Velocity Circulation of Money : A Case of India

This study deals with the present situation of income velocity of money in case of India. It has taken the help of the secondary sources of data; the main source is the Reserve Bank of India bulletin. The data has been collected from 1950-51 to 2001-02 for broad and narrow money supply and also for GDP. The income velocity of money is nothing but the ratio of velocity of circulation of money and, as normally understood, is the ratio of the level of aggregate expenditure (GDP) at current market prices in the economy to the average money stock in a given year. In other words, it is the speed at which the money stock changes hands. The numerical value of the velocity of circulation of money is normally greater than unity, indicating that a unit of money changes hands more than once in a given period. When in a country GDP at current market prices is increasing faster than that of the increase in the money supply, the velocity increases. But when the money supply grows faster than GDP at current market prices, the velocity of money decreases. In India the money supply is growing faster than the GDP. The study examines the two types of income velocity i.e., the narrow and the broad income velocity of money, where it has come to the conclusion that the income velocity of broad money is declining faster than the narrow income velocity of money. This is due to certain issues like the growth in the banking sector, the ratios of the Currency to Aggregate Deposit (CUAD), aggregates deposit to that of broad money (ADM3) and the ratio of time deposit in the Total Deposit (TOD). In case of M3 income velocity has been declining from the beginning of 1970-71. It has become 1.40 from 4.34. To show the fall in the income velocity of money we took the help of the first log difference to know the larger shocks. From this analysis it is clear that the income velocity of M3 is declining faster and more steadily falling than that of the income velocity of M1.