money supply, banking & financial institutions section 5 MCQ Questions & Answers Detailed Explanation

Answer: (a)

Hot money is a term that is most commonly used in financial markets to refer to the flow of funds (or capital) from one country to another in order to earn a short-term profit on interest rate differences and/ or anticipated exchange rate shifts.

These speculative capital flows are called "hot money" because they can move very quickly in and out of markets, potentially leading to market instability.

Answer: (c)

Urban cooperative banks (UCB) are also called Primary cooperative banks and are under dual regulation of Central/State Governments and the RBI.

Though the Banking Regulation Act came into force in 1949, the banking laws were made applicable to cooperative societies only in 1966 through an amendment to the Banking Regulation Act, 1949. Since then there is a ‘duality of control’ over cooperative banks (urban and rural both) between the State Registrar of Cooperative Societies/Central Registrar of Cooperative Societies and the Reserve Bank of India.

The Reserve Bank regulates and supervises the banking functions of UCBs/StCB/DCCB under the provisions of Section 22 and 23 of Banking Regulation Act, 1949 and the non-banking aspects like registration, management, administration and recruitment, amalgamation and liquidation are regulated by the State/ Central Governments.

PACS and long-term credit co-operatives (SCARDB and PCARDB), which are basically rural cooperative banks, are outside the purview of the Banking Regulation Act, 1949 and are hence not regulated by the Reserve Bank.

Cabinet approved an Amendment on 5th Feb 2020 in Banking Regulation Act 1949 and Govt. is planning to bring management functions also of UCB/StCB/DCCB under RBI but not administrative.

Urban Cooperative Banks are under the supervision of RBI but supervision of all rural cooperative banks including StCB/DCCB has been delegated to NABARD by RBI.

For a detailed understanding, you can refer to the book on Indian Economy by Vivek Singh.

Answer: (a)

Securitization is the process of pooling and repackaging financial assets (like debt papers generally) into marketable securities that can be sold to investors.

For example, an NBFC has given loans to different companies. Now, these different loan papers are an asset for NBFC. Suppose all the loan papers is of Rs. 100 crores.

Now, one lakh shares have been created out of this asset worth Rs. 100 each and these shares can be sold to different people. NBFCs will get immediate liquidity/money and the share price will vary depending on whether the loan is being serviced/repaid properly or not.

If the companies to whom NBFC gave the loan are not returning the principal or interest, the price of security/share will fall.

Banks/NBFCs can sell these loan papers directly (“Direct Assignment" with certain restrictions) or they can also create security (“Securitization”) out of this loan paper and sell.

Both routes are adopted when they want liquidity. In other words, basically, securitization involves repackaging less liquid assets into saleable securities.

Answer: (b)

Answer: (a)

As per the RBI Act 1934, RBI follows a flexible inflation target of 4% +/- 2%. The Act says “the primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth”.

It means that if inflation is in control, RBI can focus on the economic growth of the country and can reduce the repo rate.

The explicit mandate of monetary policy is price stability and not financial stability.

Price stability is not sufficient for financial stability as there may be less inflation but we have huge NPAs and various financial institutions defaulting. (Like the situation in the last 4/5 years).

Answer: (d)

If the supply is less than the demand, the price will increase. Inflation, the persistent increase in the average price level, can be caused by an increase in aggregate demand or a decrease in aggregate supply.

This suggests two basics sources, causes, or types of inflation—demand-pull inflation and cost-push inflation.

In general, prices increase as a result of market shortages, which occur when quantity demanded exceeds quantity supplied. Market shortages can be created by either increase in demand or decreases in supply.

Translating this to the macroeconomy suggests that inflation occurs when aggregate demand exceeds aggregate supply.