Question

What are the alternative definitions of money supply in India?

Answer 1

The various definitions of money supply in India as prescribed by RBI are M₁, M₂, M₃ and M₄.

M₁, M₂, M₃ and M₄ are arranged in the descending order of liquidity. In other words, M₁ has the highest liquidity and M₄ has the least liquidity.

So,

M₁ = C + DD + OD

Where,

C = Currency held by public

DD = Net demand deposits of the bank

OD = other deposits held by RBI

M₂ = M₁ + Savings of the people with Post offices (M₂ includes the components of M₁ as well as the savings of people with Post office.)

M₃ = M₁ + Net time deposits with commercial banks (M₃ is the most commonly used measure of money supply. It includes the components of M₁ and net time deposits of commercial banks.)

M₄ = M₃ + Total deposits with post offices (excluding National Saving certificate)

All these definitions of money supply in India are represented in the flow chart given below.