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Indian Economy Questions for IAS Preparation: Financial Market

Dec 14, 2017 18:33 IST
    Indian Economy Questions for IAS Preparation Financial Market
    Indian Economy Questions for IAS Preparation Financial Market

    IAS aspirants must have the understanding of every subject of UPSC IAS syllabus. An understanding of any IAS aspirant can be developed by practicing a number of questions and studying the concepts related to the respective topics.

    Here, we have provided questions of Indian economy for IAS Prelims Exam and we have covered the topic of financial market of Indian economy through our questions. Such questions can be asked in IAS Prelims Exam.

    Indian Economy for IAS Exam 2018

    1. Which of the following is/are a component of organised Indian money market?
    1. Commercial Papers
    2. Mutual Funds
    3. Treasury Bills
    4. Cash Management Bills

    Which of the above statement is true?
    a. 1, 2 and 3
    b. 2, 3 and 4
    c. 1, 3 and 4
    d. All of the above

    Answer: d

    Explanation:

    In India, there are 8 components or the instruments of Indian money especially devised to fulfil the short-term fund requirements of the different categories of the individuals, institutions or the firms and companies:

    (i) Treasury Bills

    (ii) Call Money Market

    (iii) Certificate of Deposit

    (iv) Commercial Bills

    (v) Commercial Papers

    (vi) Mutual Funds

    (vii) Repo and Reverse Repo Markets.

    (viii) Cash Management Bill

    2. Consider the following statements regarding the financial market:
    1. Money market and capital market are the two segments of the financial market of an economy.
    2. The long-term financial market is called money market while the short time financial market is called capital market.

    Which of the above statement is true?
    a. Only 1
    b. Only 2
    c. Both 1 and 2
    d. Neither 1 nor 2

    Answer: a

    Explanation:

    In a financial market of an economy, funds are transacted between the fund-surplus and fund-scarce individuals and groups on the basis of either interest or dividend. Financial might be an institutionalised or a non-institutionalised will serve the motive of supply of funds for the desired time period. The time period can be a long-term and a short-term.

    Financial markets in every economy are having two separate segments today, one catering to the requirements of the short-term funds and the other to the requirements of the long-term funds. The short-term financial market is known as the money market while the long-term financial market is known as the capital market. The money market fulfils the requirements of funds for the period up to 364 days (i.e. short-term) while the capital market does the same for the period above 364 days (i.e., long-term).

    Indian Economy Questions for IAS Preparation: Public Finance in India

    3. Consider the following statements regarding the money market:
    1. It is a short-term financial market of an economy.
    2. Money market operates both in the organised and organised way.
    3. No collateral security is required to borrow from the money market.

    Which of the above statement is true?
    a. 1, 2 and 3
    b. 2, 3 and 4
    c. 1, 3 and 4
    d. All of the above

    Answer: d

    Explanation:

    Money Market is the short-term financial market of an economy. In this market, basically, money is traded between individuals or groups (i.e., financial institutions, banks, government, companies, etc.) who are either cash-surplus or cash-scarce. The trading is done at a rate known as discount rate which is determined by the market and guided by the availability of and demand for the cash in the day-to-day trading10. The ‘repo rate’ of the time (announced by the RBI) works as the guiding rate for the current ‘discount rate’. Borrowings in this market may or may not be supported by collaterals. In money markets, the financial assets which have quick conversion quality into money and carry minimal transaction cost are also traded11. Money market may be defined as a market where short-term lending and borrowing takes place between the cash-surplus and cash-scarce sides.

    4. Which of the following committee underlined the need of an organised money market for the first time in the country?
    a. Chakravarthy Committee
    b. Vahul Committee
    c. Justice B N Srikrishna Commission
    d. Narasimhan Committee

    Answer: a

    Explanation:

    The organised form of money market in India is just about two decades old. However, its presence has been there but restricted to the use of the Government only12. It was the Chakravarthy Committee (1985) which for the first time underlined the need of an organised money market in the country13 and the Vahul Committee (1987) laid the blue print for its development.

    5. Consider the following statements regarding the Call Money Market:
    1. This is basically an inter-bank money market where funds are borrowed and lent for one day.
    2. Collateral Security is required to borrow from this market.

    Which of the above statement is true?
    a. Only 1
    b. Only 2
    c. Both 1 and 2
    d. Neither 1 nor 2

    Answer: c

    Explanation:

    This is basically an inter-bank money market where funds are borrowed and lent for one day. Also known as over-night borrowing (called as money at call) and for a period up to 14 days (called short notice). No collateral is required to borrow from this market. Funds are usually raised from this market up to three days—the higher the interest, the longer the period for which the funds have been borrowed.

    The scheduled commercial banks, co-operative banks operate in this market as both the borrowers and lenders while LIC, GIC, UTI, IDBI and NABARD are allowed to operate as only lenders in this market. The interest rate in this market depends upon the demand and supply of the funds on a particular day which is market determined.

    IAS Exam 2018: All You Need to Know

    DISCLAIMER: JPL and its affiliates shall have no liability for any views, thoughts and comments expressed on this article.

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