Test: Financial Market - UGC NET MCQ

Statement 1 is correct because the RBI uses OMOs to manage money supply and influence inflation and lending rates. Statement 2 is incorrect because selling G-Secs actually removes liquidity from the market, as it takes cash out of circulation. Therefore, the correct answer is Option A: 1 Only.

The government's approach to borrowing in the fiscal year 2023-24 focuses on aligning borrowing with actual needs. This strategy reflects a commitment to prudent fiscal management, which aims to sustain fiscal stability and ensure that expenditures are met without unnecessary increases in national debt. A notable aspect of this approach is the careful planning involved, which can help to maintain investor confidence in government securities.

The government anticipates receiving a dividend from the Reserve Bank of India in Financial Year 2025, similar to what was received in FY 2024. This expectation is significant because it indicates the government's reliance on the RBI's financial health and its implications for overall fiscal stability. Additionally, dividends from the RBI can contribute to funding government programs and initiatives, thereby impacting public finance.

To evaluate the correctness of the statements:

- Statement 1 is incorrect because retail investors can buy T-bills through an online Retail Direct Gilt (RDG) Account with the RBI or via select banks and primary agents, thus not limited to traditional banking methods.

- Statement 2 is correct as T-bills can indeed be traded in the secondary market through demat accounts, which provides liquidity and trading opportunities before their maturity.

Therefore, the correct answer is Option B: 2 Only.

• The Assertion is true because treasury bills are indeed classified as short-term Government Securities with maturities of less than one year.
• The Reason is also true, correctly distinguishing between treasury bills and long-term bonds based on their maturities.
• The Reason serves as the correct explanation for the Assertion since the classification of treasury bills as short-term is directly related to their shorter maturities.

• The Assertion is correct because Government Securities (G-Secs) are indeed considered risk-free due to the backing of the government.
• The Reason is also correct as it accurately describes one of the primary purposes for which G-Secs are issued.
• The Reason effectively explains the Assertion since the low-risk nature of these securities is largely due to their issuance for covering fiscal deficits.

The main purpose of the Reserve Bank of India's surplus transfer to the government is to provide funds for government expenditure. This transfer is governed by Section 47 of the Reserve Bank of India Act, 1934, and occurs after the RBI has allocated necessary funds for reserves and retained earnings. This mechanism helps ensure that the government has access to additional resources for public spending, which can be crucial for economic development. An interesting fact is that these transfers can significantly impact the government's budget and fiscal policies.

- The Assertion is correct because T-bills are indeed issued at a discount and do not pay interest (coupon payments).

- The Reason is also correct; however, it does not accurately explain the assertion since T-bills do not provide a fixed income but rather a return that is the difference between the purchase price and the face value at maturity.

- Therefore, while both statements are true, the reason does not correctly explain the assertion, making Option A the correct choice.

- The Assertion is true because SDLs are indeed structured similarly to Central Government dated securities and are issued through auctions.

- The Reason is also true as SDLs are used for financing specific projects at the state level. However, the liquidity of SDLs can vary and is not strictly lower than all other G-Secs; hence, this reason does not serve as a correct explanation for the assertion.

- Since both statements are true, but the reason does not explain the assertion satisfactorily, the correct choice is Option B.

The expenses of the Reserve Bank of India include currency note printing, staff salaries, and interest payments. However, investing in foreign bonds is generally considered an asset management activity rather than an expense. Understanding the financial operations of a central bank is crucial, as it impacts the overall economy and monetary policy.