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Question 1 of 5
1. Question
2 points1. Consider the following statements regarding Off-budget borrowings:
1. These borrowings are not counted while calculating the fiscal deficit.
2. In these borrowings, the government takes loans directly.
3. The budgetary resources cannot be used for repayment of these borrowings.
How many of the above statements are correct?Correct
Answer: A
Explanation:
● Statement 1 is correct: Off-budget borrowings refer to the borrowings undertaken by the public sector for which the principal and interest are serviced out of government budgets. These borrowings are kept out of the government books and are not counted while calculating the fiscal deficit.
Or
● Off-budget borrowing or extra-budget borrowing is a way for the government to finance its expenditures while keeping the debt off the books. It means that the government asks another public institution to borrow on its behalf so that the collected loan is not counted in the fiscal deficit. This intends to help the government keep its fiscal deficit within acceptable limits, but on the other hand, it also reduces the transparency and accountability of its finances.
● Statement 2 is incorrect: Off-budget borrowings (OBBs) are taken not by the government directly but by another public institution in its direction. For example, loans by FCI for paying food subsidy bills (this practice is discontinued from FY 2020-21).
● Statement 3 is incorrect: Government uses the budgetary resources for the repayment of Off-budget borrowings.
● Reasons for resorting to OBB:
o Bypass Fiscal Deficit targets under the FRBM Act, 2003,
o Avoid borrowing limits under Article 293 (3) of the Constitution.
o Article mandates States to take consent of the Centre before raising any loan if they have any outstanding loan to the Centre or loans where the Centre is the guarantor.Incorrect
Answer: A
Explanation:
● Statement 1 is correct: Off-budget borrowings refer to the borrowings undertaken by the public sector for which the principal and interest are serviced out of government budgets. These borrowings are kept out of the government books and are not counted while calculating the fiscal deficit.
Or
● Off-budget borrowing or extra-budget borrowing is a way for the government to finance its expenditures while keeping the debt off the books. It means that the government asks another public institution to borrow on its behalf so that the collected loan is not counted in the fiscal deficit. This intends to help the government keep its fiscal deficit within acceptable limits, but on the other hand, it also reduces the transparency and accountability of its finances.
● Statement 2 is incorrect: Off-budget borrowings (OBBs) are taken not by the government directly but by another public institution in its direction. For example, loans by FCI for paying food subsidy bills (this practice is discontinued from FY 2020-21).
● Statement 3 is incorrect: Government uses the budgetary resources for the repayment of Off-budget borrowings.
● Reasons for resorting to OBB:
o Bypass Fiscal Deficit targets under the FRBM Act, 2003,
o Avoid borrowing limits under Article 293 (3) of the Constitution.
o Article mandates States to take consent of the Centre before raising any loan if they have any outstanding loan to the Centre or loans where the Centre is the guarantor. -
Question 2 of 5
2. Question
2 points2. Consider the following statements regarding India Post Payments Bank (IPPB):
1. It is set up under the Ministry of Finance.
2. It is fully owned by the Government of India.
3. It is a scheduled payment bank.
4. It does not offer credit to private entities.
How many of the above statements are correct?Correct
Answer: C
Explanation:
● Statement 1 is incorrect: In 2018, IPPB was established under the Department of Posts, Ministry of Communication.
● Statement 2 is correct: Its 100% equity is owned by the Government of India.
o Vision: Build the most accessible, affordable and trusted bank for the common man in India.
o Mandate: Spearheading financial inclusion by removing barriers and reducing costs for accessing banking services.
● IPPB is registered under the Banking Regulation Act, 1949 duly licensed by RBI to carry on the business of payments banks in India.
o Statement 3 is correct: It is a scheduled payment bank offering a range of products like savings and current accounts, remittances and money transfer, Aadhar Enabled Payment System etc.
o It offers three accounts: Safal (regular account); Sugam, (Basic Savings Bank Deposit Account (BSBDA)); and Saral (BSBDA-Small).
o Statement 4 is correct: It can not offer loans or issue credit cards.
● Achievements of IPPB: More than 6 crore accounts have been opened across the country including 96 lakhs in aspirational districts.
Functions of India Post Payments Bank (IPPB):
● DEPOSITS
o Savings Account
o Current Account
● MONEY TRANSFER
o Simple & Secure
o Instant
o 24×7
● THIRD PARTY PRODUCTS
o Loans referral services
o Insurance
o Investments
o Post Office Savings schemes
● ENTERPRISE AND MERCHANT PAYMENTS
o Postal products
o Digital Payment of e-commerce delivery (CoD)
o Small merchants/Kirana stores/unorganized retail
o Offline payments
o Cash Management Services
Payment Banks:
● In August 2015, RBI granted licenses to 11 applicants for Payment Banks.
● RBI has put a cap of Rs. 2 lakhs on deposits that payment banks can receive from individual customers. This restriction will allow only those companies to seek payment bank licenses who are really interested in targeting the poor. Hence, the main target for payment banks will be migrant labourers, self-employed, low-income households etc. as they will offer low-cost savings accounts and remittance services so that those who now transact only in cash can take their first step into the formal banking system (payment banks will not be allowed to lend and issue credit cards. Payment banks will accept only demand deposits i.e., only savings account and current account facility will be available).
● The payment banks will be cashing in on mobile technology and applications to cater to the various services they will be offering and with the use of technology they can be cost efficient.
● The Payment banks will be acting as add-on to the already established banks, rather than their competitors.Incorrect
Answer: C
Explanation:
● Statement 1 is incorrect: In 2018, IPPB was established under the Department of Posts, Ministry of Communication.
● Statement 2 is correct: Its 100% equity is owned by the Government of India.
o Vision: Build the most accessible, affordable and trusted bank for the common man in India.
o Mandate: Spearheading financial inclusion by removing barriers and reducing costs for accessing banking services.
● IPPB is registered under the Banking Regulation Act, 1949 duly licensed by RBI to carry on the business of payments banks in India.
o Statement 3 is correct: It is a scheduled payment bank offering a range of products like savings and current accounts, remittances and money transfer, Aadhar Enabled Payment System etc.
o It offers three accounts: Safal (regular account); Sugam, (Basic Savings Bank Deposit Account (BSBDA)); and Saral (BSBDA-Small).
o Statement 4 is correct: It can not offer loans or issue credit cards.
● Achievements of IPPB: More than 6 crore accounts have been opened across the country including 96 lakhs in aspirational districts.
Functions of India Post Payments Bank (IPPB):
● DEPOSITS
o Savings Account
o Current Account
● MONEY TRANSFER
o Simple & Secure
o Instant
o 24×7
● THIRD PARTY PRODUCTS
o Loans referral services
o Insurance
o Investments
o Post Office Savings schemes
● ENTERPRISE AND MERCHANT PAYMENTS
o Postal products
o Digital Payment of e-commerce delivery (CoD)
o Small merchants/Kirana stores/unorganized retail
o Offline payments
o Cash Management Services
Payment Banks:
● In August 2015, RBI granted licenses to 11 applicants for Payment Banks.
● RBI has put a cap of Rs. 2 lakhs on deposits that payment banks can receive from individual customers. This restriction will allow only those companies to seek payment bank licenses who are really interested in targeting the poor. Hence, the main target for payment banks will be migrant labourers, self-employed, low-income households etc. as they will offer low-cost savings accounts and remittance services so that those who now transact only in cash can take their first step into the formal banking system (payment banks will not be allowed to lend and issue credit cards. Payment banks will accept only demand deposits i.e., only savings account and current account facility will be available).
● The payment banks will be cashing in on mobile technology and applications to cater to the various services they will be offering and with the use of technology they can be cost efficient.
● The Payment banks will be acting as add-on to the already established banks, rather than their competitors. -
Question 3 of 5
3. Question
2 points3. Which of the following statements correctly describes the term “Inflation Tax”?
Correct
Answer: D
Explanation:
● As a result of inflation (the opposite of deflation), the cost of goods and services rises, but the value of our money decreases. And that inflation is accompanied by inflation tax.
● Inflation tax is not a tax paid to the government. Instead “inflation tax” refers to the penalty for holding cash at a time of high inflation. When the government prints more money or reduces interest rates, it floods the market with cash, which raises inflation in the long run. If an investor is holding securities, real estate or other assets, the effect of inflation may be negligible. But, if a person is holding cash, the purchasing power of this cash reduces during a higher rate of inflation.Incorrect
Answer: D
Explanation:
● As a result of inflation (the opposite of deflation), the cost of goods and services rises, but the value of our money decreases. And that inflation is accompanied by inflation tax.
● Inflation tax is not a tax paid to the government. Instead “inflation tax” refers to the penalty for holding cash at a time of high inflation. When the government prints more money or reduces interest rates, it floods the market with cash, which raises inflation in the long run. If an investor is holding securities, real estate or other assets, the effect of inflation may be negligible. But, if a person is holding cash, the purchasing power of this cash reduces during a higher rate of inflation. -
Question 4 of 5
4. Question
2 points4. Consider the following statements related to the Standing Deposit Facility (SDF):
1. This tool has been introduced through an amendment to the Banking Regulation Act, 1949.
2. It enables the RBI to absorb liquidity from the economy.
3. Banks can deposit any amount for the long term under SDF.
How many of the above statements are correct?Correct
Answer: A
Explanation:
Standing Deposit Facility (SDF):
● Statement 1 is incorrect: Introduced in April 2022 by an amendment in RBI Act 1934.
● Statement 2 is correct: A Standing Deposit Facility is an overnight deposit facility that allows banks to park excess liquidity (money) and earn interest. In a liquidity-surplus banking system, the RBI is focused on absorbing excess liquidity from banks without collateral.
● The following are its important features:
o Statement 3 is incorrect: Banks can deposit any amount overnight with RBI at repo rate – 0.25% (it may change).
o As there is no binding collateral constraint on RBI under SDF, it will strengthen the operating framework of monetary policy.
o The SDF is also a financial stability tool in addition to its role in liquidity management.
o SDF will be at the discretion of banks and will be available on all days of the week, throughout the year unlike repo and reverse repo which are available at the discretion of RBI.Incorrect
Answer: A
Explanation:
Standing Deposit Facility (SDF):
● Statement 1 is incorrect: Introduced in April 2022 by an amendment in RBI Act 1934.
● Statement 2 is correct: A Standing Deposit Facility is an overnight deposit facility that allows banks to park excess liquidity (money) and earn interest. In a liquidity-surplus banking system, the RBI is focused on absorbing excess liquidity from banks without collateral.
● The following are its important features:
o Statement 3 is incorrect: Banks can deposit any amount overnight with RBI at repo rate – 0.25% (it may change).
o As there is no binding collateral constraint on RBI under SDF, it will strengthen the operating framework of monetary policy.
o The SDF is also a financial stability tool in addition to its role in liquidity management.
o SDF will be at the discretion of banks and will be available on all days of the week, throughout the year unlike repo and reverse repo which are available at the discretion of RBI. -
Question 5 of 5
5. Question
2 points5. Consider the following statements:
Statement I: Inflation Indexed Bonds are tradable in the secondary market.
Statement II: Inflation Indexed Bonds are the Government securities.
Which one of the following is correct in respect of the above statements?Correct
Answer: B
Explanation:
● Inflation Indexed Bonds (IIBs) were issued in the name of Capital Indexed Bonds (CIBs) during 1997. The CIBs issued in 1997 provide inflation protection only to principal and not to interest payment. IIBs will provide inflation protection to both principal and interest payments.
● IIBs would be Government securities (G-Sec) and the different classes of investors eligible to invest in G-Secs would also be eligible to invest in IIBs.
● FIIs would be eligible to invest in the forthcoming IIBs but subject to the overall cap for their investment in G-Secs (currently USD 25 billion).
● Statement I and II are correct but its explanation is incorrect: G-Sec can be tradable in the secondary market like other G-Secs. Because IIBs are Government securities.
● Investors will be able to trade them in NDS-OM, NDS-OM (web-based), OTC market, and stock exchanges.
● As of now investors will not be able to participate in the primary auction of IIBs through a web-based platform.Incorrect
Answer: B
Explanation:
● Inflation Indexed Bonds (IIBs) were issued in the name of Capital Indexed Bonds (CIBs) during 1997. The CIBs issued in 1997 provide inflation protection only to principal and not to interest payment. IIBs will provide inflation protection to both principal and interest payments.
● IIBs would be Government securities (G-Sec) and the different classes of investors eligible to invest in G-Secs would also be eligible to invest in IIBs.
● FIIs would be eligible to invest in the forthcoming IIBs but subject to the overall cap for their investment in G-Secs (currently USD 25 billion).
● Statement I and II are correct but its explanation is incorrect: G-Sec can be tradable in the secondary market like other G-Secs. Because IIBs are Government securities.
● Investors will be able to trade them in NDS-OM, NDS-OM (web-based), OTC market, and stock exchanges.
● As of now investors will not be able to participate in the primary auction of IIBs through a web-based platform.