Banking Terms — Set 7

Correct Answer: A. Providing liquidity and safety of principal

• **Providing liquidity and safety of principal** = Money Market Mutual Funds invest in short-term instruments like T-Bills and CP to offer safe, liquid returns. • **Slightly higher than savings accounts** — MMMFs aim to give investors returns better than a savings account while keeping risk very low. • 💡 Wrong-option analysis: [Long term capital gain]: MMMFs invest in sub-one-year instruments; they do not target capital appreciation; [Investing in real estate]: real estate is illiquid and long-term, opposite to the MMMF objective; [High risk speculation]: MMMFs are by design low-risk and conservative.

Correct Answer: C. Ease of converting an asset into cash

• **Ease of converting an asset into cash** = Liquidity is the ability to quickly sell an asset without a significant loss in value. • **Cash = most liquid** — cash needs no conversion; money market instruments rank next to cash in liquidity among all asset classes. • 💡 Wrong-option analysis: [Number of employees]: a measure of bank workforce, unrelated to liquidity; [Amount of water in bank]: a literal misreading of the word 'liquidity'; [Branch network]: branch count measures outreach, not financial liquidity.

Correct Answer: D. Monetary Policy Committee (MPC)

• **Monetary Policy Committee (MPC)** = the six-member MPC, headed by the RBI Governor, decides the policy Repo Rate in India. • **Established 2016** — MPC was set up in 2016 to bring transparency and collective decision-making to monetary policy; it meets at least four times a year. • 💡 Wrong-option analysis: [RBI Governor alone]: the Governor is the chair but cannot decide alone; all six MPC members vote; [NITI Aayog]: a policy think-tank, not a monetary policy body; [Finance Minister]: represents fiscal policy; monetary policy is independent of the Finance Ministry.

Correct Answer: C. Buying and selling of government securities by RBI

• **Buying and selling of government securities by RBI** = Open Market Operations (OMO) is how RBI injects or withdraws permanent liquidity. • **Buying = inject, selling = absorb** — when RBI buys securities it puts money into the system; when it sells, it takes money out. • 💡 Wrong-option analysis: [Export-import of goods]: international trade is managed by DGFT and trade policy, not RBI's OMO; [Opening new bank branches]: branch licensing is a bank regulation function, not OMO; [Trading in stock exchange]: RBI operates in the government securities market, not the equity market.

Correct Answer: C. Overnight Rate

• **Overnight Rate** = the Call Money rate is an overnight interest rate that fluctuates based on daily demand and supply of funds among banks. • **Real-time liquidity signal** — fluctuations in the overnight call rate indicate the immediate liquidity position of the entire banking system. • 💡 Wrong-option analysis: [Coupon Rate]: a fixed interest rate stated on a bond at issuance, not an overnight rate; [Bank Rate]: the rate at which RBI rediscounts bills, generally a long-term reference rate; [Floor Rate]: the floor of the LAF corridor is the Reverse Repo rate, not the call money rate itself.

Correct Answer: B. Written order to pay a certain sum to a person

• **Written order to pay a certain sum to a person** = a Bill of Exchange is a legally binding written instrument for trade finance and money market transactions. • **Three parties** — involves the Drawer (who orders payment), Drawee (who must pay), and Payee (who receives payment); the foundation of commercial bills. • 💡 Wrong-option analysis: [Cash receipt]: a receipt acknowledges payment already made; a bill orders future payment; [Property document]: property documents (title deeds) are entirely different legal instruments; [Insurance policy]: covers risk, not a payment order.

Correct Answer: C. They are issued at a discount to face value

• **Issued at a discount to face value** = Treasury Bills are zero-coupon instruments; investors buy them below face value and receive full face value at maturity. • **Investor profit = discount** — the difference between the purchase price and the Rs. 100 face value is the investor's entire return. • 💡 Wrong-option analysis: [Issued by private companies]: T-Bills are issued by the Government of India; [They have a 10-year tenure]: T-Bills mature in up to 364 days; 10-year instruments are Dated Securities; [They pay monthly interest]: T-Bills are zero-coupon; they pay no periodic interest.

Correct Answer: A. Cash Reserve Ratio

• **Cash Reserve Ratio** = CRR is the percentage of total deposits that banks must keep as cash reserves with the RBI. • **No interest paid** — RBI pays no interest on CRR balances; banks earn nothing on this mandatory reserve, reducing their investable funds. • 💡 Wrong-option analysis: [Credit Rating Reserve]: not a real banking term; CRR relates to cash, not ratings; [Cash Ratio Reserve]: the word order differs from the official term 'Cash Reserve Ratio'; [Central Reserve Rate]: the correct term is Cash Reserve Ratio, not Central Reserve Rate.

Correct Answer: A. Percentage of deposits banks must keep in liquid assets

• **Percentage of deposits banks must keep in liquid assets** = SLR requires banks to maintain a portion of their deposits in gold, cash, or government securities. • **Dual purpose** — SLR provides a liquidity cushion for banks and ensures a captive demand for government bonds, supporting government borrowing. • 💡 Wrong-option analysis: [Tax on bank profits]: taxes on banks are levied by the income tax authority, not through SLR; [Ratio of gold to silver]: SLR has nothing to do with gold-to-silver ratios; [Rate of interest on loans]: the lending rate is set by individual banks; SLR is a reserve requirement, not an interest rate.

Correct Answer: B. Discount rate for rediscounting bills by RBI

• **Discount rate for rediscounting bills by RBI** = Bank Rate is the rate at which RBI buys or rediscounts bills of exchange from commercial banks. • **Penalty benchmark** — the Bank Rate is also used to calculate penalties on banks that fail to meet CRR or SLR requirements; it is typically above the Repo rate. • 💡 Wrong-option analysis: [Rate on savings account]: savings rates are set by individual banks; [Rate for retail customers]: retail lending rates are derived from MCLR or EBLR, not the Bank Rate; [Tax rate on banks]: taxation is set by the government, not the Bank Rate.