Financial Markets & Instruments

Statement 1 is incorrect. The ‘lender of last resort’ (LoLR) function of the central bank primarily applies to commercial banks and financial institutions, not trade and industry bodies. Businesses and industries generally rely on commercial banks, financial institutions, and capital markets for funds. The Reserve Bank of India (RBI) does not directly lend to trade and industry bodies under its LoLR function. Statement 2 is correct. The central bank (RBI) acts as the ‘lender of last resort’ for commercial banks facing liquidity shortages. This helps prevent bank failures and maintains financial stability. RBI provides liquidity through mechanisms like repo operations, open market operations (OMO), and special liquidity facilities. Statement 3 is incorrect. The RBI does not directly lend to the government to cover budgetary deficits under the 'lender of last resort' function. The government primarily finances deficits through market borrowings, treasury bills, and bonds. However, RBI can indirectly support the government by purchasing government securities in the open market (OMO) or monetizing debt in special situations (historically, through ways and means advances - WMA).

In India, cyber insurance covers (generally) the following - Identity theft - Cyber-bullying and cyber-stalking - Cyber extortion - Malware intrusion - Financial loss due to unauthorized and fraudulent use of bank account, credit card, and mobile wallet - Legal expenses arising out of any covered risk - Social Media Cover - Phishing Cover - E-mail Spoofing - Media Liability Claims Cover - Cyber Extortion Cover - Privacy Breach and Data Breach by Third Party. Cyber insurance generally focuses on damages caused by cyber threats or electronic incidents, not physical damage to devices. Hence, statement 2 is incorrect. Hence only options 1, 3, and 4 are correct.

Expansionary Monetary Policy aims to stimulate economic activity by increasing the money supply and lowering interest rates. Statement 1 is incorrect. Cut and optimize the Statutory Liquidity Ratio: This aligns with expansionary policy as it allows banks to lend more. Statement 2 is correct. Increase the Marginal Standing Facility Rate: This goes against expansionary policy because it makes it more expensive for banks to borrow from RBI, potentially reducing liquidity. Statement 3 is incorrect. Cut the Bank Rate and Repo Rate: This is a key tool for expansionary policy. Lowering these rates encourages banks to borrow from RBI and lend at lower rates to businesses and individuals, stimulating economic activity. Therefore, increasing the Marginal Standing Facility Rate (MSF Rate) would contradict the goals of an expansionary monetary policy.

Not depending on short-term foreign borrowings: This reduces exposure to capital flight. During a crisis, foreign investors may pull their money out of emerging markets like India, leading to rupee depreciation and financial instability. By limiting short-term foreign borrowings, India can lessen the impact of such capital flight. Opening up to more foreign banks: While this might seem beneficial, it can also increase reliance on foreign capital. During a crisis, foreign banks might be more likely to restrict credit, negatively impacting the Indian economy. Maintaining full capital account convertibility: This allows for the free movement of capital in and out of the country. While it can be beneficial in normal times, it can also exacerbate capital flight during a crisis. Therefore, the most prudent strategy is to reduce dependence on short-term foreign borrowings to minimize the vulnerability caused by potential capital flight. Hence, only statement 1 is correct. Hence, option A is the correct answer.

Statement 1 is correct: The Interest Coverage Ratio (ICR) helps in understanding the present risk of a firm’s ability to pay interest on its debt. A low ICR indicates higher risk, as the firm may not have enough earnings to cover its interest obligations. Statement 2 is correct: The ICR is also used to assess emerging risks for a firm. A declining ICR over time can signal growing difficulties in servicing debt, which can be important for banks evaluating the risk of granting new loans. Statement 3 is incorrect: A higher Interest Coverage Ratio actually indicates better ability to service debt, not worse. A high ratio means the firm has a sufficient earnings buffer to cover its interest expenses, which is seen as a positive sign by creditors. Hence, option A is the correct answer.

The following statements are correct concerning the Indian economy: - Commercial Paper is a short-term unsecured promissory note. It's a money market instrument issued by companies to raise short-term funds.
- Call Money is a short-term finance used for interbank transactions. Banks borrow or lend money from each other for overnight periods to meet their liquidity requirements. Incorrect statements: - Certificate of Deposit is not issued by the Reserve Bank of India. It's a negotiable instrument issued by commercial banks to depositors for a fixed maturity period at a predetermined interest rate.
- Zero-Coupon Bonds can be long-term or short-term, but they are not issued by Scheduled Commercial Banks. These bonds don't pay periodic interest, but are sold at a discount to their face value. The difference between the purchase price and the maturity value represents the return on investment. Therefore, the correct codes are 1 and 3 only.

The phrase that best defines the nature of the Hundi generally referred to in the sources of the post-Harsha period is: A bill of exchange. Hundi as a Financial Instrument: Hundis were instruments used in trade and credit transactions during the medieval period in India. Functions of a Bill of Exchange: A bill of exchange is a written order issued by one person (drawer) to another (drawee) to pay a specified sum of money to a third party (payee) at a future date. This aligns with the functionality of a Hundi. Merchants used Hundis to facilitate trade by - Securing Payments: They could issue a Hundi to the seller upon receiving goods, instructing their bank or agent (drawee) at the seller's location to pay the specified amount. - Obtaining Credit: Merchants could also use Hundis to obtain credit. They could draw a Hundi against future earnings and have it discounted by a money lender for immediate cash.

Assets represent the resources a bank owns. For a commercial bank, these resources include: - Advances (loans): Money lent to businesses, individuals, and other borrowers.
- Investments Securities like government bonds, treasury bills, or shares in other companies.
- Money at call and short notice: Funds are lent to other banks for a very short period, usually overnight.
- Deposits are liabilities for a bank. They represent the money that customers entrust to the bank, which the bank is obligated to repay.

* Derived from Russia, India used the concept of the Five-Year Plan for economic planning. * With the first five-year plan launched in 1951, India now has a total of 12 such plans. However, the practice was called off in 2017 by the Narendra Modi-led NDA government. * The Second Plan focused on the industrial development of the country and stressed capital goods industries. * The Fourth Plan was focused on growth with stability and progressive achievement of self-reliance. The plan focused on eliminating poverty with the slogan of Garibi Hatao given during the 1971 elections by Indira Gandhi. * The Fifth Plan gave top priority to agriculture, employment, and poverty alleviation.

The Inter-Creditor Agreement (ICA) signed by Indian banks and financial institutions is a mechanism to expedite the resolution of stressed assets, particularly in cases of consortium lending involving loans of Rs. 50 crore or more.