Money supply refers to total volume of money held by public at a particular ponit of time in an economy. Features of money supply: 1. It includes 'money held by public only'. The term 'public' signifies the money-using sector, i.e. individuals and business firms. It does not include money-creating sector i.e. Government and banking system as cash balances held by them donot come into actual circulation in the country. 2. It is a 'Stock concept', i.e. it is concerned with a particular point of time. The various definitions of money supply in India as prescribed by RBI are M1, M2, M3, and M4.
M1, M2, M3, and M4. are arranged in the descending order of liquidity. In other words, M1 has the highest liquidity and M4 has the least liquidity.
so,
M1 = C + DD + OD
Where,
C = Currency held by public
DD = Net demand deposits of the bank
OD = other deposits held by RBI
M2 = M1 + Savings of the people with Post offices (M2 includes the components of M1 as well as the savings of people with Post office.)
M3 = M1 + Net time deposits with commercial banks ( M3is the most commonly used measure of money supply. It includes the components of M1 and net time deposits of commercial banks.)
M4 = M3 + Total deposits with post offices (excluding National Saving certificate) All these definitions of money supply in India are represented in the flow chart given below.
