Money Market — Set 7

Correct Answer: C. Treasury Bill

• **Treasury Bill** = issued by the Government of India, T-Bills carry no default risk and are the safest money market instrument. • **No default risk** — the government guarantees repayment, making T-Bills a benchmark for risk-free returns. • 💡 Wrong-option analysis: [Commercial Paper]: unsecured corporate debt, carries issuer credit risk; [Certificate of Deposit]: bank-issued and generally safe but carries some bank credit risk; [Commercial Bill]: a trade instrument with buyer credit risk.

Correct Answer: B. One day

• **One day** = Call Money is inter-bank borrowing and lending for exactly one day. • **Notice Money** — if the same borrowing covers 2 to 14 days, it is reclassified as Notice Money, not Call Money. • 💡 Wrong-option analysis: [More than a month]: that duration falls under Term Money; [Two to 14 days]: the definition of Notice Money, not Call Money; [15 days to 30 days]: this falls within Term Money.

Correct Answer: C. 1 year

• **1 year (364 days)** = the maximum maturity allowed for a Commercial Paper issued in India. • **7-day minimum** — CP can be issued for as short as 7 days and as long as 364 days, covering the full short-term spectrum. • 💡 Wrong-option analysis: [6 months]: a valid duration but not the maximum; CP can go up to 1 year; [14 days]: valid but not the maximum maturity; [3 months]: also valid but not the maximum maturity.

Correct Answer: C. RBI

• **RBI** = the Reserve Bank of India is the supreme regulator of the organised money market in India. • **Repo and Reverse Repo** — RBI's daily LAF operations using these tools directly steer money market liquidity and rates. • 💡 Wrong-option analysis: [SEBI]: regulates the capital market (equity and long-term debt), not the money market; [Finance Ministry]: sets fiscal policy but does not regulate the money market; [SBI]: a commercial bank and market participant, not a regulator.

Correct Answer: C. Commercial Banks

• **Commercial Banks** = Certificates of Deposit are primarily issued by scheduled commercial banks and select financial institutions. • **Tight liquidity** — banks issue CDs when their liquidity is low and they need to mobilise large funds quickly. • 💡 Wrong-option analysis: [Central Government]: issues T-Bills and CMBs, not CDs; [Municipal Corporations]: issue municipal bonds, not CDs; [Private Companies]: issue Commercial Paper, not CDs.

Correct Answer: D. Cash Management Bill

• **Cash Management Bill** = CMBs were introduced in 2010 to meet government cash-flow needs for periods less than 91 days. • **Less than 91 days** — this ultra-short maturity distinguishes CMBs from standard 91-day T-Bills in the government's borrowing toolkit. • 💡 Wrong-option analysis: [Commercial Paper]: a corporate instrument, not issued by the government; [Notice Money]: inter-bank product, not a government borrowing tool; [Treasury Bill]: minimum tenor is 91 days; CMBs fill the sub-91-day gap.

Correct Answer: C. 7 days

• **7 days** = the minimum maturity for a Certificate of Deposit issued by a bank, as per RBI guidelines. • **Maximum 1 year** — for bank-issued CDs the ceiling is one year; FI-issued CDs can go up to 3 years. • 💡 Wrong-option analysis: [15 days]: above the actual minimum; the floor is 7 days; [1 day]: below the prescribed minimum; [30 days]: also above the minimum of 7 days.

Correct Answer: D. Short-term funds

• **Short-term funds** = the money market is exclusively for short-term borrowing and lending, generally up to one year. • **Capital Market contrast** — while the money market handles short-term funds, the capital market deals with long-term equity and debt. • 💡 Wrong-option analysis: [Long-term funds]: these belong to the capital market, not the money market; [Equity shares]: capital market instruments representing ownership, not short-term debt; [Foreign direct investment]: long-term cross-border investment, entirely different from money market operations.

Correct Answer: C. Banks borrow from RBI

• **Banks borrow from RBI** = the Repo Rate is the rate at which commercial banks borrow money from RBI by selling government securities. • **Inflation tool** — RBI raises the repo rate to make bank borrowing costlier, reducing credit supply and controlling inflation. • 💡 Wrong-option analysis: [RBI borrows from banks]: that describes the Reverse Repo Rate; [Banks lend to the public]: banks set their own lending rates based partly on the repo rate, but that is not the definition of repo rate; [Government borrows from the public]: done through auctions of G-Secs, unrelated to repo rate.

Correct Answer: C. 2 to 14 days

• **2 to 14 days** = Notice Money refers to short-term inter-bank borrowing for a period between 2 and 14 days. • **Call Money distinction** — if the period is exactly 1 day, the same transaction is called Call Money, not Notice Money. • 💡 Wrong-option analysis: [15 to 30 days]: this falls under Term Money; [More than a year]: far outside the money market maturity range; [1 day]: the definition of Call Money.