Which of the following is not a component of Indian money supply?

The correct answer is Foreign exchange reserves.

Key Points

• Foreign exchange reserves are not considered a component of the money supply as they are held by the central bank and are not directly used in the economy.
• The primary components of the Indian money supply include currency in circulation, demand deposits, and fixed deposits.
• Currency in circulation refers to the physical money used by the public for transactions.
• Demand deposits are funds held in bank accounts that can be withdrawn on demand without prior notice.
• Fixed deposits are savings accounts that offer a fixed interest rate for a specified term.

Additional Information

• Money Supply (M1, M2, M3, M4)
  • M1: Includes currency in circulation, demand deposits at commercial banks, and other liquid assets.
  • M2: M1 plus savings deposits, money market mutual funds, and other near money.
  • M3: M2 plus large time deposits, institutional money market funds, and other larger liquid assets.
  • M4: M3 plus all other deposits with post office savings banks (excluding National Savings Certificates).
• Foreign Exchange Reserves
  • These are assets held by a central bank in foreign currencies, used to back liabilities and influence monetary policy.
  • They include foreign currencies, gold reserves, Special Drawing Rights (SDRs), and International Monetary Fund (IMF) reserve positions.
  • India's foreign exchange reserves are managed by the Reserve Bank of India (RBI).
  • They serve as a buffer to ensure the country's financial stability and economic security.
• Role of Reserve Bank of India (RBI)
  • The RBI is the central bank of India, responsible for regulating the issue and supply of the Indian rupee.
  • It manages the country's main payment systems and works to promote economic development.
  • The RBI also manages the country's foreign exchange and gold reserves.
  • It plays a crucial role in the control and monitoring of inflation through monetary policy.
• Importance of Money Supply
  • Money supply is a critical factor in economic policy and influences inflation, interest rates, and economic growth.
  • Proper management of money supply ensures liquidity in the economy and supports stable economic growth.
  • Excess money supply can lead to inflation, while insufficient money supply can lead to deflation and economic stagnation.
  • Central banks, like the RBI, use tools such as open market operations and reserve requirements to control the money supply.