Consider the following liquid assets: 1. Demand deposits with the banks 2. Time deposits with the banks 3. Savings deposits with the banks 4. Currency The correct sequence of these assets in the decreasing order of liquidity is
Contents11
- A1–4–3–2
- B4–3–2–1
- C2–3–1–4
- D4–1–3–2
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Answer: (D) 4–1–3–2
Liquidity means how quickly and easily an asset can be converted into cash for spending.
Currency (4) is the most liquid — it IS cash, ready to use instantly.
Demand deposits (1) come next — these are current account deposits that can be withdrawn on demand (by cheque/debit card) without any waiting period.
Savings deposits (3) are next — they can be withdrawn but may have some restrictions (like limits on number of withdrawals).
Time deposits/Fixed deposits (2) are the least liquid — your money is locked in for a fixed period, and early withdrawal usually involves penalties and delays.
So the correct decreasing order is: 4 → 1 → 3 → 2.
Liquidity determines how quickly an asset can be converted to cash for immediate use, making currency the most liquid and fixed deposits the least liquid among bank deposits.
Understanding liquidity order is essential for grasping money supply measures like M1, M2, M3 where assets are grouped by their liquidity levels.
Concept of Liquidity
Indian Economy liquid assets liquidity
Liquidity: Meaning & Ranking for UPSC
Liquidity = speed and ease of converting an asset to cash without loss
More liquid = less time + less cost + less restrictions to access cash
Liquidity ranking: Currency > Demand Deposits > Savings > Time Deposits
What is Liquidity?
Liquidity measures how quickly you can convert an asset into spendable cash. The key factors are:
• Time - How long does conversion take?
• Cost - Are there penalties or charges?
• Restrictions - Can you access it anytime?
Liquidity Ranking of Assets
Asset | Liquidity Rank | Access Time | Restrictions | Why This Rank |
|---|---|---|---|---|
Currency | 1 (Highest) | Instant | None | Already cash - ready to spend |
Demand Deposits | 2 | Instant | None | Withdraw anytime by cheque/debit card |
Savings Deposits | 3 | Same day | Minor | Some withdrawal limits per month |
Time Deposits | 4 (Lowest) | Maturity date | Major | Locked-in period, penalties for early exit |
Trap: Students often rank savings above demand deposits - but demand deposits have zero restrictions
Trap: Don't confuse time deposits with savings - time deposits are fixed deposits with lock-in periods
Memory aid: C-D-S-T = Currency, Demand, Savings, Time (decreasing liquidity order)
Types of Bank Deposits
Indian Economy demand deposits time deposits savings deposits
Bank Deposits: Demand, Savings & Time Deposits
Demand deposits = current accounts with unlimited withdrawal access
Savings deposits = earn interest but have monthly transaction limits
Time deposits = fixed deposits locked for specific periods
All three are part of money supply but differ in liquidity
Comparison of Bank Deposits
Deposit Type | Other Name | Interest Rate | Withdrawal Rules | Main Users |
|---|---|---|---|---|
Demand Deposits | Current Account | Very low/nil | Unlimited anytime | Businesses, frequent transactions |
Savings Deposits | Savings Account | Moderate | Limited transactions per month | Individuals, salary accounts |
Time Deposits | Fixed Deposits (FD) | Highest | Locked till maturity | Investors seeking guaranteed returns |
Key Features by Type
Demand deposits: Used for business transactions, cheque facility, overdraft options available
Savings deposits: Minimum balance requirements, passbook/statement provided, ATM access
Time deposits: Choose tenure (7 days to 10 years), penalty for premature withdrawal, highest safety
Connection to Question
This PYQ tests the liquidity hierarchy among these deposits. Currency remains most liquid, followed by demand (instant access), then savings (minor limits), and finally time deposits (locked funds).
Money Supply Components
Indian Economy currency
Money Supply: M1, M2, M3 & Components
M1 (narrow money) = Currency + Demand deposits + Other deposits with RBI
M3 (broad money) = M1 + Time deposits with banks
All assets in this question are part of India's money supply
What is Money Supply?
Money supply is the total stock of money in circulation in an economy. RBI measures it through monetary aggregates - different combinations of liquid assets that people use for transactions and store value.
RBI's Money Supply Measures
Measure | Components | Focus | Liquidity Level |
|---|---|---|---|
M1 | Currency + Demand deposits + Other deposits with RBI | Transaction money | Highest |
M2 | M1 + Savings deposits with Post Office | M1 + postal savings | High |
M3 | M1 + Time deposits with banks | Broad money | Medium |
M4 | M3 + Total deposits with Post Office | Broadest measure | Lower |
Why This Classification Matters
Policy tool: RBI monitors M1 for immediate spending power, M3 for overall liquidity
Economic indicator: M3 growth shows credit expansion and inflation pressure
Exam relevance: UPSC tests which assets belong to which monetary aggregate
Trap: M2 includes Post Office savings, not bank savings deposits
Trap: Time deposits are in M3 (broad money), not M1 (narrow money)
Remember: Higher M-number = broader definition = includes less liquid assets