Narrow Money (M1)

The narrow money concept classifies deposits that are extremely liquid or rapidly withdrawable as part of the money supply. Demand deposits, which may be withdrawn rapidly, or check facilities, for example, are accepted as money alongside currencies. This is called narrow money. At this point, the most liquid components of the money held by the public are:

• Currency Component: This is made up of all the coins and banknotes in circulation.
• Demand Deposit Component: The demand deposit component is the money held by banks by the general public, which may be withdrawn through check withdrawals and ATM withdrawals.

Narrow money (M1) refers to the above two components of public money, namely currency components, and demand deposit components, which together account for the nation’s money supply. Thus,

M1

• M1 = Currency in circulation + Banking System Demand + Other Deposits with the RBI

M2

• Post offices, like conventional banks, provide time-saving accounts, recurring deposits accounts, and time deposits accounts. Only post office savings (= ‘DEMAND deposits’ type) are counted here.
• M2 = M1+ Post office bank savings

The value of the currency depreciates as inflation rises. This is why the RBI keeps track of money supply by categorizing it as ‘reserve money,’ ‘narrow money,’ and ‘broad money’. Money is the most widely used means of exchange (money). Notes, coins, and bank account deposits are all examples of this money. These are also known as legal tender because no citizen in the country may refuse to accept them for transactions. As a result, the economy’s money supply balance is extremely crucial. When the money supply shrinks, prices in the economy begin to fall, which is known as deflation. However, as the amount of money printed increases and the money supply expands, inflation rises. Two elements are required in mind before falling into the money supply in India or anywhere in the world is:

• Currency held by the Public
• Demand deposits held by the Public

The money supply is a stock variable, much as money demands. Money supply refers to the total amount of money in circulation among the general population at any one moment. M1, M2, M3, and M4 are the four money supply measurements released by the RBI. The following are their definitions: