Money Market — Set 3

Correct Answer: C. Liquidity Adjustment Facility

Liquidity Adjustment Facility (LAF) allows banks to borrow or park funds through repo and reverse repo auctions. It is the primary mechanism for managing day-to-day liquidity in the banking system. By adjusting these rates, the RBI signals the direction of interest rates.

Correct Answer: C. Trade Bills

Commercial bills are negotiable instruments that arise out of genuine trade transactions. When a seller draws a bill on the buyer and the buyer accepts it, it becomes a trade bill. These bills can be discounted with banks to get immediate funds.

Correct Answer: A. Rs. 5 Lakhs

Commercial Paper is issued in denominations of Rs. 5 lakhs or multiples thereof. This high value ensures that only institutional and high-net-worth investors participate. It is a preferred tool for short-term funding for corporates with a high credit rating.

Correct Answer: C. Managing foreign flows

MSS was introduced to absorb excess liquidity created by large capital inflows from abroad. Under this scheme, the RBI issues T-bills and dated securities on behalf of the government. The money collected is kept in a separate account and not used for government expenditure.

Correct Answer: B. Rate at which RBI lends to banks

Repo rate is the interest rate at which the RBI lends short-term funds to commercial banks against securities. It is the most important signaling rate in the Indian economy. When the repo rate increases, borrowing for banks and subsequently for the public becomes more expensive.

Correct Answer: A. Difference between borrowing and lending rates

The spread refers to the difference between the rate at which an institution borrows and the rate at which it lends. It represents the profit margin and the cost of operation for financial intermediaries. A narrower spread usually indicates a more efficient and competitive market.

Correct Answer: A. Primary Dealers

The call money market is primarily an inter-bank market where scheduled commercial banks and primary dealers participate. Individual retail investors are generally not permitted to participate directly in this market. It is used to manage mandatory reserve requirements like CRR and SLR.

Correct Answer: A. Treasury

The 'T' in T-Bills stands for Treasury, signifying they are issued by the government's treasury. They are highly liquid and carry the lowest risk among money market instruments. They are sold at a discount and redeemed at face value.

Correct Answer: C. CCIL

The Clearing Corporation of India Limited (CCIL) provides the clearing and settlement infrastructure for government securities and money market trades. It reduces risk by acting as a central counterparty. CCIL ensures the smooth functioning of the secondary market for these instruments.

Correct Answer: C. Loan for more than 14 days

Term money refers to funds borrowed or lent for a period exceeding 14 days but up to one year. It is used for slightly longer-term liquidity management compared to call or notice money. The interest rates in this segment are usually higher than overnight rates.