Banking Terms — Set 8

Correct Answer: A. Simultaneous purchase and sale to profit from price difference

Arbitrage involves exploiting price differences of the same instrument in different markets. It helps in bringing price uniformity across the entire financial system. Professional traders use sophisticated software to identify these opportunities.

Correct Answer: D. Risk that a borrower will not pay back

Default risk is the probability that an issuer of a debt instrument will fail to pay interest or principal. Money market instruments like T-bills have almost zero default risk. Unsecured instruments like Commercial Paper have a higher default risk.

Correct Answer: B. Total deposits held by a bank

NDTL is the sum of demand and time liabilities (deposits) of a bank with the public and other banks. It is the base on which CRR and SLR requirements are calculated. Demand liabilities include current and savings accounts, while time liabilities include fixed deposits.

Correct Answer: D. Fixed Deposit

Time liabilities are deposits that are payable only after a specific period. Fixed deposits (FDs) and recurring deposits (RDs) are prime examples. Demand liabilities are those that must be paid whenever the customer asks.

Correct Answer: D. Minimum interest rate below which a bank cannot lend

The Base Rate was the minimum interest rate that a bank could charge its customers. It was introduced to ensure transparency in lending. It has now been replaced by the MCLR and subsequently by External Benchmark Linked Rates (EBLR).

Correct Answer: B. To manage money supply and achieve price stability

Monetary policy is the process by which the central bank manages the supply of money. Its main objectives are to control inflation and support economic growth. It uses tools like interest rates and reserve requirements to achieve these goals.

Correct Answer: A. General increase in prices and fall in purchasing power

The correct answer is 'General increase in prices and fall in purchasing power'. Inflation occurs when there is too much money chasing too few goods. It reduces the value of money over time. Central banks aim to keep inflation within a target range to ensure economic stability.

Correct Answer: B. Repo Rate

The Repo rate is the primary policy rate used by the RBI to signal its monetary stance. All other rates in the LAF corridor (like Reverse Repo and MSF) are usually linked to the Repo rate. It is the most watched rate by economists and markets.

Correct Answer: C. Decrease in general price level of goods

Deflation is the opposite of inflation and occurs when prices fall. While it might sound good, persistent deflation can lead to lower economic growth and high unemployment. Central banks use expansionary monetary policy to combat deflation.

Correct Answer: B. A document that transfers the right of payment to another person

Negotiable instruments like cheques, promissory notes, and bills of exchange are easily transferable. The legal rights of the instrument can be passed to another person by endorsement or delivery. Most money market instruments are negotiable by nature.