CAIIB BFM Module C (Unit 22) Funding and Regulatory Aspects MCQ

CAIIB BFM Module C (Unit 22) Funding and Regulatory Aspects MCQ. Preparing for BFM Module C? This post gives you important MCQs on Funding and Regulatory Aspects. Test your knowledge on the Reserve Bank of India’s (RBI) tools like Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), and the Liquidity Adjustment Facility (LAF). Practice these multiple-choice questions to understand key banking concepts like NDTL, money multiplier, payment systems, and boost your exam preparation.

BFM Module C (Unit 22) Funding and Regulatory Aspects MCQ – Attempt Now!

Question 1: What is the effect of the money multiplier?

A. It decreases the money supply in the economy.
B. It shows how banks can expand the money supply through lending.
C. It directly controls the inflation rate set by the RBI.
D. It is the ratio of liquid money to the total money supply.

Show Explanation

Correct Answer: B. It shows how banks can expand the money supply through lending. Banks lend out deposits, which are then re-deposited, leading to a multiple expansion of the initial money supply.

Question 2: What does M3 include?

A. Only currency held by the public.
B. Currency and demand deposits only.
C. Currency, demand deposits, time deposits, and post office savings.
D. Only fixed deposits and post office savings.

Show Explanation

Correct Answer: C. Currency, demand deposits, time deposits, and post office savings. M3 is a broad measure of the money supply in an economy.

Question 3: What is the formula for the money multiplier?

A. M1 / M3
B. M3 + M1
C. M3 / M1
D. M3 – M1

Show Explanation

Correct Answer: C. M3 / M1. The money multiplier is calculated by dividing the total money supply (M3) by the most liquid form of money (M1).

Question 4: What is one of the main roles of the Reserve Bank of India (RBI) regarding reserve assets?

A. To encourage banks to lend as much as possible.
B. To keep all the deposits of the public safe in their own vaults.
C. To use reserves like CRR and SLR to control inflation and manage liquidity.
D. To directly set the interest rates for all loans in the country.

Show Explanation

Correct Answer: C. To use reserves like CRR and SLR to control inflation and manage liquidity. The RBI uses these tools to influence the amount of money circulating in the economy.

Question 5: What is the Cash Reserve Ratio (CRR)?

A. The total amount of money a bank has in its vaults.
B. The percentage of a bank’s profits that it must deposit with the government.
C. The percentage of a bank’s Net Demand and Time Liabilities (NDTL) that it must keep with the RBI.
D. The amount of liquid assets a bank must hold to meet unexpected withdrawals.

Show Explanation

Correct Answer: C. The percentage of a bank’s Net Demand and Time Liabilities (NDTL) that it must keep with the RBI. CRR is a tool used by the RBI to control the money supply.

Question 6: What is the Statutory Liquidity Ratio (SLR)?

A. The percentage of a bank’s total assets that must be in the form of loans.
B. The percentage of a bank’s Net Demand and Time Liabilities (NDTL) that it must invest in specified liquid assets.
C. The maximum amount of money a bank is allowed to lend to a single customer.
D. The rate at which the RBI lends money to commercial banks.

Show Explanation

Correct Answer: B. The percentage of a bank’s Net Demand and Time Liabilities (NDTL) that it must invest in specified liquid assets. SLR ensures banks have enough liquid assets to meet their obligations.

Question 7: Which section of the RBI Act 1934 governs the Cash Reserve Ratio (CRR)?

A. Section 24(1)
B. Section 18(1)
C. Section 42(1)
D. Section 56

Show Explanation

Correct Answer: C. Section 42(1). This section of the RBI Act gives the RBI the power to set the CRR.

Question 8: Which section of the Banking Regulation (BR) Act, 1949 also relates to the Cash Reserve Ratio (CRR)?

A. Section 24
B. Section 42
C. Section 18(1)
D. Section 56

Show Explanation

Correct Answer: C. Section 18(1). This section of the BR Act also mandates the maintenance of CRR by banks.

Question 9: What principle has been in effect regarding the Cash Reserve Ratio (CRR) since 2007?

A. The CRR must always be above a certain minimum level.
B. The CRR cannot exceed a certain maximum level.
C. There is no mandatory floor or ceiling on the CRR percentage.
D. The CRR is fixed at a specific percentage and cannot be changed.

Show Explanation

Correct Answer: C. There is no mandatory floor or ceiling on the CRR percentage. The RBI has the flexibility to set the CRR as needed.

Question 10: What is the current Cash Reserve Ratio (CRR) as per the provided information?

A. 18% of NDTL
B. 90% of NDTL
C. 4.50% of NDTL
D. 100% of NDTL

Show Explanation

Correct Answer: C. 4.50% of NDTL. This is the current percentage of NDTL that banks are required to keep with the RBI.

Question 11: On what basis is the Cash Reserve Ratio (CRR) calculated?

A. On the bank’s total assets at the end of the financial year.
B. On the bank’s Net Demand and Time Liabilities (NDTL) of the current fortnight.
C. On the bank’s Net Demand and Time Liabilities (NDTL) of the second preceding fortnight.
D. On the bank’s projected profits for the next financial year.

Show Explanation

Correct Answer: C. On the bank’s Net Demand and Time Liabilities (NDTL) of the second preceding fortnight. This ensures a stable and predictable calculation of the required reserves.

Question 12: What is the daily requirement for scheduled commercial banks regarding the maintenance of the required CRR?

A. They must maintain 100% of the required CRR each day.
B. They must maintain an average of 90% of the required CRR over a fortnight.
C. They must maintain 90% of the required CRR daily, averaging 100% over the fortnight.
D. They must maintain 100% of the required CRR daily, averaging 90% over the fortnight.

Show Explanation

Correct Answer: C. They must maintain 90% of the required CRR daily, averaging 100% over the fortnight. This provides some flexibility while ensuring sufficient reserves are maintained.

Question 13: What interest rate does the RBI pay on the Cash Reserve Ratio (CRR) balances held with it?

A. Equal to the Bank Rate.
B. A fixed rate of 2% per annum.
C. Zero interest.
D. The prevailing market interest rate.

Show Explanation

Correct Answer: C. Zero interest. Banks do not earn any interest on the funds they maintain as CRR with the RBI.

Question 14: Which type of banks have a special provision allowing them to count branch cash towards their CRR?

A. Scheduled commercial banks.
B. Payment banks.
C. Small finance banks.
D. Urban co-operative banks.

Show Explanation

Correct Answer: D. Urban co-operative banks. This is a specific relaxation provided to these banks.

Question 15: What do Demand Liabilities in Net Demand and Time Liabilities (NDTL) include?

A. Only fixed deposits.
B. Only the time portion of savings accounts.
C. Current deposits and the demand portion of savings accounts.
D. All types of deposits held by a bank.

Show Explanation

Correct Answer: C. Current deposits and the demand portion of savings accounts. These are liabilities that the bank has to pay on demand.

Question 16: What do Time Liabilities in Net Demand and Time Liabilities (NDTL) include?

A. Only current deposits.
B. Only the demand portion of savings accounts.
C. Fixed deposits and the time portion of savings accounts.
D. All types of loans given by a bank.

Show Explanation

Correct Answer: C. Fixed deposits and the time portion of savings accounts. These are liabilities that the bank has to pay after a specific period.

Question 17: Which of the following is NOT excluded when calculating Net Demand and Time Liabilities (NDTL) for CRR?

A. Liabilities to other banks in India.
B. Paid-up capital of the bank.
C. Reserves of the bank.
D. Deposits from the general public.

Show Explanation

Correct Answer: D. Deposits from the general public. These are the primary liabilities that form part of the NDTL.

Question 18: What is the penalty for a shortfall in maintaining the required Cash Reserve Ratio (CRR) on the first day of the shortfall?

A. 3% below the Bank Rate.
B. 5% above the Bank Rate.
C. 3% above the Bank Rate.
D. No penalty is charged on the first day.

Show Explanation

Correct Answer: C. 3% above the Bank Rate. This is the penalty imposed by the RBI for not meeting the CRR requirement.

Question 19: What is the penalty for a continued shortfall in maintaining the required Cash Reserve Ratio (CRR) on subsequent days after the first day?

A. 3% above the Bank Rate.
B. 3% below the Bank Rate.
C. 5% above the Bank Rate.
D. No penalty is charged after the first day.

Show Explanation

Correct Answer: C. 5% above the Bank Rate. The penalty increases for continued non-compliance with CRR requirements.

Question 20: What types of assets can banks hold to meet their Statutory Liquidity Ratio (SLR) requirement?

A. Only cash.
B. Only gold.
C. Cash, gold, or approved (mainly government) securities.
D. Only loans given to the government.

Show Explanation

Correct Answer: C. Cash, gold, or approved (mainly government) securities. These are highly liquid assets that banks can easily convert to cash.

Question 21: Which section of the Banking Regulation (BR) Act, 1949 governs the Statutory Liquidity Ratio (SLR)?

A. Section 42
B. Section 18
C. Section 24
D. Section 56

Show Explanation

Correct Answer: C. Section 24. This section of the BR Act mandates the maintenance of SLR by banks.

Question 22: What principle has been in effect regarding the Statutory Liquidity Ratio (SLR) since 2007?

A. The SLR must always be above a certain minimum level.
B. The SLR cannot exceed a certain maximum level.
C. There is no mandatory minimum on the SLR percentage.
D. The SLR is fixed at a specific percentage and cannot be changed.

Show Explanation

Correct Answer: C. There is no mandatory minimum on the SLR percentage. The RBI has the flexibility to set the SLR as needed.

Question 23: What is the current Statutory Liquidity Ratio (SLR) as per the provided information?

A. 4.50% of NDTL
B. 90% of NDTL
C. 18% of NDTL
D. 100% of NDTL

Show Explanation

Correct Answer: C. 18% of NDTL. This is the current percentage of NDTL that banks are required to hold as liquid assets.

Question 24: On what basis is the Statutory Liquidity Ratio (SLR) calculated?

Show Explanation

Correct Answer: C. On the bank’s Net Demand and Time Liabilities (NDTL) of the second preceding fortnight. Similar to CRR, this ensures a stable calculation.

Question 25: How does the calculation of Net Demand and Time Liabilities (NDTL) for SLR differ from that for CRR?

A. For SLR, it excludes liabilities to the banking system in India.
B. For SLR, it includes paid-up capital and reserves.
C. For SLR, it includes liabilities to the banking system in India.
D. There is no difference in the calculation of NDTL for CRR and SLR.

Show Explanation

Correct Answer: C. For SLR, it includes liabilities to the banking system in India. This is a key difference in the definition of NDTL for SLR purposes.

Question 26: Which section of the Banking Regulation (BR) Act, 1949 specifies the penal interest for a shortfall in maintaining the Statutory Liquidity Ratio (SLR)?

A. Section 24 only.
B. Section 56 only.
C. Section 24 read with Section 56.
D. Section 18 read with Section 24.

Show Explanation

Correct Answer: C. Section 24 read with Section 56. These sections together outline the penalties for SLR shortfall.

Question 27: What type of monetary policy tools are Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)?

A. Qualitative monetary policy tools.
B. Selective monetary policy tools.
C. Quantitative monetary policy tools.
D. Fiscal policy tools.

Show Explanation

Correct Answer: C. Quantitative monetary policy tools. These tools affect the overall quantity of money and credit in the economy.

Question 28: What is the effect of increasing the Cash Reserve Ratio (CRR) or the Statutory Liquidity Ratio (SLR) on the economy?

A. It injects liquidity into the market, increasing the money supply.
B. It has no impact on the liquidity or money supply.
C. It absorbs liquidity from the market, reducing the money supply.
D. It directly increases the interest rates charged by banks.

Show Explanation

Correct Answer: C. It absorbs liquidity from the market, reducing the money supply. Higher reserve requirements leave banks with less money to lend.

Question 29: What is the effect of decreasing the Cash Reserve Ratio (CRR) or the Statutory Liquidity Ratio (SLR) on the economy?

A. It absorbs liquidity from the market, reducing the money supply.
B. It has no impact on the liquidity or money supply.
C. It injects liquidity into the market, increasing the money supply.
D. It directly decreases the interest rates charged by banks.

Show Explanation

Correct Answer: C. It injects liquidity into the market, increasing the money supply. Lower reserve requirements free up more funds for banks to lend.

Question 30: What are the key objectives of using Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as monetary policy tools?

A. To maximize the profits of commercial banks.
B. To promote unlimited lending by banks.
C. To control inflation (price stability) and stabilize financial markets.
D. To directly control the foreign exchange rates.

Show Explanation

Correct Answer: C. To control inflation (price stability) and stabilize financial markets. These are primary goals of monetary policy.

Question 31: Which department in a bank is primarily responsible for ensuring compliance with CRR and SLR requirements?

A. Human Resources department.
B. Marketing department.
C. Treasury department.
D. Loan department.

Show Explanation

Correct Answer: C. Treasury department. This department manages the bank’s funds and ensures regulatory compliance.

Question 32: How frequently does the bank’s Treasury department report on CRR and SLR compliance to the RBI?

A. Monthly.
B. Quarterly.
C. Fortnightly (every two weeks).
D. Annually.

Show Explanation

Correct Answer: C. Fortnightly (every two weeks). Banks are required to report their reserve positions regularly to the RBI.

Question 33: What is the name of the form in which banks report their CRR and SLR compliance to the RBI?

A. Form B
B. Form C
C. Form A
D. Form D

Show Explanation

Correct Answer: C. Form A. This is the specific form prescribed by the RBI for reporting reserve maintenance.

Question 34: How do changes in CRR and SLR potentially impact credit availability in the economy?

A. Increasing CRR/SLR increases the funds available for lending.
B. Decreasing CRR/SLR decreases the funds available for lending.
C. Increasing CRR/SLR reduces the funds available for lending.
D. Changes in CRR/SLR have no impact on credit availability.

Show Explanation

Correct Answer: C. Increasing CRR/SLR reduces the funds available for lending. Higher reserve requirements mean banks have less money to lend out.

Question 35: How do changes in CRR and SLR potentially impact investment levels in the economy?

A. Increased credit availability due to lower CRR/SLR can encourage more investment.
B. Reduced credit availability due to lower CRR/SLR can encourage more investment.
C. Changes in CRR/SLR have no impact on investment levels.
D. Higher CRR/SLR always leads to higher investment.

Show Explanation

Correct Answer: A. Increased credit availability due to lower CRR/SLR can encourage more investment. Easier access to funds can stimulate business and individual investment.

Question 36: How do changes in CRR and SLR potentially impact interest rates in the economy?

A. Higher CRR/SLR can lead to lower interest rates due to increased competition among banks.
B. Lower CRR/SLR can lead to higher interest rates due to increased demand for loans.
C. Higher CRR/SLR can lead to higher interest rates as banks try to compensate for reduced lendable funds.
D. Changes in CRR/SLR have no impact on interest rates.

Show Explanation

Correct Answer: C. Higher CRR/SLR can lead to higher interest rates as banks try to compensate for reduced lendable funds. With less money to lend, banks might increase the cost of borrowing.

Question 37: How do changes in CRR and SLR potentially impact foreign exchange rates?

A. Increased money supply due to lower CRR/SLR can lead to a stronger domestic currency.
B. Reduced money supply due to higher CRR/SLR can lead to a weaker domestic currency.
C. Changes in CRR/SLR can influence capital flows and thus impact foreign exchange rates.
D. Changes in CRR/SLR have no impact on foreign exchange rates.

Show Explanation

Correct Answer: C. Changes in CRR/SLR can influence capital flows and thus impact foreign exchange rates. These changes can affect the overall economic sentiment and attractiveness of the domestic currency.

Question 38: What is the primary purpose of the Liquidity Adjustment Facility (LAF) of the Reserve Bank of India (RBI)?

A. To provide long-term loans to banks for infrastructure projects.
B. To manage the daily liquidity in the banking system.
C. To regulate the stock market and trading of securities.
D. To set the interest rates for all types of bank deposits.

Show Explanation

Correct Answer: B. To manage the daily liquidity in the banking system. LAF is the RBI’s main tool for controlling the amount of money available to banks on a short-term basis.

Question 39: Which of the following is NOT a core instrument of the Liquidity Adjustment Facility (LAF)?

A. Repo
B. Reverse Repo
C. Marginal Standing Facility (MSF)
D. Credit Rating Adjustment (CRA)

Show Explanation

Correct Answer: D. Credit Rating Adjustment (CRA). Repo, Reverse Repo (largely replaced by SDF), and MSF are the main instruments of LAF.

Question 40: What is a Repo transaction under the Liquidity Adjustment Facility (LAF)?

A. RBI borrows money from banks against government securities.
B. RBI lends money to banks without any collateral.
C. RBI provides funds to banks by temporarily purchasing government securities from them.
D. Banks lend money to each other using government securities as collateral.

Show Explanation

Correct Answer: C. RBI provides funds to banks by temporarily purchasing government securities from them. This injects liquidity into the banking system.

Question 41: What is a Reverse Repo transaction under the Liquidity Adjustment Facility (LAF)?

A. RBI lends money to banks against government securities.
B. RBI borrows money from banks without any collateral.
C. RBI absorbs funds from banks by temporarily selling government securities to them.
D. Banks borrow money from each other using government securities as collateral.

Show Explanation

Correct Answer: C. RBI absorbs funds from banks by temporarily selling government securities to them. This takes liquidity out of the banking system.

Question 42: What is the Marginal Standing Facility (MSF)?

A. A facility for banks to invest their surplus funds in the stock market.
B. A regular window for banks to borrow long-term funds from the RBI.
C. An emergency window for banks to borrow overnight funds from RBI at a rate higher than the Repo rate.
D. A facility for the government to borrow money from the RBI.

Show Explanation

Correct Answer: C. An emergency window for banks to borrow overnight funds from RBI at a rate higher than the Repo rate. MSF is a safety net for banks facing temporary liquidity shortages.

Question 43: What is the Standing Deposit Facility (SDF)?

A. A facility for banks to borrow funds from the RBI against collateral.
B. A facility for banks to lend funds to each other without collateral.
C. A facility that allows banks to place overnight deposits with RBI without needing collateral.
D. A facility for the government to deposit its surplus funds with the RBI.

Show Explanation

Correct Answer: C. A facility that allows banks to place overnight deposits with RBI without needing collateral. SDF is primarily used by the RBI to absorb excess liquidity.

Question 44: How often are Repo and Reverse Repo auctions typically conducted under the LAF?

A. Weekly
B. Monthly
C. Daily for overnight liquidity adjustments
D. Fortnightly

Show Explanation

Correct Answer: C. Daily for overnight liquidity adjustments. These daily auctions help the RBI manage short-term liquidity fluctuations.

Question 45: What is the minimum bid size for Repo and Reverse Repo auctions under the LAF?

A. ₹1 crore
B. ₹5 crore
C. ₹10 crore
D. ₹25 crore

Show Explanation

Correct Answer: B. ₹5 crore. Bids must also be submitted in multiples of this amount.

Question 46: Where must the securities used in LAF transactions be held by the banks?

A. In the bank’s physical vault.
B. In the bank’s current account with the RBI.
C. In the bank’s Subsidiary General Ledger (SGL) account.
D. In the bank’s investment portfolio managed by a third party.

Show Explanation

Correct Answer: C. In the bank’s Subsidiary General Ledger (SGL) account. SGL is a system for holding government securities in electronic form.

Question 47: What is a Variable Rate Term Repo/Reverse Repo?

A. Repo/Reverse Repo transactions with a fixed interest rate for a short period.
B. Auctions for longer tenors where banks bid for funds or placement at a variable interest rate.
C. Repo/Reverse Repo transactions conducted only with foreign banks.
D. Repo/Reverse Repo transactions where the amount is fixed by the RBI.

Show Explanation

Correct Answer: B. Auctions for longer tenors where banks bid for funds or placement at a variable interest rate. These help in managing liquidity for periods longer than overnight.

Question 48: When do the 14-day variable rate repo/reverse repo auctions typically occur?

A. On the first Friday of every month.
B. On the last Friday of every month.
C. On reporting Fridays (as decided by the RBI).
D. Every alternate Friday.

Show Explanation

Correct Answer: C. On reporting Fridays (amount decided by RBI). These auctions are a regular feature of the RBI’s liquidity management.

Question 49: When are other Variable Rate Term Repo/Reverse Repo auctions conducted?

A. Every Monday and Wednesday.
B. Only during periods of high inflation.
C. At the RBI’s discretion based on liquidity conditions.
D. Only when there is a shortage of government securities.

Show Explanation

Correct Answer: C. At the RBI’s discretion based on liquidity conditions. The RBI uses these auctions to address specific liquidity needs in the market.

Question 50: What is the borrowing limit for banks under the Marginal Standing Facility (MSF)?

A. A fixed percentage of their total deposits.
B. A limit linked to their Statutory Liquidity Ratio (SLR) holdings.
C. A fixed amount determined by the RBI at the beginning of each financial year.
D. There is no limit on borrowing under MSF.

Show Explanation

Correct Answer: B. A limit linked to their Statutory Liquidity Ratio (SLR) holdings. This ensures that banks have sufficient liquid assets even after using the MSF window.

Question 51: What are the operating hours for the Marginal Standing Facility (MSF) window?

A. 9:00 AM to 5:00 PM
B. 10:00 AM to 4:00 PM
C. 5:30 PM to 11:59 PM
D. 24 hours a day

Show Explanation

Correct Answer: C. 5:30 PM to 11:59 PM. This timing is designed to help banks manage their overnight liquidity needs after the regular banking hours.

Question 52: What was the main tool for absorbing excess liquidity before the Standing Deposit Facility (SDF) became prominent?

A. Repo
B. Marginal Standing Facility (MSF)
C. Fixed Rate Reverse Repo
D. Open Market Operations (OMOs)

Show Explanation

Correct Answer: C. Fixed Rate Reverse Repo. SDF has largely replaced the fixed rate reverse repo as the primary tool for absorbing liquidity.

Question 53: How often is the Standing Deposit Facility (SDF) available for banks to place deposits with the RBI?

A. Weekly
B. Monthly
C. Daily
D. Only on reporting Fridays

Show Explanation

Correct Answer: C. Daily. SDF provides a continuous option for banks to park their excess funds with the RBI.

Question 54: Which of the following is often used by the RBI for managing durable liquidity in the banking system?

A. Overnight Repo auctions
B. Marginal Standing Facility (MSF)
C. Foreign Exchange (FX) Swaps
D. Standing Deposit Facility (SDF)

Show Explanation

Correct Answer: C. Foreign Exchange (FX) Swaps. These are used for managing liquidity over a longer term compared to daily LAF operations.

Question 55: Which of the following is another tool used by the RBI for managing durable liquidity?

A. Overnight Reverse Repo auctions
B. Marginal Standing Facility (MSF)
C. Long Term Variable Rate Repo (LTR)
D. Standing Deposit Facility (SDF)

Show Explanation

Correct Answer: C. Long Term Variable Rate Repo (LTR). LTRs are conducted for longer durations to address more persistent liquidity needs.

Question 56: What determines the timing and amount for tools like FX Swaps, LTR, LTRR, and OMOs?

A. It is fixed and announced at the beginning of each financial year.
B. It is determined by the government’s borrowing requirements.
C. It is determined at the RBI’s discretion based on prevailing market conditions.
D. It is decided by a committee of commercial bank CEOs.

Show Explanation

Correct Answer: C. It is determined at the RBI’s discretion based on prevailing market conditions. The RBI adjusts these tools as needed to manage liquidity effectively.

Question 57: What is the Policy Rate Corridor?

A. The range between the Repo rate and the inflation rate.
B. The range between the SDF rate (floor) and the MSF rate (ceiling).
C. The range between the highest and lowest interest rates in the banking system.
D. The range between the CRR and the SLR.

Show Explanation

Correct Answer: B. The range between the SDF rate (floor) and the MSF rate (ceiling). This corridor helps to keep the short-term money market rates within a defined band.

Question 58: Which rate is considered the target policy rate within the LAF corridor?

A. The SDF rate
B. The MSF rate
C. The Repo rate
D. The Reverse Repo rate

Show Explanation

Correct Answer: C. The Repo rate. The Repo rate is the key indicator of the RBI’s monetary policy stance.

Question 59: What does the RBI aim to keep aligned with the Repo rate?

A. The inflation rate
B. The GDP growth rate
C. The Weighted Average Call Rate (WACR)
D. The foreign exchange rate

Show Explanation

Correct Answer: C. The Weighted Average Call Rate (WACR). WACR is the average interest rate at which banks lend to each other overnight.

Question 60: What role does the SDF rate play in the overnight money market interest rates?

A. It acts as the ceiling.
B. It acts as the floor.
C. It is the average rate.
D. It has no direct impact.

Show Explanation

Correct Answer: B. It acts as the floor. Banks will generally not lend below the rate they can earn by depositing with the RBI under SDF.

Question 61: What role does the MSF rate play in the overnight money market interest rates?

A. It acts as the floor.
B. It is the average rate.
C. It acts as the ceiling.
D. It has no direct impact.

Show Explanation

Correct Answer: C. It acts as the ceiling. Banks will be reluctant to borrow at a rate higher than the MSF rate from other banks when they have the option to borrow from the RBI at the MSF rate.

Question 62: What level of discretion does the RBI have over LAF operations?

A. Limited discretion based on pre-set rules.
B. Full discretion over terms, amounts, and bid acceptance/rejection.
C. Discretion only on the interest rates, but not the amounts.
D. No discretion; all operations are rule-based.

Show Explanation

Correct Answer: B. Full discretion over terms, amounts, and bid acceptance/rejection. This allows the RBI to respond flexibly to changing market conditions.

Question 63: Why are efficient payment and settlement systems considered vital?

A. They primarily benefit large corporations.
B. They are essential for the stability and development of the financial market.
C. They only affect international transactions.
D. They are important for individual customers but not for banks.

Show Explanation

Correct Answer: B. They are essential for the stability and development of the financial market. Efficient payment and settlement systems ensure smooth flow of funds and reduce risks in financial transactions, contributing to overall market stability and growth.

Question 64: What is the main difference between payments and settlements in the financial system?

A. Payments involve the exchange of securities, while settlements involve fund transfers.
B. Payments are always instantaneous, while settlements can be delayed.
C. Payments involve the transfer of funds, while settlements involve the final exchange of funds, securities, or forex.
D. Payments are for domestic transactions, while settlements are for international transactions.

Show Explanation

Correct Answer: C. Payments involve the transfer of funds, while settlements involve the final exchange of funds, securities, or forex. Payments initiate the transfer, while settlements complete the transaction by the final exchange of value.

Question 65: Which institution operates the Real Time Gross Settlement (RTGS) system in India?

A. National Payments Corporation of India (NPCI)
B. State Bank of India (SBI)
C. Reserve Bank of India (RBI)
D. Indian Banks’ Association (IBA)

Show Explanation

Correct Answer: C. Reserve Bank of India (RBI). The RBI is the central bank of India and operates the RTGS system.

Question 66: Since when has the Real Time Gross Settlement (RTGS) system been operational in India?

A. October 2000
B. January 2004
C. October 2004
D. January 2005

Show Explanation

Correct Answer: C. October 2004. The RTGS system was launched by RBI in October 2004.

Question 67: What is the primary benefit of the Real Time Gross Settlement (RTGS) system?

A. It allows for the netting of transactions, reducing the overall settlement amount.
B. It eliminates the settlement risk associated with systems that net transactions.
C. It processes a large volume of transactions in batches at the end of the day.
D. It is available to all individuals for small value transactions.

Show Explanation

Correct Answer: B. It eliminates the settlement risk associated with systems that net transactions. RTGS settles each transaction individually and instantly, thus removing the risk of one party failing to meet their obligations after others have.

Question 68: What is the minimum amount required for a transaction through the Real Time Gross Settlement (RTGS) system?

A. ₹1 lakh
B. ₹2 lakhs
C. ₹5 lakhs
D. There is no minimum transaction amount.

Show Explanation

Correct Answer: B. ₹2 lakhs. The minimum transaction amount stipulated for RTGS is ₹2 lakhs.

Question 69: What is essential for banks to participate in the Real Time Gross Settlement (RTGS) system?

A. They need to have a large number of customers.
B. They must maintain sufficient funds with the Reserve Bank of India (RBI).
C. They should have a wide network of branches across the country.
D. They need to process a minimum volume of transactions daily.

Show Explanation

Correct Answer: B. They must maintain sufficient funds with the Reserve Bank of India (RBI). RTGS operates on a gross basis, requiring banks to have the necessary funds available with the RBI for each transaction.

Question 70: What does the Reserve Bank of India (RBI) provide to facilitate the smooth operation of the Real Time Gross Settlement (RTGS) system?

A. Subsidized transaction fees for banks.
B. Intra-day Liquidity (IDL) through repo against securities.
C. Extended operating hours for RTGS transactions.
D. Direct access to government securities for all RTGS participants.

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Correct Answer: B. Intra-day Liquidity (IDL) through repo against securities. RBI provides IDL to banks to help them manage their liquidity needs during the day for smooth RTGS operations.

Question 71: What is the Indian Financial Network (INFINET)?

A. A payment gateway for online transactions.
B. A secure closed user group network for the financial sector.
C. A mobile application for fund transfers.
D. A system for trading in government securities.

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Correct Answer: B. A secure closed user group network for the financial sector. INFINET provides a secure communication infrastructure for financial institutions in India.

Question 72: Which institution developed the Indian Financial Network (INFINET)?

A. National Payments Corporation of India (NPCI)
B. Reserve Bank of India (RBI)
C. Institute for Development and Research in Banking Technology (IDRBT)
D. Indian Banks’ Association (IBA)

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Correct Answer: C. Institute for Development and Research in Banking Technology (IDRBT). IDRBT is responsible for developing and maintaining INFINET.

Question 73: What is the Structured Financial Messaging System (SFMS) used for?

A. For international fund transfers only.
B. For standardized messaging for secure domestic financial transactions.
C. For trading of government securities.
D. For customer relationship management in banks.

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Correct Answer: B. For standardized messaging for secure domestic financial transactions. SFMS ensures secure and standardized communication for various financial transactions within India.

Question 74: What is the domestic equivalent of SWIFT (Society for Worldwide Interbank Financial Telecommunication) in India?

A. Real Time Gross Settlement (RTGS)
B. National Electronic Funds Transfer (NEFT)
C. Structured Financial Messaging System (SFMS)
D. Negotiated Dealing System (NDS)

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Correct Answer: C. Structured Financial Messaging System (SFMS). SFMS serves a similar role as SWIFT but for domestic financial communication in India.

Question 75: What is the Negotiated Dealing System (NDS)?

A. A system for inter-bank lending.
B. RBI’s electronic platform for trading government securities and money market instruments.
C. A platform for retail investors to buy and sell shares.
D. A system for clearing and settlement of foreign exchange transactions.

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Correct Answer: B. RBI’s electronic platform for trading government securities and money market instruments. NDS facilitates trading in these instruments.

Question 76: When was the Negotiated Dealing System (NDS) introduced by the RBI?

A. February 2000
B. October 2002
C. February 2002
D. January 2004

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Correct Answer: C. February 2002. NDS was launched by RBI in February 2002.

Question 77: What are the key functions facilitated by the Negotiated Dealing System (NDS)?

A. Only secondary market trading of government securities.
B. Electronic bidding in auctions, secondary market trading, reporting, and settlement of government securities and money market instruments.
C. Primarily reporting of all financial transactions by banks.
D. Only settlement of money market instruments.

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Correct Answer: B. Electronic bidding in auctions, secondary market trading, reporting, and settlement of government securities and money market instruments. NDS provides a comprehensive platform for these activities.

Question 78: What is NDS-OM (Order Matching)?

A. The primary auction segment of the Negotiated Dealing System.
B. An anonymous electronic order matching segment within NDS for government securities trading.
C. The reporting module of the Negotiated Dealing System.
D. The settlement system linked to the Negotiated Dealing System.

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Correct Answer: B. An anonymous electronic order matching segment within NDS for government securities trading. NDS-OM allows for anonymous trading of government securities.

Question 79: On what principle does the NDS-OM (Order Matching) segment operate?

A. First-in, first-out (FIFO) principle.
B. Price/time priority, with counterparty revealed after the trade.
C. Counterparty preference, where traders can choose their trading partners.
D. Volume-based priority, where larger orders are executed first.

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Correct Answer: B. Price/time priority, with counterparty revealed after the trade. NDS-OM prioritizes orders based on price and then time of entry, revealing the counterparty only after the trade is executed.

Question 80: What is the role of Straight-Through Processing (STP) in the context of NDS-OM?

A. It allows direct communication between traders.
B. It enables automatic processing of trades from execution to clearing house (CCIL).
C. It provides real-time market data to participants.
D. It is used for reporting trades to the RBI.

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Correct Answer: B. It enables automatic processing of trades from execution to clearing house (CCIL). STP streamlines the post-trade process by automating the flow of information to the clearing house.

Question 81: What is mandatory regarding government securities deals and the Negotiated Dealing System (NDS)?

A. Only deals above a certain threshold must be reported on NDS.
B. All government securities deals must be traded or reported on NDS.
C. Only primary market transactions in government securities are conducted on NDS.
D. Banks have the option to use NDS for their government securities transactions.

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Correct Answer: B. All government securities deals must be traded or reported on NDS. This ensures transparency and efficient monitoring of the government securities market.

Question 82: What is the Clearing Corporation of India Ltd. (CCIL)?

A. A regulatory body for the banking sector.
B. A Central Counterparty (CCP) that clears and settles trades in various financial instruments.
C. A government agency that manages public debt.
D. An association of banks that sets inter-bank lending rates.

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Correct Answer: B. A Central Counterparty (CCP) that clears and settles trades in various financial instruments. CCIL plays a crucial role in reducing counterparty risk in financial markets.

Question 83: How does the Clearing Corporation of India Ltd. (CCIL) reduce counterparty risk?

A. By providing insurance against default by trading members.
B. By acting as the buyer to every seller and the seller to every buyer.
C. By monitoring the financial health of all market participants.
D. By delaying the settlement of transactions until both parties confirm.

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Correct Answer: B. By acting as the buyer to every seller and the seller to every buyer. This central role of CCIL ensures that if one party defaults, the other party is still guaranteed settlement by CCIL.

Question 84: What is FX Clear?

A. A system for clearing and settling retail foreign exchange transactions.
B. CCIL’s platform for clearing and settling inter-bank USD/INR and cross-currency forex deals.
C. A platform for trading in foreign exchange derivatives.
D. A regulatory framework for foreign exchange transactions in India.

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Correct Answer: B. CCIL’s platform for clearing and settling inter-bank USD/INR and cross-currency forex deals. FX Clear provides a centralized platform for these transactions.

Question 85: What are the benefits of clearing transactions through CCIL’s FX Clear platform?

A. Faster transaction processing and lower fees.
B. Guaranteed settlement and netting benefits for cleared transactions.
C. Direct access to international foreign exchange markets.
D. Exemption from regulatory reporting requirements.

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Correct Answer: B. Guaranteed settlement and netting benefits for cleared transactions. CCIL guarantees the settlement of cleared transactions and allows for netting, which reduces the overall settlement obligations.

Question 86: Which institutions are India’s securities depositories holding dematerialised securities?

A. Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI).
B. National Securities Depository Limited (NSDL) and Central Depository Services Limited (CSDL).
C. State Bank of India (SBI) and Punjab National Bank (PNB).
D. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

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Correct Answer: B. National Securities Depository Limited (NSDL) and Central Depository Services Limited (CSDL). NSDL and CSDL are the two main depositories in India.

Question 87: What type of settlement do National Securities Depository Limited (NSDL) and Central Depository Services Limited (CSDL) enable for securities transactions?

A. Gross Settlement
B. Net Settlement
C. Delivery vs. Payment (DVP) settlement
D. Deferred Net Settlement (DNS)

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Correct Answer: C. Delivery vs. Payment (DVP) settlement. Depositories facilitate DVP to ensure simultaneous exchange of securities and funds.

Question 88: What does Delivery vs. Payment (DVP) settlement ensure?

A. That the transaction is processed on the same day.
B. That the transfer of securities and the payment of funds happen simultaneously.
C. That the transaction is settled through a central counterparty.
D. That the transaction is reported to the regulatory authorities.

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Correct Answer: B. That the transfer of securities and the payment of funds happen simultaneously. DVP eliminates the risk of one party fulfilling their obligation without the other party doing so.

Question 89: What is the National Electronic Funds Transfer (NEFT)?

A. An instant real-time payment system.
B. An electronic system for transferring funds across banks nationwide.
C. A system used only for government-related payments.
D. A mobile-based payment application.

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Correct Answer: B. An electronic system for transferring funds across banks nationwide. NEFT facilitates the transfer of funds between different bank accounts across India.

Question 90: On what basis does the National Electronic Funds Transfer (NEFT) system operate?

A. Real Time Gross Settlement (RTGS) basis.
B. Immediate Payment Service (IMPS) basis.
C. Deferred Net Settlement (DNS) basis, processing transactions in batches.
D. Gross settlement on a continuous basis.

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Correct Answer: C. Deferred Net Settlement (DNS) basis, processing transactions in batches. NEFT processes transactions in batches at specific time intervals.

Question 91: What is Core Banking Solution (CBS)?

A. A system for inter-bank communication.
B. Bank systems enabling customers to transact from any branch.
C. A regulatory framework for banking operations.
D. A system for managing government securities.

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Correct Answer: B. Bank systems enabling customers to transact from any branch. CBS allows customers to access their accounts and perform transactions from any branch of their bank.

Question 92: What is the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS)?

A. An independent body that audits payment systems.
B. An RBI sub-committee responsible for regulating and supervising all payment and settlement systems in India.
C. A government ministry overseeing financial transactions.
D. An industry association for payment system providers.

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Correct Answer: B. An RBI sub-committee responsible for regulating and supervising all payment and settlement systems in India. BPSS is the apex body for payment systems regulation in India.

Question 93: What is the primary aim of the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS)?

A. To promote competition among payment system operators.
B. To ensure the safety, security, and efficiency of India’s payment systems.
C. To increase the volume of digital payments in India.
D. To reduce the cost of payment transactions for customers.

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Correct Answer: B. To ensure the safety, security, and efficiency of India’s payment systems. BPSS works towards maintaining a robust and reliable payment infrastructure in the country.