International Journal for Multidisciplinary Research (IJFMR)
E-ISSN: 2582-2160 ● Website: [Link] ● Email: editor@[Link]
High Powered Money in India-an Empirical
Analysis
Dr. Prakash Seervi
Associate Professor in Economics SPC Government College AJMER (Rajasthan)
Abstract:
High powered money in the sum of commercial bank reserves and currency (notes and coins) held by
Public. High powered money in the base for the expansion of bank deposit and creation of money
supply. Thus high powered money H=C+RR+ER. Where C represents currency with the public, RR the
required reserves in the commercial banks and ER the excess reserves with banks. High powered money
also known as the monetary base. In India the Reserve Bank of India is responsible for regulatory and
controlling the monetary base. It is important to note that the composition and dynamics of high
powered money in India can change over time due to shifts in monetary policy, economic conditions,
and changes in banking regulations.
High powered money plays a fundamental role in monetary system. It serves as the base upon which the
broader money supply (M1, M2 etc) is created through the process of fractional reserve banking. When
banks make loans, they create deposits, effectively increasing the broader money supply. The RBI uses
various tools, such as open market operations and reserve requirement, to control the growth of high
powered money and, consequently the money supply to achieves its monetary policy objectives, such as
controlling inflation and promoting economic growth.
Keywords: Reserve requirement, Money supply, Deposits, Monetary policy, Bank reserves, Base
money.
Introduction:
High powered money represents the total amount of money in an economy that serves as the foundation
for broader money supply. High powered money consists of two main components :
1. Currency in circulation with policy. This includes all physical money in the form of bank notes
and coins that is held by public and not deposited in banks. It is the most liquid form of money,
readily available for transactions.
2. Reserves held by banks at the Central Bank : Commercial banks are required to hold a portion of
their deposits as reserves with the Central Bank (RBI). These reserves serve as a net for the
banking system and are used to settle interbank transactions.
High powered money is called high powered because it has a powerful impact on the money supply in
economy. The central bank, through its monetary policy tools, can influence the growth of high powered
money. High powered money in the base upon which the entire money supply of an economy built.
Understanding its dynamic and the central bank’s control over it is a crucial for comprehending how
changes in the money supply can affect economic activity, inflation and the interest rates.
IJFMR23068712 Volume 5, Issue 6, November-December 2023 1
International Journal for Multidisciplinary Research (IJFMR)
E-ISSN: 2582-2160 ● Website: [Link] ● Email: editor@[Link]
Objective of the study:
1. To understand the concept of high powered money.
2. To study the changes in hpm over 20 years.
3. To study the components of hpm.
4. To study the process of credit creation, how high powered money serves as base money and
leads to change in money supply.
Data collection and study period:
Secondary data has been used to conduct the research paper. Data was collected from various
magazines, journals, newspapers and internet. The study was collected from RBI bulletin and RBI
website the study period is 20 years from2002-03 to 2021-2022.
Literature Review:
Lothian R James (1976) in his paper shows however, is that the choice is not nearly so simple, empirical
analysis is often circumscribed by lack of data on money of the variables theory suggests can affect the
demand for money. The rationale is that since high powered money is of relatively constant quality over
time and space, such specification errors are likely to be less important for high powered money than for
deposit inclusive totals.
Kanotor Brian (2022) in his research paper that the recent achievements of stabilization policy of South
Africa give little cause for satisfaction. An unstable world economy and financial profligacy of
politicians and civil servants have played their part.
Arato Hiroki (2020) in his research paper builds a model which allows an equilibrium nominal interest
rate on reserve deposit below zero and examines the effect of high powered money and reserve rate
policy. In this model, bank holds cash and reserve deposits for money creation and interbank settlement,
but cash can be used only for money creation.
He find that the long run effect of a higher growth of high powered money on output is negative, but the
sign of the effect of a lower reserve rate on output depends on the household’s labour disutility
parameter and firm’s productivity.
Importance of High Powered Money:
High powered money is of significant importance in India for several key reasons :-
1. High powered money is crucial tool for the RBI to implement monetary policy. RBI can
influence the money supply and interest rate which are vital for achieving the central bank
objectives, including price stability and economic growth.
2. Reserves held by commercial banks at RBI, which form part of high power money, serve as a
source of stability and confidence in the banking system.
3. Managing high power money is instrumental in controlling inflation. RBI can influence the
money supply, which in turn affects inflationary pressures in economy.
4. The RBI may use its foreign exchange reserves a component of monetary base, to stabilize or
manage the value of the Indian rupee in international currency markets.
5. High powered money contribution to overall economic stability by ensuring the availability of
liquid assets for transactions and maintaining confidence in Indian banking and financial system.
Economic stability is essential for attracting investments and fostering economic growth.
IJFMR23068712 Volume 5, Issue 6, November-December 2023 2
International Journal for Multidisciplinary Research (IJFMR)
E-ISSN: 2582-2160 ● Website: [Link] ● Email: editor@[Link]
6. The RBI conducts open market operations to influence the level of high powered money in the
economy these operations have direct impact on liquidity conditions in financial markets and can
effect short term interest rates.
7. High powered money can indirectly impact government financing. When the RBI buys the
government securities in open market that can be used to finance public spending.
8. Monitoring high powered money is essential for macro prudential regulation, ensuring the
stability of financial system and protecting against systemic risks.
Factor
influenced
the demand
of high
powered
money
Interest Economic Technological
Rates Advancements
Activity
Regulatory Government Inflation Global Banking
Changes Policies Expectation Economic Sector Crisis
Condition Behaviour Situation
IJFMR23068712 Volume 5, Issue 6, November-December 2023 3
International Journal for Multidisciplinary Research (IJFMR)
E-ISSN: 2582-2160 ● Website: [Link] ● Email: editor@[Link]
FACTOR INFLUENCING THE SUPPLY OF HIGH POWERED MONEY
Empirical Analysis of High Powered Money:
Table-1 Components of money stock (Rupees in Crore)
Year Currency Other Bankers Reserve Broad Money
in deposits deposits Money Money Multiplier
circulation with the with the (HPM) (M3)
RBI RBI
2002-03 282473 3219 83346 369038 1717936 4.655174
2003-04 327028 5097 104365 436490 2005654 4.59496
2004-05 368661 6454 113996 498111 2245653 4.508339
2005-06 429578 6843 135511 571932 2719493 4.754924
2006-07 504099 7467 197295 708861 3310038 4.669516
2007-08 590801 9027 328447 928275 4017855 4.328302
2008-09 691153 5533 291275 987961 4794775 4.853203
2008-10 799549 3806 352299 1155653 5602698 4.84808
2010-11 949659 3653 423509 1376821 6504116 4.72401
2011-12 1067230 2822 356291 1426344 7384831 5.177454
IJFMR23068712 Volume 5, Issue 6, November-December 2023 4
International Journal for Multidisciplinary Research (IJFMR)
E-ISSN: 2582-2160 ● Website: [Link] ● Email: editor@[Link]
2012-13 1190975 3240 320671 1514886 8389919 5.538317
2013-14 1301074 1965 429703 1732742 9517386 5.492673
2014-15 1448312 14590 465561 1928463 10550168 5.470765
2015-16 1663463 15451 501826 2180740 11617615 5.327373
2016-17 1335266 21091 544127 1900485 12791940 6.730882
2017-18 1829348 23907 565525 2418779 13962587 5.772577
2018-19 2136770 31742 601969 2770481 15432067 5.570176
2019-20 2447312 38507 543888 3029707 16799963 5.545078
2020-21 2853763 47351 698867 3599981 18844578 5.234633
2021-22 3133716 58444 876726 4068887 20493729 5.036692
Source : RBI Bulletin, 2023
Column 1 :- In above table-1 and column 1 shows the study period of empirical analysis of high
powered money. Which is 2002-03 to 2021-22.
Column-2 :- In above table-1 shows that the component currency in circulation has continuously
increased from 282473 crore (Rupees) in 2002-03 to 3133716 crore in 2021-22 with exceptional was
decline in 2016-17 where it stood 1335266 crore. The other component which is though very small
portion of total money supply and high powered money observed fluctuating trend.
Column 3- The second component of high powered money is other deposit with the RBI shows
fluctuating trends through out 2002-03 to 2021-22.
Column 4- The third component i.e. Bankers deposit with the RBI or reserves which serves as base for
credit creation shows an increasing trend, but some times it’s fluctuate.
Column 5- Reserve money also known as High Powered Money (HPM) continuously increased from
369038 crores in 2002-23 to 4068887 crores in 2021-22 with exceptional was decline in 2016-17 where
it stood 1900485 crores.
Column 6 – In above table broad money is most flexible method for measuring the economic activities.
It’s also shows as increasing trend. continuously increased 1717936 crores in 2002-03 to 20493729
crores in 2021-22.
Column 7- In this column we calculate money multiplier (broad money divided by reserve money) and
value obtain was 4.65 in 2002-03 and it’s continuously fluctuate and in 2021-22 it has been 5.03.
If money multiplier value is known the price stability in economy can be achieved. The money supply
i.e. the purchasing power should be equivalent to production or output in the economy. Hence if
multiplier value is known then that times reserve money can be generated which will be equal to output
level to achieve price stability. This shows as important role the money multiplier plays.
Limitation:
▪ Limited control over currency in circulation.
▪ Dependence on Foreign Exchange Reserves.
▪ Limited Transmission Mechanism
▪ Informal Economy
▪ Structural Issues (NPAs)
▪ Liquidity Management
▪ Global Economic Factors.
IJFMR23068712 Volume 5, Issue 6, November-December 2023 5
International Journal for Multidisciplinary Research (IJFMR)
E-ISSN: 2582-2160 ● Website: [Link] ● Email: editor@[Link]
▪ Data Challenges.
These limitation highlight the complexity of managing high powered money in Indian context. To
address these challenges, the RBI employs various tools and strategies to conduct effective monetary
policy and maintain financial stability, including open market operations, reserve requirements and
policy rate adjustments. Additionally ongoing financial sector reforms and efforts to promote digital
payments aim to reduce the reliance on physical cash in economy.
Conclusion:
High powered money is cornerstone of a country’s monetary system, allowing central bank to control
the money supply, influence interest rates, manage inflation and promote economic stability. Its proper
management is crucial for stability of an economy. High powered money from the basis for the money
multiplier effect, plays a significant role in the monetary system and economic management. HPM also
plays a vital role in maintaining the stability of Indian banking system.
Bibliography:
1. Lothan R James (1976) The Demand for High Powered Money, The American Economic Review,
Vol. 66, No. 1 (March 1976) pp. 56-68, Published by American Economic Association.
2. Kantor Brian (28 Jan 2022) The Demand for and Supply of High Powered Money, Money and Bank
Credit or towards a new Monetary Analysis for South Africa, Page 70-90, Published online,
[Link] 1979, 1212156
3. Arato Hiroki (2020) The Effects of High Powered Money Growth and Reserve Rate Policy in the
Model with Money Creation and Interbank Settlement, Posted 20 May 2020, Available at SSRN :
[Link] or [Link] [Link]/10.2139/ssrn.3584125
4. PN Ireland, The Macroeconomic Effects of Interest on Reserves, Macroeconomic Dynamics,
Volume 18, Issue 6 Page, 1271-1312, Posted 2014.
5. RBI Bulletin 2023
6. [Link] (website)
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