Money Market — Set 4

Correct Answer: C. 40%

• **40%** = Under the Banking Regulation Act, RBI has statutory power to set SLR anywhere from 0% to 40% of a bank's NDTL. • **Current SLR is ~18%** — well below the ceiling, giving RBI ample room to tighten if needed to drain liquidity. • SLR must be maintained in approved assets: cash, gold, or approved government securities (not just any asset). • 💡 **No limit** is wrong — the Act explicitly caps it at 40%; **25%** was the old maximum before the 2007 amendment; **15%** is not a statutory figure anywhere.

Correct Answer: A. High capital gain

• **High capital gain** = Money market instruments are held for liquidity and safety, not price appreciation — their short maturities leave almost no room for capital gains. • **Maturity ≤ 1 year** — instruments like T-Bills, CP, and CDs are redeemed at face value; any 'gain' is simply the discount earned, not a capital gain. • 💡 **Highly liquid**, **Short term**, and **Low risk** are textbook characteristics of the money market — all three are correct, so only 'High capital gain' is the odd one out.

Correct Answer: C. Time lag in clearing funds

• **Time lag in clearing funds** = Float is the period during which money appears simultaneously in the accounts of both the payer and the payee because a cheque or transfer has not yet fully cleared. • **Float creates temporary double-counting** — a bank can exploit this window; the RBI's RTGS and NEFT systems were designed to minimise float by speeding settlement. • 💡 **Interest rate fluctuation** is called rate volatility; **Market entry fee** is a cost concept; **Exchange rate change** refers to forex risk — none of these are 'float'.

Correct Answer: D. Commercial Paper

• **Commercial Paper (CP)** = CP is an unsecured promissory note issued by highly-rated corporates to meet short-term or seasonal working capital needs without going to a bank. • **Maturity: 7 days to 1 year** — a sugar mill, for instance, can issue CP before the cane-crushing season and repay after revenues come in. • 💡 **Equity Shares** are long-term capital, not short-term liquidity tools; **Certificates of Deposit** are issued by banks to raise funds, not by corporates; **Treasury Bills** are government instruments used to fund fiscal shortfalls, not seasonal corporate needs.

Correct Answer: C. Net

• **Net** = NDTL = Net Demand and Time Liabilities; 'Net' means inter-bank deposits placed with other banks are subtracted to avoid double-counting. • **CRR and SLR are calculated as a % of NDTL** — so the exact definition of 'Net' directly determines how much reserve a bank must hold. • 💡 **Nominal** would imply face-value totals ignoring inter-bank netting; **New** and **National** have no meaning in this banking regulation context.

Correct Answer: C. Liquidity increases

• **Liquidity increases** = CRR is the share of deposits banks must park as cash with RBI earning zero interest; reducing it frees up that cash for lending. • **Multiplier effect** — every rupee released through CRR cut expands through the credit multiplier, so the actual rise in money supply is larger than the raw cut suggests. • 💡 **Liquidity decreases** is what happens when CRR is raised, not lowered; **Liquidity remains same** ignores the direct release of reserves; **None of these** is simply incorrect.

Correct Answer: A. Borrowing without collateral

• **Borrowing without collateral** = In the call money market, a 'Clean Call' is an overnight/short-term interbank loan extended purely on the borrowing bank's creditworthiness, with no security pledged. • **Contrast with 'Collateralised Call'** — where government securities back the transaction; most call money in India is clean (unsecured) between scheduled commercial banks. • 💡 **Borrowing with gold** and **Borrowing with bonds** both involve collateral — the opposite of 'clean'; **Legal way to borrow** is meaningless as all regulated borrowings are legal.

Correct Answer: C. Call Money Market

• **Call Money Market** = Overnight call rates respond within hours to any RBI LAF operation (repo/reverse repo), making it the fastest transmission channel of monetary policy. • **MIBOR (overnight)** is published daily and is the benchmark for call money; any repo rate change is almost immediately reflected in MIBOR. • 💡 **Commercial Paper** rates adjust over days/weeks as corporates reprice new issuances; **Commercial Bills** are tied to trade cycles; **T-Bills** are anchored to auction yields, which respond more slowly than overnight call rates.

Correct Answer: C. Margin on collateral value

• **Margin on collateral value** = A haircut is the percentage by which the collateral's market value is reduced to determine the loan amount; e.g., a 5% haircut on ₹100 bond means only ₹95 is lent. • **Purpose: credit risk buffer** — if the borrower defaults and the bond price falls, the lender is still protected because the collateral was over-valued relative to the loan. • 💡 **Staff fee** and **Service charge** are operational costs unrelated to collateral; **Interest deduction** describes how discount instruments are priced, not how repo collateral is valued.

Correct Answer: A. Mutual Funds

• **Mutual Funds** = Money Market Mutual Funds (MMMFs) are regulated by SEBI and invest only in standardised instruments like T-Bills, CPs, and CDs — squarely in the organised sector. • **RBI regulates the organised money market** (banks, PDs, MMMFs); SEBI oversees MMMFs on the investment side. • 💡 **Chit Funds** are largely state-regulated informal pools; **Money Lenders** and **Indigenous Bankers (Hundiwallas/Sahukars)** operate in the unorganised sector — unregulated, informal, and outside RBI's direct purview.