M3

Also called: Aggregate monetary resources · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 12, Ch 3 "Money and Banking"

Meaning

M3 is the broadest money measure the RBI uses most often. It adds up all the money the public holds as cash and as bank deposits of every kind, both demand and fixed.

Formula: M3 = M1 + net time deposits of banks

• Since M1 = currency with the public + net demand deposits of banks + other deposits with RBI:
• M3 = currency with the public + net demand deposits + net time deposits + other deposits with RBI

M3 is also called aggregate monetary resources. It is the main measure used to track money supply. That makes it a key link between RBI policy, bank lending and inflation.

Explanation

Components of M3

• Currency with the public: notes and coins held by people and firms. Cash lying inside banks is not counted.
• Net demand deposits: savings and current account balances. Depositors can withdraw these at any time.
• Net time deposits: fixed deposits. These are locked for a set period.
• Other deposits with RBI: a small item. It appears in both M0 and M1, so it is part of M3 too.
• Why "net"? Only the public's deposits count. Deposits that one bank keeps with another bank (inter-bank deposits) are left out. This stops the same money being counted twice.
• What is left out: money held by the government and by the banking system itself. Money supply is money held by the public only.

Where M3 sits among the measures

Measure	Definition	Type
M1	Currency with public + net demand deposits + other deposits with RBI	Narrow
M2	M1 + Post Office savings bank deposits	Narrow
M3	M1 + net time deposits of banks	Broad; most used
M4	M3 + total Post Office savings deposits (excluding NSC)	Broad

• Liquidity means how easily money can be spent. It falls from M1 to M4.
• M3 is less liquid than M1 because fixed deposits cannot be spent straight away.
• M3 has no Post Office deposits in it. Those appear only in M2 and M4.

How M3 is created: the money multiplier

• Money supply = m × H
• H (high-powered money, or M0) is the money the RBI itself issues.

• m (money multiplier) is the number of rupees of money created for each rupee of H.

• How banks multiply H:

• A bank gets a deposit. It keeps a part as reserves and lends the rest.
• The loan is spent and comes back to a bank as a new deposit.

• That deposit is lent out again. Total deposits, and so M3, end up as a multiple of the reserves.

• Simple example (CRR 20%):

• Leela deposits ₹100. The bank keeps ₹20 and lends ₹80. The ₹80 comes back as a deposit.
• The rounds form the series 100 + 80 + 64 + 51.2 + … = 100 × 1/(1 − 0.8) = ₹500.

• Simple multiplier = 1/CRR = 1/0.2 = 5.

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

• cdr (currency deposit ratio) = cash held by the public ÷ the public's bank deposits.
• rdr (reserve deposit ratio) = the share of deposits that banks keep as reserves.
• Example: cdr = 0.25 and rdr = 0.20 give m = 1.25/0.45 ≈ 2.8.

What makes M3 rise or fall

• H rises → M3 rises. H goes up when:
• the RBI's net credit to government rises (it buys G-secs or lends to government);
• the RBI's credit to banks rises (for example, repo loans);

• the RBI's net foreign exchange assets rise (it buys dollars and pays in rupees).

• CRR cut → M3 rises.

• A lower CRR means banks keep less as reserves.

• The multiplier rises, and banks can lend more.

• cdr falls → M3 rises.

• When people keep more money in banks and less as cash, more money comes back into banks to be lent again.

• Weak loan demand → M3 grows slowly.

• Banks cannot lend if firms and households do not want to borrow.

In India

• Who compiles it: the RBI has compiled monetary statistics since July 1935. It works out M3 with a balance-sheet approach, which combines the balance sheets of the RBI and the banking sector (commercial and co-operative banks) [4].
• Latest size: M3 = ₹272.87 lakh crore (2024-25).
• Growth: from ₹11.24 lakh crore (1999-2000) to ₹272.87 lakh crore (2024-25). That is about a 24-fold rise in 25 years.
• Worked example with the multiplier (2024-25):
• M0 ≈ ₹48.3 lakh crore.
• m = M3 ÷ M0 = 272.87 ÷ 48.3 ≈ 5.6.

• So each rupee the RBI issues supports about ₹5.6 of M3.

• Checking with the fuller formula (2024-25, approximate):

• Currency with the public ≈ ₹36.3 lakh crore. Deposits ≈ 272.87 − 36.3 ≈ ₹236.6 lakh crore. So cdr ≈ 0.15.
• Bank reserves ≈ ₹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 multiplier is not 33:

• CRR was cut to 4.0% of NDTL in December 2024 [5] and now stands at 3.00% [3].
• The simple formula would give 1/0.03 ≈ 33.

• The real multiplier is only about 5–6, because the public holds a lot of cash and banks keep some extra cash as well.

• Committee link: the Working Group on Money Supply: Analytics and Methodology of Compilation, chaired by Dr Y.V. Reddy, reported in June 1998. It proposed new aggregates NM1, NM2, NM3, based on residency and maturity, and liquidity aggregates L1, L2, L3 [4].

Don't confuse with

• M0 (reserve money / high-powered money): this is the RBI's own liability (currency in circulation + bankers' deposits with RBI + other deposits with RBI). M3 is the public's money, which banks build on top of M0. M3 ≈ 5.6 × M0 (2024-25).
• M1 (narrow money): M1 covers only demand deposits. M3 also adds time deposits (fixed deposits).
• M4: M4 = M3 + total Post Office savings deposits (excluding NSC). M3 has no Post Office deposits.
• Currency in circulation vs currency with the public: M0 uses currency in circulation, which includes cash lying with banks. M3 uses only currency with the public.

Prelims Hooks

• M3 = M1 + net time deposits of banks. It is also called "aggregate monetary resources" and is the most commonly used measure of money supply.
• M1 and M2 are narrow money. M3 and M4 are broad money. Liquidity falls from M1 to M4.
• Trap: "M3 includes Post Office savings deposits." This is false. They are in M2 and M4 only. "Other deposits with RBI" are in both M0 and M1, so they are in M3 as well.
• Money supply = m × H. In 2024-25, m ≈ 5.6 (M3 ₹272.87 lakh crore ÷ M0 ₹48.3 lakh crore).
• The RBI compiles M3 with a balance-sheet approach and has compiled monetary statistics since July 1935 [4].
• The Y.V. Reddy Working Group (June 1998) proposed NM1–NM3 and L1–L3 [4].

Mains Points

• The RBI controls M3 only partly.
• The RBI sets H and the CRR (cut to 4% in Dec 2024 [5], now 3% [3]).
• But M3 also depends on how much cash people hold (cdr) and on whether firms and households want to borrow.

• So a CRR or repo rate cut (repo at 5.50% after 6 June 2025 [2]) gives banks more money to lend, but M3 grows only if there is demand for loans. This is why monetary policy can pass through weakly (GS-III).

• Financial inclusion raises M3 for the same base money.

• Jan Dhan accounts and digital payments lower cdr, so the multiplier rises.
• More money stays inside banks, where RBI signals can reach it.

• Demonetisation (2016-17) showed the reverse: currency with the public fell sharply.

• Links between fiscal, external and monetary policy.

• When the RBI buys G-secs or buys dollars to stop the rupee from rising, H grows, and M3 grows with it.
• To keep inflation in check, the RBI may sterilise: it absorbs the extra money through OMO sales, MSS bonds or the SDF.
• This shows that fast M3 growth is linked to government borrowing and foreign inflows, not only to bank lending.

Related concepts

• Credit creation
• Bank balance sheet
• Bank reserves
• Money multiplier
• Currency deposit ratio
• Reserve deposit ratio
• Bank run
• High-powered money
• Currency in circulation
• Money supply

Read more

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