The money supply is the total amount of money(currency+deposit money) present in an

economy at a particular point in time. The standard measures to define money usually include
currency in circulation and demand deposits.

The record of the total money supply is kept by the Central Bank of the country. The change in
the supply of money in an economy can affect the price level of securities, inflation, rates of
exchange, business policies, etc.

This is an important topic for the IAS exam. In this article, aspirants can find information related
to the money supply in an economy.

Money Supply – Latest Updates

According to recent Reserve Bank of India data, the uncertainty caused by the Covid-19

pandemic has led to a surge in the money supply. Know in detail about the Reserve Bank of India
– RBI on the linked page. The currency held by the public increased by 8.2% since March-end
2020 and the savings and current account deposits decreased by 8%.

1. The reason for this increase in Money supply is that there were higher cash
withdrawals by depositors to meet needs during the lockdown period and also to
safeguard themselves against salary cuts or job losses.
2. Impact of the increase in the money supply –

 People have curtailed their discretionary spending as they’re not sure of their
permanent income.
 A rise in money supply usually is seen as a leading indicator of growth in
consumption and business investments, but due to the Covid-19 pandemic, the
rise did not encouraged either.
 Due to the decrease in discretionary spending the demand for industrial and
manufactured goods alos decreased, therefore even the Lenders are not willing
to take risks.

Types of Money
The types of money circulated in an economy are as follows:

Full-bodied money
It is the type of money whose value as money is equivalent to its value as a commodity. E.g. –
Gold coin

Token Money/Credit Money/Paper Money

Value as money is much more than the value as a commodity. E.g. – Paper Currency

Representative full-bodied money

It is a kind of token money but is issued against the backing of equivalent value of bullion (gold
and silver in bulk) with the issuing authority.

To know about the different monetary systems in the economy, refer to the linked article.
Monetary aggregates Concept – Money Supply
Types of bank deposits

1. Current Account
2. Fixed deposit
3. Recurring deposit account

M1 = C + DD + OD (Narrow Money)

 Where C denotes Currency held by the public

 DD- Demand Deposits with Banks
 OD- Other deposits (Demand Deposits held by RBI)
Demand Deposits (DD) can be withdrawn on demand from banks.

Time Deposits (TD) can be withdrawn only after a specific time.

Total Deposits = DD+TD

Other deposits(OD) include demand deposits with the RBI.

DD with RBI can be held only by Quasi- Governmental agencies, international agencies, or former
Governors of RBI.

M1

M1 is known as narrow money as it includes only 100% liquid deposits which is a very narrow
definition of the money supply.

M2

M2 includes M1 and only saving account deposits with Post offices

M2 = M1 + Savings account deposits with Post Offices

Note- Post offices have no facility for the opening of current accounts. The types of accounts
that can be opened are – Savings account, Fixed deposit, and Recurring deposit.

Though the size of post office saving accounts is negligible M2 term is used as all the deposits
in M2 are not liquid.

M3

M3 is called Broad money as along with liquid deposits it also includes time deposits thus
making it a broad classification of Money.

M3 = M1 + TD (Broad Money)

TD – Time Deposits with Banks Includes fixed deposits, Recurring deposits, and time liability of
Savings accounts

The most common measure used for money supply is M3

M4 = M3 + Total Deposits with Post Office

As the total deposits with the post office are negligible there is not much difference between M3
and M4
Money Supply Control
The money supply in the economy can be influenced by the Central Bank of the country. The
money supply can be increased in an economy by purchasing government securities such as
treasury bills and government bonds.

The reverse happens when the central bank tightens the money supply, by selling securities on
the open market, drawing liquid funds out of the banking system. The prices of such securities
fall as supply is increased, and interest rates rise.

Cash reserve ratio is an essential monetary policy tool used for controlling the money supply in
the economy. It is a regulation implemented in almost every nation by the Central Bank of that
country.
ECONOMIC TIMES
The total stock of money circulating in an economy is the money supply. The circulating money
involves the currency, printed notes, money in the deposit accounts and in the form of other liquid
assets.

Description: Valuation and analysis of the money supply help the economist and policy makers to
frame the policy or to alter the existing policy of increasing or reducing the supply of money. The
valuation is important as it ultimately affects the business cycle and thereby affects the economy.

Periodically, every country's central bank publishes the money supply data based on the monetary
aggregates set by them. In India, the Reserve Bank of India follows M0, M1, M2, M3 and M4
monetary aggregates.

Money Supply
Let us first understand the meaning of money supply or monetary
supply. Simply put,  the money supply is the total stock of money
that is in circulation in an economy on any specific day.

This includes all the notes, coins and demand deposits held by the
public on such a day. Such as money demand, money supply is also a
stock variable

One important point to note is that the stock of money kept with the
government, central bank, etc. is not taken into account in money
supply. This money is not in actual circulation in the economy and
hence does not form a part of the monetary supply.
Now there are essentially three main sources of money supply in our
economy. They are the produces of the money and are responsible for
its distribution in the economy. These are

i. The government who produces all the coins and the one
rupee notes
ii. The Reserve Bank of India (RBI) which issues all the paper
currency
iii. And commercial banks as they create the credit as per the
demand deposits

Measures of Money Supply in India

Now we come to the next logical question. How can we measure the
amount of money in the economy? It certainly isn’t an easy or
straightforward task.

There is no one way to calculate the money supply in our economy.

Instead, the Reserve Bank of India has developed four alternative
measures of money supply in India.

These four alternative measures of money supply are labelled M1,

M2, M3 and M4. The RBI will collect data and calculate and publish
figures of all the four measures. Let us take a look at how they are
calculated.

M1 (Narrow Money)

M1 includes all the currency notes being held by the public on any
given day. It also includes all the demand deposits with all the banks
in the country, both savings as well as current account deposits. It
also includes all the other deposits of the banks kept with the RBI. So
M1 = CC + DD + Other Deposits

M2

M2, also narrow money, includes all the inclusions of M1 and

additionally also includes the saving deposits of the post office banks.
So M2 = M1 + Savings Deposits of Post Office Savings

M3 (Broad Money)

M3 consists of all currency notes held by the public, all demand

deposits with the bank, deposits of all the banks with the RBI and the
net Time Deposits of all the banks in the country. So M3 = M1 +
time deposits of banks.

M4

M4 is the widest measure of money supply that the RBI uses. It

includes all the aspects of M3 and also includes the savings of the
post office banks of the country. It is the least liquid measure of all of
them. M4 = M3 + Post office savings

Reserve Money (M0):

Reserve money is also called central bank money, monetary base, base
money, or high-powered money. It is the base level for the money supply or
the high-powered component of the money supply.

In the most simple language, Reserve Money is Currency in

Circulation plus Deposits of Commercial Banks with RBI. 

Mo

 = Currency in circulation + Bankers’ deposits with the RBI +

‘Other’ deposits with the RBI
 = Net RBI credit to the Government + RBI credit to the
commercial sector + RBI’s claims on banks + RBI’s net foreign
assets + Government’s currency liabilities to the public – RBI’s
net non-monetary liabilities