---
title: "Reserve Money (M0): RBI Monetary Base | Model Diplomat"
description: "Reserve Money (M0) is the central bank's monetary base — currency plus bank reserves. See its RBI components, multiplier link to M3, and why UPSC GS3 tests it."
url: "https://modeldiplomat.com/learn/glossary/reserve-money-m0"
---

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Model Diplomat Research Team · Last reviewed June 22, 2026

TL;DR

- Reserve Money (M0) is the monetary base created by a central bank, comprising currency in circulation, bankers' deposits with the central bank, and other deposits with it.
- What are the components of Reserve Money (M0) in India?
- How does Reserve Money differ from M1 and M3?
- Why is M0 called high-powered money?
- Does the RBI still target reserve money?

[Civil Service & Diplomatic Exams](https://modeldiplomat.com/learn/civil-services/glossary)Updated June 22, 2026

Reserve Money (M0) is the monetary base created by a central bank, comprising currency in circulation, bankers' deposits with the central bank, and other deposits with it.

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## Positions at a glance

### Supporters

For the working practitioner — the policy researcher, the civil-services aspirant preparing General Studies Paper III, or the desk officer interpreting RBI releases — reserve money remains the analytical anchor for understanding monetary transmission. Reading the weekly sources-and-uses decomposition reveals whether liquidity expansion is driven by fiscal financing, forex intervention, or banking-system support, each carrying distinct inflationary and exchange-rate implications. Even in an interest-rate-targeting regime, M0 movements signal the scale of central-bank intervention and the structural liquidity surplus or deficit that shapes the policy corridor. Mastery of its composition and multiplier logic equips the analyst to read central-bank balance sheets with precision across jurisdictions.

### Opponents

A persistent analytical controversy concerns the controllability of M0 and the stability of the money multiplier. Following the adoption of flexible inflation targeting in 2016 under the amended RBI Act and the establishment of the Monetary Policy Committee, the RBI shifted its operating target to the weighted average call money rate rather than any quantity of reserve money, reflecting a broader global move from monetary-targeting to interest-rate-targeting frameworks. Critics note that in an open economy with large capital flows, net foreign assets can dominate movements in M0 irrespective of domestic policy intent, complicating sterilisation and sometimes requiring instruments such as the Market Stabilisation Scheme. The rise of digital payments and the pilot of the central bank digital currency, the e-rupee from 2022, further raise questions about how currency in circulation, and hence M0, will evolve.

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Example

In November 2016, India's demonetisation of ₹500 and ₹1,000 notes sharply contracted currency in circulation, shrinking Reserve Money (M0) even as banks' deposits with the RBI surged from returned notes.

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