High-powered money

Also called: Reserve money, monetary base, M0 · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 12, Ch 3 "Money and Banking"

Meaning

High-powered money (also called reserve money, monetary base or M0) is the total money the RBI has issued and owes. It is made up of all the currency in circulation plus the deposits that banks and others keep with the RBI.

Formula: M0 = Currency in circulation + Bankers' deposits with RBI + Other deposits with RBI (Currency in circulation = currency with the public + cash with banks)

It is called "high-powered" because it is the base on which banks build loans and deposits. Each rupee of high-powered money (H) supports several rupees of broad money (M3). So H is the starting point of the whole money supply.

Explanation

Components of M0

• Currency in circulation. These are all the notes and coins issued, wherever they are held:
• Currency with the public: cash held by people and firms.

• Cash with banks: vault cash (cash kept in the bank's own safe).

• Bankers' deposits with RBI. These are the balances banks keep in their accounts at the RBI. The Cash Reserve Ratio (CRR) (the legal minimum share of deposits a bank must keep with the RBI) is held here.

• Other deposits with RBI. These are deposits of other bodies with the RBI, apart from banks and the government.
• Why each is a liability of the RBI:
• A currency note is a promise made by the RBI.
• A bank's deposit at the RBI is money the RBI owes to that bank.

• So M0 is the RBI's total monetary liability.

• Bank reserves = vault cash + banks' deposits with the RBI. Both are parts of M0.

How H becomes a larger money supply: the money multiplier

• Money supply = m × H. Here m is the money multiplier (the rupees of money created for every rupee of H).
• The chain:
• The RBI supplies H.
• Banks keep a fraction of each deposit as reserves and lend the rest.
• The loan is spent and comes back to a bank as a new deposit, which is lent again.

• Total deposits end up as a multiple of the reserves.

• Worked example (simple multiplier, CRR = 20%):

• Leela deposits ₹100. The bank keeps ₹20 and lends ₹80. The ₹80 comes back as a deposit, so deposits become ₹180.
• Lending goes on: 100 + 80 + 64 + 51.2 + … This is a geometric series with ratio r = 0.8.
• Sum = 100 × 1/(1 − 0.8) = ₹500.

• m = 1/CRR = 1/0.2 = 5.

• If CRR rises to 25%:

• m = 1/0.25 = 4, so maximum deposits fall to ₹400.

• Loans fall from ₹400 to ₹300, so banks must call back ₹100 of loans.

• Fuller formula (NCERT): m = (1 + cdr)/(cdr + rdr)

• cdr (currency deposit ratio) = currency held by the public ÷ the public's bank deposits.
• rdr (reserve deposit ratio) = the share of deposits banks keep as reserves (required plus extra).
• Example: cdr = 0.25 and rdr = 0.20 give m = 1.25/0.45 ≈ 2.8.
• If cdr = 0, then m = 1/rdr, which is the simple formula.

What makes H rise or fall: the sources of M0

Reserve money is created when the RBI acquires assets and pays for them with its own money:

• RBI's net credit to government. The RBI buys government securities or lends to the government.
• RBI's credit to banks. Example: repo loans. The repo rate is the interest rate at which the RBI lends money to banks for a short time.
• Net foreign exchange assets.
• The RBI buys dollars and pays for them in rupees.
• These new rupees enter the system.

• So H rises.

• When any of these three rises, H rises and banks can create more credit. When they fall, H shrinks.

• Banks cannot create H. Only the RBI can. Banks can only multiply it.

In India

• Who manages it: the RBI issues currency, holds banks' reserves and controls the sources of M0. The RBI has compiled monetary statistics since July 1935 [4].
• How M3 is derived: the RBI uses a balance-sheet approach. It combines the balance sheets of the RBI and the banking sector (commercial and co-operative banks) [4].
• M0 in 2024-25 (Table 3.5):

Component	₹ crore
Currency in circulation	37,24,448 (₹37.24 lakh crore)
Bankers' deposits with RBI	9,91,488 (₹9.91 lakh crore)
Other deposits with RBI	1,13,307
M0	≈ 48,29,243 (≈ ₹48.3 lakh crore)

• The multiplier in India (2024-25): m = M3 ₹272.87 lakh crore ÷ M0 ₹48.3 lakh crore ≈ 5.6.
• Check with the fuller formula (2024-25, approximate):
• Currency with the public ≈ ₹36.3 lakh crore. Deposits ≈ ₹236.6 lakh crore. So cdr ≈ 0.15.
• Reserves = cash with banks ₹0.94 lakh crore + deposits with RBI ₹9.91 lakh crore ≈ ₹10.85 lakh crore. So rdr ≈ 0.046.

• m ≈ 1.15/(0.15 + 0.046) ≈ 5.8. This is close to 5.6.

• Why the simple formula fails for India:

• CRR was cut to 4.0% of NDTL in December 2024 [5]. It now stands at 3.00% [3].
• At 3%, 1/CRR gives m ≈ 33. The real multiplier is only about 5–6.

• The gap exists because the public holds a lot of cash (high cdr) and banks keep vault cash above the CRR. So the fuller formula describes India better.

• The rule behind the reserve part: CRR is the average daily balance a bank must keep with the Reserve Bank, as a per cent of its net demand and time liabilities (NDTL) [2]. NDTL is, roughly, the bank's deposits and similar liabilities to the public.

• Policy rates linked to credit to banks: the repo rate was cut by 50 basis points to 5.50% on 6 June 2025, at the 55th MPC meeting [2]. After the cut, the SDF rate became 5.25%, and the MSF rate and the Bank Rate became 5.75% [2].
• Errors in Table 3.5 to note:
• Cash with banks for 2024-25 is printed as 9396. It should be about ₹93,697 crore (37,24,448 − 36,30,751).
• Currency with the public for 2016-17 is printed as 124124. It should be about ₹12,64,124 crore.

Don't confuse with

• M1 (narrow money): M1 = currency with the public + net demand deposits of banks + other deposits with RBI. M0 counts all currency in circulation, including cash with banks, and bankers' deposits with the RBI. M1 counts money held by the public only. "Other deposits with RBI" appear in both.
• M3 (broad money / money supply): M3 is the money the public holds, created jointly by the RBI and banks (M3 = m × H). M0 is only the RBI's part, the base. In 2024-25, M3 (₹272.87 lakh crore) was about 5.6 times M0 (₹48.3 lakh crore).
• Bank reserves / CRR balances: reserves (vault cash + deposits with RBI) are only one part of M0. M0 also includes currency with the public. CRR balances sit with the RBI and cannot be held in government securities. Government securities count towards SLR [2].
• Currency in circulation vs currency with the public: currency in circulation = currency with the public + cash with banks. Only currency with the public enters M1.

Prelims Hooks

• High-powered money = M0 = reserve money = monetary base = currency in circulation + bankers' deposits with RBI + other deposits with RBI.
• Sources of M0: RBI's net credit to government + RBI's credit to banks + net foreign exchange assets. So when the RBI buys forex, reserve money rises.
• Money supply = m × H. Simple m = 1/CRR. Fuller m = (1 + cdr)/(cdr + rdr). If cdr falls, m rises.
• India 2024-25: M0 ≈ ₹48.3 lakh crore, M3 ₹272.87 lakh crore, so m ≈ 5.6.
• Trap: "Commercial banks can create high-powered money." This is false. Only the RBI creates H. Banks only multiply it through lending.
• Trap: "CRR balances can be held in government securities." This is false. CRR is kept with the RBI as a % of NDTL [2]. It is currently 3.00% [3].

Mains Points

• The RBI controls money supply only partly.
• The RBI controls H and the CRR.
• But m also depends on how much cash the public holds (cdr) and on whether banks want to lend and borrowers want to borrow.

• So a CRR cut (4% in Dec 2024 [5] → 3% [3]) frees money for banks, but credit grows only if people and firms want loans. This explains why policy cuts can reach the economy weakly (GS-III: monetary policy effectiveness).

• Forex and government borrowing change H automatically. This links external, fiscal and monetary policy.

• When the RBI buys dollars to stop the rupee from rising, or buys G-secs (government securities), H grows.
• A larger H can lead to more credit and higher inflation.

• So the RBI sterilises: it takes the extra money back out through OMO sales, MSS bonds or the SDF.

• Financial inclusion makes each rupee of H go further.

• Jan Dhan accounts and digital payments lower cdr.
• A lower cdr raises the multiplier, and more money stays inside banks, where RBI signals reach it.
• Demonetisation (2016-17) showed the reverse: currency with the public fell sharply (Table 3.5).

Related concepts

• Credit creation
• Bank balance sheet
• Bank reserves
• Money multiplier
• Currency deposit ratio
• Reserve deposit ratio
• Bank run
• Currency in circulation
• Money supply
• M1

Read more

• Credit creation, high-powered money and the money supply