Ramesh Singh Test : Indian Financial Market


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QUESTION: 1

Consider the following statements.

1. Trading is done on a rate known as the discount rate which is determined by the market.

2. Borrowings in the money market must be supported by collaterals.

3. In the capital market, money can be traded on the interest rate as well as the discount rate.

Which of these statements is/are correct?

Solution:
  • The money market is the short-term financial market of an economy. In this market, money is traded between individuals or groups (i.e., financial institutions, banks, government, companies, etc.), who are either cash-surplus or cash-scarce.

  • Trading is done on a rate known as the discount rate which is determined by the market and guided by the availability of and demand for the cash in the day-to-day trading.

  • Borrowing in this market may or may not be supported by collaterals.

  • In the capital market, money is traded on the interest rate as well as on dividends. Long-term loans are raised on well-defined interest rates, while long-term capital is raised on dividends through the sale of shares.

QUESTION: 2

Consider the following statements about the Indian money market.

1. The market operates in both ‘organised and ‘unorganised channels in India.

2. The transactions might take place through the intermediaries or directly between the trading sides.

Which of these statements is/are correct?

Solution:

The market operates in both ‘organised and ‘unorganised channels in India. Starting from the 'person-to-person’ mode and converting into ‘telephonic transaction', it has now gone online in the age of internet and information technology. The transactions might take place through the intermediaries (known as brokers) or directly between the trading sides.

QUESTION: 3

What is the need for the money market in India?

1. To meet shortfalls in working capital requirements.

2. Protecting the economic system from creating a chain of negatives.

3. To support the capital requirement of the projects of the public sector industries.

Which of these statements is/are correct?

Solution: This requires the creation of a different segment of the financial market which can cater to the short-term requirements of such funds for the enterprises-known as the money market or the working capital market. To support the capital requirement of the projects of the public sector industries, there is a capital market.

QUESTION: 4

Which of the following committee laid the blueprint for the development of the money market in India?

Solution:
  • The organised form of money market in India is just close to three decades old. However, its presence has been there but restricted to the government only.

  • It was the Chakravarthy Committee (1985) which, for the first time, underlined the need of an organised money market in the country and the Vaghul Committee (1987) laid the blueprint for its development.

  • Today, the money market in India is not an integrated unit and has two segments- unorganised Money Market and Organised Money Market.

QUESTION: 5

Chettiars come under which of the following categories of unorganised money market?

Solution:
  • Indigenous Bankers: Indigenous bankers receive deposits and lend money in the capacity of an individual or private firms. There are four such bankers in the country functioning as non-homogenous groups: (a) Gujarati Shroffs: They operate in Mumbai, Kolkata as well as in industrial, trading and port cities in the region. (b) Multani or Shikarpuri Shroffs: They operate in Mumbai, Kolkata, Assam tea gardens and North-Eastern India. (c) Marwari Kayas. They operate mainly in Gujarat with a little bit of presence in Mumbai and Kolkata. (d) Chettiars: They are active in Chennai and at the ports of southern India.

QUESTION: 6

Which of the following types of treasury bills are issued in India?

1. 14-day TBs

2. 184-day TBs

3. 365-day TBs

Choose from the following options.

Solution: (a) 14-day (Intermediate TBs) (b) 14-day (Auctionable TBS) (c) 91-day TBS (d) 182-day TBS (e) 364-day TBS Out of the above five variants of the TBs, at present only the 91-day TBs, 182-day TBs and the 364-day TBs are issued by the government. The other two variants were discontinued in 2001. The TBs other than providing short-term cushion to the government, also function as short-term investment avenues for the banks and financial institutions, besides functioning requirements of the CRR and SLR of banking institutions.

QUESTION: 7

Consider the following statements regarding the certificate of deposit.

1. It is used by banks and issued to the depositors for a specified period ranging less than one year.

2. They are negotiable and tradable in the money market.

3. Financial Institutions are allowed to issue CDs for the maturity periods up to 1 year only.

Which of these statements are correct?

Solution:
  • Certificate of Deposit (CD): Organised in 1989, the CD is used by banks and issued to the depositors for a specified period ranging less than one year—they are negotiable and tradable in the money market.

  • Since 1993 the RBI allowed the financial institutions to operate in it- IFCI, IDBI, IRBI (IIBI since 1997) and the Exim Bank—they can issue CDs for the maturity periods above one year and up to three years.

QUESTION: 8

Fund can be borrowed/raised for a maximum period up to 14 days (called short notice). Borrowing in this market may take place against securities or without securities. Rate of interest in this market ‘glides’ with the ‘repo rate of the time the principle remains very simple—longer the period, higher the interest rate. We are talking about?

Solution: Self-explanatory

QUESTION: 9

Which of the following are correct about repos and reverse repos?

1. In a reverse repo, the banks and financial institutions purchase government securities from the RBI.

2. Most of the government securities are dated and the interest for the repo or reverse repo transactions are announced by the RBI from time to time.

Choose from the following options.

Solution: In a reverse repo, the banks and financial institutions purchase government securities from the RBI (basically here the RBI is borrowing from the banks and the financial institutions). All government securities are dated and the interest for the repo or reverse repo transactions are announced by the RBI from time to time.

QUESTION: 10

Tourism Finance Corporation of India Limited comes under:

Solution: