Narrow Money and Broad Money | JAIIB CAIIB Bank & BANK Promotions 2023
Narrow Money & Broad Money are important topics from the applicable CAIIB & JAIIB MAY/JUNE 2023 Syllabus & other IIBF Banking exams in which finance plays a role. In this article, we will put some insight into the topic of Money & then move forward with how you can clear your CAIIB’s & JAIIBs’ upcoming MAY / JUNE 2023 Attempts. Both of them being flagship courses of IIBF, JAIIB & CAIIB candidates need the right material & right strategy to pass their respective MAY / JUNE 2023 Exams!
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What are Narrow Money and Broad Money?
Well, before we try to make you understand what is Narrow Money & Broad Money, we would like for you to understand the meaning of money.
Money serves as a medium of exchange. A medium of exchange of goods in the past besides barter trade was gold or silver. In spite of these, money remains the primary tool for exchanging goods and services.
Most people see money as just that: money. Money, however, is defined differently in different regions. There are, however, different measures of broad and narrow money in different countries.
However, let’s explore the differences between the two.
Narrow Money (M1)
At any point in time, the money held with the public has two most liquid components
- Currency Component: This consists of all the coins and notes in the circulation
- Demand Deposit Component: The demand Deposit component is the money of the general public with the banks, which can be withdrawn by them using cheques, withdrawals and ATMs.
The above two components i.e. currency component and demand deposit component of the public money is called Narrow Money and is denoted by the RBI as M1. Thus,
M1 = Currency with the public + Demand Deposits of public in Banks
When a third component viz. Post office Savings Deposits is also added to M1, it becomes M2.
M2 = M1 + Post Office Savings.
Narrow money is the most liquid part of the money supply because the demand deposits can be withdrawn anytime during banking hours.
Time deposits on the other hand have a fixed maturity period and hence cannot be withdrawn before the expiry of this period. When we add the time despots into the narrow money, we get the broad money, which is denoted by M3.
M3 = Narrow money + Time Deposits of the public with banks
We note here that Broad money does not include interbank deposits such as deposits of banks with RBI or other banks.
At the same time, time deposits of the public with all banks including the cooperative banks are included in the Broad Money.
Now, we understand that the major distinction between the M1 and M3 is the “Treatment of deposits with the banks”. If we go a little deep, the M3 is the treatment of “Time Deposits” of the public, since demand deposits are available against cheques and ATMs.
When you add the Post Office Savings money also into the M3, it becomes M4.
Both M2 and M4 which include: the Post office Savings with narrow money and broad money respectively are nowadays irrelevant.
Post Office savings was once a prominent figure when the banks had not expanded in India as we see them today all around. The RBI releases data at times regarding the money supply in India and Post Office Savings Deposits have not been updated frequently.
There is NOT much change in the money of people deposited with the Post office and RBI did not care to update this money.
Further, there was a time when the Reserve Bank used broad money (M3) as the policy target. However, with the weakened relationship between money, output, and prices, it replaced M3 as a policy target with a multiple indicators approach. RBI started using the Multiple Indicator Approach since 1998
Currently, Narrow Money (M1) and Broad Money (M3) are relevant indicators of the money supply in India. The RBI in all its policy documents, monthly Bulletins, and other documents shows these aggregates.
Difference between Narrow Money and Broad Money
|Narrow Money||Broad Money|
|Cash held by the general public, demand deposits at commercial banks,
and savings accounts at post offices make up this category.
|Cash deposited in the public bank, net time deposits at commercial banks,
and total savings at post offices are included in Broad Money.
|Transactions are readily available and they are highly liquid.||There is a lower level of liquidity in the Broad money.|
|Symbolically, M1 and M2 represent narrow money.||Symbolically, M3 and M4 represent broad money.|
In order to control macroeconomic parameters such as inflation, consumption, growth, and liquidity over the medium and long term, the Reserve Bank of India uses the broad money measure to assess the money supply in the economy.
PASS JAIIB & CAIIB MAY / JUNE 2023 | LATEST STUDY MATERIAL 2023
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