Money Market — Set 6
Banking · मुद्रा बाजार · Questions 51–60 of 80
Which rate acts as the 'Floor' or the lower limit of the interest rate corridor in India?
Correct Answer: B. SDF Rate
The Standing Deposit Facility (SDF) rate is the lower boundary of the RBI's policy corridor. The MSF rate serves as the 'Ceiling' or upper boundary. The policy Repo rate is positioned between these two rates.
What is 'Liquidity' in financial terms?
Correct Answer: D. Ease of conversion to cash
Liquidity refers to how quickly and easily an asset can be converted into cash without a significant loss in value. Cash is the most liquid asset. Money market instruments are highly liquid compared to real estate or stocks.
What is 'Over-the-Counter' (OTC) trading?
Correct Answer: C. Trading directly between two parties
OTC trading involves transactions that take place directly between two parties without the supervision of an exchange. Most call money and many repo transactions in India are OTC. They are often later reported to a centralized platform for transparency.
Which of these is a risk associated with 'Commercial Paper'?
Correct Answer: A. Default Risk
Commercial Paper is an unsecured instrument, meaning it is not backed by collateral. Therefore, it carries a 'Default Risk' if the issuing company fails to pay. This is why only companies with very high credit ratings are allowed to issue CP.
In money market terminology, what is 'Basis Point'?
Correct Answer: A. 0.01 percent
A basis point is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%. For example, if a rate increases by 25 basis points, it means an increase of 0.25%.
What is 'Primary Dealer' in the money market?
Correct Answer: C. Specialized intermediaries in government securities
Primary Dealers (PDs) are specialized institutions that deal in government securities and money market instruments. They act as intermediaries between the RBI and the general market. They help in the smooth conduct of auctions and provide liquidity in the secondary market.
Which of the following is used to manage 'Daily' liquidity in the banking system?
Correct Answer: A. LAF
The Liquidity Adjustment Facility (LAF) is the primary tool for the RBI to manage day-to-day liquidity. It allows banks to adjust their cash positions through repo and reverse repo operations. It helps in keeping the inter-bank rates close to the policy repo rate.
What is 'Inter-bank Participation Certificate' (IBPC)?
Correct Answer: A. Short-term instrument to share risk and liquidity between banks
IBPCs are short-term money market instruments used by banks to buy or sell their loan assets. This allows banks to manage their credit portfolio and liquidity without transferring the actual account. They are usually issued for periods ranging from 91 to 180 days.
In 'MIBOR', what does the 'M' stand for?
Correct Answer: D. Mumbai
MIBOR stands for Mumbai Inter-Bank Offered Rate. it is the benchmark interest rate at which banks borrow funds from other banks in the Mumbai inter-bank market. It is calculated daily by the National Stock Exchange (NSE).
What is the 'Secondary Market' for money market instruments?
Correct Answer: C. Where previously issued instruments are traded
The secondary market is where investors buy and sell instruments that have already been issued. It provides liquidity to investors who wish to exit their investment before maturity. The trading platform provided by CCIL is a major venue for this activity.