Measuring the money supply: M0 to M4

Detail

1. What "money supply" means

• Money supply is the total stock of money held by the public at a point in time.
• A stock variable is measured at a moment, like the water in a tank on 31 March. A flow variable is measured over a period, like the water that runs in during a month.

• Money demand is also a stock variable.

• "The public" means households, firms and local bodies. It does not include the government's own cash or the banking system's own cash.

• "Net" deposits means only the public's deposits are counted.
• Interbank deposits (money one bank keeps with another bank) are left out.

• If they were counted, the same rupee would be counted twice.

• Why measure it: the RBI tracks money supply to judge liquidity (how much spendable money is in the economy), inflation pressure and credit growth.

2. Reserve money (M0): the base

• Reserve money (M0) is also called high-powered money or the monetary base.
• Formula: M0 = Currency in circulation + Bankers' deposits with RBI + 'Other' deposits with RBI [2]
• Currency in circulation = all notes and coins outside the RBI, whether held by the public or kept as cash in bank vaults.
• Bankers' deposits with RBI = balances banks keep at the RBI, including the CRR (cash reserve ratio, the share of deposits a bank must park with the RBI).

• 'Other' deposits with RBI = deposits of bodies such as foreign central banks, international institutions and some public bodies.

• Why "high-powered": banks create deposits on top of this base. They lend out part of each deposit, the loan comes back to some bank as a new deposit, and so on. One rupee of M0 therefore supports several rupees of broad money.

• Money multiplier = M3 ÷ M0.
• Worked example (illustrative numbers): if M0 = ₹50 lakh crore and M3 = ₹250 lakh crore, the multiplier = 250 ÷ 50 = 5.

• A higher CRR leaves banks less to lend, so the multiplier falls.

• Frequency:

• The 1998 Working Group planned M0 to be compiled weekly [2].
• The RBI now issues its "Reserve Money" release fortnightly. For example, the data for the fortnight ended 15 September 2026 was released on 24 September 2026 [6].

3. RBI's four classic measures (M1–M4)

• Origin: the Second Working Group on Money Supply (1977) introduced this series.
• It defined M3 = M1 + time deposits with the banking system.
• It defined M4 = M3 + all deposits with post office savings banks [4].

Measure	Formula	Type	Liquidity
M1	Currency with the public (CU) + net demand deposits of banks (DD) + other deposits with RBI	Narrow money	Highest
M2	M1 + savings deposits with post office savings banks	Narrow	↓
M3	M1 + net time deposits of banks	Broad money	↓
M4	M3 + total post office deposits, excluding National Savings Certificates (NSCs)	Broad	Lowest

• Key terms:
• Currency with the public = currency in circulation − cash on hand with banks.
• Demand deposits = deposits you can withdraw at any time without notice. Examples: current accounts, and the demand portion of savings accounts.
• Time deposits = fixed or term deposits that are locked in for a period. You can get the money early only with a penalty.

• Other deposits with RBI are usually tiny, so Class 12 simplifies M1 to CU + DD.

• Other names:

• M3 is called "aggregate monetary resources". It is the most used measure.

• M1 and M2 are narrow money; M3 and M4 are broad money.

• Liquidity falls from M1 to M4. Liquidity means how quickly an asset can be spent without loss.

• Cash and current-account money (M1) can be spent at once.
• A fixed deposit (in M3) must first be broken.

• Post office time deposits (in M4) are slower still.

• Worked example (M1 vs M3):

• CU = ₹30, DD = ₹20 and other deposits with RBI = ₹1, so M1 = ₹51.
• If net time deposits = ₹150, then M3 = 51 + 150 = ₹201.

4. Near money

• Near money means highly liquid assets that are not themselves used for payment but can be turned into cash quickly.

• Examples: time deposits and treasury bills (short-term government IOUs of up to one year).

• This is why time deposits sit in broad money (M3) and not in narrow money (M1).

5. New monetary aggregates (Y.V. Reddy Working Group, 1998)

• Body: the Working Group on Money Supply: Analytics and Methodology of Compilation (WGMS), chaired by Dr Y.V. Reddy, reported in June 1998 [2][3].
• What it proposed: four monetary aggregates, three liquidity aggregates, and broad measures of credit [3].
• The new "NM" series [2]:
• NM1 = Currency with the public + Demand deposits with the banking system + 'Other' deposits with RBI. This is the same as the old M1.
• NM2 = NM1 + time-liability portion of savings deposits + Certificates of Deposit (CDs) issued by banks + term deposits of residents with contractual maturity of up to and including 1 year.

• NM3 = NM2 + term deposits of residents with maturity over 1 year + call/term borrowings from "non-depository" financial corporations.

• Two new rules for sorting deposits:

• Maturity: deposits are split at a one-year cut-off.

• Residency: only deposits of residents are counted.

  • So FCNR(B) deposits (foreign-currency deposits of NRIs), Resurgent India Bonds and India Millennium Deposits are not directly counted in NM2 and NM3 [3].
  • These are foreign-currency funds that can be taken abroad. They behave differently from domestic money.

• Liquidity aggregates (L1, L2, L3). These go wider than bank money:

• L1 = NM3 + all postal deposits (excluding NSCs).
• L2 = L1 + deposits with financial institutions (FIs).
• L3 = L2 + public deposits of NBFCs (non-banking financial companies) [3].

• L1 and L2 are compiled monthly; L3 is compiled quarterly [3].

• Current publication:

• The RBI's "Money Supply" release comes out fortnightly; the latest listed is for 15 September 2026 [5].
• The "Reserve Money" release also comes out fortnightly [6].
• The regular focus is on M0, M1 and M3. The old M2 and M4 are not headline series.

6. Data from Class 12 (RBI Handbook of Statistics 2024-25)

Year	M1 (₹ lakh crore)	M3 (₹ lakh crore)	M3 ÷ M1	M3 − M1 (≈ time deposits)
1999-2000	3.42	11.24	3.3	7.82
2015-16	26.03	116.18	4.5	90.15
2016-17	26.82	127.92	4.8	101.10
2024-25	65.84	272.87	4.1	207.03

• The gap between M3 and M1 is time deposits.
• In 2024-25: 272.87 ÷ 65.84 ≈ 4.1.

• So about three-quarters of broad money is locked-in savings, not spending money.

• Long-run trend: M3 grew about 24 times, from ₹11.24 lakh crore (1999-2000) to ₹272.87 lakh crore (2024-25).

7. Demonetisation (November 2016): the measures under stress

• Currency in circulation:
• It fell from ₹16.63 lakh crore (2015-16) to ₹13.35 lakh crore (2016-17), a drop of about 19.7%.
• It recovered to ₹18.29 lakh crore (2017-18).

• It reached ₹37.24 lakh crore (2024-25).

• Why M1 barely grew while M3 jumped:

• Old notes were deposited in banks, so currency with the public fell.
• Demand deposits rose, which roughly cancelled the fall in cash inside M1.
• M1 grew only about 3.0% (26.03 → 26.82).
• Much of the deposited cash stayed in banks as savings and fixed deposits, so M3 rose about 10.1% (116.18 → 127.92).

• As a result, the M3 ÷ M1 ratio peaked at 4.8 in 2016-17.

• NCERT printing error:

• Table 3.5 prints currency with the public for 2016-17 as 124124.

• Correct figure = currency in circulation − cash with banks = 13,35,266 − 71,142 = ₹12,64,124 crore.

• UPI era link: even with digital payments growing, currency in circulation more than doubled after 2017-18, reaching ₹37.24 lakh crore (2024-25). Cash demand did not vanish.

8. Policy use of these measures

• Monetary-targeting era (1985-1998):
• The RBI set a target for M3 growth.

• The idea was that money growth drives inflation.

• Multiple-indicator approach (from 1998-99):

• The RBI looked at many indicators together, such as interest rates, credit, exchange rate, output and inflation.

• Money growth became only one of them.

• Flexible inflation targeting (2016): CPI inflation became the target, and the repo rate became the main tool. → banking-monetary-policy

• Why M3 lost primacy:
• After financial liberalisation, the link between money and prices became unstable.
• New products and digital payments changed how fast money moves (velocity of money, the number of times a rupee changes hands in a year).

Prelims Hooks

• M0 (reserve money/high-powered money) = currency in circulation + bankers' deposits with RBI + 'other' deposits with RBI. It is not "currency with the public".
• M3 = M1 + net time deposits of banks. It is called "aggregate monetary resources" and is the most used measure.
• M4 excludes National Savings Certificates. This is a classic trap.
• M2 (old) = M1 + post office savings deposits, but NM2 = NM1 + short-term (≤1 year) resident term deposits + CDs + time portion of savings deposits. The two are different.
• Liquidity order: M1 > M2 > M3 > M4. Narrow money = M1 and M2; broad money = M3 and M4.
• Y.V. Reddy Working Group (1998) introduced NM1-NM3 and L1-L3, based on residency and a one-year maturity cut-off. The Second Working Group (1977) introduced M1-M4.
• L3 = L2 + public deposits of NBFCs. L1 and L2 are monthly; L3 is quarterly.
• FCNR(B) deposits are not directly counted in NM3 because of the residency concept.
• Interbank deposits are excluded from money supply ("net" concept). Money supply is a stock variable.
• Demonetisation year (2016-17): M1 grew about 3% but M3 grew about 10%, and the M3 ÷ M1 ratio peaked at 4.8.

Mains Points

• Choosing the right measure matters for policy.
• M3 targeting (1985-98) worked when money and prices moved together.
• Liberalisation, new deposit products and UPI changed velocity and weakened that link.

• This supported the move to multiple indicators (1998) and inflation targeting (2016).

• Demonetisation showed the difference between narrow and broad money.

• Cash moved into bank deposits: CU fell 19.7% while M3 rose 10.1% (2016-17).
• This increased bank liquidity for a short time.

• But currency in circulation doubled again by 2024-25 (₹37.24 lakh crore), which raises the question of how far formalisation lasted.

• The residency and maturity rules (1998) make the data more useful.

• Keeping volatile non-resident foreign-currency deposits out of NM3 gives a truer picture of domestic liquidity.

• The L-aggregates capture money held with NBFCs, which matters more after the IL&FS-type stress in NBFCs.

• Measuring money in the digital era.

• UPI balances still sit in bank demand deposits, so they are counted in M1.
• New forms such as the e-rupee (CBDC) and prepaid wallets raise questions about where they belong in M0 and M1. The monetary aggregates may need regular review.