Money Market — Set 3

Correct Answer: B. Treasury Bills

• **Treasury Bills** = sovereign debt instruments guaranteed by the central government, offering zero default risk. • **Zero default risk** — backed by the full faith of the government, making them the safest short-term instrument available. • 💡 Wrong-option analysis: [Commercial Paper]: unsecured corporate debt, carries issuer credit risk; [Corporate Bonds]: carry issuer credit and interest rate risk; [Equity Shares]: the riskiest category, involving market and company risk.

Correct Answer: D. Primary Dealers and All-India Financial Institutions

• **Primary Dealers and All-India Financial Institutions** = besides highly-rated companies, these entities can also issue Commercial Papers in India. • **Wholesale funding** — CP issuance by PDs and FIs helps them bridge short-term funding gaps in the financial sector. • 💡 Wrong-option analysis: [Small retailers]: lack the credit rating and regulatory approval required to issue CPs; [Municipalities only]: municipalities do not issue CPs; they may issue bonds; [Individual investors]: individuals cannot issue CPs.

Correct Answer: C. Market forces of demand and supply

• **Market forces of demand and supply** = the call money rate is a freely floating market rate determined by overnight liquidity conditions. • **RBI's indirect influence** — RBI does not fix the call rate directly but steers it via Repo and Reverse Repo rates. • 💡 Wrong-option analysis: [Governor of RBI]: does not directly set the call rate; policy rates are fixed by the MPC; [Finance Minister]: has no role in setting call money rates; [World Bank]: an international institution with no authority over India's domestic inter-bank rates.

Correct Answer: D. It can be transferred from one person to another

• **Transferable** = a 'negotiable' Certificate of Deposit can be legally transferred to another person in the secondary market. • **Secondary market trading** — transferability provides liquidity, allowing investors to exit before maturity without penalty. • 💡 Wrong-option analysis: [Only used by the government]: CDs are issued by banks, not the government; [Valid only for one day]: CDs have a minimum maturity of 7 days, not one day; [Interest rate can be haggled]: the CD terms are set at issuance and cannot be renegotiated.

Correct Answer: B. Chit Funds

• **Chit Funds** = these belong to the unorganised or semi-organised sector and are NOT organised money market participants. • **Regulated vs unregulated** — organised participants (banks, MFs, insurance companies) follow RBI/SEBI norms; chit funds operate under state-level registration. • 💡 Wrong-option analysis: [Insurance Companies]: regulated by IRDAI and are organised market participants; [Mutual Funds]: regulated by SEBI, active in organised money market; [Commercial Banks]: the backbone of the organised money market.

Correct Answer: C. Bank Rate

• **Bank Rate** = the rate at which RBI buys or rediscounts bills of exchange; used for borrowing beyond the Repo window, typically exceeding 14 days. • **Aligned with MSF** — the Bank Rate is currently kept equal to the Marginal Standing Facility (MSF) rate. • 💡 Wrong-option analysis: [Repo Rate]: applies to short-term overnight borrowing through LAF, not beyond; [Call Rate]: market-determined overnight rate, not an RBI-administered rate; [Reverse Repo Rate]: rate at which RBI absorbs funds, not lends.

Correct Answer: C. Government Securities and Money Market instruments

• **Government Securities and Money Market instruments** = Primary Dealers are licensed specialists dealing in G-Secs and short-term market papers. • **Market makers** — PDs provide two-way quotes in the secondary market, ensuring liquidity in government securities. • 💡 Wrong-option analysis: [Agricultural crops]: traded on commodity exchanges, not in the money market; [Small savings of households]: collected by post offices and small finance banks, not PDs; [Real Estate]: handled by real estate firms and NBFCs, not Primary Dealers.

Correct Answer: C. 7 days to 1 year

• **7 days to 1 year** = the maturity range for a Certificate of Deposit issued by a scheduled commercial bank. • **1 to 3 years** — CDs issued by All-India Financial Institutions (not banks) can have a longer maturity of 1–3 years. • 💡 Wrong-option analysis: [91 days to 364 days]: valid for T-bills, not the full CD maturity range; [1 month to 3 years]: the 1–3 year bracket applies only to FI-issued CDs; [1 year to 5 years]: exceeds the maximum allowed for bank CDs.

Correct Answer: B. Individual investors

• **Individual investors** = Money Market Mutual Funds were introduced to give retail investors access to high-denomination money market instruments. • **Pooling mechanism** — MMMFs pool small savings and invest in T-Bills and CPs, passing market-linked returns to small savers. • 💡 Wrong-option analysis: [State governments only]: states access short-term funds through WMA, not MMMFs; [Large Foreign Banks]: already have direct access to money market instruments; [Central Government]: issues instruments; it does not invest via MMMFs.

Correct Answer: C. Short-term credit from RBI to Government

• **Ways and Means Advances (WMA)** = a temporary credit facility provided by RBI to the Central and State governments to bridge receipts–payments mismatches. • **Short-term internal arrangement** — WMA is not public borrowing; it is a credit line between RBI and the government, repaid quickly. • 💡 Wrong-option analysis: [Private Corporate Loan]: WMA is a sovereign facility, not a private-sector product; [Stock exchange credit]: refers to margin funding on securities, unrelated to WMA; [Inter-bank borrowing]: takes place in the call money market, not under WMA.