Module: | MODULE C: TREASURY MANAGEMENT
Q477: Consider the following statements regarding the regulatory framework and operational mechanics of primary money market products:
1. Treasury Bills, foundational money market instruments issued by the Government of India, are typically issued in three standard maturity periods of 91 days, 182 days, and 364 days.
2. The Repo Rate functions as the benchmark rate at which the Reserve Bank of India injects short-term liquidity by lending money to commercial banks against approved securities.
3. The Negotiable Instruments Act, enacted in 1881, governs the clearance of primary money market instruments, legally classifying Demand Drafts as guaranteed payment mechanisms.
4. Cheques represent a highly liquid component of the payment system, but hold a strictly enforced maximum validity period of 90 days from the date of issuance before becoming stale.
2. The Repo Rate functions as the benchmark rate at which the Reserve Bank of India injects short-term liquidity by lending money to commercial banks against approved securities.
3. The Negotiable Instruments Act, enacted in 1881, governs the clearance of primary money market instruments, legally classifying Demand Drafts as guaranteed payment mechanisms.
4. Cheques represent a highly liquid component of the payment system, but hold a strictly enforced maximum validity period of 90 days from the date of issuance before becoming stale.
✅ Correct Answer: C
The Indian money market is heavily regulated to ensure systemic liquidity and the secure settlement of short-term financial instruments.
Treasury Bills (T-Bills) are sovereign zero-coupon bonds issued at a discount and redeemed at par, functioning as the safest money market instrument, strictly available in 91-day, 182-day, and 364-day maturities.
The Reserve Bank of India manages interbank liquidity primarily through the Liquidity Adjustment Facility (LAF), using the Repo Rate as the benchmark to lend overnight or term funds to commercial banks against the collateral of government securities.
The foundational legal framework for clearing and settling negotiable paper in India is the Negotiable Instruments Act, 1881.
Under this Act, a Demand Draft is differentiated from a standard cheque because it is drawn by a bank upon itself or another branch, eliminating the risk of dishonour due to insufficient funds, thus making it a guaranteed payment mechanism.
Furthermore, to streamline the clearing process and reduce the circulation of stale instruments, the RBI strictly mandates that cheques and bank drafts are valid for only 90 days (or three months) from the date of issuance.
A: This option incorrectly excludes statement 3. The classification of Demand Drafts under the Negotiable Instruments Act, 1881, and their legal status as guaranteed payment instruments, is a correct and fundamental banking concept.
B: This option incorrectly excludes statement 1. The specific maturity buckets for Government of India Treasury Bills (91, 182, and 364 days) are strictly defined and correct.
C: This is the correct option.
All four statements accurately reflect the maturities, legal statutes, benchmark rates, and validity periods governing Indian money market instruments.
D: This option incorrectly isolates statements 1 and 3, completely ignoring the factual mechanics of Repo operations and the 90-day validity rule for cheques.
Treasury Bills (T-Bills) are sovereign zero-coupon bonds issued at a discount and redeemed at par, functioning as the safest money market instrument, strictly available in 91-day, 182-day, and 364-day maturities.
The Reserve Bank of India manages interbank liquidity primarily through the Liquidity Adjustment Facility (LAF), using the Repo Rate as the benchmark to lend overnight or term funds to commercial banks against the collateral of government securities.
The foundational legal framework for clearing and settling negotiable paper in India is the Negotiable Instruments Act, 1881.
Under this Act, a Demand Draft is differentiated from a standard cheque because it is drawn by a bank upon itself or another branch, eliminating the risk of dishonour due to insufficient funds, thus making it a guaranteed payment mechanism.
Furthermore, to streamline the clearing process and reduce the circulation of stale instruments, the RBI strictly mandates that cheques and bank drafts are valid for only 90 days (or three months) from the date of issuance.
A: This option incorrectly excludes statement 3. The classification of Demand Drafts under the Negotiable Instruments Act, 1881, and their legal status as guaranteed payment instruments, is a correct and fundamental banking concept.
B: This option incorrectly excludes statement 1. The specific maturity buckets for Government of India Treasury Bills (91, 182, and 364 days) are strictly defined and correct.
C: This is the correct option.
All four statements accurately reflect the maturities, legal statutes, benchmark rates, and validity periods governing Indian money market instruments.
D: This option incorrectly isolates statements 1 and 3, completely ignoring the factual mechanics of Repo operations and the 90-day validity rule for cheques.