Measure of Money Supply | Measures of Money Supply in India

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Hi friends, in today’s article we are going to know about the various measure of money supply and also know the concept of high-powered money. So let’s discuss in details.

The RBI has adopted four measures of money supply in termed as M1, M2, M3 and M4. According to the RBI report, money supply measures has two fold significance. It is both economic as well as policy controlled.

(i) As an economic variable, money supply is influenced by the portfolio behaviour of the public to the banks.

(ii) As a policy controlled variable, money supply is influenced by the views and behaviour of the monetary authority.

Measure of Money Supply | Measures of Money Supply in India

Various Measure of Money Supply

The main significance or policy implications of the various measures of money supply are explained below –

• M0 or M1 measure of Money Supply – M or M1 is regarded as narrow money. It includes currency hold by the public (C) + demand deposits with the banks (DD) + other deposits with the RBI (OD).

Thus, M1 defines money supply in the traditional sense and emphasises the medium of exchange function of money. It includes only the most liquid and the most generally accepted means of payment as medium of exchange and for final settlement of debt.

• M2 measure of Money Supply – M2 includes M1 + post office savings bank deposits. Post offices accept two types of deposits (a) Saving deposits and (b) Time deposits. Saving deposits are withdrawable on demand.

But, saving deposits do not serve as a medium of exchange because of lack of cheque facility. Thus, M2 represents a compromise between the need for conceptual neatness and operative feasibility.

The post office saving deposits are less liquid than the demand deposits with banks, but more liquid than the time deposits.

• M3 measure of Money Supply – M3 is called the broad money or aggregate monetary resource. It includes M1 + net time deposits of banks. Time deposits or fixed deposits are repayable after the maturity of the period.

They can not be withdrawable by cheque. Recurring deposits and a part of saving deposits are also included in time deposits. Therefore, M3 represents the aggregate monetary measures.

• M4 measure of Money Supply – M4 includes the M3 + total post office saving deposits.

The RBI regards these four measures of money supply that is M1, M2, M3 and M4 in the descending order of liquidity.

High-powered Money (H)

Besides these above measures, RBI has adopted another important measure of money supply which is called high powered money (H). It refers to the money produced by the monetary authority or the central bank of a country.

In India the high powered money is produced by the RBI and the govt. of India. The high-powered money is also called the monetary base or reserve money.

High Powered Money is comprised of –

(i) Currency held by the public (C)

(ii) Cash reserves of the banks (R)

(iii) Other deposits with the RBI (OD)

Thus, High powered money (H) = C + R + OD

FAQs

What are the different measures of money supply?

The RBI has adopted four measures of money supply in termed as M1, M2, M3 and M4.

What is High Powered Money?

High powered money refers to the money produced by the monetary authority or the central bank of a country.

What is the formula of high powered money?

The formula of High powered money (H) = C + R + OD

Conclusion

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