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Day-613
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Question 1 of 5
1. Question
1. Consider the following statements with reference to ‘side-pocketing’ in financial markets:
1. It is an accounting technique used in debt mutual funds to segregate the bad assets within the fund.
2. The Securities and Exchange Board of India (SEBI) has not permitted this practice.
Which of the statements given above is/are correct?Correct
Answer: A
Explanation:
Statement 1 is correct: Side pocketing is a technique to safeguard investors in instruments that have exposure to risky assets. It is basically an accounting method that is used to separate illiquid investments from liquid and quality investments, in a debt portfolio.
● When side pocketing is implemented, and illiquid assets are pushed in a separate pocket, the fund’s NAV (net asset value) reflects the value of liquid assets only — a different NAV assigned to the side pocket assets based on an estimate of the realizable value of investors.
● With the help of side pocketing, risky bets can be segregated from safer and liquid investments that may get impacted due to changing credit profiles of risky assets.
Statement 2 is incorrect: India’s financial market regulator, SEBI, allowed side pocketing in India in 2018. In 2018, many debt schemes saw a sharp fall in the NAV. After these schemes, investments in Infrastructure Leasing & Financial Services Ltd (IL&FS) and some of its subsidiaries saw credit rating downgrades.Incorrect
Answer: A
Explanation:
Statement 1 is correct: Side pocketing is a technique to safeguard investors in instruments that have exposure to risky assets. It is basically an accounting method that is used to separate illiquid investments from liquid and quality investments, in a debt portfolio.
● When side pocketing is implemented, and illiquid assets are pushed in a separate pocket, the fund’s NAV (net asset value) reflects the value of liquid assets only — a different NAV assigned to the side pocket assets based on an estimate of the realizable value of investors.
● With the help of side pocketing, risky bets can be segregated from safer and liquid investments that may get impacted due to changing credit profiles of risky assets.
Statement 2 is incorrect: India’s financial market regulator, SEBI, allowed side pocketing in India in 2018. In 2018, many debt schemes saw a sharp fall in the NAV. After these schemes, investments in Infrastructure Leasing & Financial Services Ltd (IL&FS) and some of its subsidiaries saw credit rating downgrades. -
Question 2 of 5
2. Question
2. Which of the following best describes the term ‘Tobin Tax’?
Correct
Answer: A
Explanation:
● Tobin tax is a duty proposed on spot currency trades to penalize short-term currency trading to stabilize markets and disincentive speculation.
● It can be used to generate revenue streams for countries that see a great deal of short-term currency movement.
● It is sometimes referred to as the Robin Hood tax, as many see it as a way for governments to take small amounts of money from the people making large, short-term currency exchanges.
● It was proposed by James Tobin in 1972, when the fixed exchange rates under the Bretton Woods system were replaced with flexible exchange rates in 1971, and there was a massive movement of funds between different currencies that threatened to destabilize the economy.Incorrect
Answer: A
Explanation:
● Tobin tax is a duty proposed on spot currency trades to penalize short-term currency trading to stabilize markets and disincentive speculation.
● It can be used to generate revenue streams for countries that see a great deal of short-term currency movement.
● It is sometimes referred to as the Robin Hood tax, as many see it as a way for governments to take small amounts of money from the people making large, short-term currency exchanges.
● It was proposed by James Tobin in 1972, when the fixed exchange rates under the Bretton Woods system were replaced with flexible exchange rates in 1971, and there was a massive movement of funds between different currencies that threatened to destabilize the economy. -
Question 3 of 5
3. Question
3. With respect to the foreign banks in India, consider the following statements:
1. There are more foreign banks than public sector banks.
2. Foreign banks are not subject to priority sector lending targets.
3. They are subject to Basel capital framework norms.
How many of the above statements are correct?Correct
Answer: B
Explanation:
Statement 1 is correct: In the Indian banking system, foreign banks are more than public sector banks. At present, while there are 44 foreign banks operating in India, there are only 12 public sector banks.
Statement 2 is incorrect: Foreign banks, with more than 20 branches, are also subject to priority sector lending targets.
● Reserve Bank of India (RBI) regulations require banks to allocate 40% of their adjusted net bank credit (ANBC), for the priority sector, comprising agriculture, small and medium enterprises, exports, and economically vulnerable groups such as small farmers, micro-enterprises, and disadvantaged segments.
● Other than lending, these norms also prescribe banks to ensure that the loans extended under PSL are for approved purposes and the end use is continuously monitored. For this, banks are advised to put in place a proper internal control system.
Statement 3 is correct: In India, all the scheduled commercial banks, comprising public sector banks, private sector banks and foreign banks, but excluding regional rural banks, fall under the purview of Basel III regulations.
● The global financial crisis of 2008, triggered by the Lehman Brothers’ collapse, set alarm bells ringing for financial institutions.
● The Basel III norms are a comprehensive set of reform measures which are designed & developed by the Basel Committee on Banking Supervision with an aim to strengthen the regulation, supervision and risk management of the banking sector (BCBS). The norms call for improvement of the quantity and quality of capital of banks, stronger supervision, and more stringent risk management and disclosure standards.Incorrect
Answer: B
Explanation:
Statement 1 is correct: In the Indian banking system, foreign banks are more than public sector banks. At present, while there are 44 foreign banks operating in India, there are only 12 public sector banks.
Statement 2 is incorrect: Foreign banks, with more than 20 branches, are also subject to priority sector lending targets.
● Reserve Bank of India (RBI) regulations require banks to allocate 40% of their adjusted net bank credit (ANBC), for the priority sector, comprising agriculture, small and medium enterprises, exports, and economically vulnerable groups such as small farmers, micro-enterprises, and disadvantaged segments.
● Other than lending, these norms also prescribe banks to ensure that the loans extended under PSL are for approved purposes and the end use is continuously monitored. For this, banks are advised to put in place a proper internal control system.
Statement 3 is correct: In India, all the scheduled commercial banks, comprising public sector banks, private sector banks and foreign banks, but excluding regional rural banks, fall under the purview of Basel III regulations.
● The global financial crisis of 2008, triggered by the Lehman Brothers’ collapse, set alarm bells ringing for financial institutions.
● The Basel III norms are a comprehensive set of reform measures which are designed & developed by the Basel Committee on Banking Supervision with an aim to strengthen the regulation, supervision and risk management of the banking sector (BCBS). The norms call for improvement of the quantity and quality of capital of banks, stronger supervision, and more stringent risk management and disclosure standards. -
Question 4 of 5
4. Question
4. With reference to the Micro, Small and Medium Enterprises (MSMEs) sector in India, consider the following statements:
1. It contributes less than 40% to India’s overall exports.
2. It contributes more than 40% to India’s overall manufacturing output.
Which of the statements given above is/are correct?Correct
Answer: D
Explanation:
The Micro, Small and Medium Enterprises (MSMEs) sector plays an important role in the growth of the Indian economy.
Statement 1 is incorrect. The share of MSME-specified goods in overall exports stood at 43.6% in FY23. It was 45.03% in FY22, 49.35 per cent in FY21 and 49.77 per cent in FY20.
As can be seen, the share of MSMEs in overall exports has been declining. The decline in export share is contrary to the government’s target. Former MSME Minister in 2020 had set a target of increasing MSMEs’ share in exports to 60% in five years.
Statement 2 is incorrect: The share of MSME manufacturing output in all India manufacturing output during the year 2019-20, 2020-21 and 2021-22 was 36.6%, 36.9% and 36.2% respectively. Hence, it has been less than 40%.Incorrect
Answer: D
Explanation:
The Micro, Small and Medium Enterprises (MSMEs) sector plays an important role in the growth of the Indian economy.
Statement 1 is incorrect. The share of MSME-specified goods in overall exports stood at 43.6% in FY23. It was 45.03% in FY22, 49.35 per cent in FY21 and 49.77 per cent in FY20.
As can be seen, the share of MSMEs in overall exports has been declining. The decline in export share is contrary to the government’s target. Former MSME Minister in 2020 had set a target of increasing MSMEs’ share in exports to 60% in five years.
Statement 2 is incorrect: The share of MSME manufacturing output in all India manufacturing output during the year 2019-20, 2020-21 and 2021-22 was 36.6%, 36.9% and 36.2% respectively. Hence, it has been less than 40%. -
Question 5 of 5
5. Question
5. Consider the following statements:
Statement-I: Effective revenue deficit excludes the grants in aid for the creation of assets in states.
Statement-II: It was suggested by the Rangarajan Committee on public expenditure.
Which one of the following is correct in respect of the above statements?Correct
Answer: B
Explanation:
Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
Statement 1 is correct: Revenue deficit arises when the government’s revenue expenditure exceeds the total revenue receipts. Revenue deficit includes those transactions that have a direct impact on a government’s current income and expenditure.
Effective revenue deficit is the difference between revenue deficit and grants for creation of capital assets.
Statement 2 is correct: The concept of effective revenue deficit has been suggested by the Rangarajan Committee on Public Expenditure.
The concept was introduced to ascertain the actual deficit in the revenue account after adjusting for expenditure of capital nature.Incorrect
Answer: B
Explanation:
Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
Statement 1 is correct: Revenue deficit arises when the government’s revenue expenditure exceeds the total revenue receipts. Revenue deficit includes those transactions that have a direct impact on a government’s current income and expenditure.
Effective revenue deficit is the difference between revenue deficit and grants for creation of capital assets.
Statement 2 is correct: The concept of effective revenue deficit has been suggested by the Rangarajan Committee on Public Expenditure.
The concept was introduced to ascertain the actual deficit in the revenue account after adjusting for expenditure of capital nature.