money supply, banking & financial institutions section 9 MCQ Questions & Answers Detailed Explanation

Answer: (a)

A “Real estate investment trust" is a trust registered under the Indian Trusts Act, 1882 which manages a fund/ corpus where the funds are invested in real estate property.

REITS are mutual fund like institutions that enable investment into the real estate sector by pooling small sums of money from a multitude of individual investors. REITS are regulated by the Securities and Exchange Board of India (SEBI).

Most middle-class investors presently do not invest in commercial real estate because of the big size of the investment. This entry barrier will be removed through REITs as it will make the expensive real estate sector accessible to the middle-class investor (min. investment limit is Rs. 2 lac).

REITS will also help the real estate industry which is currently plagued with problems such as weak demand, cash constraints, stuck projects etc. Now, the developers will be able to sell their property to REITs and move on to the execution of new projects.

SEBI has also approved Infrastructure Investment Trusts (InvITs) along with REITs which are very similar to REITs but are for the infrastructure sector.

Answer: (d)

In the case of a forex swap, RBI may give rupees to banks and can take dollars, which leads to an increase in rupee liquidity in the economy, resulting in inflation. Of course, forex swaps can also be used to take out the excess liquidity in the economy (RBI giving dollars to banks and taking rupees).

An increase in foreign capital inflow leads to an increase in money supply leading to inflation. General elections lead to higher spending levels by the government increasing inflation.

Answer: (d)

When the interest rate moves up in the economy, government securities (bonds) prices go down. If the liquidity in the economy is surplus, the interest rate comes down in the economy resulting in higher bond prices.

Developments in money, capital and forex markets also impact the interest rates and liquidity in the domestic economy resulting in changes in government securities prices.

Answer: (d)

Answer: (b)

Currency Swap Agreement: US India $1 = Rs. 70 In US, the US company can raise loans at 6%, but for an Indian company doing business in US, the loan rate is 8%.

So, the US company will raise a loan of $1 billion at 6% and give it to the Indian company working in US.

The Indian company will keep on paying the interest rate at 6% and after the term ends, it will give back the $1 billion amount to the US company.

In India, the Indian company can raise loans at 9%, but for a US company doing business in India, the loan rate is 11%.

So, the Indian company will raise a loan of Rs. 70 billion at 9% and give it to the US company working in India. The US company will keep on paying the interest rate 9% and after the term ends, it will give back the Rs. 70 billion amount to the Indian company.

A currency swap is an agreement in which the two parties (multinational· corporations/governments) exchange the principle amount of a loan (and the interest) in one currency for the principle and interest in another currency.

At the start of the swap, the equivalent principle amounts are exchanged at the prevailing rate. At the end of the swap period, the principle amounts are swapped back at either the· prevailing rate or at a pre-agreed rate such as the rate of the original exchange of principle amount.

Currency swaps are used to obtain foreign currency loans at a better interest rate or· as a method of hedging transaction risk on foreign currency loans. Currency swap agreements can be at the government and the company level both.

Answer: (b)

If there is inflation in the economy it leads to a loss in the value of currency i.e. currency depreciates.

Nominal interest rate (deposit rate) = Inflation + real interest rate

When inflation increases banks increase the nominal interest rate and generally real interest rate remains the same.