Money Supply Definitions

The amount of money in circulation at a given time, usually controlled by

some central banking authority. English dictionary

or

The sum of demand or checking-account deposits and currency in

circulation.
economics
The Reserve Bank of India defines

 Reserve Money (M0): Currency in circulation + Bankers’

deposits with the RBI + ‘Other’ deposits with the RBI = Net
RBI credit to the Government + RBI credit to the commercial
sector + RBI’s claims on banks + RBI’s net foreign assets +
Government’s currency liabilities to the public – RBI’s net
non-monetary liabilities.

 M1: Currency with the public + Deposit money of the public

(Demand deposits with the banking system + ‘Other’ deposits
with the RBI).
 M2: M1 + Savings deposits with Post office savings banks.

 M3: M2+ Time deposits with the banking system = 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 (Other than Time
Deposits).

 M4: M3 + All deposits with post office savings banks

(excluding National Savings Certificates).
Components of money supply

Supply of Money

M1 M2 M3 M4

Currency M1 M1 M3
with + + +
public Post Office Time Total post
+ Saving bank Deposits Office
demand Deposits With Banks Deposits
Deposits
with banks
+
Other
Deposits
with RBI
 Sources of Money Supply (in %)

  Oct 09 – Dec As on
April 09 – June 09 July 09 – Sep 09 Jan 10- Mar 10 Apr 9, 2010
09

14.1 13.6 13.9

Currency with the public 14.0 13.9
11.4 11.6 11.3
Demand deposits with banks 12.0 12.0
0.2 0.1 0.1
Other deposits with RBI 0.1 0.1
74.3 74.7 74.7
Time deposits with banks 74.2 74.0
100.0 100.0 100.0
Money Supply 100.0 100.0
Explanation
 Components of Money Supply: If we see the components of
money supply, we can see bank deposits form bulk of the
money supply. Within deposits, it is time deposits which form
around 3/4th of the money supply.  The share of time
deposits has declined from 74.7% in Oct – Dec 09 to 74% on
9 April 2010. The share of demand deposits has risen from
11.3% in Oct – Dec 09 to 12% on 9 April 2010.

 The percentage contributions of each item in components of

money supply do not change much in the year.
Deployments of Money Supply /uses of money
supply:

 There are 5 categories of money supply deployments:

 1. Net bank credit to government (A): It is further divided into

two categories:

 RBI’s credit to government: RBI lends to government for

short-term expenditure management.

 Other banks’ credit to government – This represents the total

of commercial and cooperative banks investments in
government securities, including treasury bills.
 2. Bank credit to commercial sector (B): It is also divided into
two categories

 RBI’s credit to commercial sector: This is the aggregate of

RBI investments in shares, bonds of financial institutions like
ARDC, DICGC, debentures of land mortgage banks, loans and
advances to financial institutions like IDBI, IFCI and state
financial corporations, and internal bills purchased and
discounted.
 Other banks’ credit to commercial sector: Loans given by
commercial and cooperative banks to commercial sector.
Also includes investments by banks in securities (shares,
bonds etc) issued by commercial sector

 3. Net foreign exchange assets of banking sector (C): Sum of

RBI’s foreign exchange and foreign assets held by
commercial and cooperative banks. The percentage of
foreign assets held by banks is very small. RBI holds majority
of the foreign assets as part of its forex reserve.
 4. Government’s currency liabilities to the public (D): These
comprise the holdings of one rupee notes, rupee coins and
small coins with the public.

 5. Banking sectors’ net non-monetary liabilities other than

time deposits (E): This includes capital and reserves, branch
adjustments, and bills payables; the liabilities are net of
investments in fixed assets, and branch adjustments. This
item is subtracted from the sum of the above 4 items
Deployments of Money Supply (in %)

  Apr Jul Oct Jan As on

09 – Jun 09 09 – Sep 09 09 – Dec 09 10- Mar10 Apr 9, 2010

Net bank credit to government (A) 27.6 28.3 28.4 29.1 29.3
 of which          
RBI’s net credit to government 0.9 0.6 1.1 2.3 2.3
Other banks’ credit to government 26.5 27.7 27.4 26.8 27.0
Bank credit to commercial sector (B) 61.2 60.8 60.7 61.7 61.8
Net foreign exchange assets of banking sector (C) 27.1 27.2 26.0 24.2 22.3

Government’s currency liabilities to the public (D) 0.2 0.2 0.2 0.2 0.2

Banking sectors net non-monetary liabilities other 16.1 16.5 15.3 15.3 13.6
than time deposits (E)
Money Supply (A+B+C+D-E) 100 100 100.0 100.0 100
Explanation
 If we analyse where money supply is going, around 60%
goes as credit to commercial sector. The percentage of bank
credit to commercial sector declines from 61% in Apr-Jun 09
to 60.7% in Oct-Dec 09. However, it has improved steadily
since then with figure increasing to 61.8% on 9 April 2010.
This is in line with growth in credit which started picking up
from Nov-09 onwards. With Indian economy expected to
grow, the share of this category is likely to increase.
 Another trend we see is the persistent increase of Net bank
credit to government. Within this category, the other banks
credit to government has declined but RBI’s credit to
government has increased. Contribution of other Banks’
credit to government increased from 26.5% in Apr-Jul 09 to
27.7% in Jul-Sep 09.

This was because of record fiscal deficit in FY 2009-10.

The government had front loaded its borrowing program
hence we see a rise in banks credit to government in Jul-Sep
09. The percentage then declines to 26.8% in Jan-Mar 10. As
bulk of the borrowing was completed in H1 2009-10, there
was not much stress on monetary sources in the second half.
It has again increased to 27.0% on 9 April 2010 as again the
borrowing program is front-loaded in first half of 2010-11.
 RBI’s credit to government has increased from 0.6% in Jul-
Sep 09 to 2.3% on 9 April 2010. Therefore, the total funds
used by government have risen from 27.6% in Apr-Jun 09 to
29.3% on 9 April 2010.

The government continues to use higher percentage of

financial resources available in the economy in every quarter.
Conclusions