Sources of Money Stock (M3) - Notes on Reserve Bank of India

>Sources of Money Stock (M3) is the data released in [Monthly Bulletin](https://rbi.org.in/Scripts/BS_ViewBulletin.aspx). We can derive the equation for M3 can be combined by combining the reserve money and banks' assets and liabilities. **==M3 = Currency (cash) with the public + Demand deposits with the banks + Time deposits with the banks + [[Reserve Money#1.3 Other Deposits with the RBI|Other deposits with the RBI]] ==** = Money easily spendable by public + rupee deposits with RBI by foreign central banks and governments, etc. #### Reserve Money (M0) (Equation 1) = Currency in Circulation (cash with public + cash with banks) + Bankers' Deposits with RBI + Deposits by Others with RBI =Net Reserve Bank credit to Government + RBI Credit to the Banks & Commercial Sector+Net Foreign Exchange Assets of RBI+ Government's Currency Liabilities to the Public \- Net non-monetary liabilities of RBI #### For banks (Equation 2) Deposits of Public with banks (Time +Demand) \+ Liabilities to RBI \+ Non-monetary Liabilities \= Other Banks Investments in Government Securities \+ Other Banks’ Credit to Commercial Sector \+ Net Foreign Exchange Assets of Other Banks \+ Bankers' Deposits with RBI \+ Cash with banks \+ Non-monetary Assets #### Now we combine both (Equation 1 and 2), to get Cash with public \+ Cash with banks \+ Bankers' Deposit with RBI + Deposits by Others with RBI \+ Deposits of Public with banks (Time +Demand) + Liabilties + Non-monetary Liabilities of banks \= Net Reserve Bank credit to Government + Net RBI claims on Banks + RBI Credit to Commercial Sector + Net Foreign Exchange Assets of RBI + Government's Currency Liabilities to the Public \- Net non-monetary Liabilities of RBI \+ Other Banks Investments in Government Securities \+ Other Banks’ Credit to Commercial Sector \+ Net Foreign Exchange Assets of Other Banks \+ Bankers' Deposit with RBI \+ Cash with banks + Non-monetary Assets of banks > [!cyan] > So we are left with, > *(Components-Liabilities to Public)* > =Cash with public + Deposits of Public with banks (Time +Demand) + Deposits by Others with RBI > > *(Sources-Assets with RBI+Banks for the above Liabilities)* > \= Net Bank Credit to Government (Net Reserve Bank credit to Government \+ Other Banks Investments in Government Securities) ......**(1)** > \+ RBI Credit to Commercial Sector + Other Banks’ Credit to Commercial Sector ......**(2)** > \+ Net Foreign Assets of RBI + Net Foreign Assets of Other Banks ( NFA of the banking sector)......**(3)** > \+ Government's Currency Liabilities to the Public ......**(4)** > \- Net non-monetary liabilities of RBI - (Net Non-monetary Liabilities of Other Banks=Non-Monetary Liabilities - Non-monetary Assets)......**(5)** > > *Sources side can also be written as* > \= Net Domestic Assets (by RBI+Banks) +Net Foreign Exchange Assets (by RBI+Banks) \+ Government's Currency Liabilities to the Public \- (Net non-monetary liabilities of RBI + Other Banks) ## Components (Liabilities) 1.1 Currency (cash) with the public 1.2 Demand deposits with the banks 1.3 Time deposits with the banks 1.4. Other’ deposits with the RBI ## Sources Side (Assets) These are sources of changes in money stock (M3) ### 1. Net Bank Credit to Government 1. RBI’s net credit to Government (1-2) 1. Claims on Government 1. Central Government 2. State Governments 2. Government deposits with RBI 1. Central Government 2. State Governments 2. Other Banks’ Credit to Government ### 2. Bank Credit to Commercial Sector 1. RBI’s credit to commercial sector 2. Other banks’ credit to commercial sector 1. Bank credit by commercial banks 2. Bank credit by co-operative banks 3. Investments by commercial and co-operative banks in other securities ### 2.3 Net Foreign Exchange Assets (External) of Banking Sector 1. RBIs net foreign exchange assets (1-2) 1. Gross foreign assets 2. Foreign liabilities 2. Other banks’ net foreign exchange assets ### 2.4 Government’s Currency Liabilities to Public 1. This comprises of Rupee coin and small coins. ### 2.5 Non-monetary Liabilities of Banking Sector 1. Net Non-Monetary Liabilities of Banking Sector (1+2) 1. Net Non-monetary Liabilities of RBI 2. Net Non-monetary Liabilities of Other Banks ## 1985-97 1. India followed a monetary policy framework that could broadly be characterised as one of loose and flexible monetary targeting with feedback (from developments in the real sector like movement in interest rates, exchange rate and availability of credit to productive sectors of the economy). [^1] 2. The broad money (M3) was as an intermediate target. 3. Under this approach, RBI forecast (projected) money supply (M3) growth based on 1. expected GDP growth (growth in real income), and 2. a projected or tolerable inflation rate. 4. On the basis of these two parameters, an indicative (forecast/projected) target for expansion of broad money (M3) was set. It was announced publicly through the Governor's statement on monetary and credit policy. [^2] 1. Consistent with the targeted level of broad money expansion, is a desired level of reserve money expansion. So reserve money was the operating target. 2. The order of the reserve money expansion, however, had to be consistent with the likely fiscal and external payments position, since the main sources of reserve money expansion are net RBI credit to government and net foreign exchange assets. 5. In other words, the monetary targeting framework was used in a flexible manner with feedback from developments in the real sector. ## References 1. Y.V. Reddy. *Monetary Policy in India : Objectives, Instruments, Operating Procedures and Dilemmas*. A speech by Dr.Y.V. Reddy, at the Fourth Securities Industry Summit, organised by Invest India Pvt. Ltd., at Mumbai, on May 26, 1999). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=19) 2. Y. V. Reddy. Apr 02, 2007. *Role of Monetary Policy in Attaining Growth with Stability: The Indian Experience*. Address by Dr. Y. V. Reddy, Governor, Reserve Bank of India at the Bank of Greece, Athens, Greece on April 2, 2007. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=330) 3. Rakesh Mohan. (Apr 02, 2007). *Monetary Policy Transmission in India*. (Paper presented by Dr, Deputy Governor, RBI, at the Deputy Governor's Meeting on "Transmission Mechanisms for Monetary Policy in Emerging Market Economies - What is New?" at Bank for International Settlements, Basel on Dec 7-8, 06.). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=329) 4. Y V Reddy. (June 30, 2007). *Evolving role of the Reserve Bank of India: Recent Developments* - Speech delivered by Dr. Y V Reddy, Governor, Reserve Bank of India on the occasion of the Foundation Day of the Institute of Development Studies, Jaipur on June 30, 2007). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=363) 5. Rakesh Mohan. (Feb 14, 2008). *The Growth Record of the Indian Economy, 1950-2008: A Story of Sustained Savings and Investment* - (Keynote Address by Dr.Rakesh Mohan, Deputy Governor, Reserve Bank of India at the Conference “Growth and Macroeconomic Issues and Challenges in India” organised by the Institute of Economic Growth, New Delhi on February 14, 2008). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=379) 6. RBI. (Jun 18, 2014). *A Handbook on RBI's Weekly Statistical Supplement* 7. RBI (September 18, 2020). *Notes on Tables in Handbook of Statistics on Indian Economy*. [Link](https://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of%20Statistics%20on%20Indian%20Economy) 8. RBI. (Dec 22, 2025). Sources of Money Stock M3. [Link](https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/7T_221220250F40F1FEA56A43E88DED9FF0F449CFD7.PDF) 9. RBI. (August 29, 2025). *Table 165: Sources of Money Stock in Handbook of Statistics on Indian Economy.* [Link](https://rbi.org.in/Scripts/AnnualPublications.aspx?head=Handbook%20of%20Statistics%20on%20Indian%20Economy) [^1]: Rakesh Mohan. (Apr 02, 2007). *Monetary Policy Transmission in India*. (Paper presented by Dr, Deputy Governor, RBI, at the Deputy Governor's Meeting on "Transmission Mechanisms for Monetary Policy in Emerging Market Economies - What is New?" at Bank for International Settlements, Basel on Dec 7-8, 06.). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=329) [^2]: Y.V. Reddy. *Monetary Policy in India : Objectives, Instruments, Operating Procedures and Dilemmas*. A speech by Dr.Y.V. Reddy, at the Fourth Securities Industry Summit, organised by Invest India Pvt. Ltd., at Mumbai, on May 26, 1999). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=19)