money supply, banking & financial institutions section 11 MCQ Questions & Answers Detailed Explanation
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The following question based on Money Supply, Banking and Financial Institutions topic of indian economy mcq
- Through masala bonds, capital is raised in foreign currency
- Through masala bonds capital is raised in domestic currency
- By issuance of masala bonds, the exchange risk is transferred to the investor
(a) (ii) only
(b) (i) & (iii) only
(c) (i) only
(d) (ii) & (iii) only
The correct answers to the above question in:
Answer: (b)
Through Masala bonds money is raised from abroad in foreign currency but the bonds are denominated in Rupee. Masala Bonds are a kind of ECB where the bonds are issued outside India but denominated in Indian Rupees, rather than the local currency. Masala is an Indian word and it means spices.
Unlike dollar bonds, where the borrower takes the currency risk, Masala bond makes the investors bear the risk. ECB MASALA Bonds USD 1 = Rs. 70 (2019) USD 1 Bond was issued to foreign investors and the borrower (Indian company) got USD 1 for one year.
Money is raised in foreign currency and the borrower issued a Dollar-denominated bond to the foreign investor. Rs. 70 Bond was issued to foreign investors and the borrower (Indian company) got USD 1 (as the rupee-dollar rate was USD 1=Rs.70) for one year.
Money is raised in foreign currency but the borrower issued Rupee denominated bond to the foreign investor. USD 1=Rs. 80 (2020) In 2020, the borrower needs to return USD 1 to the foreign investor and for that he will have to spend Rs. 80 to get USD 1.
The conversion/exchange risk is of the borrower (Indian company). In 2020, the borrower needs to return Rs. 70 to the foreign investor rather than USD 1.
The conversion/exchange risk from Rupee to Dollar is of the foreign investor.
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Read more money and supply banking financial institutions Based Indian Economy Questions and Answers
Question : 1
Which among the following gives a precise definition of “ Arbitrage” in Financial World?
a) To profit from an existing discrepancy among prices, exchange rates, and/or interest rates on Different Markets without risk of these changing
b) To profit from an existing discrepancy among prices, exchange rates, and/or interest rates on new techniques or products in same market.
c) to profit from an existing discrepancy among prices, exchange rates, and/or interest rates on Same market without risk of these changing
d) All of above
Answer »Answer: (a)
Question : 2
Consider the following statements regarding the Capital Adequacy Ratio (CAR) of banks:
- Deposits of the public is a part of the capital for calculating CAR
- Bondholders increase the CAR of the bank and hence safety of the depositors
a) (ii) only
b) Both (i) & (ii)
c) (i) only
d) Neither (i) nor (ii)
Answer »Answer: (a)
Question : 3
Consider the following statements regarding Money Multiplier:
- It increases with an increase in reserve requirements of banks
- It decreases with an increase in reserve requirements of banks
- It increases with Monetary Base
- It decreases with Monetary Base
a) (ii) only
b) (ii) & (iii) only
c) (i) only
d) (ii) & (iv) only
Answer »Answer: (a)
From the above example, the money multiplier decreases when banks are required to keep more reserves.
From the above example, the Money multiplier remains constant irrespective of change in the monetary base
Question : 4
With reference to the Indian Public Finance, consider the following statements:
- External liabilities reported in the Union Budget are based on historical exchange rates
- The continued high borrowing has kept the real interest rates high in the economy
- The upward trend in the ratio of Fiscal Deficit of GDP a recent years has a adverse effect on private investment
- Interest payments is the single largest component of the non-plan revenue expenditure of the Union Government
a) 1 and 4
b) 1, 2 and 3
c) 2, 3 and 4
d) 1, 2, 3 and 4
Answer »Answer: (c)
Question : 5
Consider the following statements regarding payment banks:
- They can open demand and time deposit accounts both
- They are set up as differentiated banks
- They may act as Business Correspondents for other banks
- They will provide payments/remittance services to migrant labour workforce and small businesses
a) (i) & (ii) only
b) (ii), (iii) & (iv) only
c) (i) & (iv) only
d) All of the above
Answer »Answer: (b)
The objectives of setting up payment banks are to promote financial inclusion by providing small savings accounts and payments/remittance services to migrant labour workforce, low-income households, small businesses, other unorganized sector entities and other users.
The following will be the scope of activities for payment banks:
- Acceptance of demand deposits (savings and current) but no time deposits
- No lending activity
- Issuance of ATM/debit cards but not credit cards
- Payments and remittance services through various channels
- Acting as Banking Correspondent (BC) of another bank
- Distribution of simple financial products like mutual funds/insurance products, etc.
Payment banks will be required to maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). The total deposits of the public must be invested in government securities and/ or deposited in other commercial banks (i.e. no lending is allowed).
This makes the public deposit in payment banks safe. Payment banks will be set up as differentiated banks for serving niche interests. (Differentiated banks have restrictions either in geography or in operation or both. Opposite of differentiated banks are universal banks).
Question : 6
Consider the following statements regarding the interest rates linked with an external benchmark rate:
- External benchmark rate can be repo rate or yield on government securities or any rate published by Financial Benchmarks India Pvt. Ltd.
- Once repo rate changes the lending rate of banks will automatically change
- Banks are mandated by RBI to link the deposit and lending rate with external benchmark rate
a) (i) & (ii) only
b) (ii) only
c) (i) only
d) (i) & (iii) only
Answer »Answer: (a)
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money supply, banking & financial institutions section 11
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