Understanding The Concept Of Money Supply In Context Of Indian Economy
Post on 03,December 2015   5:00 PM
By - PolyEyes Staff
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Money Supply in terms of economics is the Total stock of money held by public. Public Comprises of - Households, firms, local authorities, Non Banking financial institutions (NBFI), Non departmental Public sector undertaking – Hindustan Machine Tools (HMT) and Bharat Heavy Electrical Limited (BHEL).

The term public excludes- Central Government, Reserve Bank of India (RBI) and the commercial banks. 

Economist define money supply in two ways

  • Narrow definition of money supply (M1).
  • Broader definition of money supply (M2)

Narrow money supply: Assets included in this definition of money supply are: 

a) Currency.

b) Demand deposits with the banks.

M1= C + DD

M1 = Narrow Definition of Money Supply; C= Currency, DD= Demand deposits

Broader money supply:  Developed by Milten Freedom of Chicago School of Economics 

Broad money supply includes currency with the public, demand deposits and time deposits with the banks.

M2 = C + DD + TD

C= Currency with Public; DD= Demand Deposits; TD= Time Deposit. 

RBI MEASURES OF MONEY SUPPLY: RBI has four alternative measures of Money Supply- M1, M2, M3, and M4 

The measures of money supply adopted by RBI are as follows.

  • M1= Currency with the Public + Demand Deposit with the Banking System + other Deposits with the RBI.
  • M2= M1+ Time deposit with the banking system.
  • M3= Net bank credit to the Government + Bank Credit to the commercial Sector + Net foreign exchange assets of the banking sector + Government’s currency liabilities to the public – Net non-monetary liabilities of the banking sector. 
  • M4= M3+ All deposits with post office  saving banks (Excluding National Saving Certificates).

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