Introduction
When discussing India’s economy nationally, it is important to consider current accounting and financial economics issues. India, a developing country, has quickly climbed the economic ladder and now has the fifth-largest GDP in the world. This essay will cover a variety of topics that influence the demand for money in India, including central bank policies, financial innovation, digital currencies, and low-interest rates; how to maintain a positive budget balance by raising the multiplier; and how deflation has become a pressing issue in the nation that calls for the government to take action through various policies and initiatives.
Factors Affecting the Demand for Money in India
Central Bank Policies
The Reserve Bank of India (RBI) is the nation’s central bank and a significant factor in the nation’s economy. The RBI determines the Reserve Repo rate, the policy rate, and the Cash Reserve Ratio (CRR) (Dua, 2023). In contrast to the latter, representing the percentage of all deposits held by commercial banks with the RBI, the former refers to the rate at which the RBI lends money to commercial banks. The RBI is responsible for preserving the economy’s financial and price stability (Dua, 2023). By ensuring an adequate money supply and liquidity and regulating currency prices, it aims to maintain price stability.
Policy Rate
Setting the policy rate is the RBI’s first step in establishing its monetary policy. This is the interest rate that the Reserve Bank of India charges commercial banks when they borrow money from it. Typically, the policy rate is set at the beginning of each fiscal year and adjusted in response to the state of the economy.
The amount that commercial banks can borrow and lend directly depends on the policy rate. Commercial banks must pay more to borrow money from the RBI when the policy rate is high, increasing borrowing costs (Dua, 2023). As a result, the cost of borrowing money increases for individuals and organizations, and the need for money decreases.
Cash Reserve Ratio
The second measure the RBI takes is calculating the Cash Reserve Ratio (CRR). The CRR is the portion of deposits commercial banks have with the RBI. The amount of money available for loan disbursement decreases as the CRR increases due to the increased cash commercial banks must hold with the RBI (Dua, 2023). The RBI typically increases the CRR when it wants to decrease the economy’s money supply and decreases it when it wants to increase it. When the CRR is increased, less money is available in the banking system, which raises borrowing costs and reduces demand for credit.
Currency Eschange
The RBI has additional tools to affect the amount of money in the economy and establish the policy rate and CRR. It can buy, sell, and exchange currencies with other central banks to control the money supply. In times of need, the financial system’s liquidity is also increased through open market activities. The RBI also employs buyback and reverse repurchase agreements to regulate short-term borrowing rates.
Overall, the RBI’s policies significantly impact India’s demand for money. The policy rate has an impact on commercial banks’ borrowing and lending rates, which in turn has an impact on businesses and consumers. The CRR influences how much money is available for loan disbursements, so by raising it, the RBI can decrease the money supply and raise borrowing costs. Open market and buyback operations also impact the money supply, impacting the demand for money.
Financial Innovation
The demand for money in India is significantly influenced by financial innovation. Customers can now better manage their financial needs thanks to the development of numerous new financial products and services (Ozili, 2020). In practice, this has increased the need for money in the economy.
Mutual Funds
One type of financial innovation in India is mutual funds, which enable investors to pool their resources. Customers can benefit from a larger capital base as a result, which increases returns. Such investments could increase returns, which could be used to pay for goods or services. Mutual funds boost the demand for money, which benefits the economy.
Derivatives
Another type of financial innovation in India is the use of derivatives. Contracts known as derivatives allow investors to profit by speculating on the value of a specific asset, potentially generating significant returns. Due to the increased demand for money caused by this type of investment, investors can now become wealthier. Derivatives are a desirable investment tool because they allow for price speculation, and as a result, their use is growing steadily in India (Selvamuthu et al., 2019). These investments are also particularly appealing to investors due to the high potential returns they can provide.
E-Commerce
E-commerce has become a household term in India over the past ten years. Customers can now shop from various online shopping sites while lounging in their homes. People now have a much more convenient way to spend money, significantly increasing the demand for money (Selvamuthu et al., 2019). Furthermore, customers can transfer money much more easily thanks to the widespread use of online payment systems like UPI, cards, and others (Selvamuthu et al., 2019). The demand for money in India has grown even more due to this convenience.
QR Codes
Barcode and QR Code scanning have recently become incredibly popular in India. Thanks to this, customers now have a risk-free way to make payments. As a result, more people now pay for goods and services using cashless methods, raising the demand for currency in India. The use of physical cash in the Indian economy has also decreased due to the widespread acceptance of QR Code payments (Akash et al., 2021).
Financial Technology
Last but not least, the growth of financial technology firms in India has contributed to a revolution in the financial services sector. These companies have bridged the gap between consumers and financial institutions by providing easily accessible, affordable, and secure financial services. More customers now have access to a broader range of financial services thanks to the increased use of fintech in India. This has encouraged them to save and invest more, which has increased the demand for money in the Indian economy.
Digital Currencies
Digital currencies are becoming increasingly popular in India because they are convenient and relatively safe. Because digital currencies make it quick and straightforward to transmit money across borders, Indian consumers have accepted them with open arms. Carrying cash is considerably safer since theft or money loss is less likely.
The “Lakshmi” digital money will soon be available thanks to a recent RBI decision (N & John, 2023)—the introduction of digital currency. Thanks to Lakshmi, customers now have a more straightforward and quicker alternative to the standard payment methods. It is anticipated to offer a more affordable and practical transaction method. Additionally, it makes it possible for customers to track their payments more easily and at a lower cost.
The arrival of Lakshmi has increased the demand for money in general and the use of digital currencies. Customers are much more likely to engage in transactions now that there is an easier way to make payments (N & John, 2023). Since they are no longer required to carry large sums or rely on cash payments, Lakshmi has also enabled more people to access banking services.
Additionally, Lakshmi allows users to securely store money on their mobile devices, accessed anywhere with an internet connection (N & John, 2023). Customers can now send and receive money immediately and access direct transactions much more easily. This digital currency would increase the demand for money globally by luring customers to make investments or buy foreign currency because it can be transferred across borders much more swiftly and efficiently than conventional methods (N & John, 2023). Because the money is kept in a single digital wallet, digital currencies like Lakshmi may also help lower the financial risks of cross-border transactions. This helps to lessen the risk of currency exchange fluctuations and eliminates the need for multiple accounts held in different currencies.
Low-Interest Rates
One of the most crucial elements of monetary policy that influences the demand for money in the Indian economy is low interest rates. Because it is India’s primary financial institution, the Reserve Bank of India (RBI) controls most of the country’s interest rates. Because lower interest rates benefit the economy so much, the RBI works tirelessly to reduce the current rate of interest (Shaikh & Vallabh, 2022).
The demand for money in India gradually increases as interest rates fall, encouraging businesses and individuals to borrow and spend more. Interest rates are reduced to promote investment by private individuals, businesses, and institutions. Low-interest rates draw investors, who then bring their capital to the market, which helps raise the money supply while lowering the demand for it.
When consumers know the enhanced borrowing potential of low-interest rates, they are encouraged to use loans for their purchases. Numerous Indian households depend on loans to cover daily expenses. These families benefit when interest rates fall since it lowers their cost of loan servicing.
Additionally, rising consumer borrowing contributes to rising money demand. Moreover, when interest rates are low, financial institutions like banks provide better terms and conditions for customers, such as lower fees and bigger lending pools (Shaikh & Vallabh, 2022). As a result, there is a rise in the demand for financial investments and the amount of borrowing within the economy.
Investors are also attracted to the debt and equity markets by low-interest rates. They are encouraged to invest their money because they see the current low-interest-rate environment as a sign of good things to come (Pandey et al., 2021). Investors’ desire to profit from their investments furthers the trend of rising money demand.
The decline in interest rates also affects inflation and unemployment. A decrease in interest rates stimulates the economy, increasing employment and business activity overall. As more people have access to money, demand for it rises.
Low-interest rates can raise overall demand. The total amount of spending occurring within an economy is known as aggregate demand, and the increased spending brought on by low-interest rates also contributes to an increase in the demand for money (Pandey et al., 2021). Given the advantages low interest rates provide for the general public, it should not be surprising that the RBI works hard to keep them there.
Calculating the Multiplier
The multiplier is a term from economics that describes how a rise in money demand impacts the economy more than the initial rise in demand. The multiplier describes how much extra income a new infusion of cash into the economy produces. The following equation determines an economy’s multiplier: MPC denotes a marginal propensity to consume; multiplier = 1/(1-MPC).
The multiplier is crucial when analyzing an economy’s budget balance. The gap between government spending and revenue is known as the budget balance (Gadbail et al., 2021). An improvement in the budget balance results from an increase in the multiplier because it causes an increase in total expenditures, which in turn causes an increase in government revenue.
Calculations
If the MPC is 0.6, the multiplier would be calculated as follows:
- Multiplier = 1/(1-MPC)
- Multiplier = 1/(1-0.6)
- Multiplier = 1/0.4
- Multiplier = 2.5
Commenting on the Budget Balance
Through the adoption of specific fiscal policies, the Indian economy has recently seen a positive budget balance. The increased multiplier is a significant contributor to the better budget balance. The government’s two most important initiatives, the GST and demonetization, have increased revenues and improved the budget balance (Lahiri, 2020).
The GST makes a more organized tax system possible, which increases tax revenue collection. Demonetization also involves the conversion of cash into digital currency, which has led to an increased multiplier and, as a result, a stronger budget balance (Lahiri, 2020). The country’s black money flow has been reduced due to this action, and the revenue earned that supports a healthy economy has increased.
It also helps maintain the country’s independence by lowering its dependency on imports and the global market. Aside from these actions, the government has also changed the tax rules in several ways, including lowering the corporate tax rate, rationalizing the goods and services tax, giving taxpayers relief, and benefiting the industrial sector’s infrastructure. These actions by the government and others have improved the budget’s balance and contributed to India’s overall development.
Contemporary Issues of Deflation
Despite increased money demand and a favorable fiscal balance in recent years, deflation is one of India’s present financial and economic issues. Deflation is when prices for goods and services fall from the previous year. The price of various commodities has significantly decreased in India in recent years.
Inflation, for instance, declined from 4.7% in August 2020 to 4.4% in September 2020, according to the Consumer Price Index (CPI) (Patnaik &Pandey, 2020). Numerous households have lowered their demand and spending due to the ongoing epidemic and its effects on the economy, leading to the present decline in inflation. Because people have less money to spend, there is a drop in demand for various things like clothing, food, and luxury items.
Deflation is an issue for the Indian economy since it may lead to more unemployment, fewer investments, and decreased output. The government has implemented economic stimulus policies to avoid grave effects, such as decreasing the repo rate and increasing market liquidity. The government expanded public investment in housing and infrastructure projects to increase employment and promote economic growth.
Nationalist Agenda
Regarding its financial demands, the Indian government’s nationalist agenda aims to ensure the efficient and successful operation of the economy. This is done by employing various tactics, such as limiting the money available, choosing the correct interest rate, and getting engaged when the economy is struggling. The government actively uses strategies, such as taxes and establishing different tax incentives and exemptions, to manage the nation’s money demand. This enables them to organize market liquidity and successfully guide citizens, businesses, and investors, preserving the country’s long-term fiscal health (Echeverri-Gent et al., 2021).
Inflation can be harmful to an economy when it is too high. It can raise prices, reduce consumer spending, and worsen the nation’s fiscal balance. To address this, the Indian government has taken steps such as boosting the cash reserve ratio and lowering lending rates. Individuals and businesses in challenging financial situations might also get liquidity support. These actions are meant to lessen the effects of excessive inflation and help the economy achieve balance.
The working and lower-income groups bear the brunt of excessive inflation due to rising living costs and a decline in purchasing power. The Indian government has committed to lowering inflation and has implemented fiscal and monetary policies while fostering economic growth. Infrastructure investment can reduce inflationary pressures by improving supply-side structures. Furthermore, by aggressively encouraging the purchase of goods and services through tax breaks and other incentives, the government can lower the price of items and services for customers.
Conclusion
Digital currencies, central bank regulations, financial innovation, and low-interest rates, among other things, impact India’s credit demand. Calculating the multiplier is necessary to examine the Indian economy’s budget balance. The administration has achieved a positive budget balance thanks to an increase in the multiplier. However, India’s capacity to keep its economy steady is still impacted by deflation.
The administration has implemented specific programs to strengthen the economy. They have improved the financial balance and provided aid to needy persons and companies while focusing on the nationalist agenda. In the end, the government’s many initiatives and policies have helped to increase India’s economy’s need for money and produce a positive budget balance.
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