Money Market — Set 2
Economics · मुद्रा बाजार · Questions 11–20 of 80
Treasury Bills are issued at a price which is lower than their face value. This difference is known as?
Correct Answer: A. Discount
Treasury Bills do not pay interest; instead, they are issued at a discount and redeemed at face value. The difference between the issue price and face value represents the return to the investor. These are also known as Zero-Coupon bonds.
Cash Management Bills (CMBs) were introduced in 2010 to meet which of the following?
Correct Answer: A. Temporary mismatches in cash flow of Government
Cash Management Bills are short-term instruments issued by the RBI on behalf of the Government to meet temporary cash flow mismatches. They have a maturity period of less than 91 days. They are highly flexible and issued only when necessary.
Which entity acts as the 'Lender of Last Resort' in the Indian money market?
Correct Answer: B. Reserve Bank of India
The Reserve Bank of India acts as the lender of last resort to maintain financial stability. It provides emergency liquidity to banks when they face severe cash shortages. This function prevents systemic failures in the financial system.
Commercial Bills are instruments used by firms to finance their?
Correct Answer: C. Working Capital
Commercial Bills are used to finance the working capital requirements of business firms. They are negotiable instruments drawn by a seller on the buyer for the value of goods sold. They can be discounted with a bank to receive immediate cash.
In the context of the money market, 'DFHI' stands for?
Correct Answer: A. Discount and Finance House of India
The Discount and Finance House of India was established by the RBI to provide liquidity to money market instruments. It facilitates the secondary market for Treasury Bills and other short-term papers. It was merged with STCI in 2004 to form STCI Primary Dealer Ltd.
What is the maximum tenor for a Treasury Bill issued in India?
Correct Answer: B. 364 days
Treasury Bills in India are issued with a maximum maturity of 364 days. Since it is less than a year, it qualifies as a money market instrument. The 364-day tenor was introduced to provide a long-term benchmark in the short-term market.
Which of the following describes the 'Unorganized' money market in India?
Correct Answer: D. Indigenous Bankers and Moneylenders
Indigenous Bankers and Moneylenders form the unorganized money market in India. They operate outside the direct control of the RBI and often charge high interest rates. They are common in rural areas where formal banking reach is limited.
The rate at which the RBI absorbs liquidity from banks under the Liquidity Adjustment Facility is?
Correct Answer: A. Reverse Repo Rate
The Reverse Repo Rate is the interest rate at which banks park their surplus funds with the RBI. It is used as a tool to absorb excess liquidity from the banking system. An increase in this rate incentivizes banks to lend less to the public.
Repo (Repurchase Agreement) is a contract where a seller of a security agrees to?
Correct Answer: D. Buy back the security at a specified price and date
In a Repo transaction, the seller agrees to buy back the same security at a pre-determined future date and price. It acts as a collateralized short-term loan. The difference between the sale and repurchase price is the interest paid.
The primary objective of the Liquidity Adjustment Facility (LAF) used by the RBI is?
Correct Answer: D. To manage day-to-day liquidity in the banking system
LAF is a tool that allows banks to borrow or park funds through Repo and Reverse Repo auctions. It helps the RBI manage the volume of money in the economy daily. This ensures that interest rates in the call money market stay within a desired range.