Money Market — Set 7

Correct Answer: B. Repurchase Agreement

• **Repurchase Agreement** = a contract where a seller sells securities and simultaneously agrees to buy them back at a higher price on a future date — the price difference is the implicit interest. • **Key mechanism** — the buyer is effectively the lender; the seller (borrower) gets funds now and repays by repurchasing; government securities are used as collateral. • **RBI Repo** = when RBI conducts repos with banks, it lends at the Repo Rate; Market Repos between banks trade at the market repo rate, which can differ. • 💡 **Repurchase Option** = an option contract, not a borrowing agreement; **Real Purchase Option** and **Recover Purchase Order** are invented terms with no standard meaning in banking.

Correct Answer: D. 14 days

• **14 days** = Notice Money covers inter-bank loans from 2 days to 14 days; the lender can recall the funds by giving advance notice. • **Distinction within call money market** — 1 day = Call Money; 2–14 days = Notice Money; beyond 14 days = Term Money (up to 1 year). • Only scheduled commercial banks and Primary Dealers (PDs) can participate in call/notice money; NBFCs and mutual funds are excluded. • 💡 **30 days** exceeds the notice money limit (that falls in term money); **1 day** = call money specifically; **7 days** is within the range but not the maximum — 14 days is.

Correct Answer: B. T-Bills

• **T-Bills (Treasury Bills)** = issued at a price below face value (discount) and redeemed at face value on maturity — the investor earns the difference, not periodic interest. • **Yield formula** — Yield = [(Face Value − Issue Price) / Issue Price] × (365 / Days to Maturity) × 100; higher the discount, higher the effective yield. • Commercial Paper (CP) and Certificates of Deposit (CD) also follow the same discount model — all three are zero-coupon short-term instruments. • 💡 **Equity Shares** = ownership instruments with no maturity or face-value redemption; **Savings Account** and **Fixed Deposits** pay explicit interest — they are not discount instruments.

Correct Answer: A. Minimum rate

• **Minimum rate** = the floor rate is the lowest bound of RBI's interest rate corridor; currently set by the Standing Deposit Facility (SDF) rate, at which banks park surplus funds with RBI. • **Corridor structure** — SDF Rate (floor) → Repo Rate (policy rate) → MSF Rate (ceiling); call money rates stay within this corridor. • The floor prevents market overnight rates from falling below SDF, since banks always have the option to deposit with RBI at that rate. • 💡 **Tax rate** = a fiscal concept, unrelated to the monetary policy corridor; **Average rate** = no formal role in corridor design; **Maximum rate** = that is the role of the ceiling (MSF rate), not the floor.

Correct Answer: D. Certificate of Deposit

• **Certificate of Deposit** = a negotiable, short-term debt instrument issued by scheduled commercial banks (7 days to 1 year) and select All-India Financial Institutions (1–3 years) against deposited funds. • **Key features** — minimum face value ₹1 lakh; issued at a discount; held in demat form; tradeable in the secondary market unlike a regular fixed deposit. • CDs are issued by banks (borrower = bank), whereas Commercial Paper is issued by corporates — both are discount instruments but differ in issuer type. • 💡 **Credit Deposit** and **Current Deposit** are ordinary banking terms with no such acronym in money markets; **Cash Discount** = a trade/commerce term, not a money market instrument.

Correct Answer: C. MIBOR

• **MIBOR (Mumbai Inter-Bank Offered Rate)** = the benchmark overnight inter-bank lending rate in India, published by FBIL (Financial Benchmarks India Pvt. Ltd.) based on actual call money transactions. • **Usage** — floating-rate bonds, overnight indexed swaps (OIS), and many short-term loan contracts are priced as MIBOR + spread. • MIBOR replaced LIBOR as the domestic benchmark after India moved away from the LIBOR-linked system; SOFR is the global replacement for USD LIBOR. • 💡 **LIBOR** = London Inter-Bank Offered Rate — a global benchmark, now largely discontinued and replaced by SOFR; **Inflation Rate** = a macroeconomic indicator, not a lending benchmark; **SENSEX** = a stock market index, unrelated to money markets.

Correct Answer: B. Less than 1 year

• **Less than 1 year** = the money market, by definition, deals exclusively in instruments with a maturity of up to 364 days (T-Bills, CPs, CDs, call money, repos). • **Capital market vs money market** — capital markets handle instruments with maturity beyond 1 year (G-Secs 1–40 years, corporate bonds, equity); money markets handle below 1 year. • The 1-year boundary is critical for regulatory classification: RBI regulates the money market; SEBI regulates the capital market. • 💡 **Exactly 10 years** and **More than 5 years** = capital market territory (long-term bonds, G-Secs); **Zero years** = not a meaningful financial concept.

Correct Answer: D. Ratio

• **Ratio** = CRR stands for Cash Reserve Ratio — the percentage of a bank's Net Demand and Time Liabilities (NDTL) that must be kept as cash with RBI, earning no interest. • **Function** — CRR is a monetary policy tool; raising CRR drains liquidity from the system; lowering it injects liquidity. • CRR is different from SLR (Statutory Liquidity Ratio): CRR = cash held with RBI; SLR = liquid assets (cash, gold, approved securities) held by the bank itself. • 💡 **Rate** = commonly confused because monetary policy uses 'rates', but CRR is a ratio not a rate; **Reserve** = the second R in CRR, not the last; **Revenue** = a government/corporate accounting term, not part of CRR.

Correct Answer: B. Maturity value

• **Maturity value** = face value is the amount the government promises to pay at maturity; T-Bills are issued at a discount (below face value) and redeemed at the full face value. • **Standard denominations** — Indian T-Bills are issued at face values of ₹100; the investor pays less than ₹100 at purchase and receives ₹100 at maturity. • The difference between the purchase price and the face value (maturity value) is the investor's entire return — there are no coupon payments. • 💡 **Price paid** = the issue/purchase price, which is always less than face value; **Discounted value** = another name for the purchase price, not the face value; **Market price** = fluctuates in the secondary market and may differ from both issue price and face value.

Correct Answer: C. Loan for 24 hours

• **Loan for 24 hours** = overnight borrowing means funds are borrowed today and repaid the next working day; it constitutes the 'call money' segment of the money market. • **Participants** — only scheduled commercial banks and Primary Dealers can borrow/lend in the overnight call money market; NBFCs, mutual funds, and insurance companies are excluded (they use TREPS instead). • The RBI's SDF and MSF rates set the floor and ceiling for overnight rates, keeping call money rates anchored to the policy corridor. • 💡 **1 month** = far beyond overnight; falls in the commercial paper or CD segment; **1 year** = maximum maturity of most money market instruments — not overnight; **1 week** = falls in the notice money or short-term repo category, not overnight.