Money Market — Set 5

Correct Answer: A. Indigenous Bill of Exchange

• **Indigenous Bill of Exchange** = A Hundi is a traditional Indian financial instrument functioning like a bill of exchange — a written promise or order to pay, used extensively in pre-modern trade. • **Written in vernacular languages** (not English), governed by custom rather than the Negotiable Instruments Act; used by indigenous bankers in internal trade credit. • 💡 **Equity Share** is an ownership instrument; **Government Bond** is a long-term debt instrument of the organised sector; **Modern Bill** is not a defined financial term — Bills of Exchange are already governed by the NI Act.

Correct Answer: C. Liquidity and safety of principal

• **Liquidity and safety of principal** = MMMFs invest exclusively in high-quality, short-maturity instruments (T-Bills, CPs, CDs) to ensure near-instant redemption and capital preservation. • **Yield is a bonus, not the goal** — returns are modest (slightly above savings account rates); the fund's NAV is designed to stay stable at ₹1 per unit. • 💡 **Long-term investment** and **Wealth creation** require equity or long-term bonds, not overnight/short-term debt; **Capital appreciation** is a stock market objective — money market prices barely move.

Correct Answer: D. Inverse relation

• **Inverse relation** = A higher repo rate raises the cost of borrowing from RBI, so banks lend less, reducing money supply and tightening liquidity in the market. • **Mechanism** — when repo rises, call money rates and lending rates follow; credit growth slows, pulling liquidity out of the system. • 💡 **Direct relation** would mean liquidity rises when repo rises — the opposite of reality; **Fixed relation** implies no responsiveness; **No relation** contradicts the core transmission mechanism of monetary policy.

Correct Answer: A. Individual with low income

• **Individual with low income** = CP is a wholesale market instrument — the minimum investment is ₹5 lakh, automatically excluding low-income individuals from participation. • **Eligible issuers** are highly-rated corporates (minimum A2+ rating), All-India Financial Institutions, and Primary Dealers; retail investors are not issuers. • 💡 **Companies**, **Financial Institutions**, and **Primary Dealers** are all explicitly listed as eligible issuers or investors in RBI's CP guidelines — none of them are excluded.

Correct Answer: C. Unconditional written order

• **Unconditional written order** = A Bill of Exchange is defined under the Negotiable Instruments Act as a written instrument containing an unconditional order, signed by the maker, directing a certain person to pay a fixed sum to a specified person or bearer. • **Three parties involved** — Drawer (seller/creditor), Drawee (buyer/debtor), Payee (who receives payment); when a bank accepts it, it becomes a 'bank-accepted bill'. • 💡 **A type of share** is equity, not a debt instrument; **Cash receipt** merely acknowledges payment already made; **Oral promise** is legally unenforceable under the NI Act — the bill must be written.

Correct Answer: A. Triparty

• **Triparty** = TREPS = Triparty Repo; CCIL (Clearing Corporation of India Ltd) acts as the central third party between borrower and lender, managing collateral selection, valuation, and settlement. • **TREPS replaced CBLO in 2019** — it functions similarly (overnight collateralised borrowing) but with CCIL as the guarantor, reducing counterparty risk significantly. • 💡 **Term** would imply it's for fixed-term deals only; **Treasury** would mean only T-Bills are involved; **Trade** is far too generic — none of these match the actual triparty structure.

Correct Answer: A. T+0 or T+1

• **T+0 or T+1** = Call money and repo settle on T+0 (same day); G-Sec trades moved to T+1 settlement in January 2023 as part of SEBI's reform. • **Speed is essential** — banks use overnight instruments to manage daily CRR/SLR compliance; even a one-day delay in settlement would break their liquidity management. • 💡 **T+5, T+2, T+3** are longer settlement cycles used in equity markets — completely unsuitable for overnight money market instruments that mature within hours or days.

Correct Answer: A. Annual rate of return

• **Annual rate of return** = Yield is the actual annualised return an investor earns on a money market instrument, calculated as the discount or interest expressed as a percentage of the investment. • **Yield moves inversely to price** — for discount instruments like T-Bills, if price rises (more demand), yield falls; this inverse relationship is fundamental to fixed-income analysis. • 💡 **Transaction cost** is brokerage or spread, not return; **Face value** is the maturity amount printed on the instrument; **Total volume** describes market size — none are yield.

Correct Answer: C. Reverse Repo

• **Reverse Repo** = Under Reverse Repo, RBI borrows funds from banks overnight, paying them the Reverse Repo rate (currently repo – 25 bps = floor of LAF corridor). • **Note: SDF has largely replaced Reverse Repo as the de facto floor since April 2022** — under SDF, banks park funds without any collateral, whereas Reverse Repo involves G-Sec as collateral. • 💡 **OMO** (Open Market Operations) involves buying/selling G-Secs in the secondary market — a different liquidity tool; **Bank Rate** is charged on loans to banks, not deposits; **MSF** (Marginal Standing Facility) is for banks to borrow from RBI, not park funds.

Correct Answer: C. Less than 91 days

• **Less than 91 days** = CMBs are ultra-short T-Bill variants introduced in 2010 by the Government of India to meet temporary cash mismatches in government revenues and expenditure. • **Non-standard and ad hoc** — unlike regular 91-day, 182-day, or 364-day T-Bills which are auctioned weekly, CMBs are issued on an as-needed basis with flexible but always sub-91-day maturities. • 💡 **1–2 years** is the range for short-term government bonds, not bills; **Exactly 182 days** and **Above 364 days** are standard T-Bill tenors — CMBs are specifically shorter than the shortest regular T-Bill.