In the financial system, banks can enhance money supply by expanding loans out of the deposits they receive. The deposit received by commercial banks are part of base money. But after receiving the deposits, banks create money by expanding loans and cheque facilities. Here, the banking system as a whole can create additional money impact through deposit acceptance and loan disbursal. The multiple in which the banking system can expand deposits received in the form of base money into broad money is called money multiplier. From a practical sense, money multiplier shows what is the proportion of broad money compared to base money.
Money multiplier is expressed as a ratio between broad money and base money.
For example, the base money as on March 31, 2017 was Rs 19405.97 billion, whereas broad money was Rs 121815.26 billion. This means a money multiplier of 6.2.
