Money Market — Set 6

Correct Answer: B. SDF Rate

• **SDF Rate** = The Standing Deposit Facility rate (= Repo rate – 25 bps) is the floor of RBI's LAF corridor, introduced in April 2022; banks park excess liquidity with RBI without providing collateral. • **LAF Corridor structure** — Floor: SDF rate → Centre: Policy Repo rate → Ceiling: MSF rate (Repo + 25 bps); this 50-bps corridor keeps overnight call rates anchored. • 💡 **Bank Rate** is a penal rate charged on loans to banks — it is not part of the LAF corridor; **Repo Rate** is the centre of the corridor, not the floor; **MSF Rate** is the ceiling, not the floor.

Correct Answer: D. Ease of conversion to cash

• **Ease of conversion to cash** = Liquidity measures how quickly an asset can be sold or redeemed at or near its fair market value without a significant loss. • **Liquidity spectrum** — Cash > T-Bills > G-Secs > Corporate bonds > Real estate; the money market exists precisely to trade the most liquid short-term instruments. • 💡 **Total assets** describes a balance sheet figure regardless of how liquid those assets are; **Yearly profit** is profitability, not liquidity; **Water content** is a physical science concept with no relevance here.

Correct Answer: C. Trading directly between two parties

• **Trading directly between two parties** = OTC trades are negotiated bilaterally without a centralised exchange matching the order; price, quantity, and terms are agreed directly between buyer and seller. • **Call money, repos, and interest rate swaps in India are OTC** — though post-trade reporting to CCIL/RBI is mandatory for transparency and systemic risk monitoring. • 💡 **Trading on BSE** is exchange-based, the opposite of OTC; **Trading in shop** conflates retail commerce with financial markets; **Trading through app only** describes a channel, not whether a trade is OTC or exchange-based.

Correct Answer: A. Default Risk

• **Default Risk** = CP is an unsecured instrument — no collateral backs it; if the issuing company faces financial distress before maturity, investors may not get repaid. • **This is why CP issuers need a minimum credit rating of A2+** — the rating requirement is the market's protection against default risk since there is no government guarantee. • 💡 **Zero Risk** applies only to sovereign instruments like T-Bills; **Government Risk** is not a standard financial term; **None of these** ignores the very real and well-documented default risk in commercial paper markets.

Correct Answer: A. 0.01 percent

• **0.01 percent** = One basis point (bps) = 1/100th of 1% = 0.01%; so 100 bps = 1%, and 25 bps = 0.25%. • **Used to avoid ambiguity** — saying 'rates rose 25 basis points' is clearer than 'rates rose 0.25%', especially when comparing percentage changes in rates that are themselves percentages. • 💡 **1 percent** = 100 bps, not 1 bps; **10 percent** = 1,000 bps — far too large; **0.1 percent** = 10 bps — ten times larger than a single basis point.

Correct Answer: C. Specialized intermediaries in government securities

• **Specialized intermediaries in government securities** = Primary Dealers (PDs) are RBI-licensed entities — banks or standalone PDs — that underwrite G-Sec auctions and provide two-way quotes in the secondary market. • **Obligation to bid at auctions** — PDs must commit to a minimum success ratio in T-Bill and G-Sec auctions, ensuring the government's borrowing programme goes through even in weak demand. • 💡 **First bank in area** is a geographic concept; **Insurance agent** sells risk products, not securities; **Stock broker** deals in equities on exchanges — PDs deal in government debt in the OTC/LAF space.

Correct Answer: A. LAF

• **LAF (Liquidity Adjustment Facility)** = RBI conducts daily LAF repo auctions (lending to banks) and reverse repo/SDF operations (absorbing from banks) to keep overnight call rates close to the policy repo rate. • **Two-way daily tool** — on deficit days, banks borrow via repo; on surplus days, they park funds via SDF/reverse repo; together, these operations keep system liquidity balanced every single day. • 💡 **Five Year Plans** are long-term developmental frameworks; **Direct Taxes** are fiscal instruments that affect money supply over months, not days; **Capital Market** deals in long-term instruments and has no daily liquidity-management function.

Correct Answer: A. Short-term instrument to share risk and liquidity between banks

• **Short-term instrument to share risk and liquidity between banks** = An IBPC allows one bank (issuing bank) to sell a participation in its loan assets to another bank (participating bank) for 91–180 days, without actually transferring ownership. • **Two types** — 'With risk' (participating bank shares credit risk) and 'Without risk' (purely a liquidity tool; issuing bank retains all credit risk); both help optimise balance sheets. • 💡 **Share certificate** evidences equity ownership; **Staff reward** is an HR concept; **Training degree** is an educational credential — none of these relate to interbank money market instruments.

Correct Answer: D. Mumbai

• **Mumbai** = MIBOR = Mumbai Interbank Offered Rate; it is the rate at which top Indian banks offer to lend unsecured funds to each other in the Mumbai interbank market. • **Overnight MIBOR is most important** — calculated and published daily by FBIL (Financial Benchmarks India Pvt Ltd) since 2015; it replaced NSE's computation and is the benchmark for floating-rate bonds and interest rate swaps. • 💡 **Monthly** describes a frequency, not a location; **Market** would make the acronym read 'MIBOR' ambiguously; **Money** is similarly generic — the 'M' specifically honours Mumbai, India's financial capital.

Correct Answer: C. Where previously issued instruments are traded

• **Where previously issued instruments are traded** = After an instrument (T-Bill, CD, CP) is issued in the primary market, it can be bought and sold among investors in the secondary market before it matures. • **Provides exit liquidity** — an investor who bought a 91-day T-Bill but needs cash in 30 days can sell it; CCIL's NDS-OM platform facilitates this for government securities. • 💡 **Market for agriculture** is a commodity market; **Second hand shop** is a retail analogy — not a financial concept; **Market for shares only** confuses the secondary market for equities (stock exchange) with the broader secondary market concept that applies to all tradable instruments.