an in in ndia 12.29
its report in June 1998. The Working Group money (which includes only the non-interest-
recommended compilation of four monetary bearing monetary liabilities of the banking sector)
aggregates on the basis of the balance sheet of the and broad money (an all-encompassing measure
banking sector in conformity with the norms of that includes long-term time deposits). The new
progressive liquidity: M0 (monetary base), M1 broad money aggregate (referred to as NM3 for the
(narrow money), M2 and M3 (broad money). purpose of clarity) in the Monetary Survey would
In addition to the monetary aggregates, the comprise, in addition to NM2, long-term deposits
Working Group had recommended compilation of residents as well as call/term borrowings from
of three liquidity aggregates namely, L1, L2 and L3, non-bank sources, which have emerged as an
which include select items of financial liabilities important source of resource mobilisation for
of non-depository financial corporations such banks. The critical difference between M3 and NM3
as development financial institutions and non- is the treatment of non-resident repatriable fixed
banking financial companies accepting deposits foreign currency liabilities of the banking system
from the public, apart from post office savings in the money supply compilation.
banks. The New Monetary Aggregates are as There are two basic changes in the new
given below: monetary aggregates. First, since the post office bank
Reserve Money (M0) = Currency in is not a part of the banking sector, postal deposits
circulation + Bankers’ Deposits with the are no longer treated as part of money supply, as
RBI + ‘Other’51 deposits with the RBI. was the case in the extant M2 and M4. Second,
Narrow Money (M1) = Currency with the residency criterion was adopted to a limited
the Public + Demand Deposits with the extent for compilation of monetary aggregates.
Banking System + ‘Other’ deposits with The Working Group made a recommendation
the RBI. in favour of compilation of monetary aggregates
M2 = M1 + Savings Deposits of Post-office on residency basis. Residency essentially relates
Savings Banks. to the country in which the holder has a centre
Broad Money (M3) = M1 + Time Deposits of economic interest. Holdings of currency
with the Banking System. and deposits by the non-residents in the rest of
the world sector, would be determined by their
M4 = M3 + All deposits with Post Office
portfolio choice. However, these transactions form
Savings Banks (excluding National
part of balance of payments (BoP). Such holdings
Savings Certificates).
of currency and deposits are not strictly related
While the Working Group did not recommend to the domestic demand for monetary assets. It is
any change in the definition of reserve money therefore argued that these transactions should be
and M1, it proposed a new intermediate monetary regarded as external liabilities to be netted from
aggregate to be referred to as NM2 comprising foreign currency assets of the banking system.
currency and residents’ short-term bank deposits However, in the context of developing countries
with contractual maturity up to and including such as India, which have a large number of
one year, which would stand in between narrow expatriate workers who remit their savings in the
51. ‘Other’ deposits with RBI comprise mainly: (i) deposits form of deposits, it could be argued that these non-
of quasi-government; other financial institutions residents have a centre of economic interest in their
including primary dealers, (ii) balances in the accounts country of origin. Although in a macro-economic
of foreign Central Banks and Governments, and
(iii) accounts of international agencies such as the accounting framework all non-resident deposits
International Monetary Fund. need to be separated from domestic deposits and