Department of Economics, CMP Degree College

Class: B.A. Part II

Subject: Economics - Paper III
“Money, Banking and Public Finance”
Date: 20-09-2021 Time: 02:50 to 03:40pm
Teacher: Dr. Satyendra Kumar

Today’s Topic:
“Concept and Components of Money Supply”

Outline of the Lecture:

Concept of Money Supply

Components of Money Supply

 Concept of Money Supply
मुद्रा आपूर्ति की अवधारणा
• The total stock of money circulating in an economy is the money supply.
The circulating money involves the currency, printed notes, money in the
deposit accounts and in the form of other liquid assets (किसी अर्थव्यवस्र्ा में धन
िा िुल स्टॉि मुद्रा आपूकतथ है । परिसंचािी धन में मुद्रा, मुकद्रत नोट, जमा खातों में धन औि अन्य तिल
संपकि िे रूप में शाकमल है ।).
• The money supply is all the currency and other liquid instruments in a
country's economy on the date measured. The money supply roughly
includes both cash and deposits that can be used almost as easily as cash
(धन िी आपूकतथ, किसी दे श िी अर्थव्यवस्र्ा में मापी गई तािीख पि सभी मुद्रा औि अन्य तिल
उपििण हैं । मोटे तौि पि पैसे िी आपूकतथ में निदी औि जमा दोनों शाकमल होते हैं कजनिा उपयोग
लगभग निद िे रूप में आसानी से किया जा सिता है ।).
• The money supply (or money stock) is the total value of money available in
an economy at a point of time. There are several ways to define "money",
but standard measures usually include currency in circulation and demand
deposits (depositors' easily accessed assets) (मुद्रा आपूकतथ (या मुद्रा स्टॉि) किसी
अर्थ व्यवस्र्ा में उपलब्ध धन िा िुल मूल्य है । "धन" िो परिभाकित ििने िे िई तिीिे हैं , लेकिन
मानि उपायों में आम तौि पि प्रचलन Dr. में Satyendra
मुद्रा औि किमां ि किपॉकजट (जमािताथ ओं िी आसानी
Kumar 2
से
प्राप्त संपकि) शाकमल हैं ।).
 Concept of Money Supply
मुद्रा आपूर्ति की अवधारणा
• By money supply we mean the total stock of monetary media of exchange
available to a society for use in connection with the economic activity of
the country (पैसे िी आपूकतथ से हमािा तात्पयथ दे श िी आकर्थि गकतकवकध िे संबंध में उपयोग िे
कलए समाज िो उपलब्ध कवकनमय िे मौकद्रि मीकिया िे िुल स्टॉि से है ।).
• Money supply plays a crucial role in the determination of price level and
interest rate. In economic analysis it is generally presumed that money
supply is determined by the policy of Central Bank of a country and the
Government (मूल्य स्ति औि ब्याज दि िे कनधाथ िण में मुद्रा आपूकतथ महत्वपूणथ भूकमिा कनभाती है ।
आकर्थ ि कवश्लेिण में यह आमतौि पि माना जाता है कि धन िी आपूकतथ किसी दे श औि सििाि िे
सेंटरल बैंि िी नीकत से कनधाथ रित होती है ।).
• However, this is not fully correct as in the determination of money supply,
besides Central Bank and Government, the public and commercial banks
also play an impor-tant role. There are various measures of money supply
depending upon which types of deposits of banks and other financial
institutions are included in it (हालांकि, यह पूिी तिह से सही नहीं है क्ोंकि मुद्रा आपूकतथ िे कनधाथिण
में , िेंद्रीय बैं ि औि सििाि िे अलावा, सावथजकनि औि वाकणज्यिि बैंि भी महत्वपूणथ भूकमिा कनभाते हैं । मुद्रा
आपूकतथ िे कवकभन्न उपाय हैं , कजनिे आधाि पि बैंिों औि अन्य कविीय संस्र्ानों िे प्रिािों िो इसमें शाकमल किया
Dr. Satyendra Kumar 3
जाता है )
 Definition of Money

• The definitions of money supply forwarded by the Reserve Bank of

India (RBI) from time to time were available in the propositions of
(भाितीय रिज़वथ बैंि (RBI) द्वािा समय-समय पि अग्रेकित िी गई धन आपूकतथ िी
परिभािाएँ कनम्नकलज्यखत प्रस्तावों में उपलब्ध हैं ,

• The First Working Group (1961),

• The Second Working Group (1977) ,
• The Third Working Group (1998)

Dr. Satyendra Kumar 4

 The First Working Group (1961)
• The First Working Group (1961) (FWG) of RBI, chaired by Dr. S.L.N.
Simha, for the first time threw light on the concept of money supply in
India. The FWG emphasized the role of money as a liquid asset as well a
medium of exchange (आिबीआई िे पहले िायथ समूह (1961) (एफिब्ल्यूजी) ने पहली बाि
भाित में मुद्रा आपूकतथ िी अवधािणा पि प्रिाश िाला। एफिब्ल्यूजी ने तिल परिसंपकि िे सार्-सार्
कवकनमय िे माध्यम िे रूप में धन िी भू कमिा पि जोि कदया।).
• The FWG defined money supply as consisting of
1. Currency notes and coins with the public excluding the balances of central
and state governments held at treasuries and cash on hand of scheduled and
reporting non-scheduled banks and state cooperative banks (एफिब्ल्यूजी ने मुद्रा
आपूकतथ िो मुद्रा नोटों औि कसक्ों िे रूप में परिभाकित किया है , जो अनुसूकचत औि गैि-अनुसूकचत
बैंिों औि िाि सहिािी बैंिों, औि (रिपोकटिं ग) िे हार्ों िोिागाि औि निदी पि आयोकजत िेंद्र औि
िाि सििािों िी शेि िाकश िो छोड़िि जनता िे सार् हैं । ).
2. The demand deposits (excluding inter-bank demand deposits) of scheduled
and non-reporting non-scheduled banks and state cooperative banks (अनुसूकचत
औि गै ि-रिपोकटिं ग वाले गै ि-अनुसूकचत बैंिों औि िाि सहिािी बैंिों िे किमां ि किपॉकजट (अंति-बैंि
किमां ि किपॉकजट िो छोड़िि).
Dr. Satyendra Kumar 5
 The First Working Group (1961)
3. The other deposits held with RBI excluding the balance of International Monetary
Fund (IMF). For scheduled and cooperative banks demand deposits included inter-
bank deposits and some other demand liabilities. The term ‘public’ meant all
holders of money other than government and the banking system (आिबीआई िे पास
मौजूद अन्य किपॉकजट िो अंतिाथ ष्ट्रीय मुद्रा िोि (IMF) िे बैलेंस िो छोड़िि। अनुसूकचत औि
सहिािी बैंिों िे कलए किमां ि किपॉकजट में इं टि-बैं ि किपॉकजट औि िुछ अन्य किमां ि दे नदारियां
शाकमल र्ीं। 'जनता' शब्द िा अर्थ सििाि औि बैंकिंग प्रणाली िे अलावा सभी धन धाििों से है ।).

• In General, Money Supply

• M = C + DD + OD
M = Money Supply
C = Currency in the circulation
DD = Demand Deposit
OD = Other Deposit Dr. Satyendra Kumar 6
 The Second Working Group (1977)
• The Second Working Group (SWG) was on “Money Supply in India:
Concepts, Compilation and Analysis” and it chaired by M. L Ghosh.
• The four measures of money supply for annual compilation
developed in India by the SWG (1977) are as follows:
• M1 = currency with public + demand deposits with the banking
system + other deposits with RBI
• M2 = M1 + saving deposits with post office savings banks
• M3 = M1 + time deposits with the banking system
• M4 = M1 + all deposits with post office savings banks excluding
National Saving Certificates

Dr. Satyendra Kumar 7

 The Third Working Group (1998)
• The Third Working Group (TWG) (1998) was on “Money Supply: Analytics
and Methodology of Compilation”, and it chaired by Chairman Y. V. Reddy.
• The TWG proposed compilation of following measures of monetary
aggregates,
• Weekly compilation
• M0 = currency in circulation + bankers’ deposits with RBI + other deposits
with RBI.
• M0 is essentially the monetary base, i.e. reserve money. It is mainly
compiled from RBI’s balance sheet.
• It is also called as high powered money, base money and central bank
money. All these name suggests that reserve money represents the base
level for money supply or it is the high powered component of money
supply.
• Other forms of money like broad money depends upon the volume of
reserve money. Actually, broad money will be a multiple of reserve money.
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 The Third Working Group (1998)
• M0 = currency in circulation + bankers’ deposits with RBI + other deposits
with RBI.
• “Currency in circulation’ includes notes in circulation, rupee coins and
small coins. Rupee coins and small coins in the balance sheet of the
Reserve Bank of India include ten-rupee coins issued since October 1969,
two rupee-coins issued since November 1982 and five-rupee coins issued
since November 1985. Currency with the public is arrived at after
deducting cash with banks from total currency in circulation, as reported by
RBI.”
• Bankers’ Deposits with the RBI represent balances maintained by banks in
the current account with the Reserve Bank mainly for maintaining Cash
Reserve Ratio (CRR) and as working funds for clearing adjustments.
• Other Deposits with the Reserve Bank for the purpose of monetary
compilation includes deposits from foreign central banks, multilateral
institutions, financial institutions etc.
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 The Third Working Group (1998)
• Total Reserve money is Rs 3057359 crores as on end March 2020.
Outstanding as on
Reserve Money Components March 27, 2020 In %
(Rs crores)
(i) Currency in Circulation 2439307 79.8%

(ii) Bankers’ Deposits with RBI 579875 19.0%

(iii)`Other’ Deposits with RBI 38177 1.2%

Total Reserve Money (i+ii+iii) 3057359 100%

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 The Third Working Group (1998)
• Reserve money holds the topmost position in the RBI’s monetary
policy. Since it is mostly currency in circulation with the people ,
reserve money decides the level of liquidity and price level in the
economy. Management of reserve money is thus very important to
manage liquidity and price level (inflation).
• Fortnightly compilation
• M1 = currency with public + demand deposits with the banking
system + other deposits with RBI
• M1 = currency with public + current deposits with the banking
system + demand liability portion of saving deposits with the
banking system + other deposits with RBI.
• Demand Deposit or Demand Liabilities include all liabilities which
are payable on demand that include current deposits, demand
liabilities portion of savings bank deposits, etc..
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 The Third Working Group (1998)
• Time Liabilities are those which include fixed deposits, cash
certificates, cumulative and recurring deposits, time liabilities portion
of savings bank deposits, etc.
• M1 is the money supply that is composed of physical currency and
coin, demand deposits, travellers' checks, other checkable deposits,
and negotiable order of withdrawal (NOW) accounts.
• M1 includes the most liquid portions of the money supply because it
contains currency and assets that either are or can be quickly
converted to cash.
• M1 is also known as ‘Narrow Money’.
• M2 = M1 + time liability portion of savings deposits with the
banking system + certificates of deposit issued by banks + term
deposits (excluding non resident foreign currency deposits) with a
contractual maturity up to and including one year with the banking
system Dr. Satyendra Kumar 12
 The Third Working Group (1998)
• M2 = currency with public + current deposits with the banking
system + saving deposit with the banking system + certificates of
deposit issued by banks + term deposits (excluding non resident
foreign currency deposits) with a contractual maturity up to and
including one year with the banking system + other deposit with RBI
• The savings deposits can be classified in two,
a) the demand liability portion of savings deposits
b) the time liability portion of savings deposits
• Till August 1978 ‘the demand liability portion of savings deposits’
used to be defined as ‘the portion of savings deposits freely
withdraw-able.’ This portion was included (along with current
account deposits) under demand deposits. And the rest of the savings
deposits were included under time deposits.

Dr. Satyendra Kumar 13

 The Third Working Group (1998)
• From August 1978 the RBI amended the ground rule “for
apportioning savings deposits into demand and time deposits. Under
the new rule ‘the average of the monthly minimum balances in a
savings account on which interest is being credited to the account
shall be regarded as a time liability and the excess over the said
amount as a demand liability.’
• Term Deposits are one of the best investment options for people who
are looking for a stable and safe return on their investments.
• In Term Deposits, the sum of money is kept for a fixed maturity and
the depositor is not allowed to withdraw this sum till the end of the
maturity period. That is why they are called as Term Deposits
because they are kept up to a particular term.
• There are two types of Term Deposits:
1. Recurring Deposits
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2. Fixed Deposits
 The Third Working Group (1998)
• Recurring Deposit:
• In a Recurring Deposit, a fixed sum of money is invested at a fixed
interval. In most cases, this interval is once a month. The investments
earn interest on them till the maturity period.
• Once the sum of money and the tenure of the Recurring Deposit is
fixed, it cannot be changed. Premature withdrawal is possible, but
there will be a penalty in the rate of interest that is given by the bank.
• The minimum Recurring Deposit amount is Rs. 1,000 and can be
increased in multiples of Rs. 100 (HDFC, Bank). The minimum
period of investment for a Recurring Deposit is 6 months and the
maximum period is 10 years. The rate of interests on Recurring
Deposit ranges between 7% to 9%.
• Some banks provide an option to convert a Recurring Deposit to a
Fixed Deposit on the maturity.
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 The Third Working Group (1998)
• Fixed Deposit:
• FD are deposits where a particular sum of money is invested for a
fixed duration. The duration of FD is flexible. It can range from 7
days to 10 years. The rate of interest for the Fixed Deposit depends on
the period for which the funds are locked in.
• Just like a Recurring Deposit, a FD amount cannot be withdrawn until
the maturity period. Premature withdrawal is allowed after the bank
charges a penalty in the rate of interest.
• The minimum amount of investment for a FD is Rs. 5,000 (HDFC,
Bank). The rate of interest on the FD ranges from 4% to 7.5%.
• Some banks provide the option of a sweep out facility where the
amount above a particular balance in a Savings Account is
automatically converted to a FD. This helps the Savings Account earn
more interest.
Dr. Satyendra Kumar 16
 The Third Working Group (1998)
• M3 = M2 + term deposits (excluding non resident foreign currency
deposits) with a contractual maturity up to and including one year
with the banking system + call borrowings from ‘Non-Depository’
financial corporations by the banking system.
• In addition, the TWG proposed two liquidity measures as substitutes
of broad money and inclusive of a range of instruments that might be
empirically related to overall economic activities.
• Monthly compilation
• L1 = M3 + all deposits with post office savings bank except NSC
• L2 = L1 + term deposits with Term Lending Institutions and
Refinancing Institutions (FIs) + term borrowing by FIs and
Certificates of Deposits issued by FIs
• Quarterly compilation
• L3 = L2 + public deposits ofDr.non banking financial companies 17
Satyendra Kumar
Current Scenario of the Monetary Aggregates in India

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Current Scenario of the Monetary Aggregates in India

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Current Scenario of the Monetary Aggregates in India

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 Thank You
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Dr. Satyendra Kumar 21