UPSC Prelims 2002 Q116: Indian Economy – Monetary Policy & Money Supply
Consider the following:
1. Currency with the public
2. Demand deposits with banks
3. Time deposits with banks
Which of these are included in Broad Money (M3) in India?
- (a) 1 and 2
- (b) 1 and 3
- (c) 2 and 3
- (d) 1, 2 and 3
Answer: (d) 1, 2 and 3
Explanation
Components of Broad Money (M3) in India
| Component | In M3? |
|---|---|
| Currency with the public | Yes |
| Demand deposits with banks | Yes |
| Time deposits with banks | Yes |
| Other deposits with the RBI | Yes, a small item |
Broad Money (M3) = currency with the public + demand deposits with banks + time deposits with banks + other deposits with the RBI. Narrow money M1 omits time deposits, so all three listed items are part of M3.
Answer: (d) 1, 2 and 3.
Why each option is right or wrong
- (a) Incorrect. It leaves out time deposits, which M3 includes.
- (b) Incorrect. It leaves out demand deposits, which M3 includes.
- (c) Incorrect. It leaves out currency with the public, which M3 includes.
- (d) CORRECT. All three are included in M3.
Key point
M1 = currency + demand deposits + other RBI deposits; M3 = M1 + time deposits with banks.
Remember
M3 = M1 + time deposits with banks.
Common mistakes
- Excluding time deposits, which belong in M3 but not M1.
- Confusing M3 with the narrower aggregate M1, which has no time deposits.
- Counting reserves of the RBI as money.
Exam tip
M3 is the widest of the listed aggregates, so it contains all three.
Sources
- RBI — Money supply aggregates
- Ramesh Singh — Indian Economy