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Which of the following instruments is commonly associated with the Capital Markets in India?
- a)Repo
- b)Tri-Party Repo
- c)Treasury Bills
- d)Call Money
Correct answer is option 'A'. Can you explain this answer?
Verified Answer
Which of the following instruments is commonly associated with the Cap...
In the context of the Indian Capital Markets, the instrument commonly associated is Repurchase Agreements (Repo). A Repo transaction involves the sale of securities, typically government securities, by one party to another with a commitment to repurchase them at a predetermined future date and price. This mechanism serves as a crucial avenue for short-term borrowing and lending, providing financial institutions with a means to manage liquidity and access short-term funds using securities as collateral. The Repo market plays a pivotal role in optimizing cash flows, facilitating efficient liquidity management, and enhancing the overall stability of the financial system by leveraging the security of government securities as the underlying collateral.
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Which of the following instruments is commonly associated with the Cap...
Understanding Capital Markets in India
Capital markets in India play a crucial role in the economy by facilitating the trading of financial securities. Among various instruments, the repo (repurchase agreement) stands out as a significant tool.
What is a Repo?
- A repo is a short-term borrowing instrument where one party sells securities to another with an agreement to repurchase them at a later date at a predetermined price.
- This instrument is primarily used by banks and financial institutions to manage liquidity and finance their operations.
Role of Repo in Capital Markets
- Liquidity Management: Repos help institutions manage their liquidity efficiently, allowing them to meet short-term funding needs.
- Interest Rate Control: The repo rate is a key monetary policy tool used by the Reserve Bank of India (RBI) to control inflation and manage economic growth.
- Risk Mitigation: Since repos are collateralized transactions, they provide a safer means for lenders to earn returns while minimizing default risk.
Comparison with Other Instruments
- Tri-Party Repo: Involves a third party to facilitate the transaction but is less commonly associated with standard capital market operations.
- Treasury Bills: Short-term government securities primarily used for funding and are considered a part of money markets.
- Call Money: A money market instrument used for short-term borrowing, typically for overnight loans among banks.
Conclusion
The repo is most closely associated with capital markets due to its significant impact on liquidity management and interest rate regulation, making it a vital instrument within this sector in India.
Capital markets in India play a crucial role in the economy by facilitating the trading of financial securities. Among various instruments, the repo (repurchase agreement) stands out as a significant tool.
What is a Repo?
- A repo is a short-term borrowing instrument where one party sells securities to another with an agreement to repurchase them at a later date at a predetermined price.
- This instrument is primarily used by banks and financial institutions to manage liquidity and finance their operations.
Role of Repo in Capital Markets
- Liquidity Management: Repos help institutions manage their liquidity efficiently, allowing them to meet short-term funding needs.
- Interest Rate Control: The repo rate is a key monetary policy tool used by the Reserve Bank of India (RBI) to control inflation and manage economic growth.
- Risk Mitigation: Since repos are collateralized transactions, they provide a safer means for lenders to earn returns while minimizing default risk.
Comparison with Other Instruments
- Tri-Party Repo: Involves a third party to facilitate the transaction but is less commonly associated with standard capital market operations.
- Treasury Bills: Short-term government securities primarily used for funding and are considered a part of money markets.
- Call Money: A money market instrument used for short-term borrowing, typically for overnight loans among banks.
Conclusion
The repo is most closely associated with capital markets due to its significant impact on liquidity management and interest rate regulation, making it a vital instrument within this sector in India.
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Which of the following instruments is commonly associated with the Capital Markets in India?a)Repob)Tri-Party Repoc)Treasury Billsd)Call MoneyCorrect answer is option 'A'. Can you explain this answer?
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