Financial Markets Extended (Ch. 13)

A comprehensive set of flashcards covering key concepts, definitions, and mechanisms related to financial markets as outlined in Chapter 13 of UPSC Economics.

How does the buyback restriction on CDs help control short-term liquidity risks?

It prevents early encashment, allowing stable planning for liquidity and monetary control.

What systemic risks arise if a company issues Commercial Paper without meeting an A-3 rating?

It raises default risk in the system, eroding investor confidence and market integrity.

How do CPs differ from T-bills in terms of issuer profile and credit risk?

CPs are issued by companies, are unsecured and riskier; T-bills are sovereign and safer.

What happens if repo eligibility is extended to unsecured debt instruments?

It increases credit risk for RBI and may disrupt collateral-based liquidity management.

How does FIMMDA influence credit discipline in the CP and CD market?

It standardizes pricing and improves transparency and governance in short-term debt markets.

Why are T-bills considered zero-coupon and how do investors earn returns on them?

They don’t pay periodic interest but are sold at discount and redeemed at face value.

What does a spike in overnight repo volumes indicate about banking system liquidity?

It signals sudden liquidity stress and banks’ need for emergency short-term funds.

How do Cash Management Bills offer fiscal flexibility without breaching borrowing limits?

They allow government to meet urgent cash needs without altering borrowing ceilings.

Why is term repo preferred by RBI during seasonal liquidity mismatches?

It offers mid-term liquidity to banks when call or term money markets are volatile.

How do inter-corporate deposits reflect trust-based borrowing among firms?

They show informal confidence among businesses, often substituting for bank loans.

What makes LIBOR vulnerable to manipulation compared to SOFR?

LIBOR is based on bank estimates; prone to manipulation and lacks transaction backing.

Why is SOFR considered more transparent than LIBOR?

SOFR is derived from real transaction data, improving objectivity and reliability.

How does MIBOR impact the pricing of financial instruments in Indian markets?

It serves as benchmark rate for short-term loans, derivatives, and interbank products.

What role does DFHI play in deepening India’s secondary money market?

It ensures secondary liquidity, bridging short-term mismatch for banks and FIs.

How do collateral loans differ from call money in systemic risk exposure?

Collateral loans reduce counterparty risk; call money is unsecured and volatile.

What structural weakness exists in the acceptance market as a liquidity instrument?

Low acceptability and lack of depth limit banker's acceptance use in today’s systems.

How does chit fund mobilize savings in low-access financial ecosystems?

It pools informal savings and provides a revolving credit system for small groups.

Why is chit fund regulation left to states despite central legislation?

States are better positioned to monitor localized chit schemes through registrars.

What challenges arise due to RBI and SEBI not regulating chit funds?

Overlapping jurisdiction leads to weak oversight and investor vulnerability.

Why are repo and reverse repo crucial for short-term monetary transmission?

They anchor short-term policy rates and manage day-to-day systemic liquidity.

How do primary and secondary markets differ in investor risk exposure?

Primary market carries pricing and subscription risk; secondary reflects market sentiment.

How do zero-coupon bonds reduce reinvestment risk for conservative investors?

Investor doesn’t face reinvestment risk due to lack of interim coupon flows.

Why are climate bonds critical in green financing for emerging economies?

They finance climate projects and align investment with global sustainability goals.

What makes inflation-linked bonds attractive during monetary tightening?

They preserve real returns even as nominal rates fluctuate due to inflation.

How do masala bonds hedge foreign currency risk for Indian issuers?

They protect investors from rupee depreciation while providing INR-denominated returns.

Why are SDLs excluded from being called T-bills despite being government securities?

T-bills are short-term; SDLs are dated securities with longer maturities.

How does the presence of tradable SDLs support state-level fiscal decentralization?

Tradable SDLs help deepen bond market and allow states to access capital efficiently.

What risks do debenture holders face that bondholders are protected from?

Debenture holders have no collateral rights, making recovery harder in default.

Why are non-convertible debentures preferred in corporate debt structuring?

They offer fixed income without conversion risk, suited for conservative investors.

What is the significance of DRs being non-voting instruments for foreign investors?

DRs limit control for foreigners, preserving strategic ownership in Indian firms.

How do ADRs expand capital access for Indian companies in US markets?

They allow Indian firms to tap US capital while complying with SEC norms.

What differentiates GDRs from ADRs in terms of global fundraising?

GDRs allow fundraising in multiple markets, offering broader investor reach.

How does qualified institutional placement streamline fundraising for listed companies?

It allows faster institutional fundraising without elaborate public offer procedures.

Why is QIP preferred over public issue in urgent capital requirements?

QIPs save time and costs by targeting known, sophisticated institutional buyers.

How does SEBI regulate venture capital investments differently than angel funding?

SEBI ensures disclosure, due diligence, and protects investor interests in VCs.

What is the strategic role of depositories in India’s demat system?

Depositories dematerialize securities and ensure safe electronic storage and transfers.

How does NSDL enhance security and access in Indian equity markets?

NSDL improves market efficiency, reduces fraud, and boosts retail investor participation.

Why is dematerialization mandatory for trading in listed securities?

To prevent fraud, improve transparency, and align with global trading norms.

What regulatory vacuum is filled by SEBI (CRA) Regulations, 1999?

They define entry, rating methodology, conflict rules, and reporting for CRAs.

How do credit rating agencies influence bond market yields and investor confidence?

Ratings affect perceived risk and hence pricing, demand, and investment decision.

Why is SEBI regulation necessary for participatory notes despite anonymity?

They enable foreign investment tracking and check misuse while allowing access.

What ethical concerns are raised by the anonymity of P-notes?

It risks money laundering and market manipulation through anonymous routes.

How does a forward contract differ from futures in OTC vs exchange-based trading?

Forwards are bilateral and unregulated; futures are standardized and exchange-traded.

Why are options contracts considered asymmetric risk hedging instruments?

Only buyer has right, seller must comply — useful for one-sided risk hedging.

How do swap contracts reduce forex volatility for large importers/exporters?

By locking in exchange rates, swaps protect firms from volatile currency shifts.

Why is the spot market more suitable for short-term currency needs?

It ensures immediate currency availability without speculation on future movements.

What challenges do OTC derivatives pose to financial market transparency?

They lack clearinghouse oversight, increasing risk opacity and systemic vulnerability.

How does DFHI’s quoting mechanism improve money market price discovery?

Daily bid-ask spreads from DFHI build pricing benchmarks and enhance trust.

What is the difference between callable and traditional bonds in refinancing strategy?

Callable bonds allow issuer to redeem early, reducing interest cost during rate fall.

Why are floating rate bonds preferred during inflation uncertainty?

They adjust payout to inflation trends, protecting real income of investors.

How does SEBI Act, 1992 differ from Depositories Act, 1996 in regulatory scope?

SEBI Act governs securities and intermediaries; Depositories Act handles electronic ownership.

How do inflation-linked bonds impact monetary policy effectiveness in real terms?

They guide real-rate expectations, influencing RBI’s stance on rate changes.