Correct Option
Broad Money (M3) is a comprehensive measure of the money supply in an economy. As defined by the Reserve Bank of India (RBI), M3 includes the following components:
- Currency with the public: This comprises physical cash (notes and coins) held by individuals and businesses outside the banking system.
- Demand deposits with banks: These are funds held in current and savings accounts that are withdrawable on demand.
- Time deposits with banks: These include fixed deposits, recurring deposits, and other term deposits held by the public with commercial banks. While less liquid than demand deposits, their significant volume makes them a crucial part of broader money supply analysis.
Therefore, all three components listed are included in Broad Money (M3). M3 can also be expressed as M1 (Currency with the public + Demand deposits with banks + Other deposits with RBI) plus Net Time deposits of residents.
Incorrect Options
- Option (a) 1 & 2: This combination primarily represents Narrow Money (M1), which includes currency with the public and demand deposits with banks, along with 'Other deposits with RBI'. It excludes time deposits, which are a significant component of M3.
- Option (b) 1 & 3: This option omits demand deposits with banks. Demand deposits are a fundamental and highly liquid component of both Narrow Money (M1) and Broad Money (M3), essential for transactional purposes.
- Option (c) 2 & 3: This option excludes currency with the public. Currency with the public is the most liquid form of money and a core component of all major money supply aggregates, including M1 and M3.