what are the factors affecting money supply?
The following are some of the factors affecting money supply.
1. The extent of deficit financing by the government: In case of deficit in budget, the government borrows from the RBI in the form of deficit financing (printing of new currency notes). This adds to the money supply in the country.
2. CRR requirements: The CRR requirements affects the extent of credit creation by the commercial banks. Lower is the CRR requirement, higher is the credit creation which in turn increases the money supply.
3. Rate of interest: A higher rate of interest encourages savings by the people in the form of time deposits and demand deposits with the commercial banks and post offices. This adds to the money supply in the country.
4. Foreign transactions: Greater the foreign transactions in the form of purchase of foreign currency by the Central Bank or the public, greater is the money supply and vice-versa.
5. Sale and purchase of securities by the Central Bank: When the Central Bank purchases securities from the public, it adds to the money supply in the country and vice-versa.