerbated by the increase in NFA. >9. In 2017-18, while the liquidity overhang from demonetisation moderated gradually with increasing re-monetisation thus taking the system level liquidity closer to neutrality, primary durable liquidity increased due to forex inflows which was partly offset through OMO (sales). >10. After the end of automatic deficit monetisation (1997), changes in RBI’s net foreign assets became a major source of reserve money expansion >11. After RBI’s credit to government, changes in net foreign assets have become a [major](Reserve%20Money.md#SOURCES) source of the creation/expansion of reserve money > **Change in reserve money - Few cases** >1. When net domestic assets increase (NDA) due to increase in net RBI credit to Government or commercial sector, or on account of liquidity assistance (*refinance earlier*) to banks, new money or created money is infused into the system. >2. Likewise, the net foreign exchange assets (NFA) of the RBI would increase as and when the RBI actually buys foreign currency, say, U.S. dollars by paying in rupees, thereby increasing the liquidity with banks (ADs). >3. When RBI transfers annual profits to RBI, its Net Non-Monetary Liabilities decreases, and govt. cash balances with RBI increases, so reserve money does not change. > 1. Only when govt. withdraws it, RBI transfers it to banks' current account with RBI, increasing banks reserves with RBI (excess reserves). So reserve money increases. > 1. RBI and Govt of India's Just-in-Time (JIT) mechanism, implemented through SNA-SPARSH is a public financial management system designed to release funds for Centrally Sponsored Schemes (CSS) only when needed, reducing idle funds and preventing parking of money in bank accounts. > 2. So only to the extent the funds are transferred under JIT, the "excess reserves" with banks increases. > 2. Now when there is cash withdrawal by the banks, it decreases banks' balance with RBI for real cash and increases currency in circulation (physical notes with banks and/or with public). When there are electronic transfers, current account of one bank gets debited and beneficiary bank's current account is credited. So 'Bankers' deposits with RBI' remains unchanged. This is because RBI only settles between banks’ current accounts. In other words, RBI current accounts are interbank settlement accounts. > **Sources:** >1. Mohanty, D. (2011, August 12). *How does the Reserve Bank of India conduct its monetary policy?* \[Speech\]. Indian Institute of Management, Lucknow, India. [Link](https://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=590) >2. Raj, J., Pattanaik, S., Bhattacharya, I., & Abhilasha. (2018, August). _Forex Market Operations and Liquidity Management_. Reserve Bank of India Bulletin. [Link](https://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=17703) >3. Source: [Report](https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=944#:~:text=For%20example%2C%20during,instance%2C%202018%2D19) of Internal Working Group to Review the Liquidity Management Framework-2019 ^1cef6c >[!normal] >RBI does not follow a fixed rate of growth of money supply, but rather a flexible money supply targeting, and this has actually laid the foundations for what we follow now as flexible inflation targeting >-*(Rangarajan, C., Forks in the Road: My Days at RBI and Beyond (New Delhi: Penguin Business, 2022).* >[!important] The Reserve Bank of India had set up a Committee in 2003 on Procedures and Performance Audit on Public Services (Chairman: Shri S.S. Tarapore, former Deputy Governor, Reserve Bank of India), which submitted its reports between January and April 2004 >The committee examined the Reserve Bank's procedures and performance under four different areas affecting individual customer transactions. These were: >1. [Foreign exchange](RBI-Group-Committee_200404_Report%20on%20Exchange%20Control%20relating%20to%20individuals_CPPAPS_Report-1.pdf) > 1. [Action taken report](RBI_Group-Committee_20040525_Action%20taken%20by%20RBI%20on%20Report%20No.%20–%20I%20on%20Exchange%20Control%20relating%20to%20Individuals_CPPAPS_Report-1.pdf) >2. [Government transactions](RBI_Group-Committee_200405_%20Report%20on%20Government%20Transactions%20relating%20to%20Individuals_CPPAPS_Report-2.pdf) > 1. [Action taken report](RBI_Group-Committee_200405_Action%20taken%20report%20of%20RBI%20to%20Report%20No.2%20on%20Government%20Transactions%20relating%20to%20Individuals_CPPAPS_Report-2.pdf) >3. [Banking operations](RBI_Group-Committee_20040528_Report%20on%20Banking%20Operations_CPPAPS_Report-3.pdf) > 1. [Action taken report](RBI_Group-Committee_200405_Action%20Taken%20Report%20on%20Tarapore%20Committee%20Recommendations%20on%20Banking%20Operations_CPPAPS_Report-3.pdf) >4. [Currency management](RBI_Group-Committee_200405_Report%20on%20Currency%20Management%20-%20Services%20Relating%20to%20Individuals(Non-Business)_CPPAPS_Report-4.pdf) > 1. [Action taken Report](RBI_Group-Committee_200405_Action%20Taken%20Report%20on%20Tarapore%20Committee%20Recommendations%20on%20Currency%20Managemen_Report-4.pdf) > Further Reading: > 5. Y.V. Reddy. (Nov 14, 1997). *Financial Sector Reforms and RBI's Balance Sheet Management.* (by Dr. Y.V. Reddy, Deputy Governor, Reserve Bank of India, Mumbai. The Vysya Bank 11th Annual Lecture on Banking at Bangalore on November 14, 1997). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=234) > 6. RBI. (Aug 29, 2008). Box III.2 - Challenges to Liquidity Management. RBI's Annual Report-08. [Link](RBI_Annual%20Report_2008.pdf#page=204&selection=70,0,71,34) > 7. [Central Bank Reserves as an Instrument of Monetary Policy Credibility](RBI_Annual%20Report_2005.pdf) in RBI's Annual Report-2005 > 8. [Box II.15 Adjusted Reserve Money and Money Multiplier](RBI_Annual%20Report_2009.pdf#page=110&selection=60,0,61,43) in RBI's Annual Report of 2009 ## Data Releases 1. WSS-The data is showed for the last day of the second preceding fortnight. 1. Apr 03, 2026 release shows Reserve Money as on March 15, 2026. ## Related Notes 1. [[Currency Management]] 2. [[Balance Sheet OPEN]] ## References: 1. Y.V. Reddy. (Nov 14, 1997). *Financial Sector Reforms and RBI's Balance Sheet Management.* (by Dr. Y.V. Reddy, Deputy Governor, Reserve Bank of India, Mumbai. The Vysya Bank 11th Annual Lecture on Banking at Bangalore on November 14, 1997). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=234) 2. Handbook 3. RBI. (2003, Dec 29). *Reserve Bank’s Clean Note Policy: An Overview*. [Will banks take my soiled notes?](https://www.rbi.org.in/scripts/PublicationsView.aspx?Id=5907) 4. RBI. (2004, May 29). *Action Taken Report on Tarapore Committee (CPPAPS, 2003) Recommendations on Currency Management (Report-4)*. [Link](https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=388) | [pdf](RBI_Group-Committee_200405_Action%20Taken%20Report%20on%20Tarapore%20Committee%20Recommendations%20on%20Currency%20Managemen_Report-4.pdf) 5. Duvvuri Subbarao. (Jan 31, 2011). ==Implications of the Expansion of Central Bank Balance Sheets==. (Comments of Dr. Duvvuri Subbarao, Governor, Reserve Bank of India at the Special Governors’ Meeting in Kyoto, Japan, on January 31, 2011.). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=547) | [pdf](RBI_Speeches_20110131_Implications%20of%20the%20Expansion%20of%20Central%20Bank%20Balance%20Sheets.pdf) 6. RBI. *Basics of Indian Currency/Currency Management*. [Link](https://rbi.org.in/CommonPerson/english/scripts/FAQs.aspx?Id=3158) ### Others 1. Ashima Goyal (former RBI-MPC member). (Jan 11, 2018). *Government securities market: Price discovery and the cost of Indian government borrowing*.NSE-IEA Lecture Series on Financial Economics. [Link](https://nsearchives.nseindia.com/research/content/G_Secs_IEA_talk_AGoyal.pdf) [^1]: Y.V. Reddy. (Nov 14, 1997). *Financial Sector Reforms and RBI's Balance Sheet Management.* (by Dr. Y.V. Reddy, Deputy Governor, Reserve Bank of India, Mumbai. The Vysya Bank 11th Annual Lecture on Banking at Bangalore on November 14, 1997). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=234)