Security Market in India: UPSC Previous Year Questions (Indian Economy)

Explanation

The real sector refers to the segment of the economy that is involved in the production and consumption of tangible goods and services. It includes industries such as agriculture, manufacturing, construction, mining, and services like health-care, education, and transportation. Statements 1 and 2 are correct:

Farmers harvesting their crops: This is a primary sector activity directly contributing to the production of goods (agricultural produce). Textile mills converting raw cotton into fabrics: This is a manufacturing activity, part of the secondary sector, which also belongs to the real sector. Statements 3 and 4 are incorrect:

A commercial bank lending money to a trading company:

This is a financial sector activity, involving monetary transactions rather than the production of tangible goods or services. A corporate body issuing Rupee Denominated Bonds overseas: This relates to the financial sector and capital markets, as it involves raising funds rather than producing goods or services.

Explanation

Bond yield is the return an investor gets on that bond or on a particular government security. It depends on the price of the bond which is impacted by its demand.

Statement 1, 2 and 3 are correct:

Factor Scenario Impact Effect on Bond Yields

1. US Federal Reserve Actions Raises Inter-est Rates Capital outflows from In-dia as US bonds become more attractive. Yields rise due to lower demand for Indian bonds. Lowers Interest Rates Capital inflows to India as Indian bonds offer better returns. Yields fall due to higher demand for Indian bonds.

2. RBI Actions Increases Repo Rates (Tightening Policy) Higher borrowing costs slow down credit growth and economic activity. Yields rise as new bonds offer higher interest. Cuts Repo Rates (Easing Policy) Cheaper borrowing encourages economic activity and credit flow. Yields fall as new bonds are issued at lower rates.

3. Inflation and Short-Term Interest Rates Rising Inflation Reduces the real value of bond interest payments. Yields rise to compensate for inflation. Falling Inflation Improves real returns on bonds, making them more attractive. Yields fall due to increased bond demand.

Explanation

Statement 1 is correct: Retail investors can participate in government securities (G-Secs) like Treasury Bills (T-Bills) and Government of India Bonds through schemes such as Retail Direct Scheme facilitated by the Reserve Bank of India (RBI). This allows them to invest directly in the primary market using Demat accounts.

Statement 2 is correct: The NDS-OM platform, is an electronic trading platform, operated by the RBI, is an anonymous order-matching system for secondary market trading in government securities (G-Secs)

Statement 3 is incorrect: CDSL is promoted by the Bombay Stock Exchange (BSE) but not by the Reserve Bank of India. It is promoted by BSE Ltd. jointly with leading banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank and Union Bank of India.

Explanation

Option (a) is incorrect: While Foreign Direct Investment (FDI) can involve capital instruments like equity shares, it is not limited to listed companies. FDI typically involves acquiring a significant ownership stake (usually 10% or more) in a company, giving the investor management control or influence over business operations. FDI can occur in both listed and unlisted companies and often includes investments in infrastructure, manufacturing units, or joint ventures. In contrast, investments primarily in listed companies without control are characteristic of Foreign Portfolio Investment (FPI), which is passive and doesn’t provide managerial influence.

Option (b) is correct: FDI involves equity investment, meaning investors acquire ownership or a significant interest in a company. Since it doesn’t require repayment like loans, it is considered a non-debt capital flow, contributing positively to the host country’s economy without creating debt obligations.

Option (c) is incorrect: Debt-servicing refers to making interest and principal payments on loans. FDI doesn’t involve such obligations, as it is equity-based. Debt-servicing is more relevant to External Commercial Borrowings (ECBs) or other loan-based investment

Option (d) is incorrect: The investment can be made in equities or equity linked instruments or debt instruments issued by the company. Thus, FDI isn’t directly associated with government securities.

Explanation

As of the latest updates, the Securities Transaction Tax (STT) in India remains a significant source of revenue for the government. Introduced in 2004, STT is a direct tax levied on the purchase and sale of securities listed on recognized stock ex-changes.

Option (a) is correct: In India, taxes on stock exchange and futures market transactions fall under the Securities Trans-action Tax (STT), which is levied by the Union Government under the Securities Transaction Tax Act, 2004. The tax is imposed on the purchase or sale of listed securities, including equities and derivatives.

Statement 1 is correct: The Union Government levies and collects the STT, as per the provisions of the Finance Act (2004).

Statement 2 is incorrect: State governments do not collect STT. Instead, stamp duties on share transfers are collected by states, but not the transaction tax.

Explanation

Financial inclusion refers to providing affordable and accessible financial services, such as savings accounts, credit, and insurance, to all segments of society, especially the underprivileged and rural populations.

Statement 1 is correct: In 1969 and 1980, the Government of India nationalized several major commercial banks. This move aimed to shift the focus from "class banking" to "mass banking," thereby extending banking services to the underprivileged and rural sectors. Post-nationalization, these banks expanded their branch networks into rural areas, providing financial services to previously unbanked populations.

Statement 2 is correct: RRBs were established under the Regional Rural Banks Act of 1976 to develop the rural economy by providing credit and other facilities to small and marginal farmers, agricultural laborers, artisans, and small entrepreneurs. The primary objective was to bridge the credit gap in rural areas and integrate them into the formal banking system, thereby promoting financial inclusion.

Statement 3 is correct: The Lead Bank Scheme, introduced by the Reserve Bank of India, assigned specific banks the responsibility of acting as a consortium leader in particular districts. These lead banks were tasked with adopting villages to ensure the provision of banking services and credit facilities. This initiative aimed to promote financial inclusion by fostering a banking relationship with rural communities and addressing their specific financial needs.

Explanation

Option (c) is correct: Special Drawing Rights (SDR) is considered artificial currency as it is not a physical currency but a reserve asset created by the International Monetary Fund (IMF). It serves as a unit of account for IMF member countries and is used for international transactions and reserve management. The value of SDR is determined based on a basket of five major currencies: US Dollar, Euro, Chinese Yuan, Japanese Yen, and British Pound. Options (a), (b) and (d) are incorrect: ADR (American Depository Receipts) and GDR (Global Depository Receipts) are not currencies but financial instruments used by companies to raise capital from foreign markets. ADRs are financial instruments that represent shares of a foreign company, but they are traded on U.S. stock exchanges (like NYSE or NASDAQ). They allow U.S. investors to invest in non-U.S. companies without dealing with foreign markets or currencies. Example: An Indian company like Infosys can issue ADRs to let American investors buy its shares in the U.S. GDRs are similar to ADRs but are traded on multiple international markets, such as the London or Luxembourg stock exchanges. They help companies raise capital from investors worldwide, not limited to the U.S. Example:

Reliance Industries might issue GDRs to attract investors from Europe, Asia, or other regions.

Explanation

Pair 1 is correctly matched: Nikkei (Japan) tracks the performance of 225 major companies listed on the Tokyo Stock Exchange.

Pair 2 is incorrectly matched: The Shanghai Composite Index (Shcomp) is the stock market index of China, not Singapore. The correct index for Singapore is the Straits Times Index (STI).

Pair 3 is correctly matched: FTSE (UK), The Financial Times Stock Exchange (FTSE 100) represents the 100 largest companies listed on the London Stock Exchange.

Pair 4 is correctly matched: Nasdaq (USA), technology-heavy stock exchange index in the United States, tracking major firms like Apple, Google, and Microsoft.

Explanation

Participatory Notes (PNs) are financial instruments used by Foreign Institutional Investors (FIIs) to invest in Indian stock markets without direct registration with the Securities and Exchange Board of India (SEBI). These instruments allow overseas investors, including hedge funds, to gain exposure to Indian equities while bypassing regulatory procedures. PNs are issued by registered FIIs and sub-accounts against underlying Indian securities. While they provide easy access to foreign investment, concerns exist regarding lack of transparency and potential misuse for money laundering.As per SEBI regulations, efforts have been made to increase transparency and reduce misuse of PNs in India’s financial markets.

Explanation

Statement 1 is incorrect: LIC is not the oldest insurance company in India. The oldest insurance company is "Oriental Life Insurance Company" (established in 1818 in Kolkata). LIC was formed later in 1956 when the government nationalized over 240 private insurance companies.

Statement 2 is correct: The National Insurance Company Limited was nationalized in 1972 and became a subsidiary of the General Insurance Corporation of India (GIC). Later, it was made an independent entity.

Statement 3 is correct: United India Insurance Company Limited is headquartered in Chennai and is one of the four public sector insurance companies in India. As per IRDAI (Insurance Regulatory and Development Authority of India) re-ports, these insurance companies play a key role in the country’s financial sector.