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Question 1Indian Economy & Indian Financial System

Under the Reserve Bank of India Act, 1934, the minimum reserve system requires the RBI to maintain assets of which minimum value as backing for currency issued?

  1. Gold coin and bullion worth ₹115 crore and foreign securities worth ₹85 crore Correct answer.
  2. Gold coin and bullion worth ₹85 crore and foreign securities worth ₹115 crore
  3. Foreign securities worth ₹200 crore only
  4. Gold coin and bullion worth ₹200 crore only

Explanation

Since the 1957 amendment to the RBI Act, India follows a minimum reserve system under which the Issue Department holds gold coin and bullion of not less than ₹115 crore and foreign securities of not less than ₹85 crore, totalling ₹200 crore. This replaced the earlier proportional reserve system that tied note issue to a fixed percentage of gold and sterling securities.

Question 2Indian Economy & Indian Financial System

In the Indian financial system, which institution is the apex regulator of the securities market and is statutorily established under the SEBI Act, 1992?

  1. Insurance Regulatory and Development Authority of India
  2. Insolvency and Bankruptcy Board of India
  3. Reserve Bank of India
  4. Securities and Exchange Board of India Correct answer.

Explanation

SEBI was given statutory status by the SEBI Act, 1992, and is the apex regulator of the Indian securities market, covering stock exchanges, intermediaries, mutual funds and listed companies. The RBI regulates banking and monetary policy, IRDAI regulates insurance, and the IBBI administers insolvency proceedings.

Question 3Indian Economy & Indian Financial System

A customer wants to know which body decides the repo rate in India. The correct answer is the:

  1. Financial Stability and Development Council
  2. Board of Financial Supervision
  3. Central Board of the RBI
  4. Monetary Policy Committee Correct answer.

Explanation

The Monetary Policy Committee, constituted under the RBI Act as amended in 2016, meets to set the policy repo rate with the objective of maintaining inflation at 4 per cent within a band of plus or minus 2 per cent. The Central Board governs the RBI generally, while FSDC and BFS are advisory or supervisory bodies without rate-setting powers.

Question 4Indian Economy & Indian Financial System

Which of the following instruments is a quantitative tool of monetary control used by the RBI?

  1. Direct action
  2. Publicity
  3. Cash Reserve Ratio Correct answer.
  4. Moral suasion

Explanation

The CRR is a quantitative instrument because it directly changes the volume of bank reserves and thereby credit creation. Moral suasion, direct action and publicity are selective or qualitative instruments that influence the direction of credit rather than its aggregate volume.

Question 5Indian Economy & Indian Financial System

A scheduled commercial bank in India wishes to raise funds by issuing a certificate of deposit. Which regulator's guidelines govern this issuance?

  1. Reserve Bank of India Correct answer.
  2. Ministry of Corporate Affairs
  3. SEBI
  4. IRDAI

Explanation

Certificates of deposit issued by scheduled commercial banks are money market instruments regulated by the RBI's directions on money market instruments. SEBI regulates capital market instruments such as commercial paper issued by corporates, while IRDAI and MCA have no role in bank CDs.

Question 6Indian Economy & Indian Financial System

The term 'bank rate' as used by the RBI refers to the rate at which the RBI:

  1. lends long-term funds to banks against eligible securities or rediscounts bills Correct answer.
  2. lends short-term funds to banks against government securities under repo
  3. absorbs surplus liquidity from banks through reverse repo
  4. pays interest on balances maintained by banks in current accounts

Explanation

The bank rate is the rate at which the RBI lends long-term funds to banks against eligible securities or rediscounts eligible bills of exchange, and it is aligned with the marginal standing facility rate under current operating procedure. The repo rate is the short-term collateralised lending rate under the liquidity adjustment facility.

Question 7Indian Economy & Indian Financial System

Which of the following is classified as a 'near money' asset rather than money in the strict sense?

  1. Coins in circulation
  2. Demand deposits with commercial banks
  3. Treasury bills held by a household Correct answer.
  4. Currency notes held by the public

Explanation

Near money refers to highly liquid financial assets that can be converted into money quickly but are not themselves a medium of exchange, such as treasury bills, bills of exchange and time deposits. Currency and demand deposits are components of the money supply and serve directly as means of payment.

Question 8Indian Economy & Indian Financial System

A bank customer's deposit is insured under the DICGC scheme up to a maximum of:

  1. ₹5 lakh per depositor across all banks
  2. ₹2 lakh per depositor per bank
  3. ₹1 lakh per depositor per bank
  4. ₹5 lakh per depositor per bank Correct answer.

Explanation

Deposit insurance cover was raised to ₹5 lakh per depositor per bank in 2020, covering principal and interest together for deposits in the same right and capacity. The cover applies separately to each bank in which the depositor holds deposits.

Question 9Indian Economy & Indian Financial System

Which of the following is a component of India's foreign exchange reserves as published by the RBI?

  1. NRI deposits with Indian banks
  2. Foreign currency assets held by the RBI Correct answer.
  3. External commercial borrowings of Indian corporates
  4. Foreign direct investment inflows

Explanation

Foreign exchange reserves comprise foreign currency assets, gold, special drawing rights and the reserve tranche position with the IMF. External commercial borrowings, FDI inflows and NRI deposits are external liabilities or inflows and do not form part of reserves.

Question 10Indian Economy & Indian Financial System

Which of the following correctly describes a 'priority sector' under RBI guidelines?

  1. Sectors in which foreign banks are prohibited from lending
  2. Sectors with the highest credit rating where banks must lend compulsorily
  3. Sectors where lending is exempt from all prudential norms
  4. Sectors identified for concessional credit as per RBI directions, including agriculture and micro enterprises Correct answer.

Explanation

Priority sector lending requires banks to extend a specified proportion of credit to sectors identified by the RBI, such as agriculture, micro, small and medium enterprises, education, housing and weaker sections. It works through credit targets and does not exempt such lending from prudential norms.

Question 11Indian Economy & Indian Financial System

Under the Negotiable Instruments Act, 1881, a cheque is defined as:

  1. a bill of exchange payable at a fixed future date
  2. an order to pay addressed to a customer of the drawee
  3. a bill of exchange drawn on a specified banker and payable on demand Correct answer.
  4. a promissory note payable after sight

Explanation

Section 6 of the Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. It therefore combines the features of a bill of exchange with a mandatory bank drawee and demand payment.

Question 12Indian Economy & Indian Financial System

The 'Banking Ombudsman' scheme in India operates under which framework?

  1. The Reserve Bank - Integrated Ombudsman Scheme, 2021 Correct answer.
  2. The Banking Regulation Act, 1949
  3. The Consumer Protection Act, 2019
  4. The RBI Act, 1934

Explanation

The RBI consolidated its grievance redressal schemes into the Reserve Bank - Integrated Ombudsman Scheme, 2021, which covers complaints against regulated entities on a 'one nation, one ombudsman' basis. The scheme is framed under Section 35A of the Banking Regulation Act, 1949, but the operative scheme itself is the 2021 integrated scheme.

Question 13Indian Economy & Indian Financial System

Which of the following represents the correct order of money supply aggregates from narrowest to broadest?

  1. M2, M1, M3, M4
  2. M4, M3, M2, M1
  3. M1, M3, M2, M4
  4. M1, M2, M3, M4 Correct answer.

Explanation

The RBI orders monetary aggregates as M1 (currency with the public plus demand deposits plus other deposits with RBI), then M2, M3 and M4 in increasing order of liquidity and coverage. M3 is the broad money measure most commonly tracked for monetary management.

Question 14Indian Economy & Indian Financial System

A small business needs working capital for six months. Which source would most appropriately meet this requirement?

  1. A ten-year term loan for plant and machinery
  2. A cash credit facility from a bank Correct answer.
  3. Raising long-term debentures
  4. Issue of equity shares to the public

Explanation

Cash credit is a short-term facility designed to finance working capital gaps, drawn against hypothecation of stock and repaid from operating receipts. Equity, long-term debentures and machinery term loans are sources of long-term capital, which would mismatch the asset with short-term needs.

Question 15Indian Economy & Indian Financial System

A bank wants to convert a demand loan into a term loan because the borrower's cash flows are seasonal. Which feature distinguishes a term loan from a demand loan?

  1. Term loans carry no interest, whereas demand loans carry interest
  2. Term loans are always unsecured, whereas demand loans are always secured
  3. Term loans are repayable over a fixed schedule, whereas demand loans are repayable on demand Correct answer.
  4. Term loans are granted only to individuals, whereas demand loans are granted only to companies

Explanation

A term loan has a defined maturity and a structured repayment schedule, often with a moratorium, whereas a demand loan is repayable on demand and is typically renewed periodically. Both are normally secured and carry interest, and both can be granted to eligible borrowers across categories.

Question 16Indian Economy & Indian Financial System

A customer holds a savings bank account with an interest rate linked to the repo rate. If the RBI reduces the repo rate, what is the most likely immediate effect on the customer's savings interest?

  1. The savings interest rate will become zero
  2. The savings interest rate will increase
  3. The savings interest rate will decrease Correct answer.
  4. The savings interest rate will remain unchanged irrespective of the repo rate

Explanation

Where the savings deposit rate is contractually linked to the repo rate, a reduction in the repo rate reduces the benchmark and hence the applicable savings rate. Since 2011 banks have been free to set savings rates, and some offer repo-linked savings products.

Question 17Indian Economy & Indian Financial System

Which of the following best explains why the RBI conducts open market operations?

  1. To inject or absorb liquidity by buying or selling government securities Correct answer.
  2. To regulate the exchange rate of the rupee
  3. To determine the priority sector lending targets
  4. To fix the lending rates of commercial banks

Explanation

Open market operations involve outright purchase or sale of government securities by the RBI to adjust durable liquidity in the banking system. Purchases inject liquidity and sales absorb it, which in turn influences short-term interest rates.

Question 18Indian Economy & Indian Financial System

In a repurchase agreement (repo) transaction between a bank and the RBI, the bank:

  1. sells securities to the RBI with an agreement to repurchase them at a later date Correct answer.
  2. lends funds to the RBI without any collateral
  3. issues a promissory note to the RBI for the borrowed amount
  4. buys securities from the RBI with no agreement to resell

Explanation

In a repo, the borrower sells securities to the lender with a simultaneous commitment to repurchase them at a specified future date and price, effectively a collateralised loan. When a bank borrows from the RBI under the liquidity adjustment facility, it sells government securities with an agreement to repurchase.

Question 19Indian Economy & Indian Financial System

A bank's statutory liquidity ratio requirement is met by holding which of the following?

  1. Cash balances with the RBI
  2. Fixed assets such as bank premises
  3. Approved government securities and other specified liquid assets Correct answer.
  4. Loans to priority sectors

Explanation

SLR requires banks to hold a prescribed percentage of net demand and time liabilities in cash, gold or approved securities, with government securities forming the bulk. Cash balances with the RBI count towards CRR, which is a separate and distinct requirement.

Question 20Indian Economy & Indian Financial System

An Indian company receives a large export payment in US dollars. Which market would it approach to hedge the rupee-dollar exposure?

  1. The capital market
  2. The money market
  3. The primary market
  4. The foreign exchange market Correct answer.

Explanation

Currency exposure is hedged in the foreign exchange market through forward contracts, futures or options on the dollar-rupee pair. The primary and capital markets raise long-term funds, while the money market deals in short-term rupee instruments.

Question 21Indian Economy & Indian Financial System

Under the Basel III framework as implemented in India, the minimum common equity tier 1 capital ratio for scheduled commercial banks is:

  1. 8 per cent of risk-weighted assets
  2. 9 per cent of risk-weighted assets
  3. 4.5 per cent of risk-weighted assets Correct answer.
  4. 2.5 per cent of risk-weighted assets

Explanation

Basel III prescribes a minimum common equity tier 1 ratio of 4.5 per cent of risk-weighted assets, with total tier 1 of 6 per cent and total capital of 8 per cent, plus a capital conservation buffer. The RBI requires Indian banks to maintain a higher overall capital adequacy of 9 per cent plus buffers.

Question 22Indian Economy & Indian Financial System

A bank classifies a borrower's account as a non-performing asset. Which of the following is the correct criterion for such classification?

  1. The borrower's credit rating has fallen below investment grade
  2. Interest or principal has remained overdue for more than 90 days Correct answer.
  3. The account has been operated only through cheques
  4. The loan has been sanctioned beyond the delegated authority

Explanation

An asset becomes non-performing when interest or principal remains overdue for more than 90 days, with sub-categories of sub-standard, doubtful and loss assets based on the period and recoverability. External credit ratings and operational mode do not themselves determine NPA classification.

Question 23Indian Economy & Indian Financial System

A company issues commercial paper to meet its working capital needs. Which statement about commercial paper is correct?

  1. It carries a fixed coupon paid periodically until maturity
  2. It is a secured bond issued for a maturity of five years
  3. It is an unsecured promissory note issued at a discount and repayable at face value Correct answer.
  4. It is issued only by banks to other banks

Explanation

Commercial paper is an unsecured, short-term promissory note issued at a discount and redeemed at face value, typically for maturities up to one year. It is issued by highly rated corporates and financial institutions and is not a secured long-term bond.

Question 24Indian Economy & Indian Financial System

Which of the following best describes the 'reverse repo' operation in the RBI's liquidity framework?

  1. The RBI absorbs liquidity from banks by borrowing against government securities Correct answer.
  2. The RBI lends funds to banks against government securities
  3. The RBI purchases foreign currency from banks
  4. The RBI rediscounts bills of exchange for banks

Explanation

In a reverse repo, the RBI absorbs surplus liquidity from the banking system by borrowing against government securities, with an agreement to return them later. It is the mirror image of the repo, where the RBI injects liquidity by lending against securities.

Question 25Indian Economy & Indian Financial System

A firm with surplus funds for two days wants a safe, liquid avenue with minimal credit risk. Which instrument is most appropriate?

  1. Overnight call money lending to a bank Correct answer.
  2. A cumulative fixed deposit for three years
  3. A five-year corporate bond
  4. Equity shares of a listed company

Explanation

Call money is an overnight or very short-term unsecured interbank market where banks lend surplus funds for one to fourteen days, offering a liquid avenue with counterparty selection. Equity, long-term bonds and fixed deposits involve longer lock-in periods or market price risk.

Question 26Indian Economy & Indian Financial System

The Reserve Bank of India was established as a shareholders' bank and was nationalised in which year?

  1. 1949 Correct answer.
  2. 1969
  3. 1935
  4. 1991

Explanation

The RBI commenced operations on 1 April 1935 as a private shareholders' institution, and it was nationalised on 1 January 1949. Nationalisation brought its ownership fully into public hands soon after independence. The 1969 date belongs to bank nationalisation, not to the RBI itself.

Question 27Indian Economy & Indian Financial System

Which body is responsible for regulating the securities market in India and for registering market intermediaries such as stock brokers?

  1. IRDAI
  2. SEBI Correct answer.
  3. PFRDA
  4. NABARD

Explanation

SEBI, the Securities and Exchange Board of India, is the statutory regulator of the securities market and registers and supervises intermediaries such as brokers, merchant bankers and mutual funds. The other bodies regulate insurance, pensions and agricultural refinance respectively. Each regulator has a defined mandate, so jurisdiction is not overlapping here.

Question 28Indian Economy & Indian Financial System

In India, the rupee is said to be under a 'managed float' because the exchange rate is:

  1. set daily by the RBI through a committee of bankers
  2. fixed by statute at a notified parity against the US dollar
  3. determined by market demand and supply with RBI intervention to curb volatility Correct answer.
  4. allowed to move only within a pre-announced band of plus or minus two per cent

Explanation

India follows a managed floating exchange rate regime in which the price of the rupee is broadly market-determined, but the RBI intervenes in the foreign exchange market to prevent excessive volatility and to maintain orderly conditions. There is no statutory parity, no daily administrative fixation and no publicly announced crawling band.

Question 29Indian Economy & Indian Financial System

Which institution performs the role of the government's debt manager and banker in India?

  1. The State Bank of India
  2. The Ministry of Finance, Department of Revenue
  3. The Securities and Exchange Board of India
  4. The Reserve Bank of India Correct answer.

Explanation

The RBI acts as banker and debt manager to the Government of India, managing issuances of government securities and operating the government's accounts. The Department of Revenue handles taxation rather than debt issuance, and SEBI and SBI have no such sovereign mandate.

Question 30Indian Economy & Indian Financial System

Which of the following instruments is issued by the Government of India to borrow for periods of one year or less?

  1. Corporate debentures
  2. Dated government securities
  3. Commercial paper
  4. Treasury bills Correct answer.

Explanation

Treasury bills are short-term money market instruments issued by the Government of India, currently with tenors of 91, 182 and 364 days, and are sold at a discount to face value. Dated securities carry longer maturities, while debentures and commercial paper are issued by corporates.

Question 31Indian Economy & Indian Financial System

Which of the following is the apex institution for agricultural credit refinance in India?

  1. SIDBI
  2. NHB
  3. NABARD Correct answer.
  4. EXIM Bank

Explanation

NABARD was set up in 1982 as the apex development bank for agriculture and rural development, providing refinance and institutional support to rural credit institutions. SIDBI serves small industries, EXIM Bank finances trade, and NHB focuses on housing finance.

Question 32Indian Economy & Indian Financial System

Which of the following is a direct tax levied on the income of individuals and companies in India?

  1. Income tax Correct answer.
  2. Stamp duty
  3. Goods and Services Tax
  4. Customs duty

Explanation

Income tax is a direct tax because the burden falls on the same person who pays it, and it is levied on the income of individuals and companies. GST, customs duty and stamp duty are indirect taxes, where the incidence is generally passed on to the consumer or transaction party.

Question 33Indian Economy & Indian Financial System

The 'Statutory Liquidity Ratio' prescribed for banks is maintained in the form of:

  1. approved liquid assets such as government securities and cash Correct answer.
  2. cash balances held with the RBI only
  3. loans advanced to priority sectors
  4. balances with correspondent banks abroad

Explanation

SLR requires banks to hold a specified proportion of their net demand and time liabilities in approved liquid assets, chiefly government securities, cash and gold. It is not confined to cash with the RBI, which is the CRR, and priority sector lending is a separate obligation.

Question 34Indian Economy & Indian Financial System

A bank's net demand and time liabilities rise sharply during a festive season. Which reserve requirement will directly increase because of this growth?

  1. The capital adequacy ratio the bank must report
  2. The provisioning norm for standard assets
  3. The cash reserve ratio balance the bank must keep with the RBI Correct answer.
  4. The priority sector lending target for the following year

Explanation

CRR is a percentage of net demand and time liabilities, so any increase in NDTL automatically raises the balance a bank must maintain with the RBI. Capital adequacy is linked to risk-weighted assets, provisioning to asset classification, and priority sector targets to adjusted net bank credit.

Question 35Indian Economy & Indian Financial System

A customer wants to send money to a relative's account in another bank on the same day using a retail electronic funds transfer system that settles in batches through the RBI. Which system best fits this need?

  1. National Electronic Funds Transfer Correct answer.
  2. Real Time Gross Settlement
  3. Society for Worldwide Interbank Financial Telecommunication
  4. Unified Payments Interface

Explanation

NEFT is a retail electronic funds transfer system operated by the RBI that settles transactions in half-hourly batches and is suited to small-value transfers between bank accounts. RTGS is meant for high-value transactions settled individually in real time, UPI is a mobile-based instant payment interface, and SWIFT is a messaging network for cross-border payments.

Question 36Indian Economy & Indian Financial System

A bank's investment book holds government securities that it intends to trade actively to profit from rate movements. Under RBI norms, such securities are best classified in which category?

  1. Held for Trading Correct answer.
  2. Available for Sale
  3. Held to Maturity
  4. Standard assets

Explanation

The Held for Trading category is meant for securities acquired with the intention of trading and selling within a short period, usually ninety days, so active trading positions belong there. Held to Maturity is for securities held to maturity, and Available for Sale covers the residual portfolio not intended for trading. Standard assets is an asset-classification term for loans, not an investment category.

Question 37Indian Economy & Indian Financial System

A customer remits USD 40,000 for his son's overseas education. Under the Liberalised Remittance Scheme, which statement is correct for a resident individual?

  1. The scheme permits remittance of up to USD 25,000 per financial year without any documentation
  2. The scheme applies only to companies and not to resident individuals
  3. The scheme permits remittance of up to USD 250,000 per financial year for permitted purposes Correct answer.
  4. The scheme permits unlimited remittance provided tax has been paid

Explanation

The Liberalised Remittance Scheme allows resident individuals to remit up to USD 250,000 in a financial year for permitted current and capital account transactions, subject to the prescribed declarations and documentation. The facility is available to resident individuals, not companies, and there is no unlimited remittance avenue under it.

Question 38Indian Economy & Indian Financial System

A bank's gross non-performing assets are rising because large corporate accounts have turned stale. Which action is most consistent with the RBI's prudential framework for early recognition of stress?

  1. Writing off the loans immediately without provisioning
  2. Referring the stressed accounts for resolution under the framework for resolution of stressed assets Correct answer.
  3. Transferring the accounts to the Held to Maturity investment book
  4. Continuing to classify the account as standard until the borrower admits default

Explanation

The RBI's prudential framework requires banks to recognise stress early and to undertake a resolution plan for large stressed exposures within prescribed timelines, with additional provisioning if resolution fails. Classification cannot wait for borrower admission, write-offs still require provisioning discipline, and loans cannot be shifted into the investment book to mask stress.

Question 39Indian Economy & Indian Financial System

The RBI announces a cut in the cash reserve ratio at a time when liquidity is tight. Which outcome is most likely in the immediate term?

  1. Banks must deposit more funds with the RBI, tightening liquidity
  2. The cost of borrowing for the government rises automatically
  3. Banks' lendable resources with the RBI are released, easing liquidity Correct answer.
  4. The exchange rate of the rupee is fixed at a new parity

Explanation

A cut in CRR reduces the proportion of net demand and time liabilities that banks must keep with the RBI, releasing funds for lending and easing liquidity conditions. A CRR increase would absorb liquidity, and the CRR has no direct link to fixing the exchange rate or automatically setting government borrowing costs.

Question 40Indian Economy & Indian Financial System

Which of the following best describes the role of the Monetary Policy Committee constituted under the RBI Act?

  1. It supervises the functioning of commercial banks' branches
  2. It determines the policy repo rate to achieve the inflation target Correct answer.
  3. It approves the annual budget of the Government of India
  4. It sets the exchange rate of the rupee against a basket of currencies

Explanation

The Monetary Policy Committee, chaired by the RBI Governor, decides the policy repo rate with the objective of achieving the inflation target set in consultation with the Government. Exchange rate management, fiscal budgeting and branch supervision lie outside its mandate.

Question 41Indian Economy & Indian Financial System

A bank wants to raise short-term funds by borrowing against government securities it owns, with an agreement to repurchase them the next day. Which market segment is being used?

  1. The foreign exchange forward market
  2. The primary market for government securities
  3. The collateralised borrowing and lending obligation segment Correct answer.
  4. The call money market

Explanation

The Collateralised Borrowing and Lending Obligation segment, operated by the Clearing Corporation of India, allows banks to borrow against government securities as collateral without the securities changing ownership outright. Call money is unsecured interbank lending, the primary market is for new issuance, and the forward market deals in future exchange rates.

Question 42Indian Economy & Indian Financial System

Which of the following is the primary objective of the Insolvency and Bankruptcy Code, 2016, as reflected in its framework?

  1. To guarantee that every creditor recovers the full amount owed
  2. To provide a permanent moratorium to defaulting companies
  3. To provide time-bound resolution of insolvency to maximise the value of assets Correct answer.
  4. To replace the RBI as the regulator of banks

Explanation

The Code establishes a time-bound corporate insolvency resolution process aimed at maximising the value of the corporate debtor's assets and promoting entrepreneurship and credit availability. It does not guarantee full recovery for creditors, does not displace the RBI as banking regulator, and does not grant permanent protection from creditors.

Question 43Indian Economy & Indian Financial System

A mutual fund scheme invests only in short-term debt instruments with maturity of up to one year. Which category of scheme does this represent?

  1. Gilt scheme with long-duration holdings
  2. Index exchange traded fund
  3. Equity linked savings scheme
  4. Liquid scheme Correct answer.

Explanation

Liquid schemes are permitted to invest only in debt and money market instruments with maturity of up to 91 days, so a portfolio of very short-term debt corresponds to this category. ELSS schemes are equity-oriented with a lock-in, gilt schemes hold government securities of longer maturity, and index ETFs track equity indices.

Question 44Indian Economy & Indian Financial System

A company with a strong credit rating wants to raise funds for 270 days by issuing an unsecured promissory note. Which instrument is it using, and what is a key eligibility condition?

  1. A treasury bill, which only the government may issue
  2. A debenture, which must be secured by a charge on assets
  3. Commercial paper, which requires a minimum credit rating and a tangible net worth threshold Correct answer.
  4. A certificate of deposit, which only banks may issue

Explanation

Commercial paper is an unsecured short-term promissory note issued by corporates with maturities up to one year, and issuers must satisfy conditions such as a minimum credit rating and a prescribed tangible net worth. Certificates of deposit are issued by banks, treasury bills by the government, and debentures are typically secured and long-term.

Question 45Indian Economy & Indian Financial System

A bank holds a government security that pays a fixed coupon. If market yields rise after purchase, what happens to the market value of that security?

  1. The market value rises because the coupon is fixed
  2. The market value rises only if the security is held to maturity
  3. The market value falls because the fixed coupon is discounted at a higher yield Correct answer.
  4. The market value remains unchanged until maturity

Explanation

Bond prices and yields move inversely: when market yields rise, the present value of a security's fixed future cash flows falls, so its market value declines. Holding to maturity affects accounting treatment, not the market price, and a fixed coupon does not insulate the price from yield changes.

Question 46Indian Economy & Indian Financial System

A customer's account shows a lien marked by a tax authority. What does this most directly affect?

  1. The interest rate applicable to the deposit
  2. The bank's capital adequacy ratio
  3. The bank's priority sector lending target
  4. The customer's ability to withdraw the earmarked balance Correct answer.

Explanation

A lien is a legal claim that earmarks funds in the account, restricting the customer's ability to withdraw or transfer the marked balance until the claim is released. It does not change the deposit's interest rate and has no bearing on the bank's capital adequacy or priority sector targets.

Question 47Indian Economy & Indian Financial System

A bank's net worth is being eroded by provisioning on large corporate exposures. Which regulatory measure most directly constrains the bank from expanding risk-weighted assets until capital is rebuilt?

  1. The priority sector lending requirement
  2. The capital to risk-weighted assets ratio requirement Correct answer.
  3. The branch licensing policy
  4. The cash reserve ratio requirement

Explanation

The capital to risk-weighted assets ratio requires a minimum proportion of capital against risk-weighted assets, so a bank whose capital is eroded by provisioning must either raise capital or restrain asset growth. CRR is a liquidity requirement, priority sector targets direct credit flow, and branch licensing governs expansion of premises rather than capital.

Question 48Indian Economy & Indian Financial System

The RBI conducts open market sales of government securities while the government simultaneously runs a large fiscal deficit financed by fresh bond issuance. What is the most likely combined effect on liquidity and yields?

  1. Liquidity is unaffected because both operations are neutral
  2. Liquidity expands and yields fall sharply
  3. Liquidity tightens and upward pressure on yields is reinforced Correct answer.
  4. Yields fall because open market sales increase security prices

Explanation

Open market sales absorb rupee liquidity from the banking system, and heavy government borrowing adds to the supply of securities in the market. Together these forces tighten liquidity and reinforce upward pressure on yields, rather than lowering them. Open market sales reduce security prices, so they cannot push yields down.

Question 49Indian Economy & Indian Financial System

A bank has a large portfolio of fixed-rate government securities classified as Held to Maturity. Market yields rise sharply. Which statement best captures the prudential implication?

  1. The bank must immediately sell the securities to recognise the loss
  2. The bank avoids mark-to-market losses in this book, but the portfolio still carries interest rate risk Correct answer.
  3. The bank has no interest rate risk at all because the securities are held to maturity
  4. The bank's capital adequacy ratio automatically improves

Explanation

Held to Maturity classification shields the bank from fair-value accounting losses, but the economic interest rate risk remains because the securities' opportunity cost rises with yields. The bank cannot claim zero risk, is not forced to sell, and its capital position does not automatically improve when yields rise.

Question 50Indian Economy & Indian Financial System

A company with export receivables in dollars expects the rupee to depreciate over the next three months. Which treasury action best matches this view while addressing its exposure?

  1. Ignore the exposure because exports are always naturally hedged
  2. Buy dollars forward now to gain from rupee depreciation
  3. Borrow in rupees and convert to dollars immediately
  4. Sell dollars forward now to lock in the current rate Correct answer.

Explanation

An exporter expecting to receive dollars faces the risk that the rupee may appreciate, so selling dollars forward locks in a known rupee realisation and removes uncertainty. Buying dollars forward would increase exposure in the wrong direction, and export receivables are not automatically hedged without a deliberate decision.