Near Money

Near money, also known as quasi-money, refers to financial assets that are not actual money but can be quickly converted into cash or demand deposits with little or no loss of value. These assets do not serve as a direct medium of exchange but possess high liquidity, making them close substitutes for money. Near money plays an essential role in the broader concept of money supply and in ensuring liquidity within the financial system.

Meaning and Nature

Near money consists of instruments that can be readily transformed into cash or bank deposits. While they are not accepted as a medium of payment, they provide the holder with the ability to obtain cash almost instantly when required. These assets yield some interest or return, unlike currency, which typically does not.
The essential characteristics of near money include:

• High Liquidity: They can be easily converted into cash without significant delay or loss.
• Earning Asset: They generally yield interest or dividends.
• Not Legal Tender: They cannot be used directly for transactions.
• Short-Term Nature: Many near-money assets have short maturities.

Thus, near money bridges the gap between money (perfect liquidity) and other financial assets (less liquidity).

Examples of Near Money

Several financial instruments are classified as near money because of their liquidity and convertibility. The main examples include:

1. Time Deposits and Fixed Deposits: These are bank deposits that can be converted into cash upon maturity or by premature withdrawal, subject to nominal penalties.
2. Savings Deposits: Although not instantly spendable like current accounts, they can be withdrawn on demand.
3. Treasury Bills: Short-term government securities that can be sold or redeemed easily in the money market.
4. Commercial Papers: Unsecured, short-term promissory notes issued by corporations, which can be readily traded.
5. Bills of Exchange and Promissory Notes: Negotiable instruments that can be discounted with financial institutions for immediate liquidity.
6. Government and Corporate Bonds: Marketable securities that can be sold in secondary markets to obtain cash.
7. Units of Money Market Mutual Funds (MMMFs): Provide high liquidity and short-term investment opportunities for individuals and institutions.

These assets are held both by individuals and institutions as part of their liquid portfolio to manage short-term financial needs.

Relationship between Money and Near Money

Money, in its strict sense, refers to assets that perform three main functions: medium of exchange, unit of account, and store of value. Near money, however, primarily serves the store of value and liquidity functions but not the medium of exchange function.
Economists often include near money in the broader definitions of money supply. For example, in India:

• M1 (Narrow Money): Includes currency with the public and demand deposits.
• M2 and M3 (Broad Money): Include time deposits and other near-money assets, reflecting the availability of funds that can quickly be converted into cash.

Thus, near money enhances the liquidity position of the economy and strengthens the link between money supply and credit creation.

Importance of Near Money

Near money serves several vital functions in the financial system:

• Enhances Liquidity: Provides individuals and institutions with quick access to cash for transactions or emergencies.
• Supports Monetary Policy: Influences the overall liquidity and credit conditions in the economy, thereby affecting interest rates and investment.
• Stabilises Financial System: Reduces the need for hoarding cash by offering liquid alternatives.
• Facilitates Savings and Investment: Encourages savings in interest-bearing instruments that can be easily liquidated.
• Promotes Efficient Resource Allocation: Enables funds to flow smoothly between sectors through short-term instruments.

Near Money in the Indian Context

In India, the concept of near money is reflected in the broader measures of money supply as defined by the Reserve Bank of India (RBI):

• M1 (Narrow Money): Currency with the public + demand deposits + other deposits with the RBI.
• M2: M1 + savings deposits with post office savings banks.
• M3 (Broad Money): M1 + time deposits with banks.
• M4: M3 + total deposits with post office savings organisations (excluding National Savings Certificates).

Here, time deposits, savings accounts, and similar instruments represent near money, as they are easily convertible to cash and influence overall liquidity in the financial system.

Distinction between Money and Near Money

This distinction highlights that near money complements actual money by expanding the financial system’s liquidity base.

Role in Monetary Policy and Financial Stability

Near money plays a significant role in the transmission of monetary policy. When the central bank changes interest rates or reserve ratios, it affects the attractiveness and liquidity of near-money assets. For instance, an increase in interest rates may make time deposits more attractive, thereby reducing the circulation of currency and moderating inflation.
Additionally, near money helps maintain financial stability by providing institutions with a cushion of liquid assets to meet sudden cash demands. It also reduces the volatility of money demand by offering flexible alternatives for savings and investment.

Limitations

Despite its benefits, near money has certain limitations:

• Not a Medium of Exchange: Cannot be used directly for transactions.
• Dependent on Market Conditions: Liquidity can decline during financial crises or market disruptions.
• Interest Rate Sensitivity: Returns on near-money assets fluctuate with changes in monetary policy.
• Inflation Impact: Excess liquidity in near-money forms can contribute to inflationary pressures.