Banking Terms — Set 8

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

• **Simultaneous purchase and sale to profit from price difference** = Arbitrage exploits price discrepancies for the same instrument across different markets or platforms. • **Price equaliser** — arbitrage traders help eliminate price differences, improving market efficiency and price uniformity across the financial system. • 💡 Wrong-option analysis: [Giving a loan]: lending is an intermediation activity, not arbitrage; [Paying tax]: tax compliance is a statutory obligation unrelated to arbitrage; [Filing a complaint]: a legal/regulatory action with no connection to financial arbitrage.

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

• **Risk that a borrower will not pay back** = Default Risk is the probability that an issuer will fail to pay interest or principal on a debt instrument. • **Zero for T-Bills** — Treasury Bills carry virtually zero default risk due to sovereign backing; Commercial Paper has the highest default risk among money market instruments. • 💡 Wrong-option analysis: [Risk of computer error]: that is 'operational risk' or 'technology risk'; [Risk of rain]: weather risk affects agriculture, not financial instruments; [Risk of loss in stock market]: equity price fluctuation is 'market risk', not default risk.

Correct Answer: B. Total deposits held by a bank

• **Total deposits held by a bank** = NDTL (Net Demand and Time Liabilities) is the base on which CRR and SLR requirements are calculated. • **CRR/SLR base** — Demand liabilities include current and savings accounts; Time liabilities include fixed deposits; together they form NDTL. • 💡 Wrong-option analysis: [Total loans given]: loans are assets of the bank, not liabilities; [Number of bank branches]: branch count is an operational metric unrelated to reserve requirements; [Total bank profit]: profit figures are used for capital adequacy, not for CRR/SLR computation.

Correct Answer: D. Fixed Deposit

• **Fixed Deposit** = a Time Liability because it is payable only after a specified period, unlike demand deposits which can be withdrawn anytime. • **Includes RDs** — both Fixed Deposits (FDs) and Recurring Deposits (RDs) are Time Liabilities, forming part of the NDTL base for SLR calculation. • 💡 Wrong-option analysis: [Current account]: a Demand Liability payable on demand; [Savings account]: also a Demand Liability since funds can be withdrawn at any time; [Cash in ATM]: a bank asset (vault cash), not a liability.

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

• **Minimum interest rate below which a bank cannot lend** = Base Rate was the floor rate for bank lending, ensuring transparency and preventing below-cost lending. • **Replaced by MCLR and EBLR** — the Base Rate was first replaced by MCLR (Marginal Cost of Funds-based Lending Rate) and later by External Benchmark Linked Rates. • 💡 Wrong-option analysis: [Government tax rate]: tax rates are set by the Finance Ministry, not banks; [Rate for senior citizens]: senior citizen rates are specific deposit rates, not a floor lending rate; [Maximum lending rate]: Base Rate is a minimum, not a maximum; banks can lend above it.

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

• **Manage money supply and achieve price stability** = Monetary Policy is the central bank's tool to control inflation, credit flow, and economic growth. • **MPC and Repo Rate** — the RBI's Monetary Policy Committee uses the Repo Rate, CRR, SLR, and OMOs to achieve its monetary objectives. • 💡 Wrong-option analysis: [To regulate the stock market]: that is SEBI's mandate, not the RBI's monetary policy function; [To build roads]: fiscal infrastructure spending is the government's task, not monetary policy; [To collect taxes]: tax collection is the mandate of the Income Tax Department and GST authorities.

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

• **General increase in prices and fall in purchasing power** = Inflation erodes the value of money when too much money chases too few goods. • **Target range** — central banks in India target 4% inflation (±2%) as per the flexible inflation targeting framework adopted in 2016. • 💡 Wrong-option analysis: [Growth of a company]: company expansion is measured by revenue or profit growth; [Increase in population]: population growth is a demographic metric, not an economic price phenomenon; [Expansion of bank branches]: branch expansion is a banking outreach metric, unrelated to price levels.

Correct Answer: B. Repo Rate

• **Repo Rate** = the Policy Rate of India, the primary tool through which the RBI signals its monetary stance to the market. • **LAF corridor anchor** — all other rates (Reverse Repo, MSF, Bank Rate) are calibrated in relation to the Repo rate within the Liquidity Adjustment Facility corridor. • 💡 Wrong-option analysis: [Bank Rate]: a long-standing reference rate but no longer the primary policy signal; [MSF Rate]: an emergency borrowing rate set above the Repo rate; [Reverse Repo Rate]: the floor of the LAF corridor, set below the Repo rate.

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

• **Decrease in general price level of goods** = Deflation is when prices fall persistently across the economy, signalling weak demand. • **Dangerous spiral** — deflation causes consumers to delay purchases expecting lower prices, which further reduces demand and economic growth. • 💡 Wrong-option analysis: [Increase in prices]: that is inflation, the opposite of deflation; [Giving more loans]: credit expansion is a monetary policy tool to fight deflation, not deflation itself; [Printing more money]: money printing causes inflation, not deflation.

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

• **A document that transfers the right of payment to another person** = a Negotiable Instrument is freely transferable by endorsement or delivery. • **Examples** — cheques, promissory notes, and bills of exchange are classic negotiable instruments governed by the Negotiable Instruments Act, 1881. • 💡 Wrong-option analysis: [A fixed property]: property is non-negotiable and requires a sale deed for transfer; [A document that can be bartered]: barter involves exchanging goods, not financial instruments; [An insurance policy]: insurance policies are transferable only in specific conditions and are not freely negotiable.