Legal Definitions : Narrow And Broad Money


Money supply, like money demand, is a stock variable. The total stock of money in circulation among the public at a particular point of time is called money supply.

RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and M4. They are defined as follows –

M1 = CU + DD
M2 = M1 + Savings deposits with Post Office savings banks
M3 = M1 + Net time deposits of commercial banks
M4 = M3 + Total deposits with Post Office savings organisations (excluding National Savings Certificates)

where,

  • CU is currency (notes plus coins) held by the public and
  • DD is net demand deposits held by commercial banks.
  • The word ‘Net’ implies that only deposits of the public held by the banks are to be included in money supply. The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of money supply.

M1 and M2 are known as narrow money.
M3 and M4 are known as broad money.

These gradations are in decreasing order of liquidity –

  • M1 is most liquid and easiest for transactions whereas
  • M4 is least liquid of all.

M3 is the most commonly used measure of money supply. It is also known as aggregate monetary resources.

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Bibliography : NCERT – Introductory Macroeconomics

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