Reserve money – also known as central bank money, base money or high powered money – plays a crucial role in the determination of monetary aggregates. Reserve money has two major components – currency in circulation and reserves.
Currency in circulation comprises currency with the public and cash in hand with banks. The public’s demand for currency is determined by a number of factors such as real income, price level, the opportunity cost of holding currency (i.e., the interest rate on interest-bearing assets) and the availability of alternative instruments of transactions, e.g., credit/debit cards, ATMs, cheque payments.
The demand for reserves by banks depends on the requirements for the maintenance of CRR and to meet payment obligations. The Reserve Bank is the banker to the banks and is the sole supplier of liquidity (or reserves) to these banks. A part of the reserves is supplied while performing central banking functions other than monetary policy operations and constitute the autonomous drivers of liquidity. (Source: RBI)
COMPARATIVE STATEMENT ON RESERVE MONEY Y-O-Y (INR in billion)