Money Market — Set 8

Correct Answer: D. Call Money Market

• **Call Money Market** = part of India's organized money market, regulated by RBI, operating through electronic platforms like NDS-CALL with standardized documentation and settlement. • **Organized money market instruments** — call/notice/term money, T-Bills, CMBs, repos, CPs, CDs, commercial bills discounted by banks. • The organized money market ensures transparency, price discovery, and monetary policy transmission; RBI directly participates through repos and OMOs. • 💡 **Indigenous Bankers** (like Shroffs/Seths), **Money Lenders**, and **Chit Funds** = components of India's unorganized/informal money market — unregulated, opaque, and operating outside RBI's oversight.

Correct Answer: D. Reduction from face value

• **Reduction from face value** = discount is the difference between the face value and the lower price at which the instrument is issued; the investor earns this gap as return at maturity. • **Example** — a 91-day T-Bill with face value ₹100 issued at ₹98 carries a ₹2 discount; the investor's annualized yield = (2/98) × (365/91) × 100 ≈ 8.2%. • Deeper discounts imply higher effective interest rates — this is how rising interest rate environments are reflected in T-Bill auctions. • 💡 **Penalty** = a charge for default or violation, not a return mechanism; **Extra price** = the opposite of discount (premium); **Tax** = a government levy, entirely unrelated to instrument pricing.

Correct Answer: D. Profiting from price differences in different markets

• **Profiting from price differences in different markets** = arbitrage is the simultaneous buying and selling of the same (or equivalent) asset in different markets to exploit a temporary price discrepancy, earning a risk-free profit. • **In money markets** — if the same T-Bill trades at different yields on two platforms, arbitrageurs buy on the cheaper platform and sell on the costlier one, instantly narrowing the gap. • Arbitrage is self-correcting: trading activity equalizes prices across markets, improving efficiency and price discovery. • 💡 **Giving a loan** = lending, a basic banking function; **Legal dispute** = arbitration (a similar-sounding word but refers to dispute resolution, not trading); **Paying debt** = repayment/settlement, unrelated to price differences.

Correct Answer: C. Statutory

• **Statutory** = SLR stands for Statutory Liquidity Ratio — 'statutory' means it is mandated by law under Section 24 of the Banking Regulation Act, 1949. • **What SLR covers** — banks must maintain a minimum percentage of their NDTL in cash, gold, or RBI-approved securities (primarily G-Secs and T-Bills); current SLR = 18%. • SLR differs from CRR: CRR = sterile cash with RBI (earns nothing); SLR assets remain with the bank and can earn returns (G-Secs pay interest). • 💡 **Standard** = refers to standard chartered or standard procedures, not SLR; **Savings** = a deposit category; **Systemic** = used in systemic risk terminology — none of these appear in the full form of SLR.

Correct Answer: A. Tenure of the loan

• **Tenure of the loan** = in 'Term Money', 'term' refers to a fixed duration — inter-bank loans with maturity from 15 days to 1 year fall in the term money segment. • **Three segments of the call money market** — Call Money (1 day), Notice Money (2–14 days), Term Money (15 days to 1 year); only scheduled banks and PDs participate. • Term money rates are typically higher than overnight call money rates because lenders bear more liquidity risk over a longer period. • 💡 **Condition** = 'term' can mean condition in common usage, but in finance it specifically means time period; **Interest rate** = a separate concept (rate applied over the term); **Name of the bank** = not relevant — 'term' has nothing to do with the institution's name.

Correct Answer: A. Treasury Bills

• **Treasury Bills** = issued by the Government of India and backed by sovereign guarantee — considered virtually risk-free because the government can always service its rupee-denominated obligations. • **Safety hierarchy** — T-Bills (sovereign, zero credit risk) > CDs (bank-issued, low credit risk) > Commercial Bills (trade-credit risk) > Commercial Paper (corporate issuer, highest credit risk among these). • T-Bills are also the most liquid money market instrument after call money, with deep secondary market trading via RBI's NDS-OM platform. • 💡 **Certificates of Deposit** = bank-issued, carry bank credit risk (though low); **Commercial Bills** = depend on the creditworthiness of the trade counterparty; **Commercial Paper** = unsecured, requires minimum A1+ rating but still carries corporate credit risk.

Correct Answer: A. Date of repayment

• **Date of repayment** = maturity is the date on which the principal amount becomes due and is repaid to the investor; for discount instruments like T-Bills, the face value is paid at maturity. • **Money market maturity limit** — all money market instruments must mature within 365 days of issuance (T-Bills: 91/182/364 days; CP: 7–365 days; CD by banks: 7 days–1 year). • At maturity, the instrument ceases to exist — investors receive face value and the contract is extinguished. • 💡 **Interest type** = refers to fixed vs. floating classification, not the date; **Issue date** = the opposite end — when the instrument is created, not when it ends; **Growth** = an economic/financial metric, not a property of an individual instrument.

Correct Answer: B. Short term liquidity management

• **Short-term liquidity management** = the money market channels idle short-term funds from surplus entities (banks with excess reserves) to deficit entities (banks needing cash), balancing day-to-day liquidity in the economy. • **RBI's role** — RBI uses the money market to implement monetary policy: absorbing excess liquidity via SDF/OMO sales, injecting liquidity via repos/OMO purchases of T-Bills and G-Secs. • Efficient money markets reduce the cost of short-term borrowing, stabilize overnight interest rates, and ensure smooth payment system functioning. • 💡 **Selling gold** = a commodity market function; **Long-term capital** = the role of the capital market (stocks, long-term bonds); **Printing notes** = the function of RBI's Issue Department — not market-based.

Correct Answer: D. Asset easily converted to cash

• **Asset easily converted to cash** = a liquid asset can be sold quickly in the market with minimal impact on its price; cash itself is the most liquid asset by definition. • **Liquidity spectrum in money markets** — Call Money (most liquid, matures next day) > T-Bills (secondary market available) > CPs/CDs (less liquid, higher credit risk). • Under SLR, RBI requires banks to hold liquid assets (cash, gold, G-Secs) to ensure they can meet depositor demands without distress-selling illiquid assets. • 💡 **Asset with high tax** = tax treatment is a separate concept — a highly taxed asset can still be very liquid (e.g., stocks); **Water** and **Oil** = physical commodities; 'liquid' here is a financial term meaning ease of conversion to cash, not the physical state of matter.

Correct Answer: C. Security provided for a loan

• **Security provided for a loan** = in a repo, the borrower sells government securities (G-Secs or T-Bills) to the lender as collateral; if the borrower defaults, the lender already holds the securities and can sell them to recover funds. • **Why G-Secs are preferred collateral** — sovereign backing makes them near risk-free; their deep secondary market ensures quick liquidation; RBI accepts only approved securities as collateral in its LAF repo operations. • Collateral in repos makes them safer than unsecured inter-bank lending (call money) — the lender has a legal claim on the securities throughout the transaction. • 💡 **Interest rate** = the repo rate is the cost of borrowing, not the collateral itself; **Branch name** = operationally irrelevant to the repo mechanism; **Late fee** = a penalty concept, not part of the collateral definition.