THE GREAT DEBATE AS TO DETERMINATION OF MONEY SUPPLY IN INDIA

Academics reported that - there were two ap­proaches to money supply determination in India: balance sheet or structural approach and money multiplier approach; the former focused on individual items in the balance sheet of the consolidated monetary sector in order to explain changes in money supply and the latter focused on the relationship between money stock and reserve money; the money multiplier approach emerged strongly as a critic to the balance sheet approach; between January 1976 and January 1978 there was reportedly a hot and rich debate between two groups of researchers, one group led by Gupta who believed in the money multiplier theory, the other group of RBI economists, who were not accepting this theory; the debate gave rise to a number of research papers where mostly regression techniques were used to estimate and forecast money supply function; Bhattacharya (1972), Gupta (1972) and Marwah (1972) used regression techniques to estimate money multiplier in India four years before the debate took place.

In Swamy (1976), the multiplier approach to estimation and analysis of sources of high powered was found for the first time as a monetary model, developed in the context of India. The person to understand importance and applicability of above model in India after Swamy was S.B. Gupta, who admitted his sincere perusal of Swamy’s thesis in Gupta (1976b). Gupta’s work on monetary modelling before 1975, like Gupta (1973) did not speak of his awareness of the development of this model in monetary literature abroad. Again Gupta (1976a) had certain loopholes. He made contradictory statements - one in fourth para­graph of p. 125 and another in the first paragraph of p. 126. In the fourth paragraph of p. 125 he tells that banks’ credit to government reallocates money supply in favour of government leaving total money supply unchanged, whereas in the first paragraph of p.

After Gupta (1976b), the money multiplier was reported to be found by Jadav (2006) in the non-RBI monetary models explicitly in the works like Ahluwalia (1979), Madhur, Nayak and Roy (1982) and Chitre (1986), and implicitly in the works like Krishnamurty and Pandit (1984), Chakravarty (1987), Nachane and Ray (1989), Jadhav and Singh (1990), Rangarajan and Arif (1990), and in the RBI studies like Singh, Shetty and Venkatachalam (1982) and Rangarajan and Singh (1984). There were, reportedly, attempts like Rao, Venkatachalam and Vasudevan (1981) to go beyond the multiplier approach. Still the concept and use of multiplier is found to have relevance to­day e.g.

1. It is also reported that the concept of resi­dency may emerge in near future as one of the determining factors of money supply in India. The Working Group under the Chairmanship of Y. V. Reddy on Analytics and Methodology of Compilation of Money Supply reportedly introduced the concept of residency and recommended changes in the reporting system of commercial banks; resi­dency was supposed to relate to the country in which the holder had economic interest; currency and deposits held by the non resi­dents in the rest of the world sector would presumably be related to balance of payments considerations such as international capital flows rather than to the domestic demand for monetary assets or to the use of money in domestic transactions and should therefore be regarded as external liabilities to be netted from foreign currency assets of the banking system.

2. The issue of stability of money multiplier should not skip attention Rath (1999) is reported to find over the period 1980-98 instability in both of broad and narrow money multipliers; however over the part period 1980-90, This study found M₃ multi­plier stable; he argued that reasons for such stability might be financial liberalization witnessed in the economy since late 1980; the monthly data on Indian money multiplier showed that it was varying in the range of 2.17-3.72 with a mean value of 3.0; the volatility of the multiplier measured by its standard deviation, which declined during the 1980s from the 1970s, however increased in the 1990s mainly due to frequent changes in the CRR; the movement in the broad money multiplier made the stability of the multiplier a key issue because it could not explain the long run relationship between the broad money and the monetary base.

were found to be cointegrated with reserve money which was not the case in period 3 so much so that multipliers were stable in period 2 but not in period 3 because of financial liberalization in period 3.