What is M1 M2 M3 Money Supply in India?

By BYJU'S Exam Prep

Updated on: November 9th, 2023

M1, M2, M3, and M4 were the four monetary aggregates used by the RBI between 1977 and 1998 to calculate the money supply. The idea of ​​reserve money was also used by the central bank. However, in 1998, the measurement criteria were changed. The designations are now M0, M1, M2, and M3. M3 is equal to M1 plus time deposits made with banks. M2 is calculated as M1 plus post office savings bank deposits. M1 is equal to money in circulation plus demand deposits in the banking system (savings account, current account).

M1 M2 M3 Money Supply in India

The money supply is the total amount of money used by the general public at a given point in time. It should be emphasized that total money supply and total money stock are two different things. Only that part of the overall stock of money with the public at any given time is considered the money supply. Currency, printed notes, money in bank accounts, and other liquid assets make up circulating money.
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Narrow money is also known as M1 and M2. Broad money means M3 and M4. The liquidity of these grades is decreasing. M1 is the most liquid and makes transactions the easiest, while M4 is the least liquid. The most commonly used indicator of the money supply is M3. It is also known as the total amount of financial resources. Let’s examine each of them individually:

  • Reserve Money (M0): Other names include High-Powered Money, Financial Base, Base Money, etc. M0 is calculated as follows: Money in circulation + Bankers’ deposits + Other deposits with RBI. It is the economic foundation’s currency.
  • Narrow Money (M1): M1 equals money in circulation plus demand deposits in the banking system (current and savings accounts) plus additional deposits with the Reserve Bank of India (RBI).
  • Narrow Money (M2): Post Office Savings, Bank Savings Deposits added to M1 equals M2.
  • Broad Money (M3): M3 equals M1 plus time deposits made with banks.
  • Broad Money (M4): M4 is equal to M3 plus any deposits made at post office savings banks.

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