Monetary aggregates are broad categories of money that measure the money supply such as cash and demand deposits or bank credits which have an impact on the aggregate economic activity. Appraising monetary aggregates can generate a lot of information about the financial stability and overall health of a country. For example, if large amount of money in circulation used on the same amount of goods and services, it is likely that the prices of goods and services upsurge in response. In the otherwords, when monetary aggregates grow rapidly it may result in to inflation in the economy.
The Central Banks (RBI in India) all over the world use tools of monetary policy to meet the set objectives of price stability and growth of economy. The tools used by RBI for the above purposes are; Cash Reserve Ratio (CRR), Statutory Liquidity Reserve (SLR), , Bank rate, Selective Credit Control, Liquidity Adjustment Facility (LAF), Open Market Operations (OMO), and Directed credit and administered interest, in order to stop or increase the money supply growth in some way which have an impact on the aggregate economic activity. In India, the Reserve Bank of India follows M0, M1, M2, M3 and M4 monetary aggregates which are respectively known as ‘Reserve Money’, ‘Narrow Money’, ‘Near Money’,’ Broad Money’ and ‘Broader Money’.
Reserve money is signposted in M0. The Components of Reserve Money (M0) are; Currency in Circulation plus Bankers’ Deposits with RBI plus `Other’ Deposits with RBI
Narrow money is signposted in M1. The components of narrow money are; Currency in Circulation plus Demand Deposits with the banking system plus `Other’ Deposits with RBI
Near money is signposted in M2. The components of ‘Near money’ are Currency with the Public plus Demand Deposits with Banks plus `Other ‘ Deposits with Reserve Bank plus Savings deposit in Post office.
Broad money is signposted in M3. The components of broad money (M3) are; Currency with the Public plus Demand Deposits with Banks plus Time Deposits with Banks plus `Other ‘ Deposits with Reserve Bank.
Broadest money is signposted in M4. The components of broadest money (M4) are; Currency with the Public plus Demand Deposits with Banks plus Time Deposits with Banks plus `Other ‘ Deposits with Reserve Bank plus money market instruments.
However, Reserve Bank of India (RBI) assesses money supply in to our economy on the yardstick of broad money M3.
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