Money Market — Set 2

Correct Answer: A. Discount

• **Discount** = Treasury Bills are issued below face value and redeemed at face value; the gap is the investor's return. • **Zero-Coupon** — T-Bills pay no periodic interest, earning returns only through price appreciation at redemption. • 💡 Wrong-option analysis: [Coupon Rate]: applies to bonds that pay regular interest; T-Bills have no coupon; [Premium]: would mean issued above face value, which is the opposite; [Dividend]: relates to equity shares, not debt instruments.

Correct Answer: A. Temporary mismatches in cash flow of Government

• **Cash Management Bills (CMBs)** = short-term instruments issued by RBI on the government's behalf to address temporary cash-flow mismatches. • **Less than 91 days** — CMBs have the shortest maturity among government market borrowing instruments. • 💡 Wrong-option analysis: [Permanent fiscal deficit]: CMBs address only temporary gaps, not structural deficits; [Export promotion]: handled by schemes like MEIS/RoDTEP, not CMBs; [Long-term infrastructure needs]: financed through bonds and budgetary allocations.

Correct Answer: B. Reserve Bank of India

• **Reserve Bank of India** = RBI acts as the lender of last resort, providing emergency liquidity to banks in distress. • **Financial stability** — this function prevents contagion and systemic failure when banks face acute cash shortages. • 💡 Wrong-option analysis: [Finance Ministry]: handles fiscal policy, not emergency bank liquidity; [NABARD]: focuses on agricultural and rural refinancing; [State Bank of India]: a commercial bank, not a regulator or emergency lender.

Correct Answer: C. Working Capital

• **Working Capital** = Commercial Bills finance the short-term operational funding needs of business firms. • **Self-liquidating** — the bill is repaid once the buyer sells the goods, making it self-clearing. • 💡 Wrong-option analysis: [Foreign Direct Investment]: long-term capital movement, unrelated to trade bills; [Fixed Assets]: financed through term loans, not commercial bills; [Initial Public Offers]: equity financing through the capital market.

Correct Answer: A. Discount and Finance House of India

• **Discount and Finance House of India (DFHI)** = it was set up by RBI to provide liquidity to money market instruments. • **2004** — DFHI merged with STCI to form STCI Primary Dealer Ltd., ending its independent existence. • 💡 Wrong-option analysis: [Department of Financial and Housing Investment]: a fictitious expansion; [Debt and Finance House of India]: incorrect expansion of the acronym; [Direct Financial Holding Institution]: not a real institution.

Correct Answer: B. 364 days

• **364 days** = the maximum tenor for a Treasury Bill in India, qualifying it as a money market instrument. • **364 days (not 365)** — the 364-day T-bill was introduced to serve as a benchmark for short-term interest rates. • 💡 Wrong-option analysis: [365 days]: not a valid T-bill tenor; the maximum is 364 days; [91 days]: an active tenor but not the maximum; [182 days]: an active tenor but not the maximum.

Correct Answer: D. Indigenous Bankers and Moneylenders

• **Indigenous Bankers and Moneylenders** = these form the unorganised money market, operating outside RBI's direct control. • **High interest rates** — unorganised lenders charge significantly higher rates than formal banking institutions. • 💡 Wrong-option analysis: [Scheduled Commercial Banks]: part of the organised market regulated by RBI; [Primary Dealers]: licensed entities in the organised market dealing in government securities; [Mutual Funds]: regulated by SEBI, part of the organised financial system.

Correct Answer: A. Reverse Repo Rate

• **Reverse Repo Rate** = the rate at which RBI absorbs surplus liquidity from banks under the Liquidity Adjustment Facility. • **Liquidity absorption** — when the reverse repo rate rises, banks prefer parking funds with RBI over lending, tightening money supply. • 💡 Wrong-option analysis: [Marginal Standing Facility Rate]: the rate for emergency borrowing from RBI, used for injection not absorption; [Repo Rate]: the rate for injecting liquidity, not absorbing; [Bank Rate]: used for long-term lending, not LAF operations.

Correct Answer: D. Buy back the security at a specified price and date

• **Repurchase Agreement (Repo)** = the seller sells a security and commits to buy it back at a pre-determined price and future date. • **Collateralised loan** — the security acts as collateral; the price difference between sale and repurchase equals the interest cost. • 💡 Wrong-option analysis: [Exchange the security for equity]: Repo is a debt transaction, not an equity swap; [Sell the security at a higher price later]: that describes a reverse repo from the buyer's view, not the seller's obligation; [Default on the payment]: the opposite of what a repo agreement requires.

Correct Answer: D. To manage day-to-day liquidity in the banking system

• **Liquidity Adjustment Facility (LAF)** = a mechanism allowing banks to borrow or park funds with RBI through Repo and Reverse Repo to manage daily banking-system liquidity. • **Daily** — LAF operations occur every day, keeping call money rates anchored within the policy rate corridor. • 💡 Wrong-option analysis: [Long-term credit to agriculture]: provided by NABARD's refinance schemes, not LAF; [Print new currency notes]: done by RBI's currency department, unrelated to LAF; [Regulate the stock market]: SEBI's function.