Money Market — Set 5

Correct Answer: C. Treasury Bills

• **Treasury Bills** = the 364-day T-bill provides a pricing benchmark that links short-term and long-term interest rates, forming the yield curve. • **Yield curve** — the yield curve, anchored by T-bill rates at the short end, is essential for monetary policy transmission. • 💡 Wrong-option analysis: [Commercial Paper]: a corporate borrowing tool; does not serve as a public benchmark for the yield curve; [Savings Account]: a retail banking product, not a market benchmark; [Call Money]: overnight rate only; cannot bridge short-term to long-term rates.

Correct Answer: D. Repo and Reverse Repo

• **Repo and Reverse Repo** = the Liquidity Adjustment Facility (LAF) consists of these two operations for daily liquidity management. • **Most-used indirect tool** — through daily LAF auctions, RBI manages the volume of money in the banking system precisely. • 💡 Wrong-option analysis: [Open Market Operations and Repo]: OMO is a separate tool for durable liquidity; LAF specifically means Repo + Reverse Repo; [Bank Rate and CRR]: older quantitative tools, not components of LAF; [SLR and MSF]: SLR is a reserve requirement; MSF is an emergency window separate from LAF.

Correct Answer: D. Rs. 4 Crore

• **Rs. 4 crore** = the minimum tangible net worth a company must have to issue Commercial Paper in India. • **Bank-sanctioned working capital** — besides net worth, the company's working capital limit must be sanctioned by a bank. • 💡 Wrong-option analysis: [Rs. 1 crore]: below the prescribed minimum of Rs. 4 crore; [Rs. 50 crore]: far above the actual threshold; [Rs. 10 crore]: also higher than the required minimum.

Correct Answer: D. Repo Transaction

• **Repo Transaction** = a Repo is also known as a 'Ready Forward' deal — a ready (spot) sale of a security with a pre-agreed forward repurchase. • **Collateralised daily liquidity** — banks use Repo daily to get immediate cash (ready) while committing to reverse the deal (forward). • 💡 Wrong-option analysis: [Inter-bank loan]: unsecured lending, not a ready forward; [Bill of Exchange]: a trade instrument for working capital, not a repo-style instrument; [Savings Bond]: a government retail instrument for long-term saving.

Correct Answer: C. Lack of formal documentation and regulation

• **Lack of formal documentation and regulation** = the unorganised money market operates on informal agreements with no standardisation of rates or terms. • **Beyond monetary policy reach** — RBI's tools cannot directly influence interest rates in the unorganised sector. • 💡 Wrong-option analysis: [Strict adherence to RBI rules]: the opposite is true; the unorganised market operates outside RBI oversight; [High transparency]: unorganised markets are opaque and lack reporting requirements; [Uniformity of interest rates]: rates vary widely and are set by individual lenders.

Correct Answer: A. 15 days to 1 year

• **15 days to 1 year** = Term Money refers to inter-bank borrowing for a period exceeding 14 days and up to one year. • **Fixed rate** — unlike Call Money, Term Money rates are generally fixed for the entire tenure of the transaction. • 💡 Wrong-option analysis: [More than 5 years]: far beyond the one-year cap for money market instruments; [2 to 14 days]: this is the definition of Notice Money, not Term Money; [1 day]: this is Call Money.

Correct Answer: B. Hundi

• **Hundi** = a traditional indigenous instrument used in India's unorganised money market for centuries. • **Unorganised** — Hundis lack standardised formats and regulatory backing unlike T-Bills, CDs, and CPs. • 💡 Wrong-option analysis: [Treasury Bills]: sovereign short-term instruments of the organised market; [Certificate of Deposit]: bank-issued negotiable instrument in the organised market; [Commercial Paper]: corporates' organised-market short-term borrowing tool.

Correct Answer: A. To provide exit and liquidity to existing investors

• **Exit and liquidity for existing investors** = the secondary market allows investors to sell money market instruments before maturity. • **Price discovery** — active secondary trading by institutions like DFHI ensures that market prices reflect true supply and demand. • 💡 Wrong-option analysis: [Regulate commercial banks]: the RBI's function, not the secondary market's; [Print currency]: the RBI's currency department function; [Issue new securities]: the primary market's function.

Correct Answer: C. They can be easily and quickly converted into cash

• **Near Money** = money market instruments are called 'near money' because they can be quickly and cheaply converted to cash. • **Minimal delay and cost** — their short maturity and active secondary market make liquidation almost frictionless. • 💡 Wrong-option analysis: [They have no value]: incorrect; near money has full monetary value and yield; [Only available in banks]: many instruments trade on OTC and exchange platforms beyond banks; [They look like paper currency]: the term 'near money' refers to liquidity, not physical appearance.

Correct Answer: B. Discount from the face value

• **Discount from face value** = Treasury Bills earn no coupon; investors buy at a discount (e.g., Rs. 98) and redeem at face value (Rs. 100). • **Implicit interest** — the difference between the discounted purchase price and the Rs. 100 face value is the investor's implicit return. • 💡 Wrong-option analysis: [Annual coupons]: coupon bonds pay periodic interest; T-Bills are zero-coupon instruments; [Monthly interest]: no periodic payments exist for T-Bills; [Quarterly dividends]: dividends relate to equity shares, not debt instruments.