CDS (II) 2023 GK Q31: Which of the following are included in the definition of

Q: What is the answer to CDS (II) 2023 GK Q31?

C. Correct — C, 1, 2 and 3. Narrow money is the RBI's aggregate M1, and its definition has three components: currency with the public, demand deposits with the banking system, and 'other' deposits with the Reserve Bank of India. Statements 1, 2 and 3 name exactly those three. The item is decided by statement 4. Bankers' deposits with the RBI — the balances commercial banks keep with the central bank, including their cash reserve requirement — are not part of narrow money at all. They belong to Reserve Money, M0, which is currency in circulation plus bankers' deposits with the RBI plus other deposits with the RBI. Bank reserves are the raw material out of which banks create deposits; counting them alongside the deposits they support would count the same purchasing power twice, which is why every aggregate above M0 leaves them out. The third component, 'other' deposits with the RBI, is the small residual of balances held by parties that are neither banks nor the government — foreign central banks, certain financial institutions and international bodies — and it is the component candidates most often drop.

CDS (II) 2023 General Knowledge · Question 31 of 120

Question text verified against the official CDS question paper.

Which of the following are included in the definition of Narrow Money? 1. Currency with the public 2. Demand deposits 3. 'Other' deposits with Reserve Bank of India 4. Banker's deposits with Reserve Bank of India Select the correct answer using the code given below:

(a)1, 2 and 4
(b)1 and 2 only
(c)1, 2 and 3
(d)3 and 4 only

Answer

Why

Correct — C, 1, 2 and 3. Narrow money is the RBI's aggregate M1, and its definition has three components: currency with the public, demand deposits with the banking system, and 'other' deposits with the Reserve Bank of India. Statements 1, 2 and 3 name exactly those three. The item is decided by statement 4. Bankers' deposits with the RBI — the balances commercial banks keep with the central bank, including their cash reserve requirement — are not part of narrow money at all. They belong to Reserve Money, M0, which is currency in circulation plus bankers' deposits with the RBI plus other deposits with the RBI. Bank reserves are the raw material out of which banks create deposits; counting them alongside the deposits they support would count the same purchasing power twice, which is why every aggregate above M0 leaves them out. The third component, 'other' deposits with the RBI, is the small residual of balances held by parties that are neither banks nor the government — foreign central banks, certain financial institutions and international bodies — and it is the component candidates most often drop.

Why the others are wrong

(a)1, 2 and 4 — Keeps the two obvious components but swaps the right third one for the wrong one. Bankers' deposits with the RBI are bank reserves and sit in Reserve Money (M0); 'other' deposits with the RBI are what M1 actually carries.
(b)1 and 2 only — The most tempting answer, because currency plus demand deposits is how narrow money is loosely described in ordinary teaching. It is one component short — the RBI's own definition adds 'other' deposits with the Reserve Bank.
(d)3 and 4 only — Drops the two largest items in narrow money — the currency the public holds and the demand deposits it can draw on at sight — and keeps a component that does not belong to M1 at all.

Concept

The RBI publishes a ladder of monetary aggregates ordered by how liquid each is. Reserve Money, M0, is currency in circulation plus bankers' deposits with the RBI plus other deposits with the RBI — the high-powered money the central bank itself issues. Narrow money, M1, is currency with the public plus demand deposits with the banking system plus other deposits with the RBI. M2 adds post office savings bank savings deposits. Broad money, M3, is M1 plus time deposits with the banking system. M4 is M3 plus all post office savings bank deposits other than National Savings Certificates.

Solve it by asking what each item is a claim on and who holds it. Narrow money is meant to capture spending power that can be used immediately by the public, so it counts what the public holds — notes and coins in hand, and balances withdrawable on demand. Bankers' deposits with the RBI fail that test twice over: they are held by banks, not by the public, and they are already backing the demand deposits counted in statement 2. The genuine difficulty is statement 3, which looks obscure enough to be a trap and is in fact part of the definition. A safe way to fix the order in memory is that 'other' deposits with the RBI appear in both M0 and M1, while bankers' deposits appear only in M0. The definitions are the RBI's standing ones and have not changed since the 2023 exam.

Key facts

RBI: 'M1 = Currency with the public + Demand deposits with the banking system + Other deposits with the RBI.'
RBI: 'Reserve Money (M0) = Currency in circulation + Bankers' deposits with the RBI + Other deposits with the RBI.'
M2 = M1 + post office savings bank savings deposits; M3 = M1 + time deposits with the banking system; M4 = M3 + all post office savings bank deposits excluding National Savings Certificates.
'Other' deposits with the RBI are the small residual balances of parties other than banks and the government — foreign central banks, financial institutions and international bodies.
M1 and M0 both contain 'other' deposits with the RBI; only M0 contains bankers' deposits with the RBI.

Where each of the four items sits in the RBI's money-supply ladder

Currency with the public→In M1 — and therefore in M2, M3 and M4 as well

Demand deposits with the banking system→In M1 — withdrawable at sight, so it counts as narrow money

'Other' deposits with the RBI→In M1 — the small residual held by non-bank, non-government parties

Bankers' deposits with the RBI→In M0 only — these are bank reserves, not public spending power

Time deposits with the banking system→Not in M1 at all; adding them to M1 gives broad money, M3

Narrow money counts what the public can spend now; bankers' balances at the central bank are reserves, and sit one rung lower in M0.

Study next

The full aggregate ladder M0 to M4 and what each successive step addsThe money multiplier — how reserve money expands into broad money through bank lendingCash Reserve Ratio and Statutory Liquidity Ratio, and how each affects bank reservesLiquidity ranking of assets, from currency through demand and savings deposits to time depositsWhich aggregate the RBI actually watches for policy purposes, and why broad money is the headline series

Common traps

Reading 'bankers' deposits with the RBI' as ordinary bank deposits. They are reserves held by banks at the central bank, and belong to M0.
Stopping at currency plus demand deposits — a definition that is one component short of the RBI's M1.
Confusing 'other deposits with the RBI' with the government's deposits, which are excluded from the aggregates.

As a components-of-an-aggregate item: the stem names M1, M3 or reserve money and the statements mix in one component that belongs to a different rung.

Related PYQs

UPSC_1997_GS1_Q171997Open & attempt →

The sum of which of the following constitutes Broad Money in India? I. Currency with the Public II. Demand deposits with banks III. Time deposits with banks IV. Other deposits with RBI

(a) I and II
(b) I, II and III
(c) I, II, III and IV
(d) I, II and IV

Answer(c) I, II, III and IV

The closest match in the whole UPSC set. It lists 'Other deposits with RBI' as a separate item and expects the candidate to keep it in — the very component that decides the CDS question, since M3 carries it only because M1 already does.

UPSC_2002_GS1_Q1162002Open & attempt →

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

Tests the step from narrow to broad money. Time deposits are the item that separates M3 from M1, so a candidate who can answer this one and the CDS item together has both rungs of the ladder fixed.

CDS_GK_2022_II_Q512022

Which one of the following forms of money supply is considered as the most widely used in the Indian monetary system?

(a) M1
(b) M2
(c) M3
(d) M4

Answer(c) M3

CDS asked about the same ladder one session earlier, from the policy end — which aggregate the system actually watches. Knowing that M3 is M1 plus time deposits ties the two items together.

Practice

practice — not a real PYQ
Broad money (M3) in India is best described by which one of the following?
- (a)Currency with the public plus demand deposits with the banking system
- (b)M1 plus time deposits with the banking system
- (c)Currency in circulation plus bankers' deposits with the RBI
- (d)M1 plus all post office savings bank deposits
Answer(b) M1 plus time deposits with the banking system — that is the RBI's definition of broad money; option (c) describes reserve money and option (d) points towards M4.
practice — not a real PYQ
Bankers' deposits with the Reserve Bank of India form a part of which one of the following?
- (a)Narrow money (M1)
- (b)Reserve money (M0)
- (c)Broad money (M3) but not M1
- (d)None of the monetary aggregates
Answer(b) Reserve money (M0) — reserve money is currency in circulation plus bankers' deposits with the RBI plus other deposits with the RBI; bank reserves are excluded from M1 upwards.