Money Market — Set 4

Correct Answer: C. Indigenous Bankers

• **Indigenous Bankers** = these operate outside the organised sector and are NOT part of the organised money market. • **Unregulated** — indigenous bankers lack the formal regulation and standardisation required of organised-sector participants like RBI, banks, and PDs. • 💡 Wrong-option analysis: [Financial Institutions]: regulated entities that participate in the organised market; [Commercial Banks]: core members of the organised money market regulated by RBI; [RBI]: the apex regulator and the defining pillar of the organised money market.

Correct Answer: B. Repo Rate

• **Repo Rate** = the interest rate at which commercial banks borrow funds from RBI against government securities. • **Inflation control** — when RBI raises the repo rate, bank borrowing costs rise, reducing credit supply and cooling inflation. • 💡 Wrong-option analysis: [Discount Rate]: an older term; in the modern LAF framework the correct term is Repo Rate; [Marginal Rate]: not a standard RBI policy rate; [Base Rate]: the minimum lending rate set by banks for loans, not the rate on RBI borrowing.

Correct Answer: D. 14 days

• **14 days** = the 14-day Treasury Bill is NOT a standard tenor currently issued in India. • **3 active tenors: 91, 182, 364 days** — the 14-day and 273-day T-bills were discontinued; 91-day T-bills are auctioned weekly. • 💡 Wrong-option analysis: [182 days]: an active standard tenor auctioned by RBI; [364 days]: the maximum tenor and an active T-bill duration; [91 days]: the shortest active T-bill, auctioned every week.

Correct Answer: B. Vaghul Committee

• **Vaghul Committee** = this committee recommended the establishment of DFHI in 1988 to develop India's money market. • **1988** — DFHI was set up following the Vaghul Committee report to provide a secondary market for short-term instruments. • 💡 Wrong-option analysis: [Narasimham Committee]: recommended banking sector reforms; did not directly recommend DFHI; [Urjit Patel Committee]: dealt with monetary policy framework, not DFHI; [Verma Committee]: examined weak banks, unrelated to DFHI.

Correct Answer: C. Overnight emergency needs

• **Marginal Standing Facility (MSF)** = a window allowing banks to borrow overnight from RBI against their SLR portfolio for emergency needs. • **Higher than Repo** — the MSF rate is kept above the Repo rate to discourage frequent use and signal tight liquidity. • 💡 Wrong-option analysis: [Long-term investment]: banks use capital market or long-term bonds for that; [Agricultural loans]: refinanced through NABARD, not MSF; [Export financing]: handled by EXIM Bank and ECB routes.

Correct Answer: B. Rs. 5 Lakh

• **Rs. 5 lakh** = Commercial Paper is issued in denominations of Rs. 5 lakh or multiples thereof. • **Wholesale instrument** — the Rs. 5 lakh minimum restricts CP to corporate and institutional players, not retail investors. • 💡 Wrong-option analysis: [Rs. 10,000]: too small; CP is a wholesale market instrument; [Rs. 1 lakh]: below the prescribed denomination; [Rs. 1,000]: denominations for small-savings instruments, not for CP.

Correct Answer: B. Tight liquidity condition in the market

• **Tight liquidity condition** = a high call money rate signals that the banking system is facing a shortage of funds. • **RBI intervention** — when call rates spike, RBI injects liquidity through Repo auctions to restore balance. • 💡 Wrong-option analysis: [Excess liquidity in the market]: excess liquidity would push call rates down, not up; [Low demand for funds]: low demand also keeps rates subdued; [Stable economic conditions]: stable conditions keep call rates near the repo rate corridor.

Correct Answer: D. Money Market Instruments

• **Money Market Instruments** = these are the most liquid financial assets and can be converted to cash almost instantly with minimal loss. • **Near-money** — their short maturity and active secondary market minimise price-change risk during liquidation. • 💡 Wrong-option analysis: [Real Estate]: highly illiquid; selling property takes weeks or months; [Equities]: liquid but prices can fluctuate significantly, causing value loss; [Gold]: liquid but involves storage, assaying, and possible price volatility.

Correct Answer: D. The Central Government

• **Central Government** = Treasury Bills are issued solely by the Central Government; RBI conducts auctions on their behalf. • **State governments use WMA** — states do not issue T-Bills; they meet short-term needs through Ways and Means Advances. • 💡 Wrong-option analysis: [Foreign Investors]: they can buy T-Bills but cannot issue them; [State Governments only]: states issue no T-Bills; they use WMA or State Development Loans; [Public Sector Banks]: banks purchase T-Bills; they do not issue them.

Correct Answer: C. The transaction sizes are very large

• **Very large transaction sizes** = the money market is called a 'wholesale market' because deals involve crores of rupees dominated by institutions. • **Institutional dominance** — large banks, insurance companies, and corporates are the main participants, not individual retail savers. • 💡 Wrong-option analysis: [Goods sold in bulk]: that describes a commodity wholesale market, not a financial market; [Located in mandis]: mandis are agricultural markets, entirely different; [Agricultural commodities]: traded on commodity exchanges like NCDEX, not the money market.