money supply, banking & financial institutions section 11 MCQ Questions & Answers Detailed Explanation

Answer: (a)

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

Answer: (b)

A Nostro account refers to an account that a bank holds in a foreign currency in another bank. Nostro account and Vostro account refer to the same thing from a different perspective.

For example, Bank X has an account with Bank Y in Bank Y's home currency.

To Bank X, that is a Nostro account, meaning "our account on your books," while to Bank Y, it is a Vostro, meaning "your account on our books."

These accounts are used to facilitate foreign exchange and international trade transactions.

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.

Answer: (c)

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:

1. Acceptance of demand deposits (savings and current) but no time deposits
2. No lending activity
3. Issuance of ATM/debit cards but not credit cards
4. Payments and remittance services through various channels
5. Acting as Banking Correspondent (BC) of another bank
6. 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).