Banking Terms — Set 2

Correct Answer: C. One year

• **One year** = the maximum tenure for which a Commercial Paper can be issued in India. • **7 days to 1 year** — this range defines the minimum and maximum maturity for CP, keeping it within money market boundaries. • 💡 Wrong-option analysis: [180 days]: a permissible tenure but not the maximum; [91 days]: falls within the range but is not the upper limit; [364 days]: close to one year but CP must stay within the credit rating validity period and cannot exceed one year.

Correct Answer: C. REPO

• **REPO (Repurchase Agreement)** = a secured money market instrument where securities are sold with an agreement to repurchase them later. • **Collateral-backed** — the underlying government securities serve as collateral, reducing counterparty risk unlike unsecured call money. • 💡 Wrong-option analysis: [Commercial Paper]: unsecured promissory note with no collateral; [Notice Money]: unsecured inter-bank lending for 2–14 days; [Call Money]: unsecured overnight borrowing between banks.

Correct Answer: A. Mumbai Inter-Bank Offered Rate

• **Mumbai Inter-Bank Offered Rate** = MIBOR is the benchmark rate at which banks lend unsecured funds to each other in Mumbai's inter-bank market. • **NSE calculates it daily** — MIBOR is computed by the National Stock Exchange and modelled after London's LIBOR. • 💡 Wrong-option analysis: [Madras Inter-Bank Official Rate]: incorrect expansion; the 'M' stands for Mumbai, not Madras; [Money Information Banking Online Rate]: a fabricated expansion; [Mutual Inter-Bank Offered Rate]: incorrect; it is 'Mumbai', not 'Mutual'.

Correct Answer: A. Commercial Banks

• **Commercial Banks** = the major participants who can both borrow and lend in the Call Money market alongside Primary Dealers. • **Restricted access** — insurance companies and mutual funds were phased out to give the RBI tighter control over overnight liquidity. • 💡 Wrong-option analysis: [Retail Investors]: individuals cannot participate in the inter-bank call money market; [Foreign Tourists]: have no role in inter-bank markets; [Microfinance Institutions]: operate in retail credit, not the inter-bank money market.

Correct Answer: B. CCIL

• **CCIL (Clearing Corporation of India Limited)** = provides guaranteed clearing and settlement for money market and government securities transactions. • **2001** — CCIL was established in 2001 to reduce counterparty risk and improve financial market efficiency. • 💡 Wrong-option analysis: [NPCI]: manages retail payment systems like UPI and IMPS; [SEBI]: regulates securities markets but does not handle money market settlement; [NSDL]: a depository holding securities in electronic form, not a clearing house.

Correct Answer: A. 7 days

• **7 days** = the minimum maturity period for a Certificate of Deposit issued by a scheduled commercial bank. • **Maximum 1 year for banks** — while the minimum is 7 days, the maximum is one year; financial institutions may issue CDs up to 3 years. • 💡 Wrong-option analysis: [1 day]: too short; the minimum is 7 days; [30 days]: higher than the actual minimum of 7 days; [15 days]: above the minimum; 7 days is the correct floor.

Correct Answer: D. Negotiable instrument for trade

• **Negotiable instrument for trade** = a Commercial Bill (bill of exchange) is a written order used to finance the movement of goods. • **Bank-accepted bill** — when a bank adds its guarantee to a commercial bill, it becomes a 'banker's acceptance', reducing credit risk. • 💡 Wrong-option analysis: [Stock market share]: a share represents equity ownership, not trade finance; [Insurance policy]: covers risk, not trade payments; [Government debt]: refers to T-Bills or dated securities issued by the government.

Correct Answer: B. 91 days

• **Less than 91 days** = Cash Management Bills (CMBs) have a maturity below 91 days, unlike standard Treasury Bills. • **2010** — CMBs were introduced in India in 2010 to handle very short-term government cash flow mismatches with flexible tenures. • 💡 Wrong-option analysis: [182 days]: a standard T-Bill tenure, not the CMB ceiling; [15 days]: a possible CMB tenure but not the defined upper limit; [30 days]: within the CMB range but the answer defines the ceiling as below 91 days.

Correct Answer: D. Absorbs liquidity from banks

• **Absorbs liquidity from banks** = in a Reverse Repo transaction, banks park their excess funds with the RBI, reducing money supply. • **Rate signal** — when the Reverse Repo rate rises, parking funds with RBI becomes more attractive, so banks lend less to the public. • 💡 Wrong-option analysis: [Issues new currency]: currency issuance is a separate RBI function unrelated to reverse repo; [Lends money to banks]: that is the Repo transaction, not Reverse Repo; [Sells gold]: gold sales are part of foreign exchange management, not the reverse repo operation.

Correct Answer: B. Maturity of instruments

• **Maturity of instruments** = the primary difference between Money Market and Capital Market is the tenure of financial instruments traded. • **Under vs. over 1 year** — money market instruments mature in under one year while capital market instruments have tenures exceeding one year. • 💡 Wrong-option analysis: [Size of the office]: irrelevant to market classification; [Type of currency]: both markets use the same domestic currency; [Location of the market]: both can operate in the same city or country.