Money Market — Set 6

Correct Answer: D. Call Money Market

• **Call Money Market** = banks use this overnight market to borrow funds and meet their mandatory CRR balance with RBI. • **Most active segment** — in terms of daily transaction volume, the call money market is the busiest segment of the Indian money market. • 💡 Wrong-option analysis: [Bullion Market]: for gold and silver trading, unrelated to CRR; [Foreign Exchange Market]: for currency transactions, not CRR management; [Equity Market]: for trading company shares, not for banking liquidity needs.

Correct Answer: D. Individuals, Banks, Trusts, and Corporates

• **Individuals, Banks, Trusts, and Corporates** = any resident of India, plus banks and institutions, can purchase Treasury Bills. • **FPI limit** — Foreign Portfolio Investors are also permitted to invest in T-Bills within prescribed limits set by RBI. • 💡 Wrong-option analysis: [Only the RBI]: RBI conducts auctions on behalf of the government; it does not exclusively buy T-Bills; [Only foreign governments]: foreign entities can invest under FPI limits but are not the only eligible buyers; [Only Commercial Banks]: banks are major buyers but T-Bills are open to all residents.

Correct Answer: C. Narasimham Committee (II)

• **Narasimham Committee (II)** = the Second Narasimham Committee recommended the LAF system in 1998 to modernise liquidity management. • **1998** — following the recommendation, LAF replaced the earlier system of general refinance facilities. • 💡 Wrong-option analysis: [Tarapore Committee]: dealt with capital account convertibility, not LAF; [Vaghul Committee]: recommended DFHI and money market reforms, not specifically LAF; [Khanna Committee]: not linked to LAF introduction.

Correct Answer: D. Credit demand is high and liquidity is low

• **Credit demand is high and liquidity is low** = banks issue CDs to mobilise large deposits when facing funding shortages. • **Higher cost** — CDs offer above-savings-account rates to attract corporate funds, making them a costlier but flexible funding source. • 💡 Wrong-option analysis: [Credit demand is low and liquidity is high]: banks have no urgency to issue expensive CDs in such a scenario; [Stock market is crashing]: has no direct relationship with CD issuance; [Government is in surplus]: the government's fiscal position does not trigger bank CD issuance.

Correct Answer: B. 1 day

• **Overnight Repo** = a repurchase agreement with a maturity of exactly one day used for daily liquidity management. • **Next business day** — the bank borrows today and returns the funds with interest on the next working day. • 💡 Wrong-option analysis: [14 days]: that is the maximum for Notice Money, not overnight repo; [30 days]: exceeds the overnight definition; [7 days]: the minimum maturity for CPs and CDs, not the definition of overnight repo.

Correct Answer: D. Business firms involved in trade

• **Business firms involved in trade** = Commercial Bills are issued by trading firms to settle payments for credit purchases of goods. • **Self-liquidating** — the bill is discharged when the buyer sells the goods and pays, making repayment tied to the trade cycle. • 💡 Wrong-option analysis: [Small households]: households have no trade receivables to convert into bills; [Unemployed individuals]: commercial bills require a trade transaction; [Retail shoppers]: buyers, not sellers; commercial bills are drawn by the seller on the buyer.

Correct Answer: B. Short-term

• **Short-term** = the money market exclusively handles financial instruments with maturity under one year. • **Under one year** — short maturity ensures liquidity and minimal price-change risk for participants parking idle funds. • 💡 Wrong-option analysis: [Undetermined]: money market instruments always have a fixed and defined maturity; [Perpetual]: perpetual instruments like equity belong to the capital market; [Long-term]: capital market instruments are long-term; the money market is specifically for short-term.

Correct Answer: D. 273 days

• **273 days** = this tenor is NOT currently issued; standard T-bill tenors in India are 91, 182, and 364 days only. • **91, 182, 364 days** — these three tenors cover short, medium, and near-one-year government borrowing needs. • 💡 Wrong-option analysis: [182 days]: an active standard T-bill tenor auctioned regularly; [91 days]: the shortest active tenor, auctioned every week; [364 days]: the longest active tenor providing a near-one-year benchmark.

Correct Answer: D. Banks get more incentive to park funds with RBI, reducing lending

• **Banks get more incentive to park funds with RBI, reducing lending** = raising the reverse repo rate makes parking with RBI more attractive, shrinking credit supply. • **Inflation control** — by reducing money supply in the economy, a higher reverse repo rate helps control rising prices. • 💡 Wrong-option analysis: [Borrowing from RBI becomes cheaper]: that would happen if the repo rate fell, not if the reverse repo rate rose; [Interest rates on loans decrease]: loan rates rise when the policy corridor tightens; [Liquidity in the banking system increases]: the opposite happens — funds move to RBI, reducing bank liquidity.

Correct Answer: C. Temporary deficits in cash position

• **Temporary deficits in cash position** = money market instruments are used to finance short-term liquidity mismatches between receipts and payments. • **Short-term only** — long-term needs like railways and factories require capital market funding, not money market instruments. • 💡 Wrong-option analysis: [Long-term railway projects]: infrastructure projects use long-term bonds and budgetary support; [A country's external war]: defence spending is a fiscal matter, not a money market function; [Establishment of new factories]: funded through term loans and equity, i.e., the capital market.