PYQP – Economy – Money and Banking

UPSC – CSE Prelims 2024

MEDIUM

ECONOMY – MONEY MARKET

1. Consider the following statements:

Statement-I: If the United States of America (USA) were to default on its debt, holders of US Treasury

Bonds will not be able to exercise their claims to receive payment.

Statement-II: The USA Government debt is not backed by any hard assets, but only by the faith of the Government.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II explains

(b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I

(c) Statement-I is correct, but Statement-II is incorrect

(d) Statement-I is incorrect, but Statement-II is correct

Ans. (d)

If the United States of America (USA) were to default on its debt, holders of US Treasury

Bonds can exercise their claims to receive payment, but will be unable to receive payments,

The USA Government debt is not backed by any hard assets, but only by the faith of the Government.

EASY

ECONOMY – BANKING

2. With reference to the Indian economy, “Collateral Borrowing and Lending Obligations” are the instruments of:

(a) Bond market

(b) Forex market

(c) Money market

(d) Stock market

Ans. (c)

A collateralized borrowing and lending obligation (CBLO) is a money market instrument that represents an obligation between a borrower and a lender concerning the terms and conditions of a loan.

MEDIUM

ECONOMY – BANKING

3. With reference to the rule/rules imposed by the Reserve Bank of India while treating foreign banks, consider the following statements :

1. There is no minimum capital requirement for wholly owned banking subsidiaries in India.
2. For wholly owned banking subsidiaries in India, at least 50% of the board members should be Indian nationals.

Which of the statements given above is/are correct?

(a) l only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Ans. (b)

Foreign Banks

• At present, foreign banks have presence in India only through branches.
• At present, foreign banks, if eligible, are allowed by the Reserve Bank of India (RBI) to set up business in India through a single mode of presence i.e. either branch mode or a wholly owned subsidiary (WOS) mode.
• The initial minimum paid-up voting equity capital for a WOS shall be Rs. 5 billion.
• The composition of the board of directors of WOS should be such that not less than 50 per cent directors should be Indian nationals/NRIs/PIOs subject to the condition that one-third of the directors are Indian nationals resident in India;

MEDIUM

ECONOMY – BANKING

4. Consider the following statements :

Statement-I: Syndicated lending spreads the risk of borrower default across multiple lenders.

Statement-II : The syndicated loan can be a fixed amount/lumpsum of funds, but cannot be a credit line.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II explains Statement-I

(b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I

(c) Statement-I is correct, but Statement-II is incorrect

(d) Statement-I is incorrect, but Statement-II is correct

Ans. (c)

Syndicated loan

• It is a form of financing that is offered by a group of lenders.
• Syndicated loans arise when a project requires too large a loan for a single lender or when a project needs a specialized lender with expertise in a specific asset class.
• Syndicating allows lenders to spread risk and take part in financial opportunities that may be too large for their individual capital base.
• Lenders are referred to as a syndicate, which works together to provide funds for a single borrower.
• The borrower can be a corporation, a large project, or a sovereign government.
• The loan can involve a fixed amount of funds, a credit line, or a combination of the two.

MEDIUM

ECONOMY – BANKING

5. Consider the following statements in respect of the digital rupee:

1. It is a sovereign currency issued by the Reserve Bank of India (RBI) in alignment with its monetary policy.
2. It appears as a liability on the RBI’s balance sheet.
3. It is insured against inflation by its very design.
4. It is freely convertible against commercial bank money and cash.

Which of the statements given above are correct?

(a) l and 2 only

(b) 1 and 3 only

(c) 2 and 4 only

(d) 1, 2 and 4

Ans. (d)

UPSC – CSE Prelims 2023

ECONOMY – BANKING

1. Consider the following statements:

Statement-I: In the post-pandemic recent past many Central Banks worldwide had carried out interest rate hikes.

Statement-II : Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I

(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I

(c) Statement-I is correct but Statement-II is incorrect

(d) Statement-I is incorrect but Statement-II is correct

Answer: A

Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes: This statement is correct. In the post-pandemic period, as economies recover and inflationary pressures increase, some central banks have indeed raised interest rates to manage inflation and stabilize their economies. These interest rate hikes are implemented as part of monetary policy measures.

Statement-II: Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means: This statement is the correct explanation for Statement-I. Central banks do assume that they have the ability to influence and control inflation through monetary policy tools, including interest rate adjustments. By raising interest rates, central banks aim to curb inflationary pressures by reducing borrowing and spending, thus addressing the rising consumer prices.

Based on the revised explanations, the correct answer is (a) Both Statement-I and Statement-II are correct, and Statement-II is the correct explanation for Statement-I.

ECONOMY – BANKING

2. Which one of the following activities of the Reserve Bank of India is considered to be part of ‘sterilization’?

(a) Conducting ‘Open Market Operations’ of settlement

(b) Oversight payment systems

(c) Debt and cash management for the Central and State Governments

(d) Regulating the functions of Non- banking Financial Institutions

Answer : (a)

Correct answer: (a) Conducting ‘Open Market Operations’ of settlement

‘Sterilization’ is an activity undertaken by the central bank to offset the impact of its interventions in the foreign exchange market on the domestic money supply. When the central bank intervenes in the foreign exchange market by buying foreign currency, it increases the domestic money supply. To prevent excess liquidity in the economy, the central bank conducts sterilization operations.

One of the key methods of sterilization is through ‘Open Market Operations’ (OMOs), specifically the sale or purchase of government securities. In the case of intervention to buy foreign currency, the central bank can sterilize the increased money supply by selling government securities in the open market, thereby reducing the money available in the economy. Conversely, if the central bank intervenes to sell foreign currency, it can sterilize the reduction in money supply by purchasing government securities.

Therefore, conducting ‘Open Market Operations’ of settlement is considered a part of ‘sterilization’ by the Reserve Bank of India.

ECONOMY – MONEY MARKET

3. Consider the following markets:

1. Government Bond Market
2. Call Money Market
3. Treasury Bill Market
4. Stock Market

How many of the above are included in capital markets?

(a) Only one

(b) Only two

(c) Only three

(d) All four

Answer : (b)

In the given options, only two of them are included in the capital markets:

Government Bond Market: This market involves the buying and selling of government bonds, which are debt securities issued by the government to raise funds. It is an important segment of the capital market as it allows governments to borrow money from investors.

Stock Market: The Stock Market, also known as the equity market or share market, is a market where shares or ownership interests in publicly-traded companies are bought and sold. It is a crucial component of the capital market, allowing companies to raise capital through the issuance of shares, and investors to trade in those shares.

The other two options, Call Money Market and Treasury Bill Market, are part of the money market rather than the capital market.

Call Money Market: The Call Money Market is a segment of the money market where banks and financial institutions borrow and lend money for short durations, typically overnight.

Treasury Bill Market: Treasury bills (T-bills) are short-term government securities with a maturity period of less than one year. The Treasury Bill Market is a part of the money market where these T-bills are traded.

ECONOMY – BANKING

4. Consider the following statements:

1. The Self-Help Group (SHG) programme was originally initiated by the State Bank of India by providing microcredit to the financially deprived.
2. In an SHG, all members of a group take responsibility for a loan that an individual member takes.
3. The Regional Rural Banks and Scheduled Commercial Banks support SHGs.

How many of the above statements are correct?

(a) Only one

(b) Only two

(c) All three

(d) None

Answer: (b) Only two

The Self-Help Group (SHG) programme was originally initiated by the State Bank of India by providing microcredit to the financially deprived: This statement is incorrect. The Self-Help Group (SHG) movement in India was not originally initiated by the State Bank of India. It was started by non-governmental organizations (NGOs) and other grassroots organizations to address the financial needs of the marginalized and financially deprived sections of society.

In an SHG, all members of a group take responsibility for a loan that an individual member takes: This statement is correct. In a typical SHG model, all members collectively take responsibility for the loans taken by individual members of the group. Members contribute to a common fund, and loans are given to members from this pooled fund. The group members jointly ensure the repayment of the loans taken by any individual member.

The Regional Rural Banks and Scheduled Commercial Banks support SHGs: This statement is correct. Regional Rural Banks (RRBs) and Scheduled Commercial Banks (SCBs) actively support SHGs in India. They provide financial assistance, including credit and banking services, to SHGs. These banks often collaborate with NGOs and government agencies to promote the SHG movement and provide financial support to the members.