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` Money supply refers to the total sum of money
available to the public in economy at given point
of time.
` Money supply is stock concept whereas national
income is flow concept in terms of goods and
services produced per unit of time in a year.
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` Money held by the Public includes-
` Households
` Firms and institutions (other than banks andgovernment)
` A per Third working Group of RBI,which has given the report in 1998, there
are four different Measures of moneysupply which are based on varyingdegree of liquidity. Money aggregatesare:
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` M0 (Reserve money) :
` Currency in circulation + Bankers Deposits
with the RBI
` + Other deposits with the RBI.
Four Measures of Money Supply
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.M1 : = C+DD+OD
` C= Currency (Paper currency +coins) held by the
public.
` DD = + Demand deposits with the public in the
commercial and cooperative banks.
` OD = Other deposits held by the public with RBI.
(Deposits of institution such as-
` UTI,IDBI,IFCI,NABARD etc.
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Characteristics of M1 :
` M1 is conventionally known as narrow money.
` M1 represents the highest degree of liquidity.
` M1 is more important than M3 for credit budgeting
because it is always possible to predict the growthof time deposit and total deposit on the basis ofgrowth of M1 and reserve money.
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2. M2 : M1 + Post office saving deposits.
` M2 supply measure is distinguished fromM1 because M2 deposits are not that liquid
as demand deposits are with commercial
and cooperative banks they are not as
chequable accounts.
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M3 : M1 +Time deposits of Banks
` Characteristics of M3 :
` M3 is known as Broader money.
` For credit creation total deposits are
considered to be more relevant than merely
the demand deposits. Therefore, M3 is more
important than M1 in credit creation
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` Reserve money also called Base moneyor High Powered money.
` H = C+R
C=Currency held by the publicR =Cash reserves with the central
Bank and with other banks
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` R : has two components :
` Statuary Reserve Ratio based on:
` Cash Reserve maintained by
commercial banks with RBI.
` Excess Reserve needs to maintain
as Cash in hand or cash in vaults.
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` Changing CRR is the concept of
disposable high powered money which is
often called adjusted high powered
money.
` Changes in CRR affect the amount of
disposable high powered money availableto the public and bank.
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When the CRR is raised , some reservesof commercial banks are impounded by
the Reserve Bank and thus the amount
of disposable high powered money isreduced.
When CRR is lowered, some reserves
are released which in turn cause anincrease in the amount of disposable
high powered money.
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Item
Amount in Rupeescrore
Outstanding
Variation
2005-06 2006-07
as on March 31, 2007 Amount Amount
Reserve Money (M0) 7,08,950 83,922 1,35,892
Narrow Money (M1)9,59,875 1,43,825 1,33,497
Broad Money (M3):32,96,919 3,96,881 5,67,372
a) Currency with the
Public
4,84,171 58,248 71,052
b) Aggregate Deposits: 28,05,261 3,38,081 4,95,704
i) Demand Deposits 4,68,216 85,025 61,829
ii) Time Deposits
Source : RBI
23,37,045 2,53,056 4,33,875