Money Market: UPSC Previous Year Questions (Indian Economy)

Explanation

Collateralized Borrowing and Lending Obligations (CBLO) are short-term money market instruments used for borrowing and lending funds. They are primarily used by financial institutions such as banks, mutual funds, and insurance companies to manage liquidity. CBLO transactions are collateralized, meaning they require securities (such as government bonds) as collateral, reducing credit risk. The instrument was introduced by the Clearing Corporation of India Ltd. (CCIL) to facilitate secure and efficient borrowing and lending of funds in the money market. CBLOs facilitate borrowing and lending transactions that are fully collateralized, typically using government securities as collateral. CBLOs are primarily used by financial institutions to man-age liquidity and funding needs over short durations, ranging from overnight to one year.

Explanation

The Central Bank Digital Currency (CBDC), or Digital Rupee (e), is the Reserve Bank of India’s official digital currency, interchangeable one-to-one with fiat currency and recognized as legal tender. It can be used by individuals, businesses, and government entities for transactions without needing a bank account, especially in the case of retail CBDC, which works like digital cash. CBDCs help reduce the costs of printing, transporting, and storing physical currency while improving transaction efficiency by minimizing intermediaries and enabling faster payments.

Statement 1 is correct: The Digital Rupee (e) is issued by the RBI as Central Bank Digital Currency (CBDC) and functions as legal tender, just like physical cash. Its issuance is aligned with monetary policy objectives, including promoting financial inclusion and reducing dependency on cash.

Statement 2 is correct: Since the Digital Rupee is an obligation of the central bank, it is recorded as a liability on RBI’s balance sheet, similar to physical currency notes issued by the central bank.

Statement 3 is incorrect: The Digital Rupee, like any fiat currency, is not inherently protected against inflation. Its value depends on broader economic factors, including monetary policy, demand-supply conditions, and RBI’s inflation management strategies.

Statement 4 is correct: The digital rupee can be exchanged for physical cash or commercial bank money at par value without any restrictions. CBDC is freely convertible into cash and money from commercial banks.

Explanation

Statement 1 is incorrect: Bitcoin operates on a decentralized blockchain technology, which eliminates the need for any central authority such as central banks to track transactions. The system is maintained by miners who validate transactions and add them to the public ledger called the blockchain. While central banks are increasingly exploring the implications of cryptocurrencies and some are even considering issuing their own digital currencies (CBDCs), they do not currently track Bitcoin transactions.

Statement 2 is correct: Anyone with a Bitcoin wallet (which generates a Bitcoin address) can send and receive Bitcoins to and from any other Bitcoin address, anywhere in the world. A Bitcoin address functions as a public key, similar to a digital bank account number. This address can be shared to receive payments. Sending or receiving bitcoins requires no intermediary, allowing for peer-to-peer transactions across borders which is often faster and cheaper than traditional banking systems.

Statement 3 is correct: Bitcoin transactions are pseudo-anonymous which means that while wallet addresses are visible on the blockchain but the users’ identities are not directly linked to those addresses. This makes Bitcoin ideal for privacy-conscious users. This anonymity is a key feature that has attracted some users to Bitcoin, but it has also raised concerns about its potential use in illicit activities.

Explanation

Gold Monetization Scheme and Sovereign Gold Bond Scheme were introduced to lower the physical demand for gold and remove the estimated 20,000 tonnes of the precious metal from households where it was sitting inert. Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold issued by the RBI on behalf of the Government.

Statement 1 is correct: Sovereign Gold Bond Scheme was launched along with the Gold Monetisation Scheme in November 2015. India has a strong cultural affinity for gold, and a significant amount of gold is held by households in the form of jewelry, bars, and coins. The objective is to reduce India’s gold imports and bring all the gold lying idle with individuals and households and put it to productive use in the economy.

Statement 2 is incorrect: Neither the SGB nor the GMS is explicitly designed to promote FDI in the gold and jewellery sector. Their primary focus is on domestic gold mobilization and reducing reliance on imports. While a more organized gold market resulting from these schemes could create a conducive environment for investment, promoting FDI is not a stated objective of these schemes.

Statement 3 is correct: By offering a non-physical form of gold investment, the scheme aims to curb the demand for imported gold thus reducing the country’s import bill. The SGB scheme offers investors bonds denominated in grams of gold. These bonds provide returns linked to the market price of gold along with periodic interest payments.

Explanation

Venture capital (VC) is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. The majority of venture capital is often provided by wealthy individuals, investment banks, and other financial organisations. They often provide mentorship and strategic guidance in addition to funds. Investors take on higher risks with the expectation of high returns if the business succeeds. In India, firms such as Sequoia Capital, Accel Partners, and Indian Angel Network are well-known VC providers. Sectors like technology, e-commerce, and fintech have seen significant VC investments.

Explanation

Inflation is the general rise in prices of goods and services within a particular economy wherein, the purchasing power of consumers decreases, and the value of the cash holdings erode. Inflation measures the average price change in a basket of commodities and services over time. Some causes of inflation include increase in demand, reduction in supply, demand-supply gap, excess circulation of money, increase in input costs, devaluation of currency, rise in wages, etc.

Statement 1 is correct: When the money supply in the economy increases the purchasing power of people increases leading to increased demand for goods and services. If this demand surpasses the supply the prices rise causing demand-pull inflation. Example: Post-COVID monetary easing by central banks led to global inflationary trends.

Statement 2 is correct: If the economy’s overall production of goods and services falls (aggregate supply decreases) and demand remains the same or increases then the prices will be pushed upward causing inflation. This can happen due to factors like supply chain disruptions, natural disasters, or decreased productivity.

Statement 3 is correct: "Effective demand" refers to demand that is backed by the ability to pay. If there’s an increase in demand for goods and services (due to factors like rising incomes, consumer confidence, or government spending) and supply doesn’t increase at the same rate then theprices will rise.

Explanation

Statement 1 is correct: When the central bank buys government securities (like bonds) from the public it injects money into the economy. The sellers of these securities receive cash, increasing the money supply. This is a key tool of monetary policy known as open market operations.

Statement 2 is incorrect: When the public deposits currency into commercial banks, it doesn’t increase the overall money supply. It simply changes the form of money. Currency in circulation decreases but bank deposits increase by the same amount. These deposits can then be used by banks to create credit. Thus the initial act of depositing cash is neutral with respect to the money supply.

Statement 3 is correct: When the government borrows directly from the central bank, it often leads to an increase in the money supply. The central bank essentially creates new money to lend to the government. This is sometimes referred to as "monetizing the debt."

Statement 4 is incorrect: When the Central Bank sells government securities to the public, it effectively reduces the amount of money circulating in the economy. The public (individuals or financial institutions) buys these securities by paying money to the Central Bank. This payment transfers money from the public’s hands to the Central Bank, which essentially "locks away" this cash. This tool is part of Open Market Operations (OMO) aimed at controlling inflation or overheating of the economy.

Explanation

Central Public Sector Enterprises (CPSEs) encompasses those Government companies in which the direct holding of the Central Government is 51 per cent or more and subsidiaries of such Government companies. The Statutory Corporations set up under Statutes enacted by the Parliament and other companies owned or controlled, directly or indirectly by the Central Government are also categorized as CPSEs.

Statement 1 is incorrect: External debt is the portion of a country’s debt that is borrowed from foreign lenders, including commercial banks, governments, or international financial institutions. The primary objectives of disinvestment in CPSEs are to raise resources for development, reduce fiscal deficits, and promote wider ownership of CPSEs through public participation rather than repaying external debt.

Statement 2 is incorrect: In many cases, the government retains management control by holding a majority stake (more than 50%) even after partial disinvestment. However, in strategic disinvestments, management control may be transferred to private entities. Disinvestment policy is often categorized into strategic disinvestment (selling a majority stake with management control) and minority stake sales. Air India’s strategic disinvestment in 2021 is a notable instance where management control was fully transferred.

Explanation

The Mega Food Park Scheme, launched in 2008-09, aims to significantly enhance the food processing industry by increasing value and reducing food waste throughout the supply chain, particularly for perishable goods. This initiative is over-seen by the Ministry of Food Processing Industries. The scheme is executed by a Special Purpose Vehicle (SPV), a corporate entity registered under the Companies Act, 2013. Based on a "Cluster" approach, the scheme focuses on developing advanced support infrastructure in specific agricultural or horticultural zones. This infrastructure is designed to enable the establishment of modern food processing units on industrial plots within the park, supported by a well-established supply chain.

Statement 1 is correct: Through a cluster-based approach, mega food parks build cutting-edge infrastructure facilities for food processing along the value chain from farm to market with strong forward and backward connections.

Statement 2 is correct: The Scheme is aimed at providing a method for connecting agricultural production to the market by bringing together producers, processors, and retailers in order to maximise value addition, focused processing of perishable items, reduce wastage, boost farmers’ incomes, and create jobs, particularly in the rural sector.

Statement 3 is incorrect: A Mega Food Park normally includes cold chain, collection centres, primary processing centres, central processing centres, and about 25 to 30 fully completed plots for entrepreneurs to build food processing units. While the entrepreneurs are supported to establish food processing units, providing emerging and eco-friendly food processing technologies is not an stated objective of promoting Mega Food Parks.

Explanation

The National Investment Fund (NIF) was created in India to receive the proceeds from the disinvestment of public sector undertakings (PSUs). The idea was to use these funds strategically for social sector development and investment.

Statement 1 is incorrect: the NIF’s assets were managed by selected public sector mutual funds, namely UTI Asset Management Company Ltd., SBI Funds Management Private Ltd., and LIC Mutual Fund Asset Management Company Ltd., not directly by the Union Ministry of Finance.

Statement 2 is incorrect: The NIF was kept outside the Consolidated Fund of India. This was done to ensure that the disinvestment proceeds were used for their intended purpose (social sector development) and not simply absorbed into general government expenditure.

Statement 3 is correct: The Government appoints Asset Management Companies (AMCs) from the public sector to manage the fund.

Statement 4 is correct: 75% of the annual income from NIF is allocated to social sector schemes (education, health, employment). 25% is used for capital investment in profitable/ revivable CPSEs to support their expansion and diversification.