Money Supply Measures – M0, M1, M2 & M3 for UPSC

Definitions

The RBI uses a four‑tier system to classify the money supply, each tier representing a different breadth of liquidity. The definitions below summarise what each aggregate includes:

• M0 – Reserve money: Also called high‑powered money or monetary base. It comprises currency in circulation (notes and coins issued by the RBI minus currency held by banks), bankers’ deposits with the RBI and “other” deposits with the RBI such as balances of central and state governments. M0 underpins all other aggregates because banks create deposits on top of it.
• M1 – Narrow money: This is the most liquid measure available to the public. It adds currency with the public to demand deposits with the banking system (current account balances and savings deposits’ demand portion) and other deposits with the RBI. It excludes cash held by banks because that money is not in active circulation. M1 is immediately spendable for purchases and settlements.
• M2 – Intermediate money: M2 extends M1 by including savings deposits with post office savings banks and certain term deposits of maturity up to one year. This measure acts as a bridge between narrow and broad money; funds here are still relatively liquid but may require a day or more to withdraw.
• M3 – Broad money: The most comprehensive aggregate used in India. M3 equals M1 plus net time deposits of the banking system (fixed deposits and recurring deposits with scheduled commercial banks), net of inter‑bank deposits. Because it includes long‑term savings, M3 emphasises money’s role as a store of value rather than just a medium of exchange. M3 is the RBI’s key indicator for assessing overall liquidity and credit conditions.

While older textbooks sometimes refer to M4 (which adds total deposits with the post office savings organisation to M3), the RBI rarely publishes this series. In 1998 a working group recommended harmonised new aggregates labelled NM0 to NM3, but for exams the traditional M0–M3 framework remains more popular.

Components

Each money supply measure draws from a different set of components. The diagram below shows how the aggregates build on one another, with M0 forming the base and each successive measure adding layers of deposits:

Figure 1 – Hierarchy of M0, M1, M2 and M3 (money supply measures).

The table below summarises the key components, liquidity and examples for each measure:

The liquidity of money falls as we move from M0 to M3. Currency and current deposits are the most liquid forms; savings and term deposits can be converted into cash but usually entail penalties or waiting periods. The broadest aggregate (M3) reflects the total resources available for credit creation and investment in the economy.

Why are money supply measures important?

Tracking money supply helps policymakers and researchers understand economic conditions. Here are several reasons why these aggregates matter:

• Policy formulation: Central banks use money supply growth to gauge whether liquidity is adequate. High growth in M3 may signal abundant deposits, prompting tighter policy to contain inflation, whereas sluggish growth may require easier credit conditions. For example, India’s M3 was about ₹281 trillion in July 2025, growing roughly 9 % year‑on‑year – a rate consistent with moderate inflation and stable growth. Monitoring such trends guides decisions on the repo rate, cash reserve ratio and open market operations.
• Inflation and financial stability: The quantity theory of money links money supply to price levels. When the supply of money rises faster than goods and services, inflation can accelerate. Conversely, tight money can constrain spending and trigger deflationary pressures. By watching aggregates like M1 and M3, the RBI gauges whether inflation risks are building. Broad money also influences credit expansion; excessive growth may fuel asset bubbles and instability.
• Credit and growth: Banks create money by extending loans. Time deposits (part of M3) provide the funds for long‑term lending to households and businesses. A rising share of time deposits signals confidence in the financial system and supports investment. In 2023–24 time deposits made up about 74 % of India’s M3, while currency with the public accounted for around 15 %. This composition shapes how effectively monetary policy is transmitted through the banking system.
• Digitalisation and changing behaviour: The rapid spread of Unified Payments Interface (UPI) and digital wallets is altering the demand for cash. Even as currency in circulation hit record highs during the pandemic, long‑term trends point to increasing reliance on digital instruments. Economists have noted that digital payments can reduce the M0 and M1 components by substituting physical currency with electronic balances, while boosting the velocity of money. Policy‑makers are therefore rethinking how to measure liquidity in a digitising economy.
• International comparison and markets: Global investors look at money supply to understand emerging market dynamics. A rapidly expanding broad money supply might lead to currency depreciation or capital outflows if markets fear rising inflation. On the other hand, stable money growth can attract investment. Comparing India’s M3 expansion with that of peers like China or the United States helps gauge macroeconomic resilience.

Beyond these macro considerations, understanding money supply is useful for citizens. It reveals where households keep their savings, how banks mobilise deposits and whether financial inclusion programmes are effective. In a country where cash still plays a significant role alongside rapidly growing digital payments, the composition of M1 and M3 provides valuable insights into financial behaviour.

Sources of money supply data

Aspirants often wonder where to find reliable data on monetary aggregates. The following sources provide the most up‑to‑date figures:

• RBI’s Weekly Statistical Supplement (WSS): This publication appears every Friday and includes the latest reserve money (M0) figures, components of currency in circulation and bankers’ deposits with the RBI. It also reports weekly variations in broad money and credit growth.
• RBI’s Database on Indian Economy (DBIE): A free online database offering time‑series data on M0, M1, M2 and M3, both in levels and percentage growth. Users can download monthly and annual series spanning several decades.
• Monthly Bulletin and Handbook of Statistics on Indian Economy: These documents provide detailed tables on monetary aggregates, including the composition of deposits by maturity. The Handbook is particularly useful for long‑term researchers as it compiles historical data since the 1950s.
• Ministry of Statistics and Programme Implementation (MoSPI): The MoSPI’s chapter on monetary and financial statistics summarises definitions and trends in aggregates, often used in economic surveys and exam preparation.
• International sources: Websites like the St Louis Federal Reserve’s FRED database and CEIC Data offer cross‑country comparisons of money supply. They convert Indian aggregates into US dollars for easier benchmarking. However, always refer to the RBI for official Indian statistics.

When quoting data, always cite the date and source. Monetary aggregates are revised periodically as the RBI updates its estimates. For UPSC aspirants, learning how to interpret these numbers is more important than memorising every quarterly value.

For UPSC Prelims and Mains

For Prelims

• Know the definitions and formulae: M0 = currency in circulation + bankers’ deposits + other deposits; M1 = currency with public + demand deposits + other deposits; M2 = M1 + savings deposits with post offices + short‑term term deposits; M3 = M1 + net time deposits of banks.
• Identify which aggregates are called “narrow money” (M1 and sometimes M2) and which are “broad money” (M3). Remember that liquidity decreases as we move from M1 to M3.
• Be aware of the latest values (approximate ranges) of M3 and M2 for India. In July 2025 M3 was about ₹281 trillion, while M2 was around ₹70 trillion.
• Distinguish between components: Demand deposits are repayable on demand, while time deposits have fixed maturity. Post office savings deposits are included in M2 but not M1.
• Understand why M4 is rarely used: it adds total post office deposits to M3 but is not actively published by the RBI.

For Mains

• Analyse the relationship between money supply growth and inflation. Use examples from recent years where rapid broad money expansion coincided with supply bottlenecks, leading to higher prices.
• Discuss the impact of digital payments and fintech on the demand for currency and the measurement of M0 and M1. Explain whether the RBI should update its definitions to include digital wallets and prepaid instruments.
• Evaluate the effectiveness of the RBI’s monetary targeting in the 1980s and why it shifted to interest‑rate targeting in the 1990s. How does this change affect the use of money supply aggregates in policy?
• Examine the composition of M3 over time – the declining share of time deposits and rising currency ratio – and what it implies for household saving behaviour and financialisation.
• Compare India’s money supply structure with that of developed economies. For instance, why is cash usage higher in India despite digital innovation, and how does this influence liquidity management?

Quick Facts

• Latest broad money level: India’s M3 stood at about ₹281.4 trillion in July 2025, growing roughly 9 % year‑on‑year.
• Composition of M3 (FY 2023–24): Time deposits – 74.6 %; currency with the public – 14.7 %; demand deposits and other deposits make up the rest.
• Intermediate aggregate: M2 is around ₹70 trillion as of mid‑2025 and includes post office savings and short‑term term deposits.
• Reserve money growth: M0 is influenced by the RBI’s net credit to government, claims on banks and foreign exchange assets. It provides the base for banks to create credit.
• Money multiplier: The ratio of M3 to M0 is called the money multiplier; in India this ratio typically ranges between 4.5 and 6. A high multiplier indicates efficient deposit creation.
• Digital impact: UPI transactions crossed ₹41 lakh crore in FY 2021–22 and continue to grow, affecting the demand for cash and the velocity of money.
• Global context: While many countries have discontinued M3, India continues to publish it because of the economy’s bank‑dominated structure and lower financial market depth.

UPSC Previous Year Questions (Selected)

1. Prelims 2019: Consider the following statements:
   1. M1 consists only of currency in circulation.
   2. M3 is also called broad money.
   3. Post office savings deposits are included in M2.
   Which of the statements given above are correct?
   Answer: Statements 2 and 3 are correct. M1 includes currency plus demand deposits.
2. Prelims 2021: With reference to the money supply in India, which of the following are components of M0?
   1. Bankers’ deposits with the RBI
   2. Net time deposits of banks
   3. Government currency liabilities to the public
   Select the correct answer using the code given below:
   Answer: 1 and 3 only.
3. Mains 2022 (GS III): “India’s broad money growth has remained high in recent years despite moderate inflation. Analyse the factors driving M3 expansion and discuss whether the money supply still plays a useful role in guiding monetary policy.”

Practice MCQs

Test your understanding with the following questions (answers below).

1. M1 includes:
   A. Currency with the public and net time deposits
   B. Currency with the public, demand deposits and other deposits with the RBI
   C. Currency with banks and demand deposits
   D. Currency with the public and post office savings deposits
2. Which measure is sometimes termed intermediate money because it bridges narrow and broad money?
   A. M0
   B. M1
   C. M2
   D. M3
3. As of July 2025, India’s M3 level was approximately:
   A. ₹70 trillion
   B. ₹281 trillion
   C. ₹33 trillion
   D. ₹600 billion
4. Which of the following statements is true?
   A. M0 includes bankers’ deposits with the RBI.
   B. M2 excludes post office savings deposits.
   C. M3 comprises only currency and demand deposits.
   D. M1 includes net time deposits of banks.
5. The money multiplier is defined as:
   A. The ratio of M1 to M0
   B. The ratio of M3 to M0
   C. The ratio of M2 to M1
   D. The ratio of M3 to M1

Answer Key: 1 – B; 2 – C; 3 – B; 4 – A; 5 – B

Frequently Asked Questions

What is the difference between M1 and M2?
M1 contains the most liquid forms of money – currency with the public, current account balances, the demand portion of savings deposits and other deposits with the RBI. M2 adds relatively less liquid deposits: savings deposits with the post office and short‑term term deposits. Thus M2 is slightly broader than M1 and includes funds that are spendable with some delay.

Why does the RBI focus on M3 instead of M4?
M4 equals M3 plus total post office deposits. However, post office deposits outside the savings bank are small and illiquid. The RBI therefore uses M3 as its broadest regular aggregate. Internationally, many central banks have stopped publishing M3 because financial markets provide alternative indicators.

How do digital payments affect money supply?
Digital transactions reduce the need to hold cash (lowering currency in circulation) and can increase the velocity of money, allowing the same stock of money to support more transactions. Pre‑paid instruments and mobile wallets blur the distinction between deposits and currency, posing challenges for classifying money supply. Regulators are studying how to adjust definitions accordingly.

What is the money multiplier?
The money multiplier measures how many rupees of broad money (M3) are created for every rupee of reserve money (M0). It depends on banks’ reserve ratios, the public’s preference for cash versus deposits and regulatory requirements. A higher multiplier means banks are creating more deposits from a given monetary base.

Is money supply still important when central banks target interest rates?
Yes. Even though the RBI sets the repo rate to influence borrowing costs, money supply data offer insights into deposit mobilisation, credit expansion and financial stability. Rapid money growth or contraction can signal emerging risks and complement interest‑rate‑based analysis.