UPSC Prelims 2020 Q70: Indian Economy – Financial Markets & Capital Markets
- (a) 1 and 2 only
- (b) 4 only
- (c) 1 and 3 only
- (d) 2, 3 and 4 only
Answer: (c) 1 and 3 only
Explanation
Money Market Instruments: Definitions & Features
| Statement | Claim | Verdict | Detail |
|---|---|---|---|
| 1 | Commercial Paper = short-term unsecured promissory note | TRUE | CP is issued by companies for 7 days to 1 year, unsecured. Used for working capital. |
| 2 | Certificate of Deposit = long-term RBI instrument | FALSE | CD is issued by banks (not RBI), for 3-12 months (SHORT to medium-term), not long-term. |
| 3 | Call Money = short-term interbank finance | TRUE | Call money is overnight to 14-day interbank borrowing. Used for liquidity management. |
| 4 | Zero-Coupon Bonds = interest-bearing short-term bonds by banks | FALSE | Zero-coupon bonds pay NO interest (issued at discount, redeemed at face value). And they're medium-term, not short. |
Statements 1 and 3 are correct. Answer: (c) 1 and 3 only.
Answer: (c) 1 and 3 only.
Why each option is right or wrong
- (a) Incorrect. Statement 3 is also correct.
- (b) Incorrect. Statements 2 and 4 have multiple errors.
- (c) CORRECT. Statements 1 (CP = short-term unsecured) and 3 (call money = interbank short-term) are correct. Statements 2 and 4 have false claims.
- (d) Incorrect. Statements 2 and 4 are false.
Key point
Money market instruments: CP (short, company-issued), CD (bank-issued, short-medium), Call money (interbank overnight-14d), T-bills (govt short-term). Each distinct purpose + issuer.
Remember
Commercial Paper is indeed a short-term unsecured promissory note (Statement 1 correct). Certificate of Deposit is issued BY BANKS (not RBI) for short to medium-term (Statement 2 wrong). Call Money is used for short-term interbank transactions (Statement 3 correct). Zero-Coupon Bonds pay NO interest and are longer-term (Statement 4 wrong).
Common mistakes
- Confusing CD issuer (banks) with RBI (wrong). RBI issues MSF/repo, not CDs.
- Assuming all bonds are coupon-bearing. Zero-coupon = sold at deep discount, no interest.
- Missing term distinctions - short (1d-1y), medium (1-5y), long (5y+).
Exam tip
RBI's money market ecosystem: Repo (primary), Call (overnight), T-bills (1-364 days), CP (7d-1y), CD (3-12m), CRR/SLR corridors. Each addresses different liquidity need.
Sources
- RBI - Money Market Instruments Handbook
- FIMMDA - Fixed Income Guidelines