1.
Saurabh Agarwal
SPM-PDPU(’16)
Que. Describe the concepts of M1,M2,M3,M4 (i.e. Money Supply) in India.
Ans.: As the money supply is simply total sum of money available to the public in the economy at a point of
time, which signifies the money which is flown in the market inorder to fulfill the need of the individual.
Though it also represents the amount of goods and services produced in a country over a period of time.
There are 2 elements which are required to be kept in mind before falling into money supply in India or
anywhere in the world are:
 Currency held by the Public
 Demand deposits held by the Public
The Reserve bank of India(RBI) calculates the 4 concepts of Money supply in India which is also called as
Monetary Aggregates or Money Stock Measures.
These monetary aggregates are: M1 (Narrow Money); M2, M3 (Broad Money) and M4.
Narrow Money (M1):
At any point of time, the money which is held with public has two most liquid components:-
 Currency Component: It consists of all the coins and notes in the circulation in public.
 Demand Deposit Component: Demand Deposit component is the money of the general public with the
banks, which can be withdrawn by using cheque withdrawals and ATM’s.
The above two components i.e. currency component and demand deposit component of the public money is
called Narrow Money (M1), as discussed earlier factors responsible for the money supply in the nation. Thus,
M1 = Currency with the public + Demand Deposits of public in Banks.
Now, further when one more component is included in the M1 i.e. Post Office Savings Deposits then it is
transformed into M2,
M2 = Currency with the public + Demand Deposits of public in Banks + Post Office Savings.
M2 = M1 + Post Office Savings.
Broad Money (M3):
As from the above explained Narrow Money(M1), it is the most liquidity part of the money supply as the public
can withdraw the demand deposits held with the bank anytime during the banking hours as demand skyrockets
by the public.
In the case of Broad Money, another component is introduced which is called as Time Deposit which has fixed
maturity period and hence can’t be withdrawn before expiry of this period. When we add the time deposits into
the narrow money, we get the broad money(M3), which is given by:
M3 = Currency with the public + Demand Deposits of public in Banks + Time Deposits of public with banks
M3 = M1 + Time Deposits of public with banks
The time deposits of public with all banks including the cooperative banks are included in the Broad Money.

2.
Saurabh Agarwal
SPM-PDPU(’16)
Now, further when one more component is included in the M3 i.e. Post Office Savings Deposits then it is
transformed into M4,
M4 = Currency with the public + Demand Deposits of public in Banks + Time Deposits of public with banks +
Post Office Savings.
M4 = M3 + Post Office Savings
Now, we understand that the major distinction between the M1 and M3 is “Treatment of deposits with the
banks”. If we go a little deep, the M3 is the treatment of “Time Deposits” of the public, since demand deposits
are available against cheques and ATMs.
So when we add the Post Office Savings money also into the M1 and M3, it becomes M2 and M4 respectively.
Why M2 and M4 are irrelevant in monetary aggregates?
Both M2 and M4 which include the Post office Savings with narrow money and broad money respectively are
now a days irrelevant. Post Office savings was once a prominent figure when the banks had not expanded in
India as we see them today all around. The RBI releases the data at times regarding the money supply in India
and Post Office Savings Deposits have not been updated frequently. There is NOT much change in the money
of people deposited with the Post office and RBI did not care to update this money. Further, there was a time
when the Reserve Bank used broad money (M3) as the policy target. However, with the weakened relationship
between money, output and prices, it replaced M3 as a policy target with a multiple indicators approach. RBI
started using the Multiple Indicator Approach since 1998
Currently, Narrow Money (M1) and Broad Money (M3) are relevant indicators of money supply in India. The
RBI in all its policy documents, monthly Bulletins and other documents shows these aggregates.