The total stock of money circulating in the economy at a point in time, measured by the RBI through a graded set of monetary aggregates from the most liquid (M1) to the least liquid (M4).
- M0 is reserve money or high-powered money: currency in circulation plus bankers' deposits with the RBI plus other deposits with the RBI; it is the base the RBI directly controls.
- M1 (narrow money) = currency with the public + demand deposits + other deposits with the RBI; M2 = M1 + savings deposits with post-office savings banks.
- M3 (broad money) = M1 + time deposits with banks; it is the most widely watched aggregate; M4 = M3 + total post-office deposits (excluding National Savings Certificates).
- The money multiplier links reserve money (M0) to broad money (M3); a higher CRR lowers the multiplier and shrinks money creation.
- Managing M3 growth is a goal of concept monetary policy because excess money supply can fuel concept inflation.
The ordering and components of M1 to M4, the meaning of M0 (high-powered money) and the fact that M3 is broad money are frequently asked, often in matching format.
M1 (narrow money) versus M3 (broad money, M1 plus time deposits); M0 (reserve money) is the RBI's monetary base, not the same as M1.
Graded measures of money: M0 reserve money, M1 narrow money, M3 broad money (M1 + time deposits), M4 widest; M3 is the key aggregate.