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