Money Market — Set 1

Correct Answer: D. One year

• **One year** = the Money Market deals exclusively in short-term financial instruments; any instrument with maturity up to 1 year qualifies as a money market instrument. • **Distinct from Capital Market** — Capital Market instruments (bonds, equities) have maturity beyond 1 year; Money Market instruments are used for short-term liquidity management, not long-term investment. • Key instruments include Treasury Bills (91/182/364 days), Commercial Paper (7 days–1 year), Certificate of Deposit (7 days–1 year for banks), and Call/Notice/Term Money. • 💡 Two years is wrong — exceeds the 1-year cap; One month is wrong — it is within the limit but NOT the maximum; Five years is wrong — that is a capital market maturity, far beyond the money market ceiling.

Correct Answer: C. Call Money

• **Call Money** = overnight (1 day) uncollateralised borrowing and lending between banks; also called overnight money; the interest rate charged is called the Call Rate, which is highly volatile. • **Participants** — only Scheduled Commercial Banks and Primary Dealers (PDs) can participate in the Call Money market; mutual funds, insurance companies are NOT permitted as direct lenders/borrowers. • Call Money helps banks maintain CRR (Cash Reserve Ratio) on a daily basis; if a bank is short of reserves at day-end, it borrows in the call money market. • 💡 Term Money is wrong — maturity is 15 days to 1 year, much longer than overnight; Notice Money is wrong — maturity is 2 to 14 days, not 1 day; Ready Forward (Repo) is wrong — it is a collateralised instrument where securities are pledged, not a pure overnight uncollateralised loan.

Correct Answer: B. 2 to 14 days

• **2 to 14 days** = Notice Money is short-term uncollateralised borrowing and lending between banks for a maturity period of 2 to 14 days; the borrower gives 'notice' before repaying. • **Same participants as Call Money** — only Scheduled Commercial Banks and Primary Dealers participate; the rate is negotiated bilaterally; slightly less volatile than overnight Call Rate. • Notice Money fills the gap between overnight Call Money (1 day) and Term Money (15 days–1 year), providing flexibility for short liquidity needs spanning a few working days. • 💡 Above 14 days is wrong — that is Term Money territory (15 days to 1 year); 15 to 30 days is wrong — same error, falls in Term Money range; 1 day is wrong — that is the definition of Call Money, not Notice Money.

Correct Answer: D. Central Government

• **Central Government** = Treasury Bills are short-term sovereign debt instruments issued by the Reserve Bank of India on behalf of the Government of India (Central Government) to meet its short-term cash/fiscal needs. • **Three standard maturities** — 91 days, 182 days, and 364 days; T-Bills are zero-coupon instruments issued at a discount to face value and redeemed at face value; the difference is the investor's return. • T-Bills carry zero default risk (sovereign guarantee); they are sold through weekly auctions conducted by RBI; Primary Dealers and Scheduled Commercial Banks are the primary buyers. • 💡 Public Sector Banks are wrong — they are buyers/investors in T-Bills, not issuers; Corporate Houses are wrong — they issue Commercial Paper, not T-Bills; State Governments are wrong — they issue State Development Loans (SDLs), which are long-term instruments, not T-Bills.

Correct Answer: B. Rs. 5 Lakhs

• **Rs. 5 Lakhs** = Certificate of Deposit (CD) is a negotiable, short-term money market instrument issued in dematerialised form; the minimum denomination is ₹5 lakh and further issuances are in multiples of ₹5 lakh. • **Issuers and maturity** — CDs are issued by Scheduled Commercial Banks (maturity: 7 days to 1 year) and select All-India Financial Institutions (maturity: 1 to 3 years); they are tradeable in the secondary market. • CDs differ from Fixed Deposits: CDs are negotiable (can be sold before maturity), issued in large minimum amounts, and used by corporates and institutional investors for short-term parking of surplus funds. • 💡 Rs. 25 Lakhs is wrong — no such RBI-mandated minimum for CDs; Rs. 1 Lakh is wrong — ₹1 lakh is the minimum for Commercial Paper issuance per investor (not CD); Rs. 10 Lakhs is wrong — not the correct RBI-specified minimum denomination for CDs.

Correct Answer: B. Promissory Note

• **Promissory Note** = Commercial Paper (CP) is an unsecured short-term promissory note issued by highly-rated corporates, primary dealers, and all-India financial institutions to raise short-term funds directly from the market. • **Introduced in 1990** — CP was introduced in India in January 1990 based on recommendations of the Vaghul Committee (1987); minimum maturity is 7 days, maximum is 1 year; issued in multiples of ₹5 lakh; requires minimum credit rating of A1+ (CRISIL) or equivalent. • Because CP is unsecured, only companies with strong credit ratings can issue it; it bypasses bank intermediation, allowing corporates to raise funds at rates often lower than bank lending rates. • 💡 Cheque is wrong — a cheque is a payment instrument drawn on a bank, not a money market instrument; Bill of Exchange is wrong — it is a commercial bill (trade bill) arising from actual trade transactions, used differently; Certificate is wrong — that term refers to Certificate of Deposit (CD), which is issued by banks, not corporates.

Correct Answer: A. 273 days

• **273 days** = India currently issues Treasury Bills for only three standard maturities: 91 days, 182 days, and 364 days; there is no 273-day T-Bill in the regular auction framework. • **Historical note** — India previously issued 14-day and 182-day T-Bills at different points; the 182-day T-Bill was discontinued then reintroduced; 273 days has never been a standard T-Bill tenor in India. • CMBs (Cash Management Bills) have maturities of less than 91 days and are issued on an ad-hoc basis for emergency government cash management; they are not standard T-Bills. • 💡 364 days is wrong as an answer — it IS a standard T-Bill maturity; 182 days is wrong as an answer — it IS a standard T-Bill maturity; 91 days is wrong as an answer — it IS a standard T-Bill maturity and the most commonly issued tenor.

Correct Answer: B. 7 days

• **7 days** = As per RBI guidelines, the minimum maturity period for Commercial Paper is 7 days from the date of issue; this allows very short-term corporate borrowing from the market. • **Maximum maturity is 1 year** — so CP spans a range of 7 days to 1 year; it must be issued in multiples of ₹5 lakh; the issuing company must have a minimum credit rating of A1+ or its equivalent from an approved credit rating agency. • CP is an unsecured instrument, meaning there is no collateral backing; investors rely entirely on the creditworthiness of the issuing corporate; if the issuer defaults, there is no security to recover from. • 💡 30 days is wrong — this is a common distractor; RBI sets the minimum at 7 days, not 30; 15 days is wrong — another distractor; the actual minimum is 7 days; 1 day is wrong — overnight CP is not permitted; 1-day maturity applies to Call Money (inter-bank market only).

Correct Answer: A. RBI

• **RBI (Reserve Bank of India)** = the RBI is the primary regulator and supervisor of India's money market; it regulates instruments like T-Bills, CP, CD, Call/Notice/Term Money, and Repos through its monetary policy and statutory frameworks. • **RBI's tools** — RBI uses the Liquidity Adjustment Facility (LAF — repo and reverse repo), Marginal Standing Facility (MSF), Standing Deposit Facility (SDF), and Open Market Operations (OMO) to manage liquidity in the money market. • The RBI's Monetary Policy Committee (MPC) sets the Repo Rate which anchors all money market rates; RBI also conducts T-Bill auctions weekly and oversees CCIL (the clearing corporation for money market trades). • 💡 Ministry of Finance is wrong — it controls fiscal policy and government borrowing but does not regulate the day-to-day money market; SEBI is wrong — SEBI regulates the capital market (equities, mutual funds, bonds on exchanges), not the money market; IRDAI is wrong — it regulates the insurance sector only.

Correct Answer: C. MSF

• **MSF (Marginal Standing Facility)** = an emergency overnight borrowing window created by RBI in May 2011 under which banks can borrow funds by pledging government securities from their Statutory Liquidity Ratio (SLR) portfolio — up to a specified limit above the normal SLR minimum. • **MSF Rate is higher than Repo Rate** — currently MSF Rate = Repo Rate + 25 basis points; this penal premium discourages routine use; banks use MSF only when they cannot meet overnight needs through the LAF repo window. • MSF forms the ceiling of the RBI's interest rate corridor: SDF Rate (floor) — Repo Rate (policy rate) — MSF Rate (ceiling); this corridor guides all short-term money market rates. • 💡 Reverse Repo is wrong — under reverse repo, banks LEND (park) surplus funds with RBI; it is the opposite direction; Bank Rate is wrong — it is used to calculate penal interest on CRR/SLR defaults, not an active overnight borrowing window; Repo Rate is wrong — Repo Rate is the interest rate, not the instrument/window; the instrument is the LAF Repo, not MSF.