Response of Money Stock to its Demand

It is interesting to find out as to what is the position of supply of money in India as compared to its demand. Some believe that our supply of money is more than the demand for it and that explains the persistent inflation in the economy. The demand for money is modeled based on the Keynesian theory of demand for money where it is based on national income and interest rate. The money stock data of broad money (M3) has been taken for the years 1996 to 2005. The Keynesian model of demand for money tells us that RBI has been conservative in its money supply as the same is systematically lesser than the desired demand for money.