money supply, banking & financial institutions section 10 Practice Questions Answers Test with Solutions & More Shortcuts

Answer: (d)

Market Stabilization Scheme is an instrument of sterilisation, which empowered the RBI to issue Government Treasury Bills and medium duration Dated Securities for the purpose of liquidity absorption.

This instrument of monetary management was introduced in 2004 to absorb surplus liquidity of a more enduring nature arising from large capital inflows.

The scheme worked by impounding/taking the proceeds of auctions of Treasury bills and Dated Government securities in a separate identifiable MSS cash account maintained and operated by the RBI.

At the same time, interest payments have to be given to the institutions that buy the Market Stabilization Bonds (MSB) (the Treasury bills and Dated securities of govt). Here, for the interest payment, the government allocates money from its budget to the RBI. This expenditure to service interest payment for MSBs is called carrying cost.

The amounts credited into the MSS cash account by selling MSBs are appropriated only for the purpose of redemption/buyback of the Treasury Bills/dated securities issued under the MSS.

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.

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: (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: (a)