MEASUREMENT OF MONEY SUPPLY

In India, there are four alternative measures of money supply, popularly known as M1,
M2, M3 and M4.
M1 Measurement (Narrow Money): M1 includes all the currency notes being held by the
public (CC) on any given day. It also includes all the demand deposits (DD) with all the banks
in the country, both savings as well as current account deposits. It also includes all the other
deposits (OD) of the banks kept with the RBI.
M1 = CC + DD + OD
M2 Measurement: M2, also narrow money, includes all the inclusions of M1 and additionally
also includes the saving deposits of the post office banks.
M2 = M1 + Savings Deposits of Post Office Savings
M3 Measurement (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.
M3 = M1 + time deposits of banks
M4 Measurement: 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

Difference Between Term Deposits and Demand Deposits:

• Term deposits are always for a specific period of time, like fixed deposits are for a
period of one year. Demand deposits are not for a specefic period of time.
• Depositors cannot withdraw the money (in fixed deposits) as and when needed.
Money in demand deposits can be withdrawn as and when needed.
• Term deposits are not chequeable deposits. You cannot sign a cheque against these
deposits. Demand deposits are a chequeable deposits.
Who are the producers of Money?
Producers of money refers to suppliers of money. They include:

• The government of a country

• The banking system of a country including both the central bank and the commercial
banks.
The commercial banks do not issue currency (notes & coins) but definitely they contribute to
the supply of money.

High Powered Money

High-powered money is a macroeconomic term referring to the monetary base, which
is controlled by the institution in a country that controls monetary policy. This is usually either
the finance ministry or the central bank.
High powered money or monetary base refers to the money produced by R.B.I. and
Government of India. It consists of:
(i) Currency (notes and coins) in the hands of public (C)
(ii) Cash reserve of commercial banks (R)
(iii) Other deposits with R.B.I. (OD).
H = C + R + OD
High powered money is different from ordinary money (M ) which consists of:
(i) Currency held by public (C)
(ii) Demand deposits in banks (DD)
(iii) Other deposits with R.B.I. (OD)
M = C + DD + OD
The only difference between the two (H and M ) pertains to their one component. It is
cash reserve of commercial banks (R) for high powered money but demand deposits in banks
(DD) for ordinary money.