Wednesday, 11 April 2012

Measures of Money Supply and Liquidity Aggregates

Reserve Money (M0) = Currency in Circulation + Bankers' deposits with the RBI + 'Other' deposits with the RBI.
Narrow Money (M1) = Currency with the Public + Demand Deposits with the Banking System + 'Other' Deposits with the RBI.
M2=M1 + Savings Deposits of Post-office Savings Banks.
Broad Money (M3) = M1 + Time Deposits with the Banking System.
M4 = M3 + All deposits with Post Office Savings Banks (excluding National Savings Certificates).

[Note: 'Other' deposits with RBI comprise mainly: (i) deposits of quasi-government and other financial institutions including primary dealers, (ii) balances in the accounts of foreign Central banks and Governments, (iii) accounts of international agencies such as the International Monetary Fund, etc.]  2

While measures M0, M1 and M3 are widely used in India, M2 and M4 are rarely used. The RBI initiated publication of a new set of monetary and liquidity aggregates as per the recommendations of the Working Group on Money Supply: Analytics and Methodology of Compilation. Following the submission of its report in June 1998, while no changes were made in the definitions of M0 and M1, new monetary aggregates NM2 and NM3 as well as liquidity aggregates L1, L2, and L3 were introduced, the components of which are elaborated as follows.

NM1 = Currency with the Public + Demand Deposits with the Banking System + 'Other' Deposits with the RBI.
NM2 = NM1 + Short Term Time Deposits of Residents (including and up to the contractual maturity of one year).
NM3 = NM2 + Long-term Time Deposits of Residents + Call/Term Funding from Financial Institutions.
L1 = NM3 + All Deposits with the Post Office Savings Banks (excluding National Savings Certificates)
L2 = L1 +Term deposits with Term Lending Institutions and Refinancing Institutions (FIs) + Term Borrowing by FIs + Certificates of Deposit issued by FIs
L3= L2 + Public Deposits of Non-banking Financial Companies.

Data on M0 are published by the RBI on weekly basis, while those for M1 and M3 are available on fortnightly basis. Among liquidity aggregates, data on L1 and L2 are published monthly, while those for L3 are disseminated once in a quarter.

1. Economic Survey 2012 pg. 90