Banking Sector: Money & Banking- 1 - UPSC MCQ

The Government of India issues metallic coins in India. Coins, paper currency and deposits are the components of money supply in India.

Currency notes are issued by RBI. The Government of India issues metallic coins in India.

Money supply, like money demand, is a stock variable. Hence, statement 1 is incorrect.

• The total stock of money in circulation among the public at a particular point of time is called money supply. RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3, and M4. 
• The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of the money supply. Hence, statement 2 is correct.
• M1 and M2 are known as narrow money. M3 and M4 are known as broad money. Hence, statement 3 is incorrect.
  • These gradations are in decreasing order of liquidity. M1 is the most liquid and easiest for transactions whereas M4 is the least liquid of all. M3 is the most commonly used measure of the money supply. 

Additional Information

• The measures of money supply in India are classified into four categories M1, M2, M3, and M4 along with M0.
• This classification was introduced in April 1977 by the Reserve Bank of India.
• Reserve Money (M0): It is also known as High-Powered Money, monetary base, base money etc.
  • M0 = Currency in Circulation + Bankers’ Deposits with RBI + Other deposits with RBI.
• It is the monetary base of the economy.
  • Narrow Money (M1):
    • M1 = Currency with public + Demand deposits with the Banking system (current account, saving account) + Other deposits with RBI
    • M2 = M1 + Savings deposits of post office savings banks
    • Broad Money (M3)
    • M3 = M1 + Time deposits with the banking system
    • M4 = M3 + All deposits with post office savings banks 

These are the measures of money supply adopted by RBI in 1977.

M1 is most liquid and easiest for transactions whereas M4 is least liquid of all. M3 is the most commonly used measure of money supply.

M3 is known as broad money as more items are included in this measure when compared to M1 which is known as narrow money.

M4= M3+ all deposits with post office savings banks excluding National Savings Certificate.

Data on Mo are published by the RBI on weekly basis and Data on M1 and M3 are available on fortnightly basis.

Data on liquidity aggregates L1 and L2 are published on a monthly basis.

Vijaya Bank was nationalized in 1980 with 5 other banks. In 1969, 14 banks were nationalized.

The other 3 banks are Punjab and Sind Bank, New bank of India and Oriental Bank of Commerce.

Post nationalization, banks were supposed to open more branches in rural and semi-urban areas in order to collect savings from these areas.

Under this scheme, SBI and its subsidiaries, 14 nationalised banks as well as 3 private banks were given the responsibility of development of districts.

The SBI and its subsidiaries, 14 nationalised banks as well as 3 private banks were given the responsibility of development of districts.

SBI has 5 subsidiaries now. The other 2 are State Bank of Bikaner and Jaipur and State Bank of Travancore.

The paid up capital should be increased to 300 crore rupees in 3 years of operation.

New banks are supposed to keep minimum 10% of CAR from the beginning.

In 2001, RBI issued a set of guidelines for private sector. Accordingly only 2 banks were given licence then- YES Bank and Kotak Mahindra Bank.

Inflation refers to rise in the general price level in the economy. Various demand and supply side factors cause inflation.

As a result of inflation, some sections like producers or big landlords gain due to the ownership of assets, income inequality increases.