Monetary Base,Correlation between M0, M1, M2 and M3,Money Supply vs Monetary Base

                                 

Monetary Base / Reserve Money Monetary Base (M0):

• Monetary base is the total liability of RBI which is actually the money created /printed in the economy by RBI.
• As per the RBI Act, the only liability of the Issue Department is 'Notes in Circulation' but If we analyse the balance sheet of RBI, the major liabilities are :

Monetary base formula:

Notes in circulation + Reserves with RBI .

• So, the monetary base (or M0) is the total amount of a currency that is either in general circulation or in the form of commercial bank deposits held in the central bank's reserves.
• This measure of the money supply is not often cited since it excludes other forms of non-currency money that are prevalent in a modern economy.
• It is also said to be High powered money or powerful money as it refers to the currency that has been issued by the Government and Reserve Bank of India.

WHY  M0 (Monetary base) is LIABILITY ON RBI :

• If citizen produces a currency note to RBI the latter must pay her value equal to the figure printed on the note. 
• Similarly, the deposits are also refundable by RBI on demand from deposit-holders. 
• These items are claims on RBI and hence are considered to be the liability of RBI.

Correlation between M0(Monetary base), M1, M2 and M3:

• In a modern economy, M0 is transformed to M1, M2 and M3 through the process of Money multiplier (explained in blog) which is more relevant to common man.
• Money supply ie M3 can be higher than monetary base as the M0 is transformed from M0 to M3 through the process of money multiplier.

For understanding purposes :

M0-Reserve money as on Feb 2024 is 45 trillion while value of M3 is approximately 246 trillion .

Image: RBI Website

Money Supply vs Monetary Base :

• MB is the total value of the currency in circulation and reserve balances, whereas the money supply refers to the quantity of currency with public  and checkable or demand deposits.
• Reserve balances are not included in the money supply calculation, showing that the money supply concept is more about the money available for immediate use.