The supply of money M0 M1 M2 M3


In a modern economy money consists mainly of currency notes and coins issued by the monetary authority of the country.

In India currency notes are issued by the Reserve Bank of India (RBI), which is the monetary authority in India. However, coins are issued by the Government of India.

Apart from currency notes and coins, the balance in savings, or current account deposits, held by the public in commercial banks is also considered money since cheques drawn on these accounts are used to settle transactions.

Such deposits are called demand deposits as they are payable by the bank on demand from the accountholder.

Other deposits, e.g. fixed deposits, have a fixed period to maturity and are referred to as time deposits.

 

Reserve Money (M0)—

M0 = Currency in Circulation + Bankers’ Deposits with the RBI + ‘Other’ Deposits with the RBI

[a] It is high powered money, also known as money base.

[b] It is the most liquid measure of the money supply.

[c] M1 is most liquid and easiest for transactions.

[d] Most of the changes in the money supply are due to changes in the high powered money.
 

Narrow Money (M1) and (M2)—

M1 = Currency with the Public + Demand Deposits with the Banking System + ‘Other’ Deposits with

the RBI.

= Currency with the Public + Current Deposits with the Banking System + Demand Liabilities

Portion of Savings Deposits with the Banking System + ‘Other’ Deposits with the RBI.

M2 = M1 + Time Liabilities Portion of Savings Deposits with the Banking System + Certificates of

Deposit issued by Banks + Term Deposits of residents with a contractual maturity of up to and

including one year with the Banking System (excluding CDs).

= Currency with the Public + Current Deposits with the Banking System Savings Deposits with

the Banking System + Certificates of Deposit issued by Banks + Term Deposits of residents

with a contractual maturity up to and including one year with the Banking System

(excluding CDs) + ‘Other Deposits with the RBI.

[a] M1 and M2 are known as narrow money.

[b] M1 excludes India’s deposits with IMF, World Bank, Foreign Government etc.

[c] M1 also excludes interbank deposits.

 

Broad Money (M3)—

M3 = M2 + Term Deposits of residents with a contractual maturity of over one year with the Banking

System + Call/Term borrowings from ‘Non-depository’ Financial Corporations by the Banking

System.

[a] M3 is the most commonly used measure of money supply. It is also known as aggregate monetary resources.

[b] M3 is least liquid of all.

[c] M3 does not include the interbank deposits.