Money Multiplier

Money Multiplier
What is Money Multiplier
RBI creates money in banks via reserve money (M0). As mandated by RBI,
banks keeps aside some money as part of reserve requirement (CRR 1 ) and lends out
the excess reserves (excess money in form of deposits in banks).
Money multiplier is the process through which banks create more money
through its excess reserves, thereby expanding money supply.
In other words, its process of creating more money by banks from reserve
money.
Chart below shows how banks create more money through excess reserves.
1
CRR-Cash Reserve ratio

How Money Multiplier impacts Money Supply
Money supply 2 is a function of money multiplier and reserve money.
Changes in money multiplier will have impact on the money supply.
Factors determining money multiplier are reserve ratio, currency to deposit ratio, creditdeposit
ratio.
Low reserve ratio, would require banks to keep aside less reserves as CRR, thereby
increasing its excess reserves to lend out which increases money supply. Higher reserve
ratio will have reverse effect on money supply.
Currency to deposit ratio (currency leakage) tells how much public is holding as cash
and not re depositing in banks. More cash held by public means lesser deposits thereby
reducing the amount bank can lend out resulting in lower money supply. Reverse holds
true when less cash is held by public.
Credit-deposit ratio indicates how much banks are lending out rather than keeping with
themselves. High ratio means banks are lending out more money which in turn would
increase money supply.
Chart below gives a snap shot of the money supply.
2
Money supply refers to broad money(M3) which is currency with public + Deposits with bank (time+
demand deposits )

Statistics
Chart below shows Money supply growth as a function of Reserve money growth and
Money Multiplier
In ` billion
From the above chart, we can see Money supply growth has been supported by
increase in money multiplier.
Post 2008, creation of reserve money has reduced and increase in money supply has
predominantly let to growth in money supply.
Since 2011, RBI has reduced CRR, which has led to money multiplier increase thereby
increasing money supply.
Table below shows data on money supply, reserve money and money multiplier.
M3 M0 Money Multiplier
FY 2013 3 80319.2 14582.1 5.51
FY 2012 73592.0 14271.7 5.16
FY 2011 65041.2 13768.2 4.72
FY 2010 56027.0 11556.5 4.85
FY 2009 47947.8 9879.6 4.85
FY 2008 40178.6 9282.7 4.33
FY 2007 33100.4 7088.6 4.67
3 Data for FY2013 is till 28 th December 2012