SET- 2

1. Consider the following statements:

1. RBI takes recourse to open market operations (OMOs) to manage liquidity in the system.

2. In OMOs, RBI generally sells G-Sec in open market, however, in rare cases it also buys back the same from the market.

3. A ‘debt switch’ is a method in which the RBI buys back G-Secs of short-term maturity and replaces it with G-Secs with longer maturity periods.

Which of the above statements are correct?

(a) 1 and 2

(b) 2 and 3

(d) 1, 2 and 3

2. Consider the following statements about Independent Evaluation Office (IEO).

1. It is inspired from an IMF institution with the same name.

2. Together with the Flagship Programmes it may evaluate any scheme run by the GoI.

3. IEO may take the services of civil society and non-governmental research houses of India and abroad.

4. Its reports will be directly put in the public domain.

Which of the above statements are correct?

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

3. Since 2016–17, a new methodology has been operationalised by the RBI, for the banks in India, to decide their lending rates—known as the Marginal Cost of funds based Lending Rate (MCLR). The new method aims for which of the following:select your answer using the code given below:

1. to improve transmission of policy rates into the lending rates of banks

2. to improve transparency in the methodology followed by banks for determining interest rates

3. to ensure availability of bank loans at interest rates which are fair to the borrowers as well as the banks

4. to help the banks to become more competitive and enhance their long run value

Code:

(a) 1 and 3

(b) 1, 2 and 4

(d) 1, 2, 3 and 4

4. Consider the following statements regarding the Marginal Standing Facility (MSF):

1. MSF functions as the last resort for banks to borrow short-term funds.

2. MSF is on the line of the existing LAF and is part of it.

3. Being a penal rate, MSF is a costlier route than repo.

4. MSF is linked to the net demand and time liabilities of the banks.

Which of the above statements are correct?

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

5. RBI recently announced revised norms for Priority Sector Lending in India. Consider the following statement in the light of the announcement.

1. Foreign banks’ PSL target has been increased to 40 per cent at par with Indian banks irrespective of their number of branches.

2. Food and Agro-processing and overdrafts up to Rs. 50,000 in no-frill accounts have been included in it.

3. Off-grid solar and other renewable energy solutions together with vocational education are now under the PSL.

4. MSE loans up to Rs. 2 crore have also been added under the PSL lending of the banks.

Which of the above statements are correct?

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

6. Which of the following segments of money is considered as the ‘Other’ deposits with the RBI?

1. Deposits of quasi-government bodies

2. Other financial institutions and primary dealers

3. Balance in the accounts of foreign central banks and governments

4. Accounts of international agencies

Select your answer using the code below:

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

7. As per the New Monetary Aggregates of the RBI which of the following is not regarded as ‘broad money’?

1. Bankers’ deposits with the RBI

2. Demand & Time Deposits of the banks

3. Other Deposits with the RBI

4. Currency & coins with the public

5. Currency in circulation

6. Savings of Post Offices

Select your answer using the code below:

Code:

(a) 1, 2 and 4

(b) 3, 4 and 5

(d) 2, 3 and 4

8. Which of the following segments of the money form India’s ‘Reserve Money’? Give your answer using the code given below:

1. Net forex reserves with the RBI

2. GoI currency liabilities to the public

3. RBI’s net credit to Banks and the GoI

4. Non-monetary liabilities of the RBI

Select your answer using the code below:

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

9. Consider the following statements regarding the Regional Rural Banks (RRBs) in India.

1. The share capital of the RRBs is sponsored by the GoI, RBI and the Scheduled Commercial Banks in the ratio of 50 percent, 35 percent and 15 percent.

2. Its main objective is to enlarge institutional credit for the rural and agriculture sector.

3. RRBs are being restructured by the GoI under the recommendations of the Vyas Committee.

4. Appointments to the RRB’s are done by the sponsoring Scheduled Commercial Banks which falls outside the domain of the IBPS recruitment process.

Which of the above statements about RRBs are correct?

(a) 1 and 2

(b) 2 and 3

(d) 3 and 4

10. Which of the following statements is correct about the term ‘bank run’?

(a) The net balance of money a bank has in its chest at the end of the day’s business.

(b) A panic situation when deposit holders start withdrawing cash from the banks.

(d) The period in which a bank creates the highest credit in the market.

11. Consider the following statements.

1. Bond holders and depositors both suffer due to increased inflation.

2. RBI’s profits out of its investments in the Treasury Bills fall due to increased inflation.

3. Bond holders’ income increases with increased inflation in case of an inflation-indexed bond.

4. Cost of governments’ market borrowings increases in deflationary situation.

Which of the above statements are correct?

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

12. Consider the following statements regarding the operations of the various money market components in India:

1. Commercial Paper route of borrowing working capital is profitable once inflation has peaked.

2. Cost of operation for the banks in the Call Money Market falls in the wake of rising inflation.

3. Earnings from Money Market Mutual Funds.

4. Interest payments liabilities of the GoI on account of the Cash Management Bill increases in case of decreased inflation.

Select the correct statements using the code below.

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

13. Consider the following statements.

1. Governments cost of loan repayment is minimum once the inflation is maximum.

2. Tax collections of governments increase with increased inflation.

3. Seignorage is a double-edged technique to increase governments’ income.

Select the correct statements using the code below.

(a) 1 and 2

(b) 2 and 3

(d) 1, 2 and 3

14. Consider the following statements related to the functions of RBI.

1. The final decision regarding Credit & Monetary Policy is taken by the Union Ministry of Finance.

2. Open Market Operations by the RBI comes under its autonomous powers.

3. Ultimate power of issuing fresh currency notes in India remains with the RBI.

4. RBI has been given full autonomy in the area of regulating the All India Financial Institutions.

Which of the above statements are incorrect?

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

15. Consider the following statements about ‘market maker’.

1. Market maker is a kind of broker in India’s security market who quotes two-way prices for the securities.

2. On the platform of the Over the Counter Stock Exchange of India Ltd. (OTCEI) only market makers are allowed to trade.

3. The Discount and Finance House of India (DFHI) is the chief market maker in India’s Money Market.

4. Brokers have no compulsions of quoting two-way prices of securities though they may do so voluntarily.

Which of the above statements are correct?

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

16. Consider the following statements regarding Commodity Future Trading in India.

1. It is the best tool of maintaining stable prices for the commodities.

2. Price discovery at Commodity Exchanges discounts the local and global factors in the process of price search.

3. This is highly suitable for the agricultural commodities in India where highest price fluctuations happen due to various natural and man-made reasons.

4. At times, GoI bans trading in certain agricultural commodities as in short-term it may lead to speculative price rises.

Which of the above statements are correct?

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

17. Consider the following statements about the ‘private placement’ route to raise capital from the primary security market.

1. Shares are sold to a select group of investors through a process of direct negotiations.

2. This is completely opposite to the public issue route where no negotiation takes place with the investors.

3. Other than the foreign and domestic financial institutions, individuals too can participate in it.

Which of the above statements are correct?

(a) 1 and 2

(b) 2 and 3

(d) 1, 2 and 3

18. Consider the following statements related to a limited liability firm.

1. Nominal Capital of a company is the limit up to which a company can issue shares.

2. Registered Capital and Authorised Capital of a company are synonyms.

3. Paid-up Capital of a company can never be more than its Issued Capital.

4. Upper limit of Paid-up Capital of a company is its Authorised Capital.

Select the correct statements using the code below.

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

19. Consider the following statements related to the Angel Investors.

1. Such investors are focused on helping the business succeed rather than reaping a huge profit from their investment.

2. Conceptually, in profit motive, they are exact opposite of a ‘venture

capitalist’.

3. They usually invest in ‘person’ rather than in the viability of the business.

4. In India, they are classified as a category of ‘venture capital funds’.

Select the correct statements using the code below.

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

20. Consider the following statements.

1. Indian Depository Receipts (IDRs) allow Indian investors to invest in foreign companies in rupees.

2. Global Depository Receipts (GDRs) make it possible for foreign investors to invest in Indian companies in their currencies.

3. IDRs are issued in India by a Domestic Depository.

4. Though India has provisions for IDRs, foreign companies are yet to issue IDRs in India.

Select the correct statements using the code below.

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

21. Consider the following statements about the recently set up Bharatiya Mahila Bank (BMB).

1. Its lending is restricted only to women; men are allowed to deposit money in BMB.

2. The bank is looking at providing assistance through credit to set up day care centres and start organised catering services.

3. The bank may tie up with NGOs in the process of promoting vocations

among the rural women.

4. The savings interest rate for one lakh rupee and above is 5 per cent while interest for deposits of one year is 9 percent.

Which of the above statements are correct?

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2 ,3 and 4

22. A new disinvestment policy was announced by the Government recently

—select the correct statements related to it, using the code given below;

1. As per the new policy the PSUs can be now privatised.

2. Government of India can sell the shares of the PSUs upto 100 per cent, too.

3. PSUs will be used to attract more investment in the economy.

Code:

(a) Only 1

(b) 2 and 3

(d) 1, 2 and 3

23. Consider the following statements about ‘capital consumption’.

1. A situation, when due to the losses of a company in consecutive years make it obliged to pay its current expenses using its capital base.

2. A situation when the listed firms under-report their losses so that they can take higher benefits of depreciation.

3. The process by which a company shows higher loss in its operation to withhold payments of dividends to its various share holders.

Which of the above statements are incorrect?

(a) 1 and 2

(b) 2 and 3

(d) 1, 2 and 3

24. Consider the following statements about the idea of ‘micro-finance’ in India.

1. Micro-finance is a small-scale financial intermediation, inclusive of savings, credit, insurance, business services and technical support provided to the needy borrower.

2. The thrust of the micro finance initiative is to channelize production and consumption credit in multiple doses based on the absorption capacity of the prospective borrower.

3. It has evolved through following different models at different times—a ‘charity based model’ to a ‘thrift-based model’ and finally to the ‘trust and creditworthiness model’.

4. It was in Australia where the link between microfinance institutions and the formal financial institutions evolved.

Select the correct statements using the code below.

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

25. In 2017–18, the Government has to launch a programme of ‘human resource reforms for results’ for which of the following?

(a) mason training in the rural areas

(b) panchayati raj institutions

(d) village and agro-industry

Answer Key with Explanations

1. (c) OMOs are an effective quantitative policy tool in the armoury of the

RBI by which it modulates the liquidity in the system in the short-term. This is a two-way operation—through sell or buy of the G-Secs. The OMOs is constrained by the stock of the G-Secs available with the RBI

—once it needs to siphon out money from the market.

2. (d) It was set up on February 22, 2014 under the Planning Commission, which is headed by a Director General (Ajay Chhibber is its first DG). After the NITI Aayog was set up in January 2015, the IEO is there but without a DG – the body is supposed to be abolishe by 2017–18.

3. (d) All are the objectives of the new methodology. The MCLR will be a tenor linked internal benchmark and actual lending rates will be determined by adding the components of spread to the MCLR. Banks will review and publish their MCLR of different maturities every month on a pre-announced date. The periodicity of reset shall be one year or lower. Banks will continue to review and publish Base Rate as hitherto.

As per the RBI (April 2016), ‘for monetary transmission to occur, lending rates have to be sensitive to the policy rate’. But this was not occurring by now. Banks, by now, have been using either of the following three methods to compute their Base Rate—(i) average cost of funds, (ii) marginal cost of funds, or (iii) blended cost of funds (liabilities).

4. (c) RBI announced this route in 2011–12 as a ‘penal’ route for banks to borrow once they have exhausted all borrowing option, i.e., the repo route. MSF rate is regulated by the RBI above the current repo rate. This route can be used by banks for only overnight borrowings and is linked to their net demand and time liabilities (NDTL).

5. (b) Only those foreign banks which have 20 or more branches in the country have been brought at par with domestic banks regarding PSL (in a phased manner over a maximum period of 5 years starting April 1, 2013 to March 31, 2018). The foreign banks with less than 20 branches have no sub-targets within the overall priority sector lending target of 32 per cent. It is known that the RBI in August 2011 did set up a committee to re-examine the existing classification and suggest revised guidelines with regard to PSL and related issues (chaired by S. M. V. Nair). The committee submitted its report in February 2012.

6. (d) The stock of money in ‘Other deposits’ with the RBI is the liquidity which is available at its disposal for day-to-day uses and are not of any use for long-term purposes. Accounts in international agencies include agencies like IMF and other such bodies.

7. (c) In the new monetary aggregate M3 is the ‘broad money’ (like the old one). Bankers’ deposit is part of the ‘reserve money’. Post Offices’ saving deposits (excluding National Saving Certificates) are part of M4. For ‘other deposits’ see the explanation of the Q. No. 8.

8. (d) Non-monetary liabilities of the RBI includes those liabilities which pile up due to its role as ‘promoters’ to the All India Financial Institutions.

9. (b) The share capital of the RRBs are jointly held by the GoI, the sponsoring scheduled commercial banks (SCBs) and the concerned state governments in the ratio of 50 percent, 35 percent and 15 percent. Since December 2012, appointments to the RRBs take place through the Institute of Banking Personnel Selection (IBPS). By now, the RRBs have been amalgamated into 64 only (originally there were 196 such banks set up to 1996 when GoI decided not to further them).

10. (b) This happens when there is a fear that the bank has insufficient funds with it—depositors lose confidence in the bank and start withdrawing their deposits in the concerned bank. This term has been used in contemporary journalism recently in the wake of the high loss fetched by the United Bank of India. Similar situations were seen in the wake of the sub-prime crisis in the US economy—by now, over 300 banks have been closed down in the economy due to losses.

11. (c) This question is based on the situation where ‘borrowers benefit out of inflation while lenders suffer’ (i.e., inflation premium). Inflation-indexed bonds are neutral to the effects of inflation; if someone holds such bonds during inflationary pressures, the interest benefit on it does not see any erosion.

12. (d) This question is based on the idea of relationship between ‘inflation’ and ‘real interest rate’ which borrowers pay on their borrowings. Components of money market are tools of borrowing ‘short-term’ (i.e., working capital) money from the financial market—thus inflation affects them in similar ways.

13. (d) The idea is the same as ‘inflation premium’. Seignorage is a technique by which government intends to increase its tax revenues by issuing fresh currency notes, which brings in extra cash to the government in two ways, one via printed currency and the other through increase in tax income.

14. (b) RBI avails no autonomy in its functioning—though the Narasimhan Committee-I in 1991 has suggested autonomy in areas of critical importance, similar to many Western economies. It is believed that it has been given a kind of working autonomy in the area of making and announcing the Credit & Monetary Policy (though there is no change in the official stand hitherto).

15. (d) Since market makers quote two-way prices for securities, they seem to ‘make’ market for the concerned securities. The OTCEI is modelled on the NASDAQ of the USA for listing of SMEs, which face lesser liquidity in their share transactions. The DFHI is a dedicated body for two transactions in the money market of India, operating since 1988.

16. (d) All the statements are correct. In case of India’s agricultural commodities, such trading doesn’t seem functioning well because other related institutional developments have not happened in time and farmers are not yet active players on the commodity exchanges of India (partly due to operational difficulties, smaller capital base and lack of knowledge). Once big farmers (contract/corporate farmers) emerge, it will start functioning in a better way for such commodities.

17. (d) Other routes of raising capital from the primary market are: (a) Public Issue and (b) Rights Issue.

18. (d) All the options are correct.

19. (d) Such investors are usually found among an entrepreneur’s family and friends, but they may be from outside also providing financial backing to entrepreneurs for starting their business. The Union Budget 2013–14 promised a provision for them. As per SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations), Category I AIF are those AIFs with ‘positive spill over effects’ on the economy, for which certain incentives or concessions might be considered by SEBI or the GoI or other regulators in India, which shall include Venture Capital Funds,

SME Funds, Social Venture Funds, Infrastructure Funds and such other

Alternative Investment Funds(AIFs) as may be specified.

20. (a) Standard Chartered Bank is the only company which has issued IDRs in India. In May 2010 it raised Rs. 2,500 crore through this route.

21. (b) It will predominantly deal with women clients, but there is no restriction on having male clients. Inaugurated in November 2013, the BMB focuses on Indian women across economic classes, with special attention to economically neglected, deprived, discriminated, under- banked, unbanked, rural and urban women to ensure inclusive and sustainable growth. The bank with a team of professionals with rich experience and expertise has designed and developed new products and services to suit the needs of women across different segments, including self help groups, women entrepreneurs, salaried women, HNIs and corporate—having six exclusive women members on its Board.

22. (d) As per the new policy announced by the Government in 2016–17, any amount of shares can be sold in the public sector undertakings (PSUs). Disinvestment is now seen as the part of ‘comprehensive management of Government’s investment in the PSUs’.

23. (d) Capital consumption is the other term for ‘depreciation’. In the process of their uses fixed assets depreciate (go for wear and tear) at the rate decided by the government of the economy—the rates for the same assets may vary across economies.

In the new system of national income accounting it in written as CPC (Consumption of fixed capital)–in use since 2015–16 after the advice of the IMF.

24. (d) Microfinance (MF) is a small-scale financial intermediation, inclusive of savings, credit, insurance, business services and technical support provided to the needy borrower. The thrust of the MF initiative is to channelise production and consumption credit in multiple doses based on the absorption capacity of the prospective borrower. The presumption here is that the borrowers possess basic financial literacy and requisite capacity to operate their self-determined economic ventures profitably. The formal existence of MF was found in 1972. A charity based model (interest free loans where repayment was based on peer pressure) of MF

was evolved in Ireland. Later on, in Germany, a thrift-based model was developed with establishment of saving funds. Bangladesh Grameen model is based on the principle of trust and creditworthiness of poor with both, obligatory and voluntary saving schemes. The Foundation for Development Cooperation (FDC) of Australia evolved a research project, The Banking with the Poor (BWTP) network to link microfinance institutions with formal financial institutions.

25. (b) This was announced in the Union Budget 2017–18. Under this programme the PRIs will be catered with the requisite skills so that they can implement the development programmes more effectively.