Question

Explain the principal components of money supply.

Hint:

A simple way to remember the components is to think about how you access your money. You have cash in your wallet (Currency), money in your checking/savings account (Demand Deposits), and maybe money in a fixed deposit (Time Deposits). These are the core components of money supply.

Answer 1

The money supply refers to the total stock of money in circulation in an economy at a particular point in time. In India, the RBI uses different measures of money supply, with M1 and M3 being the most common. The principal components are:


Currency with the Public (C): This includes currency notes and coins held by the public. It is the most liquid form of money.
Demand Deposits with the Banking System (DD): These are deposits in bank accounts (like current and savings accounts) that can be withdrawn on demand by writing a cheque or using a debit card. These are also highly liquid.
Other Deposits with the RBI (OD): This is a small component and includes deposits held by the RBI from quasi-governmental bodies, foreign central banks, and international financial institutions.
Net Time Deposits with the Banking System: These are deposits with a fixed maturity period, such as Fixed Deposits (FDs) and Recurring Deposits (RDs). These are less liquid than demand deposits.
These components are combined to form various measures of money supply:
M1 = Currency with the Public + Demand Deposits + Other Deposits with the RBI (This is also known as 'Narrow Money')
M3 = M1 + Net Time Deposits with the Banking System (This is known as 'Broad Money')