Money Supply

Subject: Economy

Context:

According to RBI data, M₃ money supply rose 6.7% in the first five months compared with the same period last year, the highest growth in seven years.

Concept:

• The reason behind surge in money supply is heightened uncertainty caused by the COVID-19 pandemic as people hoard cash or park money in accessible deposits to safeguard themselves against salary cuts or job losses.
• Since the end of March, currency held by the public rose 8.2% compared with a 4.1% increase in term deposits, the data showed. Savings and current account deposits fell 8% due to higher withdrawals.

Currency in circulation

• Currency with the public is arrived at after deducting cash with banks from total currency in circulation.
• Currency in circulation refers to cash or currency within a country that is physically used to conduct transactions between consumers and businesses.

Money Aggregates: Standard Measures of Money Supply

• Reserve Money (M0) = Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits with the RBI
• M1=Currency with the public + Deposit money of the public (Demand deposits with the banking system + ‘Other’ deposits with the RBI). It is called narrow money
• M2 =M1 + Savings deposits with Post office savings banks.
• M3 = M1+ Time deposits with the banking system. It is called broad money
• M4=M3 + All deposits with post office savings banks (excluding National Savings Certificates).