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Introduction

  • Monetary aggregates are the measures of money supply in an economy. They capture the total stock of all types of money such as currency and demand deposits held with the public as well as with the banks. 
  • The Reserve Bank of India (RBI) categorizes money into four broad categories (also known as the monetary aggregates) through which it computes and measures the total supply of money in the market. They are M0, M1, M2, and M4.

Monetary Aggregates 

  • Reserve Money: It is also known as the monetary base or high powered money. It includes all physical money like coins and currency along with demand deposits and other liquid assets held by the central bank. It is the total liability of the RBI.

  M0 = Currency in Circulation + Bankers’ Deposits with RBI + Other Deposits with RBI
  • Narrow Money (M1): It is known as narrow money as it contains only liquid financial assets, which are easily accessible on demand. It includes all the currency notes being held by the public on any given day. It also includes all the demand deposits with all the banks in the country, both savings as well as current account deposits and other deposits of the banks kept with the RBI.

M1= Demand deposits with the banking system + Other deposits with the RBI

Note: The Narrow money has another component known as M2 money which includes M1 component and savings deposits of post office savings account. Though the size of the post office saving accounts is negligible. The term M2 is used as all the deposits in M2 are not liquid.


 M2 = M1 + Savings Deposits of Post Office Savings account


  • Broad Money (M3): When we add time deposits into the narrow money, we get broad money which can be denoted by M3. Broad money does not include the interbank deposits. However, time deposits of the public with the banks including the cooperative banks are included in Broad money.

M3= Narrow Money (M1) + Time deposits of public with the banks

Note: When we add total savings deposits with post offices with the Broad money (M3) we get M4 Money. It excludes national saving certificates.


M4 = Broad Money(M3) + Total Saving deposits with Post offices (excluding National Savings Certificates)


Sources of Money Supply

  • The Government: It produces coins of all denominations and the One Rupee notes. The government of India has the sole right to mint coins. However, these are issued for circulation only through the Reserve Bank in terms of the RBI Act.
  • RBI: It is the only authority to issue paper currency of all denominations.
  • Commercial Banks: These create the credit as per the demand deposits.

Important Note: The most common measure used for money supply is M3 Money or the Broad money. Currently M1 and M3 are the relevant indicators of money supply in India.