Reserve Bank of India, which serves as the central bank of India, uses the M0 ratio to determine the money supply. The M0 ratio is between the M3 money supply and the RBI’s reserve money. As a result, when the central bank toughens the money supply, it takes liquid cash out of the banking system by selling assets. So as the supply of such assets increases and interest rates rise, the price of such securities decreases.
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National definitions of “money”
Policymakers must balance liquidity with inflation control to maintain economic stability, while sectoral dynamics and global uncertainties pose ongoing challenges. An increasing year-over-year percentage change in M3 indicates a growing money supply, which can be a sign of economic expansion, increased lending and borrowing activities, and potentially rising inflation. Conversely, a decrease can suggest tighter monetary conditions, possibly due to restrictive monetary policy or reduced economic activity. A substantial part of India’s economy still operates on cash transactions; hence, the money supply data can provide insights into economic liquidity and potential inflationary pressures. M3 is a comprehensive measure that includes M1 (physical currency and demand deposits) and M2 (M1 plus savings deposits, small time deposits, and money market funds), plus time deposits, institutional money market funds, and other larger liquid assets.
This is a short-hand simplification which disregards several other factors determining commercial banks’ reserve-to-deposit ratios and the public’s money demand.