What is M1 M2 M3 Money Supply in India?

M1, M2, M3, and M4 were the four monetary aggregates used by the RBI to calculate the money supply between 1977 and 1998. The idea of Reserve Money was also utilized by the central bank. However, in 1998, measurement criteria were altered. 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 currency in use by the general public at a given moment in time. It should be emphasized that total money supply and total money stock are two different things. Only that portion of the overall stock of money that the public is holding at any given time is considered the supply of money. Currency, printed notes, funds in bank accounts, and other liquid assets make up the circulating money.

Narrow money is also known as M1 and M2. Broad money refers to M3 and M4. The liquidity of these grades is declining. M1 is the most liquid and facilitates transactions the simplest, whilst M4 is the least liquid. The most often 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 for it 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 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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FAQs

  • In addition to M0, India's money supply metrics are broken down into four groups: M1, M2, M3, and M4. This classification was first used by the Reserve Bank of India in April 1977.

  • M2 and other assets that are even less liquid than M2 are included in M3, an even larger measure of the money supply. The assets included become less liquid as the number increases.

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