money supply, banking & financial institutions section 10 MCQ Questions & Answers Detailed Explanation

Answer: (d)

RBI earns income from all of the sources. RBI invests Forex to purchase US govt. bonds and lend to other Central Banks and earns interest. It also earns interest on Indian Govt securities (OMO) and it earns interest by lending to banks (Repo Operations).

Answer: (b)

Answer: (d)

In 2010, the Government of India, in consultation with RBI introduced a new short-term instrument, known as Cash Management Bills (CMBs).

It is not used to fund the Fiscal deficit but is used to meet the temporary mismatches in the cash flow of the Government of India. The CMBs have the generic character of T-bills but are issued for maturities less than 91 days. (Traded in money market)

Treasury bills or T-bills:
These are short term debt instruments issued by the Government of India for a maturity of less than one year. Treasury bills are zero-coupon securities and pay no interest. Instead, they are issued at a discount and redeemed at the face value at maturity. For example, a 91-day Treasury bill of Rs. 100/- (face value) may be issued at say Rs. 98.20, that is, at a discount of say, ?1.80 and would be redeemed at the face value of Rs. 100/-. (Treasury bills are traded in the money market).

Dated Securities:
Dated central government securities have a tenor of more than one year up to 40 years.

Answer: (d)

Marginal Standing Facility (MSF):

It is a facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit (2% of SLR) at a penal rate of interest which is above the repo rate

MSF rate = repo rate + 0.25%

This means that if a bank is keeping the minimum SLR requirement of 18.25% and it wants money/cash from RBI then, the bank can offer say 2% of the SLR reserve (securities) to RBI and can get money/cash from RBI. This provides a safety valve against unanticipated liquidity shocks to the banking system.

(This 2% has been raised to 3% because of the COVID-19 LOCKDOWN issue which resulted in liquidity crisis). For a detailed understanding, follow the telegram channel “Vivek Singh Economy”.

Answer: (d)

Alternative Investment Fund (AIF) means any fund established or incorporated in India which is a privately pooled investment vehicle that collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.

AIFs are registered with and regulated by SEBI. Angel Investor Funds and Venture Capital Funds comes under AIF.

Answer: (b)

Suppose Nominal Exchange Rate is $1 = Rs.60 and India and the US produces just burgers.

Burger Price -India : Rs. 30, US : $1

To calculate PPP exchange rate, we need to compare the prices of a basket of goods in India with US. In the above case by comparing the prices of burger in India and US, we will get $1 = Rs. 30

So, $1 = Rs. 30 is the PPP exchange rate.

It implies that, whatever Rs. 30 can purchase in India, $1 can purchase in US

i.e. purchasing power of Rs. 30 in India is equal to the purchasing power of $1 in US.

So, if the inflation rate is different in India and US, then the PPP exchange rate will change. But if there is no inflation (prices remain the same) or same inflation, then PPP exchange rates will remain the same i.e. constant. So, (i) the statement is true.

When we use the PPP exchange ($1 = Rs. 30) rate to convert the price of burgers in US in Indian currency then it is Rs. 30 in US which is the same as in India also. So, (ii) statement is also true.