Fundamentals of Business Economics and Management · Money and Banking

Money Supply and Monetary Aggregates M0 to M4 in India

Updated 10 October 2026 · Fact-checked

Money supply is the total money held by the public at a point in time. India measures it through aggregates. M0 is reserve money (high powered money). M1 is narrow money. M2 is M1 plus post office savings deposits. M3 is broad money, M1 plus bank time deposits. M4 is M3 plus all post office deposits.

Understand Money Supply and Monetary Aggregates (M1 to M4)

Money supply is the stock of money available to the public in the economy at a given moment. It is a stock, not a flow. It does not include money held by the government or by banks as their own cash, because that money is not available for spending by the public.

Not all money is equally liquid. Notes in your wallet can be spent at once. A fixed deposit takes some effort to convert into cash. So the RBI groups money into aggregates. M1 is the most liquid and M4 is the widest and least liquid.

M0 (reserve money or high powered money) is different in kind. It is the RBI's own liability: currency in circulation, bankers' deposits with the RBI and other deposits with the RBI. It is called high powered because banks can use it as a base to create many times more deposits. M0 is the monetary base on which money creation is built. M1 to M4 are measures of the money supply held by the public. The two are not a clean separation. Currency in circulation is in M0, and the part held by the public is also in M1. Other deposits with the RBI appear in both M0 and M1. Bankers' deposits with the RBI are in M0 only.

M1 (narrow money) = currency with the public + demand deposits with banks + other deposits with the RBI.

M2 and M3 are parallel measures. Each is built on M1 independently. M2 = M1 + savings deposits with post office savings banks. M3 (broad money) = M1 + time deposits with banks. M3 does not include post office savings deposits, and M2 is not the base of M3.

M4 = M3 + all deposits with the post office savings organisation (excluding National Savings Certificates). So M4 is built on M3, not on M2.

The RBI also publishes newer aggregates (NM1, NM2, NM3) and liquidity aggregates since the late 1990s. For CMA Foundation, focus on the M0 to M4 definitions above, which are the classic ones asked in MCQs.

Key formulas to remember

Reserve money (M0): M0 = Currency in circulation + Bankers' deposits with RBI + Other deposits with RBI; Also called high powered money or monetary base. It is the RBI's liability.
Narrow money (M1): M1 = Currency with the public + Demand deposits with banks + Other deposits with RBI; Most liquid measure. Time deposits are not included.
M2: M2 = M1 + Savings deposits with post office savings banks; Built on M1 alone. Bank time deposits are not added here. Only post office savings deposits are.
Broad money (M3): M3 = M1 + Time deposits with banks; Built on M1 alone, parallel to M2. It does not include post office savings deposits. It is the most widely used measure of money supply.
M4: M4 = M3 + All deposits with post office savings organisation (excluding NSCs); Built on M3, not on M2. Widest and least liquid of the four.
Currency with the public: Currency with public = Currency in circulation − Cash in hand with banks; Banks' own cash is not part of money held by the public.
Order of liquidity: M1 is the most liquid; M4 is the least liquid; M1 is smaller than M2, M3 and M4. M4 is larger than M3. M2 and M3 are separate additions to M1.

How to solve Money Supply and Monetary Aggregates (M1 to M4) questions

Most questions either ask you to define an aggregate, spot the odd component, or add up given figures. Use this method.

1Identify what is asked: M0, M1, M2, M3 or M4.
2If it is M0, think of the RBI's liabilities: currency in circulation, bankers' deposits and other deposits with the RBI.
3If it is M1 to M4, start from M1: currency with the public, demand deposits and other deposits with the RBI.
4Add the extra item. M2 and M3 each add one item to M1: post office savings deposits for M2, bank time deposits for M3. M4 adds total post office deposits to M3.
5For numerical questions, write the formula first, then pick only the figures that belong in it and ignore the rest.
6Check that currency with the public, not total currency in circulation, is used for M1. Subtract banks' cash if needed.
7Match your total to one option. As a sanity check on your computed values, M2, M3 and M4 should each be larger than M1, and M4 should be larger than M3.

Quickest way: Build each measure from M1

When to use it: Use for definition-based MCQs and for quick additions where all components are listed.

Remember the structure: M2 and M3 are both built on M1. M4 is built on M3.
M2 = M1 + post office savings. M3 = M1 + bank time deposits. M4 = M3 + post office deposits.
Remember the key word in each: demand for M1, time for M3, post office for M2 and M4.
When asked for M1, discard options that include bankers' deposits with the RBI or time deposits. Then check that the option you keep has all three M1 components.
For sums, write M1 first, then add only the one or two extra items needed.

Common mistakes in Money Supply and Monetary Aggregates (M1 to M4)

Treating M0 as the first step of the M1 to M4 series
The numbering suggests M0 is the first step of the same series.
Fix: M0 is the RBI's liabilities and is the base for money creation. M1 to M4 are measures of money supply held by the public. The two overlap: the public-held part of currency and other deposits with the RBI appear in both M0 and M1.
Adding bank time deposits to get M2
Students assume each M adds one more type of bank deposit in order.
Fix: M2 adds post office savings deposits to M1. Bank time deposits come in only at M3.
Adding M2 items into M3
Students assume M3 includes M2 because the numbers rise.
Fix: M3 = M1 + bank time deposits. It does not include post office savings deposits. M2 and M3 are parallel.
Using total currency in circulation in M1
The two terms sound the same.
Fix: M1 uses currency with the public. Cash held by banks is not money held by the public, so subtract it.
Leaving out other deposits with the RBI from M1
Students remember only currency and demand deposits.
Fix: Learn M1 as three items: currency with public, demand deposits, other deposits with RBI.
Thinking M1 is broad money and M3 is narrow money
Mixing up the numbers with size.
Fix: M1 is narrow and most liquid. M3 is broad money. M4 is the widest.
Confusing high powered money with money supply
Both are called money, and both appear in the same chapter.
Fix: High powered money (M0) is the base issued by the RBI. Money supply (M3) is what results after banks create deposits on that base.

Worked examples

Example 1

Figures in ₹ crore: currency with the public 4,000; demand deposits with banks 6,000; other deposits with RBI 200; time deposits with banks 10,000; post office savings bank deposits 500; total post office deposits 800. What is M3?
(a) ₹10,200 crore (b) ₹20,200 crore (c) ₹21,000 crore (d) ₹10,700 crore

Show the solution

M3 = M1 + time deposits with banks.
M1 = 4,000 + 6,000 + 200 = 10,200.
M3 = 10,200 + 10,000 = 20,200.
Option (a) is M1. Option (d) is M2 (10,200 + 500). Option (c) is M4 (20,200 + 800).

Answer: (b) ₹20,200 crore

Example 2

Figures in ₹ crore: currency in circulation 3,000; bankers' deposits with RBI 700; other deposits with RBI 50. What is reserve money (M0)?
(a) ₹3,750 crore (b) ₹3,700 crore (c) ₹3,050 crore (d) ₹750 crore

Show the solution

M0 = currency in circulation + bankers' deposits with RBI + other deposits with RBI.
M0 = 3,000 + 700 + 50 = 3,750.
Option (b) leaves out other deposits. Option (c) leaves out bankers' deposits. Option (d) leaves out currency.

Answer: (a) ₹3,750 crore

Exam tips

Learn the components of each aggregate word for word. Most questions test exactly one component.
Watch the odd-one-out style: 'which is not included in M1?' Usually the answer is time deposits.
For sum questions, ignore figures that do not belong in the formula. Extra data is a common trap.
If asked which measure is most liquid, answer M1. If asked which is broad money, answer M3.
Link high powered money to the RBI and to credit creation. Questions often ask why it is called high powered.

Practice questions from Money and Banking

Money Supply and Monetary Aggregates (M1 to M4) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CA FoundationMeasures of Money Supply (M1, M2, M3, M4)

Money Supply and Monetary Aggregates (M1 to M4): frequently asked questions

What is high powered money (M0)?

High powered money, also called reserve money or monetary base, is the RBI's liability. It consists of currency in circulation, bankers' deposits with the RBI and other deposits with the RBI. It is called high powered because banks can create a multiple of it as deposits.

What is the difference between M1 and M3?

M1 is narrow money: currency with the public, demand deposits and other deposits with the RBI. M3 is broad money: M1 plus time deposits with banks. M3 is larger and less liquid than M1.

How is money supply measured in India?

The RBI measures it through the aggregates M0 to M4. M2 and M3 each add one item to M1, and M4 adds post office deposits to M3. M3 is the most commonly used measure of overall money supply. The RBI also publishes newer aggregates like NM1, NM2 and NM3.

What does M4 include that M3 does not?

M4 adds all deposits with the post office savings organisation to M3. National Savings Certificates are excluded. It is the widest and least liquid measure.