What is the need for the money market in India? 1. To meet shortfalls...
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.
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What is the need for the money market in India? 1. To meet shortfalls...
The correct answer is option 'A' - 1 and 2 only.
The money market in India serves several important purposes in the financial system. It plays a vital role in meeting shortfalls in working capital requirements and protects the economic system from creating a chain of negatives. Let's understand these points in detail:
1. Meeting Shortfalls in Working Capital Requirements:
The money market in India provides short-term funds to meet the working capital requirements of businesses. Many companies face temporary cash flow imbalances due to delays in payments from customers or other unforeseen circumstances. The money market provides a platform for companies to borrow funds for a short duration, typically less than one year, to bridge these gaps. This helps businesses maintain smooth operations and meet their immediate financial obligations.
2. Protecting the Economic System from Creating a Chain of Negatives:
The money market acts as a cushion to absorb any sudden shocks or disruptions in the financial system. It provides liquidity to banks and financial institutions, ensuring their stability and preventing them from facing a liquidity crisis. This, in turn, protects the entire economic system from a potential chain of negative events that could arise from the collapse of financial institutions.
The money market achieves this by offering various short-term instruments such as Treasury Bills (T-bills), Commercial Papers (CPs), Certificates of Deposit (CDs), and Repurchase Agreements (Repos). These instruments facilitate the efficient movement of funds between surplus and deficit entities in the economy, ensuring stability and liquidity management.
3. Supporting the Capital Requirement of Public Sector Projects:
The statement mentioning the money market's role in supporting the capital requirement of public sector industries (option 3) is incorrect. Public sector industries typically raise funds for their capital requirements through long-term financing options such as equity issuance or bond markets. The money market primarily focuses on providing short-term funds and does not directly cater to the long-term financing needs of public sector projects.
In conclusion, the money market in India primarily serves the purpose of meeting shortfalls in working capital requirements and protecting the economic system from creating a chain of negatives. It does not directly support the capital requirements of public sector industries. Hence, the correct answer is option 'A' - 1 and 2 only.
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