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Question
What are the alternative definitions of money supply in India?
Solution
The various definitions of money supply in India as prescribed by RBI are M1, M2, M3 and M4.
M1, M2, M3 and M4 are arranged in the descending order of liquidity. In other words, M1 has the highest liquidity and M4 has the least liquidity.
So,
M1 = C + DD + OD
Where,
C = Currency held by public
DD = Net demand deposits of the bank
OD = other deposits held by RBI
M2 = M1 + Savings of the people with Post offices (M2 includes the components of M1 as well as the savings of people with Post office.)
M3 = M1 + Net time deposits with commercial banks (M3 is the most commonly used measure of money supply. It includes the components of M1 and net time deposits of commercial banks.)
M4 = M3 + Total deposits with post offices (excluding National Saving certificate)
All these definitions of money supply in India are represented in the flow chart given below.
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