Broad Money (M3)

Broad money includes a broader range of bank deposits and other less liquid assets. Time deposits have a set maturity term and can’t be withdrawn before that time period expires. The wide money is obtained by adding the time depots to the narrow money. M3 stands for this.

In the case of Broad money, a new component called Time Deposit is introduced, which has a defined maturity period and hence cannot be withdrawn before that period expires. When we add time deposits to narrow money, we get wide money (M3), which is calculated as follows:

M3 means:

M3 = Currency with the public = Public Demand Deposits in Banks + Public Time Deposits in Banks

• M3 = M1 + Public Time Deposits with Banks

The Broad money includes all public time deposits with all banks, including cooperative banks.

The following are the parts that makeup M3.

• The Public’s Currency
• Deposits in the Banking System (SAVINGS)
• Bank-issued Certificates of Deposit
• Residents’ Term Deposits with the Banking System having a contractual maturity of up to and including one year
• Deposits with the Reserve Bank of India (RBI) that are categorized as ‘Other’
• Residents’ Term Deposits with the Banking System with a contractual term of more than one year
• The Banking System borrows from ‘Non-depository’ financial firms on a call/term basis

M4 means:

When a fourth component, Post Office Saving Deposits, is added to the M3, it becomes M4.

M4 = Currency in circulation + Public Demand Deposits in Banks + Public Time Deposits in Banks + Post Office Savings.

• M4 = M3 + Savings at the Post Office.

DD refers to net demand deposits held by commercial banks, while CU represents cash (notes and coins) owned by the general public. The word ‘net’ refers to the inclusion of solely public deposits held by banks in the money supply. The money supply does not include interbank deposits held by a commercial bank in other commercial banks.

M1 and M2 are examples of narrow money. M3 and M4 are two types of broad money. The gradations are presented in decreasing order of fluidity. M1 has the highest liquidity and is the easiest to deal with, whilst M4 has the least. The most often used money supply statistic is M3. Another name for it is aggregate monetary resources.

The value of the currency depreciates as inflation rises. This is why the RBI keeps track of money supply by categorizing it as ‘reserve money,’ ‘narrow money,’ and ‘broad money’. Money is the most widely used means of exchange (money). Notes, coins, and bank account deposits are all examples of this money. These are also known as legal tender because no citizen in the country may refuse to accept them for transactions. As a result, the economy’s money supply balance is extremely crucial. When the money supply shrinks, prices in the economy begin to fall, which is known as deflation. However, as the amount of money printed increases and the money supply expands, inflation rises. Two elements are required in mind before falling into the money supply in India or anywhere in the world is:

• Currency held by the Public
• Demand deposits held by the Public

The money supply is a stock variable, much as money demands. Money supply refers to the total amount of money in circulation among the general population at any one moment. M1, M2, M3, and M4 are the four money supply measurements released by the RBI. The following are their definitions: