MONETARY
AGGREGATES
Dr. BUSHRA KHALID
What is meant by Monetary Aggregate?
Monetary aggregates are the measures of the money supply in a country.
The money supply is the total value of money available in an economy at a point of
time.
Very often, the money supply in the economy is represented using a monetary aggregate
called ‘broad money’, also denoted as M3.
There are also different other monetary aggregates.
From 1977 to 1998, RBI used four monetary aggregates – M1, M2, M3 and M4 – to
measure money supply. The central bank also used the concept of Reserve Money.
However, measuring standards changed in 1998.
Now, the nomenclature is M0, M1, M2, and M3.
To distinguish new aggregates from old aggregates, RBI sometimes mentions new
aggregates as NM0, NM1, NM2, and NM3.
In India, Reserve Bank of India (RBI), measures the money supply and publishes it on a
weekly or fortnight basis.
The Reserve Bank of India has a long tradition of compilation and
dissemination of monetary statistics, since July 1935.
In view of the ongoing changes in the Indian economy as well as the
developments in monetary sector, working groups were set up periodically to
review and refine the monetary aggregates.
Three working groups were set up so far, viz.:
• the First Working Group on Money Supply (FWG) (1961),
• the Second Working Group (SWG) (1977) and
• the “Working Group on Money Supply: Analytics and Methodology of
Compilation” (WGMS) (Chairman: Dr. Y.V. Reddy) (1998).
Monetary statistics at present are compiled on a balance sheet framework
with data drawn from the banking sector and postal authorities.
Old Monetary Aggregates
From 1977, RBI has been publishing four monetary aggregates –
M1, M2, M3 and M4 – besides the reserve money.
In the new system, reserve money is named M0.
M2 and M4 that included post office savings banks deposits.
However, these are not very widely used now.
New Monetary Aggregates
The RBI has started publishing a set of new monetary aggregates following the
recommendations of the Working Group on Money Supply: Analytics and
Methodology of Compilation (Chairman: Dr. Y.V. Reddy) which submitted its
report in June 1998.
The Working Group recommended compilation of four monetary aggregates on the
basis of the balance sheet of the banking sector in conformity with the norms of
progressive liquidity:
•NM0 (monetary base)
•NM1 (narrow money)
•NM2
•NM3 (broad money)
NM0 (Monetary Base or Reserve Money)
M0 is the sum of Currency in Circulation, Bankers’ Deposits with RBI, and
‘Other’ Deposits with RBI
Components of M0:
•Currency in Circulation
•Bankers’ Deposits with RBI
•‘Other’ Deposits with RBI
Note:
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 Reserve Bank’ 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 RBI comprise mainly: (i) deposits of quasi-
government and other financial institutions including primary dealers, (ii)
balances in the accounts of foreign Central banks and Governments, (iii)
accounts of international agencies such as the International Monetary Fund,
etc.
NM1 (Narrow Money)
M1 is the sum of Currency with the Public, Demand Deposits with the Banking System,
and ‘Other’ Deposits with RBI.
Components of M1:
•Currency with the Public
•Current Deposits with the Banking System
•Demand Liabilities Portion of Savings Deposits with the Banking System
•‘Other’ Deposits with RBI
In other words, M1 = Currency with the Public + Demand Deposits with the Banking
System + ‘Other’ Deposits with RBI
Significance of M1: M1 includes currency with the public and non-interest bearing
deposits with the banking sector including that of RBI.
Currency with the public’ is currency in circulation less cash held by banks.
‘Demand deposits’ include all liabilities which are payable on demand and they
include current deposits, demand liabilities portion of savings bank deposits,
margins held against letters of credit/ guarantees, balances in overdue fixed
deposits, cash certificates and cumulative/ recurring deposits, outstanding
Telegraphic Transfers (TTs), Mail Transfers (MTs), Demand Drafts (DDs),
unclaimed deposits, credit balances in the Cash Credit account and deposits held as
security for advances which are payable on demand. Money at Call and Short
Notice from outside the Banking System is shown against liability to others.
NM2
M2 is the sum of Currency with the Public, Current Deposits with the Banking System,
Savings Deposits with the Banking System, Certificates of Deposits issued by Banks,
Term Deposits of residents with a contractual maturity up to and including one year with
the Banking System, and ‘Other’ Deposits with RBI.
Components of M2:
•Currency with the Public
•Current Deposits with the Banking System
•Demand Liabilities of Savings Deposits with the Banking System
•‘Other’ Deposits with RBI
•Term Deposits of residents with a contractual maturity up to and including one year
with the Banking System
•Certificates of Deposits issued by Banks
In other words, M2=M1+ Time Liabilities Portion of Savings Deposits with the
Banking System + Certificates of Deposit issued by Banks + Term Deposits of
residents with a contractual maturity of up to and including one year with the
Banking System.
‘Time deposits’ are those which are payable otherwise than on demand and they
include fixed deposits, cash certificates, cumulative and recurring deposits, time
liabilities portion of savings bank deposits, staff security deposits, margin money
held against letters of credit if not payable on demand, India Millennium Deposits
and Gold Deposits.
NM3 (Broad Money)
M3 is the sum of Currency with the Public, Current Deposits with the Banking System,
Savings Deposits with the Banking System, Certificates of Deposits issued by Banks,
Term Deposits of residents with the Banking System, Call/Term borrowings from ‘Non-
depository’ financial corporations by the Banking System, and ‘Other’ Deposits with
RBI.
Components of M3:
•Currency with the Public
•Current Deposits with the Banking System
•Savings Deposits with the Banking System
•Certificates of Deposits issued by Banks
•Term Deposits of residents with a contractual maturity up to and including one year with
the Banking System
•‘Other’ Deposits with RBI
•Term Deposits of residents with a contractual maturity of over one year with the Banking
System
•Call/Term borrowings from ‘Non-depository’ financial corporations by the Banking
System.
NM3 (Broad Money)
M3 is the sum of Currency with the Public, Current Deposits with the Banking System,
Savings Deposits with the Banking System, Certificates of Deposits issued by Banks,
Term Deposits of residents with the Banking System, Call/Term borrowings from ‘Non-
depository’ financial corporations by the Banking System, and ‘Other’ Deposits with
RBI.
Components of M3:
•Currency with the Public
•Current Deposits with the Banking System
•Savings Deposits with the Banking System
•Certificates of Deposits issued by Banks
•Term Deposits of residents with a contractual maturity up to and including one year with
the Banking System
•‘Other’ Deposits with RBI
•Term Deposits of residents with a contractual maturity of over one year with the Banking
System
•Call/Term borrowings from ‘Non-depository’ financial corporations by the Banking
System.
M3=M2+ Term Deposits of residents with a contractual maturity of over one
year with the Banking System + Call/Term borrowings from ‘Non-depository’
financial corporations by the Banking System.
Significance of M3: M3 captures the complete balance sheet of the banking
sector.
Liquidity Aggregates – L1, L2, and L3
In addition to the monetary aggregates, the Working Group had recommended
compilation of three liquidity aggregates namely, L1, L2 and L3, which include
select items of financial liabilities of non-depository financial corporations such
as development financial institutions and non-banking financial companies
accepting deposits from the public, apart from post office savings banks.
L1 – NM3 + All deposits with the post office savings banks (excluding National
Savings Certificates).
L2 – L1 + +Term deposits with term lending institutions and refinancing
institutions (FIs) + Term borrowing by FIs + Certificates of deposit issued by
FIs.
L3 – L2 + + Public deposits of non-banking financial companies.
Central Bank Money vs Commercial Bank Money
In short, there are two types of money.
1.Central bank money (M0)- obligations of a central bank, including
currency and central bank depository accounts.
2.Commercial bank money (M1-M3) – obligations of commercial
banks, including current accounts and savings accounts.
In the money supply statistics, central bank money is M0 while the
commercial bank money is divided up into the M1-M3 components.
Thank You!
