High Powered Money. The Total liability of the monetary authority of the country, RBI, is called the high powered money or monetary base. It is the money created/produced by RBI and government of India. It consists of currency (notes and coins) in circulation with the public and vault cash of commercial banks and deposits held by government and commercial banks with RBI. It is high powered money because these are liability of RBI to refund deposits on demand from the deposit holders. Again if a person presents a currency note to RBI, the latter has to pay him value equal to the amount printed on the note. Remember, RBI acquires assets against these liabilities.
In short, RBI regulates money supply by controlling stock of high powered money, bank rate and reserve requirements of commercial banks.
Money creation by RBI. Suppose RBI wishes to increase money supply. For this it will inject additional high powered money into the economy. Let us assume that RBI purchases gold worth र 100 crores. It issues currency and makes payment for gold. This results in an increase in currency in circulation equal to र 100 crores. Further suppose that RBI purchases securities worth र 400 crores in the open market. It will issue a cheque of र 400 crores to the seller of the securities. The seller encashes the cheque at his account in, say, Canara Bank which receives this amount. Clearly currency held by the public, thus, goes up. Here comes the part played by money multiplier.