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PYQ 1200 Q/A Part - 1
PYQ 1200 Q/A Part - 2
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PYQ 1200 Q/A Part - 5
Kerala PSC Indian Economy Book Study Materials Page 353
Book's First Pagean in in ndia 12.29 its report in June 1998. The Working Group money (which includes only the non-interest- recommended compilation of four monetary bearing monetary liabilities of the banking sector) aggregates on the basis of the balance sheet of the and broad money (an all-encompassing measure banking sector in conformity with the norms of that includes long-term time deposits). The new progressive liquidity: M0 (monetary base), M1 broad money aggregate (referred to as NM3 for the (narrow money), M2 and M3 (broad money). purpose of clarity) in the Monetary Survey would In addition to the monetary aggregates, the comprise, in addition to NM2, long-term deposits Working Group had recommended compilation of residents as well as call/term borrowings from of three liquidity aggregates namely, L1, L2 and L3, non-bank sources, which have emerged as an which include select items of financial liabilities important source of resource mobilisation for of non-depository financial corporations such banks. The critical difference between M3 and NM3 as development financial institutions and non- is the treatment of non-resident repatriable fixed banking financial companies accepting deposits foreign currency liabilities of the banking system from the public, apart from post office savings in the money supply compilation. banks. The New Monetary Aggregates are as There are two basic changes in the new given below: monetary aggregates. First, since the post office bank Reserve Money (M0) = Currency in is not a part of the banking sector, postal deposits circulation + Bankers’ Deposits with the are no longer treated as part of money supply, as RBI + ‘Other’51 deposits with the RBI. was the case in the extant M2 and M4. Second, Narrow Money (M1) = Currency with the residency criterion was adopted to a limited the Public + Demand Deposits with the extent for compilation of monetary aggregates. Banking System + ‘Other’ deposits with The Working Group made a recommendation the RBI. in favour of compilation of monetary aggregates M2 = M1 + Savings Deposits of Post-office on residency basis. Residency essentially relates Savings Banks. to the country in which the holder has a centre Broad Money (M3) = M1 + Time Deposits of economic interest. Holdings of currency with the Banking System. and deposits by the non-residents in the rest of the world sector, would be determined by their M4 = M3 + All deposits with Post Office portfolio choice. However, these transactions form Savings Banks (excluding National part of balance of payments (BoP). Such holdings Savings Certificates). of currency and deposits are not strictly related While the Working Group did not recommend to the domestic demand for monetary assets. It is any change in the definition of reserve money therefore argued that these transactions should be and M1, it proposed a new intermediate monetary regarded as external liabilities to be netted from aggregate to be referred to as NM2 comprising foreign currency assets of the banking system. currency and residents’ short-term bank deposits However, in the context of developing countries with contractual maturity up to and including such as India, which have a large number of one year, which would stand in between narrow expatriate workers who remit their savings in the 51. ‘Other’ deposits with RBI comprise mainly: (i) deposits form of deposits, it could be argued that these non- of quasi-government; other financial institutions residents have a centre of economic interest in their including primary dealers, (ii) balances in the accounts country of origin. Although in a macro-economic of foreign Central Banks and Governments, and (iii) accounts of international agencies such as the accounting framework all non-resident deposits International Monetary Fund. need to be separated from domestic deposits and