Section Article

STABILITY OF INDIA’S MONEY DEMAND FUNCTION AND THE IMPACT OF FINANCIAL INNOVATION
Author(s): Kiran Bisht

Abstract
The demand for money is a critical component of monetary economics reflecting the public’s desire to hold liquidity in various forms. Understanding the stability of India’s money demand function is essential for effective monetary policy formulation inflation control and macroeconomic stabilization. In recent decades rapid financial innovation technological advancements and structural changes in the financial system have altered the traditional dynamics of money demand raising questions about the persistence responsiveness and predictive power of conventional money demand models. This study investigates the stability of India’s money demand function considering the impact of financial innovations such as electronic payment systems digital wallets mobile banking and the introduction of new financial instruments. The research integrates empirical analyses from post-liberalization India drawing on secondary sources including peer-reviewed journals Reserve Bank of India reports World Bank publications and other authoritative financial studies. It employs econometric modeling to examine the behavior of money demand testing for long-term stability sensitivity to income and interest rate variations and responsiveness to structural changes in the financial sector. The study further analyzes how financial innovations influence transactional motives speculative demand and precautionary balances potentially altering the traditional money demand function. Findings indicate that while India’s money demand function exhibits long-term stability under certain macroeconomic conditions periods of rapid financial innovation and structural shifts introduce short-term instability. Technological adoption in payments growth of digital financial services and increased accessibility to alternative financial instruments have reduced the reliance on traditional monetary aggregates such as currency and demand deposits. Moreover shifts in interest rate policies inflation expectations and financial liberalization contribute to variations in velocity and liquidity preferences. The study highlights that financial innovation impacts not only the magnitude but also the composition of money demand with implications for monetary transmission policy effectiveness and macroeconomic management. Accurate measurement and modeling of money demand are essential for forecasting liquidity requirements implementing interest rate policies and maintaining price stability. This research contributes to the literature on money demand emphasizing the dynamic interaction between structural innovations in the financial system and the stability of monetary aggregates. In conclusion understanding the stability of India’s money demand function in the context of financial innovation is crucial for policy design economic forecasting and financial system development. The study provides empirical evidence and theoretical insights into how technological institutional and structural changes shape liquidity preferences influence monetary policy effectiveness and affect overall economic stability in India.