The Reserve Bank of India defines narrow money as

[amp_mcq option1=”CU (currency notes + coins) + DD (net demand deposits held by commercial banks)” option2=”CU + DD + saving deposits with post office savings banks” option3=”CU + DD + net time deposits of commercial banks” option4=”CU + DD + net time deposits of commercial banks + total deposits of post offices” correct=”option1″]

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UPSC CAPF – 2018

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The correct answer is A) CU (currency notes + coins) + DD (net demand deposits held by commercial banks).

As per the Reserve Bank of India’s classification (both historical and current definition of M1, with slight variations in scope of ‘Other Deposits’), narrow money (M1) primarily consists of currency with the public and demand deposits with the banking system. Option A accurately reflects these main components: CU (Currency with Public) and DD (Demand Deposits with commercial banks). “Net” demand deposits exclude inter-bank deposits which is appropriate.

RBI uses four measures of money supply: M1, M2, M3, and M4.
M1 = Currency with the Public + Demand deposits with the Banking System + ‘Other’ Deposits with RBI.
M2 = M1 + Savings deposits of post office savings banks.
M3 = M1 + Net time deposits of commercial banks. (This is Broad Money)
M4 = M3 + All deposits with post office savings banks (excluding National Savings Certificates).
Option A aligns with the core components of M1.

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