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 195051 to 200102 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 197071. 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.

The ratio of the level of aggregate expenditure at current market prices in the economy to the average money stock in a given year is known as the ‘velocity circulation of money’. In other words, it is the speed at which the money changes hand in a given financial year. When the country’s GDP grows faster than the increase in the money supply, velocity increases and vise versa. The concept of money velocity started with the equation, MV=PT where, M is the total quantity of money in circulation, V stands for the velocity of money, P refers to the general price level, and T is the total volume of transactions of goods and services against money. Due to the problem of non-availability of data the term T was latter replace by Q so the equation becomes, MV=PQ Q is assumed to be full employment level and V is an institutional Constant, a direct relation between exogenously given money supply (M) and price level (P) is postulated.

Keynesian and quantity theories are two competing theories of aggregate money demand. The monetarists think that the stability of income velocity of money (V) is important, whereas the Keynesians have criticized the stability velocity of money. According to Keynes, under the conditions of unemployment equilibrium V was highly unstable. The Quantity Theory of money is often associated with the assumption of a constant V that is something as a natural constant. This is not fully correct. No doubt, the transactions approach emphasizes payment practice such as the frequency with which people are being paid. The irregularity of receipts and payments is its key determinant. But Fisher and earlier quantity theorist did explicitly recognize that velocity would also be affected by the other things such as the high interest rates and also the rate of change of prices. They recognized that both the high rate of interest and rapidly rising prices would induce people to economies on money balances and so tend to raise velocity and that low interest rate and falling prices would have the opposite effect. Therefore it was thought to be a good first appropriation to assume that V was almost a constant (Gupta, 1999; p. 202).

Applied Finance Journal, Currency to Aggregate Deposit, CUAD, Goods and Services, Financial Reforms, Financial Development, Indian Economy, Theoretical Reviews, Economic Stability, RBI, Reserve Bank of India, Ordinary Least Square Method, Financial Structure and Development.