Money supply refers to the total amount of money circulating in an economy at a given time, including cash, coins, and balances held in bank accounts. It plays a critical role in determining inflation, interest rates, and overall economic growth. Central banks, such as the Reserve Bank of India (RBI), closely monitor and regulate the money supply to maintain price stability and promote sustainable growth.

The money supply is typically divided into categories such as M1, M2, M3, and M4. M1 includes the most liquid forms of moneyócurrency with the public and demand deposits. M2 adds savings deposits, while M3 (commonly used by the RBI) includes M1 plus time deposits with banks. M4 is the broadest measure, encompassing all the above along with deposits held with post office savings banks.

Changes in money supply directly influence interest rates and inflation. When the central bank increases money supply, borrowing becomes cheaper, stimulating spending and investmentóbut it may also trigger inflation if demand outpaces supply. Conversely, reducing money supply can help control inflation but may slow down economic activity. Therefore, managing money supply is a balancing act for policymakers.

The RBI uses tools such as the Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), and Open Market Operations (OMO) to regulate liquidity in the financial system. For investors and traders, understanding how money supply affects market liquidity, credit availability, and inflation expectations can provide insights into future market trends and interest rate movements.

In essence, money supply serves as the backbone of monetary policy, shaping the pace of economic growth and financial stability within the country.