Types of Money Supply: Difference Between M0, M1, M2, M3, and M4

Current Context: The RBI closely monitors M3 growth to assess liquidity, credit expansion, inflationary pressure, and overall economic activity. Digital payment systems such as UPI only facilitate the transfer of existing money and do not create a separate category of money supply.

• M0 (Reserve Money): Includes currency in circulation, banks’ deposits with the RBI, and other deposits with the RBI. It is also known as high-powered money.
• M1 (Narrow Money): Includes currency held by the public, demand deposits with banks, and other deposits with the RBI. It represents the most liquid form of money.
• M2: Includes M1 plus savings deposits with post-office savings banks.
• M3 (Broad Money): Includes M1 plus time deposits with banks. It is the most widely used measure of money supply in India.
• M4: Includes M3 plus all deposits with post-office savings institutions, excluding National Savings Certificates. It is the broadest measure of money supply.
• Liquidity: M1 is the most liquid, while M4 has the widest coverage.

Question: 

Q1.Which of the following is known as Broad Money in India?

a) M0

b) M1

c) M2

d) M3

Answer: d) M3 includes M1 plus time deposits with banks. It is called Broad Money and is the most commonly used measure of money supply in India.