Money market Flashcards

1
Q

Indian financial systems

A

The financial system in India comprises of financial institutions, financial markets, financial instruments and financial services

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2
Q

Meaning of financial market

A

Financial market refers to a market where sale and purchase of financial assets such as bonds, stocks, derivatives, government
securities, foreign currency etc. is undertaken.

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3
Q

Financial markets operates through

A
  1. Banks
  2. Non banking financial institutions
  3. Brokers
  4. Mutual funds
  5. discount houses
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4
Q

Meaning of money market

A
  1. It is a market for lending and borrowing of short term funds
  2. It is market for near money i.e short term instruments such as government securities, trade bills, promissory notes, etc.
  3. Such instruments are highly liquid, less risky and easily marketable with a maturity period of one year or less
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5
Q

Structure of money market

A

The money market in India is dichotomous by nature
It includes both, the organized sector and the unorganized sector

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6
Q

Organized sector

A
  1. RBI
  2. Commercial banks
  3. Co-operative banks
  4. Development financial institutions
  5. Discount and finance house of india
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7
Q

Definition of central bank

A

According to Prof. W.A Shaw, Central bank is a bank which control credit

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8
Q

When was RBI nationalized

A

1st Jan 1949

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9
Q

Functions of RBI

A

1.Custodian of Foreign Exchange reserves
2.Controller of credit
3.Collection and Publication of data
4.Banker’s bank
5.Bank to the government
6.Issue of currency notes
7.Promotional and developmental functions
8.Other functions

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9
Q

Custodian of foreign exchange reserves

A

RBI acts as a custodian of the country’s foreign exchange reserves. It has to maintain the official rate of exchange of rupee as well as ensure its stability. RBI also undertakes to buy and sell the currencies of all the members of the International Monetary Fund (IMF).

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10
Q

Controller of credit

A

As a supreme banking authority of the country, RBI has the power to influence the volume of credit created by commercial banks. It also monitors the purpose or use of credit. Quantitative methods such as bank rate, open market operations, variable reserve ratios such as Cash Reserve Ratio (CRR), Statutory Liquid Ratio (SLR) etc. control the volume of credit created. Qualitative methods such as fixing margin requirements, credit rationing, moral suasion etc. regulate the purpose or use of credit.

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11
Q

Collection and publication of data

A

RBI collects and compiles statistical information related to banking and other financial sectors of the economy

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12
Q

Banker to the government

A

RBI acts as a banker, agent and advisor to the Government. It transacts the business of both, the Central and State Governments. It accepts money as well as makes payments on behalf these Governments. It also undertakes the management of public debt. It advises the Government on a wide range of economic issues.

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13
Q

Banker’s Bank

A

RBI exercises statutory control over the commercial banks. All scheduled banks are compulsorily required to maintain a certain minimum of cash reserves with the RBI against their demand and time liabilities. RBI provides financial assistance to banks in the form of discounting of eligible bills. Loans and advances are also provided against approved securities.

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14
Q

Issue of currency notes

A

RBI has the sole right to issue currency notes of all denominations, except one rupee note and coins. As per the ‘Minimum Reserve System’ of 1957, RBI is required to maintain minimum gold and foreign exchange reserves of Rs 200 crores, out of which at least ` 115 crores should be in gold and the remaining ` 85 crores should be in terms of foreign currency and government securities.

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15
Q

Promotional and developmental functions

A

RBI also performs certain promotional and developmental functions such as extending banking services to semiurban and rural areas, providing security to depositors, development of specialized institutions for agricultural credit, industrial finance etc.

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16
Q

Other functions

A

RBI acts as a clearing house for settling the accounts between its member banks. As a lender of last resort, it also provides liquidity to banks experiencing financial difficulty.

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17
Q

Categories of commercial banks

A
  1. Public sector
  2. Private sector
  3. Regional rural
  4. Foreign banks
18
Q

Def of commercial banks

A

Prof. Cairncross : “A bank is a financial intermediary, a dealer in loans and debts.”

19
Q

Functions of commercial banks

A
  1. Acceptance of deposits
  2. Providing loans and advances
  3. Ancillary functions
  4. Credit creation
20
Q

Acceptance of deposits

A

Deposits constitute the main source of funds for commercial banks. Savings lead to the creation of deposits. Deposits are categorized as (i) Demand deposits and (ii) Time deposits.

21
Q

Demand deposits

A

Deposits that are withdrawable on demand are known as demand deposits. They are in the form of Current account and Savings account deposits.
Current account is usually opened by businessmen, corporations, industrial houses, trusts etc. They are provided with overdraft facility. Overdraft means
withdrawal in excess of the balance in the account.
Savings account are operated by a large number of people, particularly the salaried class, small traders etc. who wish to save a part of their income with the bank

22
Q

Time deposits

A

Deposits that are repayable after a certain period of time are known as time deposits. They are in the form of recurring deposits and time deposits
Recurring deposit refers to a deposit wherein a customer deposits a fixed amount at regular intervals for a specified period of time.
Fixed deposits refer to a lumpsum amount deposited by a customer for a specified period of time. Compared to all other deposits, fixed deposits carry a high rate of interest

23
Q

Providing loans and advances

A

Commercial banks mobilize savings and lend these funds to institutions and individuals for various purposes. Based on the tenure, loans include call loans, short term, medium term and long term loans.
Longer the duration of the loans, greater will be the rate of interest. Besides this, banks also provide cash credit, overdraft facility as well as discount bills of exchange

24
Q

Ancillary functions

A

Commercial banks also provide a range of ancillary services such as transfer of funds, collection of money, making periodical payments on behalf of the customer, merchant banking, foreign exchange, safe deposit lockers,
D-mat facility, internet banking, mobile banking etc.

25
Q

Credit creation

A

Credit creation is an important function of commercial banks. Commercial banks are creators of credit. Demand and time deposits constitute the primary deposits of banks. After meeting the reserve requirements out of the net demand and time liabilities, the balance amount is used for giving loans. Thus, secondary deposits or ‘derivative deposits’ are created out of the loans given by the banks.

26
Q

First DFI

A

Industrial finance corporation of india(IFCI) was the first developmental financial institution to be established in 1948

27
Q

Role of money market

A
  1. Financial requirements of the government
  2. Liquidity management
  3. Implementation of monetary policy
  4. Portfolio management
  5. Short-term requirements of borrowers
  6. Equilibrating mechanism
  7. Economizes the use of cash
  8. Growth of commerce, industry and trade
28
Q

Financial requirements of gov

A

Money market helps the Government to fulfil its short term financial requirements on the basis of Treasury Bills

29
Q

Liquidity management

A

Money market is a dynamic market. It facilitates better
management of liquidity and money in the economy by the monetary authorities. This, in turn, leads to economic stability and
development of the country.

30
Q

Implementation of monetary policy

A

Monetary policy is implemented by the central bank. It aims at managing the quantity of money in order to meet the requirements of different sectors of the economy and to increase the pace of economic growth. A well-developed money market ensures successful implementation of the monetary policy. It guides the central bank in developing an appropriate interest policy.

31
Q

Portfolio management

A

Money market deals with different types of financial instruments that are designed to suit the risk and return preferences of the investors. This enables the investors to hold a portfolio of different financial assets which in turn, helps in minimizing risk and maximizing returns

32
Q

short-term financial needs of the borrowers

A

Money market provides reasonable access for meeting the short-term financial needs of the borrowers at realistic prices

33
Q

Equilibrating mechanism

A

Through rational allocation of resources and mobilization of savings into investment channels, money market helps to establish equilibrium between the demand for and supply of short-term funds.

34
Q

Economizes the use of cash

A

Money market deals with various financial instruments that are close substitutes of money and not actual money. Thus, it economizes the use of cash

35
Q

Growth of commerce, industry and trade

A

Money market facilitates discounting bills of exchange to local and international traders who are in urgent need of short-term funds. It also provides working capital for agriculture and small scale industries.

36
Q

Problems of money market

A
  1. Dual structure of money market
  2. Delays in technological upgradation
  3. Shortage of funds
  4. Seasonal fluctutations
  5. Lack of uniformity in the rates of interest
  6. Lack of financial inclusion
37
Q

Dual structure of money market

A

Presence of both, the organized and unorganized sector in the money market leads to disintegration, lack of transparency and increased volatility. The unorganized markets lack co-ordination and do not come under the direct control and supervision of the RBI.

38
Q

Delays in technological advancement

A

Use of advanced technology is a prerequisite for the development and smooth functioning of financial markets. Delays in upgradation of technology hampers the working of the money market

39
Q

Shortage of funds

A

Money market faces shortage of funds due to inadequate savings. Low per capita income, poor banking habits among the people, indulgence in wasteful consumption, inadequate banking facilities in the rural areas etc. have also been responsible for the paucity of funds in the money market.

40
Q

Seasonal Fluctuations

A

Demand for funds varies as per the seasons. During the peak season, from October to June, finance is required on a large scale for various purposes such as trading in agricultural produce, investment in business activities etc. This results in wide fluctuations in the money market.

41
Q

Lack of financial inclusion

A

Banking facilities in the country are still inadequate and inaccessible to the vulnerable groups such as the weaker sections and the low income groups. This shows lack of financial inclusion.

42
Q

Lack of uniformity in rate of interest

A

The money market comprises of various entities such as commercial banks, co-operative banks, non-bank finance companies, development finance institutions, investment companies etc. The category of borrowers is also different