Explanation:

Consider this date from Bloomberg: Every one rupee of central bank money in India is able to generate around 6 rupees of money supply in the economy. This ratio is called money multiplier. A higher money multiplier indicates that the banking system generates a higher money supply out of money given by central bank. In India, the recent push to financial inclusion has led to people holding less cash in hand (relative to deposits) leading to an increase in the money multiplier. The more individuals hold cash in hand, the less the banking system will be able to create money and hence a lower value for the multiplier. In other words, cash in hand acts as a leakage for the banking system. Similarly, reserves that banks hold with the central bank also amount to a leakage, which again reduces the money multiplier. It should be noted that central banks generally tell the banks to maintain a part of their deposits as reserves, called the cash reserve ratio. So in essence, it is only the excess reserves (that banks maintain over and above the central bank’s requirement) that constitute leakages. Indians have a tendency to hold more cash (as a percentage of banking deposits) compared with people in the US or Europe, which depresses India’s multiplier value.