Banking Terms — Set 7

Correct Answer: A. Providing liquidity and safety of principal

The correct answer is 'Providing liquidity and safety of principal'. MMMFs invest in short-term debt securities like T-Bills and Commercial Paper. Their goal is to provide investors with a safe place to park cash with slightly higher returns than a savings account. They are highly liquid and low-risk investment vehicles.

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

Liquidity refers to how quickly an asset can be sold or exchanged for cash without a significant loss in value. Cash is the most liquid asset. Money market instruments are highly liquid compared to stocks or real estate.

Correct Answer: D. Monetary Policy Committee (MPC)

The MPC is a six-member committee headed by the RBI Governor that decides the policy interest rates. It was established in 2016 to bring more transparency and accountability to monetary policy. The committee meets at least four times a year.

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

OMO is a tool used by the RBI to regulate the money supply in the economy. By buying securities, the RBI injects liquidity; by selling them, it absorbs liquidity. It is a more permanent way of managing liquidity compared to Repo.

Correct Answer: C. Overnight Rate

The call money rate is an overnight interest rate. It changes throughout the day based on the demand and supply of funds among banks. It is a critical indicator of the immediate liquidity position of the banking system.

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

A bill of exchange is a binding agreement where one party (the drawer) orders another (the drawee) to pay a fixed sum to a third party. It is a fundamental tool for trade finance. When used in the money market, it is often called a commercial bill.

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

Treasury bills do not have a coupon rate; instead, they are sold for less than their maturity value. The profit for the investor is the difference between the discount price and the face value. This makes them a 'zero-coupon' instrument.

Correct Answer: A. Cash Reserve Ratio

CRR is the percentage of total deposits that banks must keep as cash with the RBI. No interest is paid by the RBI on these reserves. It is a powerful tool to control the credit-creating capacity of banks.

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

SLR is the requirement for banks to maintain a portion of their deposits in liquid assets like gold or government securities. It ensures that banks have a safety cushion to meet unexpected demand. It also helps the government borrow money from banks.

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

The Bank Rate is the standard rate at which the RBI is prepared to buy or rediscount bills of exchange. It is also the rate used to calculate penalties on banks for failing to meet CRR or SLR requirements. It is generally higher than the Repo rate.