If a private enterprise sees an opportunity to make profits it will take up the venture and will to the bank to borrow the money for the new venture. If the bank is convinced about the returns, it will grant banks ₹ out of the thin air(and this is NOT intermediation) and them to
the private enterprise. The bank does not calculate whether it has enough ₹ in its reserve account at the RBI(India's Central Bank) nor does it dig into the money deposited by people to provide loans to support the claims. If it needs more reserves later the bank will borrow!
In aggregate, then, the private banks decide how many bank-₹ are issued (based on their calculations for potential profits) and the #RBI responds by creating any new Reserve fiat rupees necessary to cover the resulting “clearing” processes in the system. The new Reserves are
issued by the #RBI in exchange for collateral from the private banks. The collateral is held by the RBI on what is known as its “balance sheet.” If it “expands its balance sheet,” it is creating new Reserves. If it “winds down” its balance sheet, it is trading collateral for
existing Reserves—which it then simply “cancels,” erasing them from the system. #LearnMMT
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