Question 1

With reference to Financial Markets in India, consider the following statements:
1. The Capital Market primarily deals with short-term funds with a maturity of one year or less, aiming for liquidity adjustment between borrowers and lenders.
2. The Reserve Bank of India (RBI) is the designated regulator for the Capital Market, including stock exchanges.
3. Transactions in the Money Market are typically conducted with the help of a broker and occur at a formal place.

Accepted Answer

None. Statement 1 is incorrect. It swaps the roles of the Capital and Money markets. The Money Market deals with short-term funds (maturity of 1 year or less) for liquidity adjustment. The Capital Market deals with long-term funds. Statement 2 is incorrect. It swaps the regulators. The Securities and Exchange Board of India (SEBI) is the regulator for the Capital Market, while the RBI regulates the Money Market. Statement 3 is incorrect. It swaps the transaction characteristics. Transactions in the Money Market are generally done over the phone without the help of a broker. It is in the Capital Market where transactions are often done at a formal place (like a stock exchange) with the help of a broker.

Question 2

Consider the following statements:
Statement-I: The risk associated with instruments in the Money Market is generally lesser than the risk in the Capital Market.
Statement-II: Money Market instruments have a shorter duration of maturity, typically one year or less, compared to Capital Market instruments.

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.. Statement-I is correct; the Money Market is characterized by lower risk compared to the Capital Market. Statement-II is also correct; the Money Market deals with short-term funds (maturity of 1 year or less). The provided text explicitly links these two facts, stating that the Money Market has 'Lesser risk due to lesser maturity'. Therefore, the shorter maturity period described in Statement-II is the direct reason for the lower risk mentioned in Statement-I.

Question 3

Consider the following statements regarding short-term government financing instruments:

1. State Governments are authorized to issue Treasury Bills (T-Bills) to meet their short-term financial requirements.
2. Cash Management Bills (CMBs) are similar to T-Bills but are characterized by a maturity period of more than 91 days.
3. Ways and Means Advances (WMAs) are considered a primary source of finance for government expenditure and can be extended indefinitely.

How many of the above statements are correct?

Accepted Answer

None. Statement 1 is incorrect. Treasury Bills are issued by the Central Government to finance its short-term requirements. The RBI sells these bills on behalf of the Central Government. The provided text explicitly states that State Governments do not issue T-Bills, although they can avail Ways and Means Advances from the RBI. Statement 2 is incorrect. Cash Management Bills (CMBs) are short-term securities with a tenure of less than 91 days, making them distinct from the standard auctioned T-Bills which have tenures like 91, 182, and 364 days. Statement 3 is incorrect. Ways and Means Advances (WMAs) are temporary loans from the RBI to the government intended only to bridge temporary mismatches between receipts and expenditures. They are explicitly stated as not being a source of finance and must be repaid within 90 days, beyond which they are treated as an overdraft.

Question 4

With reference to money market instruments, consider the following statements:

1. Commercial Papers (CPs) are issued by Scheduled Commercial Banks to meet their short-term funds requirement and have a minimum issuance amount of ₹1 lakh.
2. Certificates of Deposit (CDs) are unsecured promissory notes that require a mandatory credit rating before issuance.
3. Banks are permitted to grant loans against their own issued Certificates of Deposit (CDs) to enhance liquidity for the depositor.

How many of the above statements are correct?

Accepted Answer

None. Statement 1 is incorrect. This statement incorrectly combines features of Certificates of Deposit (CDs) and Commercial Papers (CPs). CDs are issued by Scheduled Commercial Banks with a minimum amount of ₹1 lakh. In contrast, CPs are issued by eligible corporates, Primary Dealers, and Financial Institutions with a minimum amount of ₹5 lakh. Statement 2 is incorrect. This statement misattributes the features of CPs to CDs. Commercial Paper (CP) is an unsecured promissory note, and it is necessary for its issuers to get a credit rating. Certificates of Deposit (CDs) are not described in the text as being unsecured promissory notes requiring a mandatory credit rating. Statement 3 is incorrect. Financial institutions, including banks, are explicitly prohibited from granting loans against the security of CDs. Furthermore, they are not permitted to buy back their own CDs before the maturity date.

Question 5

Consider the following statements:

Statement-I: An increase in the discounted purchase price of a Treasury Bill, assuming the tenure and face value remain constant, leads to a decrease in its yield.

Statement-II: The yield on a Treasury Bill is calculated based on the interest income, which is the difference between its face value and discounted price, expressed as a percentage of the initial investment (the discounted price).

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.. Statement-II accurately describes how the yield of a discounted instrument like a T-Bill is determined. The yield represents the return on the invested amount (the discounted price). The return itself is the difference between the redemption value (face value) and the purchase price. Statement-I is a direct logical consequence of this relationship. If the purchase price (P) increases, the profit margin (Face Value - P) decreases. Simultaneously, the initial investment (P), which forms the denominator in the yield calculation, increases. Both of these factors—a smaller numerator and a larger denominator—cause the percentage yield to fall. Therefore, Statement-II provides the correct underlying logic for the inverse relationship described in Statement-I.

Question 6

Consider the following statements:
Statement-I: A rise in the prevailing interest rates in the broader economy will likely cause the market price of an existing bond to fall.
Statement-II: The yield of a bond has an inverse relationship with its market price.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.. Statement-I is correct. When prevailing interest rates in the economy rise, newly issued bonds will offer higher returns. This makes existing bonds with lower fixed coupon rates less attractive. To remain competitive, the market price of these existing bonds must decrease to offer a comparable yield to a new buyer. Statement-II is also correct. A bond's yield is its effective rate of return. Since the coupon payment is fixed, if the market price of the bond decreases, the yield for a new buyer increases (Yield = Fixed Coupon Payment / Market Price). This demonstrates a clear inverse relationship between a bond's market price and its yield. Statement-II provides the correct explanation for Statement-I because the mechanism through which an existing bond's price adjusts to changes in general interest rates is its yield. The price must fall (as per Statement-I) to increase the yield and match the higher returns available elsewhere, which is a direct consequence of the inverse price-yield relationship (as per Statement-II).

Question 7

With reference to the regulation and operation of Indian capital markets, consider the following statements:
1. The issuance of Government Securities (G-Secs) through auctions on the E-Kuber platform is conducted by the Securities and Exchange Board of India (SEBI).
2. Prior permission from the Reserve Bank of India (RBI) is mandatory for a company to launch an Initial Public Offer (IPO).
3. The 'RBI Retail Direct' scheme enables retail investors to open Gilt Accounts directly with the central bank to invest in G-Secs.
How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. G-Secs are issued through auctions conducted by the RBI on its E-Kuber platform, not by SEBI. Statement 2 is incorrect. Prior permission for IPOs is required from the Securities and Exchange Board of India (SEBI), not the RBI, as SEBI is the regulator for the primary market. Statement 3 is correct. The text explicitly mentions that the 'RBI Retail Direct' system allows small retail investors to invest in G-Secs by creating gilt accounts with the Central Bank (RBI). Therefore, only one statement is correct.

Question 8

Consider the following statements regarding instruments in the capital market:
1. Preference shareholders, unlike equity shareholders, are guaranteed a fixed dividend and also possess voting rights in the company's Annual General Meetings.
2. The interest paid on debentures is considered a part of the company's net profit and is distributed after all necessary expenses are covered.
3. Convertible bonds typically offer a lower rate of interest compared to non-convertible bonds because they provide the holder with an option to exchange the bond for equity.
How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. While preference shareholders receive a fixed dividend before equity shareholders, they generally do not have voting rights. Voting rights are a primary feature associated with equity shares.
Statement 2 is incorrect. Interest paid on debentures is a 'charge against profits', meaning it is treated as an expense that is deducted before calculating the company's net profit. It is not a distribution of net profit; dividends are paid out from net profit.
Statement 3 is correct. The option to convert a bond into equity shares is a valuable feature for an investor, as it offers the potential for capital appreciation if the company's stock price rises. To compensate for this added benefit, convertible bonds are issued with a lower interest rate compared to their non-convertible counterparts.
Therefore, only one statement is correct.

Question 9

Consider the following statements regarding Masala Bonds:

1. In Masala Bonds, the foreign currency exchange rate risk is primarily borne by the Indian borrowers.
2. The first Masala Bond was issued by the International Finance Corporation (IFC) to symbolize Indian culture and distinguish these bonds from others.
3. Funds raised through Masala Bonds can be used for a wide range of purposes, including direct investment in capital markets and the purchase of land.

How many of the above statements are correct?

Accepted Answer

Only one. To determine the correct option, let's analyze each statement:

*   **Statement 1 is incorrect.** Masala Bonds are rupee-denominated bonds issued in overseas markets. Because they are denominated in Indian Rupees, the currency exchange rate risk is transferred from the Indian borrower to the foreign investor. If the rupee depreciates against the investor's currency, the investor bears the loss.
*   **Statement 2 is correct.** The International Finance Corporation (IFC), a part of the World Bank Group, was the first to issue Masala Bonds in 2014. The name 'Masala' was intentionally chosen to give the financial instrument an identity associated with India and its culture.
*   **Statement 3 is incorrect.** There are specific end-use restrictions on the funds raised through Masala Bonds. The proceeds are explicitly prohibited from being used for real estate activities (except for affordable housing projects), investing in capital markets, and purchasing land.

Out of the three statements, only Statement 2 is correct. Therefore, the correct answer is 'Only one'.

Question 10

With reference to Sovereign Gold Bonds (SGBs), consider the following statements:

1. SGBs are issued by the Reserve Bank of India on behalf of the Central Government and are denominated in grams of gold.
2. A key risk for investors in SGBs is the potential for capital loss if the market price of gold falls.
3. Unlike Gold ETFs, SGBs cannot be used as collateral for availing loans from banks and Non-Banking Financial Companies (NBFCs).

How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is correct. Sovereign Gold Bonds are issued by the RBI on behalf of the Central Government and serve as a substitute for holding physical gold, with the bonds being denominated in gold. Statement 2 is correct. A primary risk associated with investing in SGBs is capital loss. Since the bond's redemption value is linked to the prevailing price of gold, a fall in gold prices will lead to a proportional decrease in the principal investment value. Statement 3 is incorrect. One of the benefits of SGBs is that they can be used as collateral for securing loans from banks and NBFCs. The text explicitly contrasts this with Gold ETFs, which cannot be used as collateral.

Question 11

Consider the following statements regarding government securities designed to protect against inflation:

Statement-I: Inflation Indexed Bonds (IIBs) provide a constant return by offering inflation protection to both the principal amount and the interest payments.

Statement-II: The earlier version of these bonds, known as Capital Indexed Bonds (CIBs), provided inflation protection only to the interest payments and not to the principal amount.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is correct but Statement-II is incorrect.. Statement-I is correct. Inflation Indexed Bonds (IIBs) are designed to protect investors against macroeconomic risks by providing inflation protection for both the principal and the interest payments, ensuring a constant real return. Statement-II is incorrect. Capital Indexed Bonds (CIBs), which were issued prior to IIBs, provided inflation protection only to the principal amount. The interest payments on CIBs were not protected from inflation. The statement incorrectly reverses this feature.

Question 12

Consider the following statements regarding the International Financial Services Centres Authority (IFSCA):

Statement-I: The IFSCA functions as a unified regulator for all financial products, services, and institutions within an International Financial Services Centre (IFSC) in India.

Statement-II: Before the establishment of IFSCA, domestic financial regulators like RBI and SEBI regulated their respective domains within IFSCs, leading to a fragmented regulatory landscape.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I. Statement-I is correct. The IFSCA was established as a unified authority to regulate all financial services, products, and institutions in International Financial Services Centres (IFSCs). Statement-II is also correct. Prior to the establishment of IFSCA, the business in IFSCs was regulated by multiple domestic financial regulators such as RBI, SEBI, PFRDA, and IRDAI. The creation of a single, unified authority (as mentioned in Statement-I) was the specific solution to the problem of a fragmented regulatory environment caused by multiple regulators (as mentioned in Statement-II). Therefore, Statement-II provides the correct rationale and explanation for the establishment and function described in Statement-I.

Question 13

Consider the following statements regarding the Financial Action Task Force (FATF):

1. The FATF was initially created by the G-20 countries to maintain the integrity of the international financial system.
2. Countries placed on the FATF 'Grey List' are designated as 'Non-Cooperative Countries or Territories' and are subject to a 'Call for Action'.
3. India was a founding member of the FATF and has been part of the organization since its inception in 1989.

How many of the above statements are correct?

Accepted Answer

None. Statement 1 is incorrect. The Financial Action Task Force (FATF) was initially created by the G-7 countries in 1989, not the G-20. Statement 2 is incorrect. The description 'Non-Cooperative Countries or Territories' and 'Call for Action' applies to the FATF Blacklist. The Grey List, officially 'Jurisdictions under Increased Monitoring', includes nations that are actively working with the FATF to address deficiencies in their financial systems. Statement 3 is incorrect. India became an observer of the FATF in 2006 and was granted full membership in 2010; it was not a founding member.

Question 14

Consider the following statements regarding the Securities Appellate Tribunal (SAT):

1. The SAT's jurisdiction is exclusively limited to hearing appeals against orders passed by the Securities and Exchange Board of India (SEBI).
2. An appeal against a decision of the SAT can be made directly to the Supreme Court.
3. The SAT is composed of one presiding officer and five other members who act as judges.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. The Securities Appellate Tribunal (SAT) has the power to hear and dispose of appeals against orders passed not only by SEBI but also by the Pension Fund Regulatory and Development Authority (PFRDA) and the Insurance Regulatory and Development Authority (IRDA). Statement 2 is correct. Any person aggrieved by a decision of the SAT can directly approach the Supreme Court through an appeal. Statement 3 is incorrect. The SAT comprises one presiding officer and two members, not five.

Question 15

Consider the following statements regarding financial market regulation and infrastructure in India:

1. The rules framed by the Securities and Exchange Board of India (SEBI) concerning the yearly limits for sweat equity shares are applicable to all companies, both listed and unlisted.
2. The Negotiated Dealing System-Order Matching (NDS-OM), an electronic trading system for Government Securities, is both owned and maintained by the Reserve Bank of India (RBI).
3. Primary Dealers, which are financial institutions licensed to trade in government securities, are registered entities with SEBI.

How many of the above statements are correct?

Accepted Answer

None. Statement 1 is incorrect. The regulatory purview of the Securities and Exchange Board of India (SEBI) is limited to listed companies. Therefore, its rules concerning sweat equity shares apply only to listed companies. Regulations for unlisted companies fall under the Companies Act, 2013.

Statement 2 is incorrect. While the Negotiated Dealing System-Order Matching (NDS-OM) platform is owned by the Reserve Bank of India (RBI), it is maintained by the Clearing Corporation of India Limited (CCIL), not the RBI itself.

Statement 3 is incorrect. Primary Dealers are registered with the Reserve Bank of India (RBI), which introduced the Primary Dealer system in 1995 to strengthen the government securities market. They are not registered with SEBI.

Since all three statements are incorrect, the correct option is 'd'.

Question 16

With reference to start-up financing, consider the following statements:

1. Angel investors are entities that pool money from different investors and companies to invest in start-ups with high growth potential on their behalf.
2. Venture Capitalists are typically High Net-Worth Individuals who use their own funds to provide capital for business start-ups, often in exchange for ownership equity.
3. Angel investors usually provide support to start-ups at their initial moments, generally preceding the involvement of Venture Capitalists.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. It describes the function of a Venture Capitalist (VC), which pools money from various sources to invest. Angel investors typically use their own funds. Statement 2 is incorrect. It describes an Angel Investor, who is usually a High Net-Worth Individual investing their personal funds. Venture Capitalists manage a larger pool of money from multiple investors. Statement 3 is correct. Angel investors are known as seed or informal investors who support start-ups at their earliest stages, often when other investors are not prepared to back them, and they generally invest before VCs enter the picture.

Question 17

Consider the following statements:

Statement-I: A company undertaking a buyback of its own shares from the market generally leads to a decrease in its Earnings Per Share (EPS).

Statement-II: A share buyback operation results in the reduction of the total number of a company's shares that are publicly traded.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is incorrect but Statement-II is correct.. Statement-I is incorrect. A share buyback reduces the number of outstanding shares. Since Earnings Per Share (EPS) is calculated by dividing the company's total earnings by the number of outstanding shares, a reduction in the denominator (shares) leads to an increase, not a decrease, in the EPS, assuming earnings remain constant. The text states that a buyback increases the earnings per share. Statement-II is correct. A buyback is a process where a company repurchases its own shares, which explicitly results in the reduction of the total number of shares of the company that are traded publicly.

Question 18

Consider the following statements regarding market conditions:
1. In a Bull market, there is an increase in the supply of securities as existing holders are not willing to sell.
2. A Bear market is characterized by a decrease in demand for securities coupled with an increase in their supply.
3. A Bull market is generally associated with a downturn in the economy and weak corporate performance.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. It contains a contradiction. In a Bull market, security holders are not willing to sell, which leads to a limited or decreased supply, not an increase. Statement 2 is correct. A Bear market is defined by investors tending to sell their stakes to minimize losses (increasing supply) while there is a shortage of buyers (decreasing demand). Statement 3 is incorrect. A Bull market is associated with a growing economy and strong corporate performance, not a downturn. A Bear market is associated with an economic downturn.

Question 19

Consider the following statements:
1. A limit order is a request by an investor to a broker to buy or sell a stock at the best possible price available in the current financial market.
2. Leverage in the stock market refers to the use of borrowed money to invest in more shares than one could otherwise afford, with the aim of amplifying returns.
3. The NASDAQ composite is an index of around 3000 stocks listed on the New York Stock Exchange.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. It describes a 'market order', not a 'limit order'. A limit order allows an investor to specify a maximum buy price or a minimum sell price. Statement 2 is correct. Leverage is the practice of borrowing funds to increase one's investment position, thereby amplifying both potential gains and losses. Statement 3 is incorrect. The NASDAQ composite is an index of stocks listed on the NASDAQ stock exchange, which is a separate entity from the New York Stock Exchange (NYSE), although both are based in New York.

Question 20

Consider the following two statements:

Statement-I: An increase in the number of outstanding shares of a company, with its market value per share remaining constant, will lead to an increase in its market capitalisation.

Statement-II: Market capitalisation is used as a primary measure of a company's size and helps investors diversify their portfolios.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are correct but Statement-II is not the correct explanation for Statement-I.. Statement-I is correct. Market capitalisation is calculated as the current market value per share multiplied by the number of outstanding shares. Therefore, if the number of shares increases while the price per share remains constant, the total market capitalisation will mathematically increase. Statement-II is also correct. Market capitalisation is a widely accepted indicator of a company's size (e.g., large-cap, mid-cap) and investors use this metric to build a diversified portfolio across companies of different sizes. However, Statement-II describes the use and significance of market capitalisation, it does not explain the mathematical calculation or the direct causal relationship described in Statement-I. Therefore, Statement-II is not the correct explanation for Statement-I.

Question 21

Consider the following statements regarding Credit Rating Agencies (CRAs):
1. The Reserve Bank of India (RBI) is the primary body responsible for the regulation of CRAs in India.
2. Fitch and Moody’s are two of the major CRAs headquartered and operating primarily within India.
3. A favorable credit rating can help an entity secure loans at a lower interest rate.
How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. The Securities and Exchange Board of India (SEBI), not the RBI, is responsible for the regulation of Credit Rating Agencies in India. Statement 2 is incorrect. Fitch and Moody's, along with S&P, are listed as major global CRAs that provide sovereign ratings, not CRAs based primarily in India. Major Indian CRAs include CRISIL, CARE, and ICRA. Statement 3 is correct. A good rating indicates that the underlying risk is assumed to be low, which helps the rated entity in securing a lower interest rate on its borrowings.

Question 22

Consider the following two statements:
Statement-I: A high credit rating is generally advantageous for a company or government when borrowing from financial markets.
Statement-II: An increase in a government's fiscal deficit is a positive indicator of its financial management, typically leading to an upgrade in its sovereign credit rating.
Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is correct but Statement-II is incorrect. Statement-I is correct. A good credit rating helps in securing a lower interest rate as the underlying risk is perceived to be low, making it advantageous for borrowing. Statement-II is incorrect. An increase in fiscal deficit is generally viewed as a negative development for a government's financial position. A rise in fiscal deficit would lead to a lowering or downgrading in ratings, not an upgrade.

Question 23

With reference to the structural shift in India's capital markets towards being domestic-led, consider the following statements:
1. This shift has led to a uniform decrease in overall market volatility.
2. The influence of Foreign Portfolio Investors on market direction is now negligible.
3. Domestic Institutional Investors' contribution to market liquidity now exceeds that of FPIs.
How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. While the shift reduces reliance on volatile global capital, potentially improving overall stability, it does not guarantee a 'uniform decrease' in volatility. Factors such as increased, and sometimes speculative, retail participation can introduce new forms of volatility, making the term 'uniform' inaccurate.
Statement 2 is incorrect. The term 'negligible' is an extreme and inaccurate characterization. While their relative dominance has decreased, Foreign Portfolio Investors still hold a substantial portion of Indian equities, particularly in large-cap indices. For instance, holding nearly a quarter of the NIFTY 50 ensures they continue to exert significant influence on market direction and sentiment.
Statement 3 is correct. A key feature of the recent structural transformation in Indian capital markets is the rise of domestic savings as the main driver of market liquidity. These savings, channeled through Domestic Institutional Investors like mutual funds, have now surpassed the liquidity provided by Foreign Portfolio Investors, marking a fundamental shift in the market's financial underpinnings. Since only one statement is correct, the answer is 'a'.

Question 24

Consider the following statements regarding the increasing role of domestic savings in Indian capital markets:
1. The Reserve Bank of India (RBI) is the nodal agency for regulating domestic equity investments.
2. The shift towards domestic capital is partly driven by policy changes encouraging pension fund investments in the equity market.
3. This trend of increasing domestic participation tends to reduce the Indian economy's vulnerability to global financial shocks.
Which of the statements given above are correct?

Accepted Answer

2 and 3 only. Statement 1 is incorrect. The Securities and Exchange Board of India (SEBI), not the RBI, is the nodal agency for regulating capital markets, including equity investments. The RBI's primary role is to regulate the banking system and monetary policy. Statement 2 is correct. A key policy objective has been to channel long-term domestic savings from sources like pension schemes (regulated by PFRDA) and insurance into capital markets to foster stable, long-term growth. Statement 3 is correct. Increased reliance on domestic savings over foreign portfolio investments (FPIs), often termed 'hot money', enhances macroeconomic stability by making the market less susceptible to sudden capital outflows triggered by external shocks.

Question 25

Consider the following statements regarding the increasing role of domestic savings in Indian capital markets:
Statement-I: The growing dominance of domestic investors in the capital market has reduced the Indian economy's vulnerability to sudden, large-scale capital outflows.
Statement-II: All forms of domestic investment, including retail and institutional, are inherently less volatile and more long-term in nature compared to Foreign Portfolio Investments.

Accepted Answer

Statement-I is correct but Statement-II is incorrect.. Statement-I is correct. An increased reliance on domestic savings for investment reduces the economy's dependence on Foreign Portfolio Investments (FPIs), which are often considered 'hot money' and can be withdrawn quickly during global uncertainty. This shift enhances market stability and lessens vulnerability to external shocks. Statement-II is an incorrect generalization. While Domestic Institutional Investments (DIIs) are often long-term and stable, domestic retail investors can sometimes exhibit herd behavior and engage in short-term speculation, which can contribute to market volatility. Therefore, it is inaccurate to claim all domestic investments are inherently less volatile than FPIs.

Question 26

Consider the following statements regarding the Financial Sector Regulatory Appointment Search Committee (FSRASC):

1. It is headed by the Cabinet Secretary.
2. It recommends appointments for the Chairperson of the Insolvency and Bankruptcy Board of India (IBBI).
3. Its mandate includes recommending members for the Competition Commission of India (CCI).

How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is correct; the FSRASC is headed by the Cabinet Secretary. Statement 2 is correct; it recommends heads of financial sector regulators like RBI, SEBI, IRDAI, and IBBI. Statement 3 is incorrect; appointments to the CCI are handled by a separate search committee under the Ministry of Corporate Affairs, excluding it from FSRASC's authority.

Question 27

Consider the following statements regarding the economic policy tool of regulatory forbearance:

Statement-I: Regulatory forbearance involves a temporary relaxation of supervisory norms, often used by central banks to mitigate immediate financial shocks.

Statement-II: Such forbearance consistently reduces long-term systemic risk by providing stability and recovery time to the financial sector.

Accepted Answer

Statement-I is correct but Statement-II is incorrect.. Statement-I correctly defines regulatory forbearance and its intended short-term purpose. Statement-II is incorrect due to a directional inversion; while providing short-term relief, forbearance can increase long-term systemic risk by allowing unviable 'zombie' firms to survive and misallocating credit.

Question 28

Consider the following statements regarding financial regulatory bodies and products in India:

1. The Financial Stability and Development Council (FSDC) is a statutory body for macro-prudential supervision.
2. Unit Linked Insurance Plans (ULIPs) are classified purely as securities, under the exclusive jurisdiction of the Securities and Exchange Board of India (SEBI).
3. Regulatory sandboxes allow for live testing of new financial products on a limited set of customers.

Which of the statements given above is/are correct?

Accepted Answer

3 only. Statement 1 is incorrect. The FSDC is an executive body established by a government order in 2010, not a statutory body created by an Act of Parliament. Statement 2 is incorrect. This is a classification swap. ULIPs are hybrid products with both insurance and investment components. While there was a jurisdictional dispute, they are primarily regulated by the Insurance Regulatory and Development Authority of India (IRDAI), not exclusively by SEBI as pure securities. Statement 3 is correct. This is the standard definition and function of a regulatory sandbox, which provides a controlled environment for financial technology firms to test their innovations.

Question 29

With reference to the global system of Sovereign Credit Ratings, consider the following statements:
1. Sovereign credit ratings are opinions on creditworthiness and are not legally binding directives for investors.
2. The pro-cyclical nature of ratings implies that agencies often upgrade sovereign ratings during economic downturns, providing a stabilizing effect.
3. A key criticism is that methodologies often give higher weight to short-term financial indicators over long-term structural strengths.
How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is correct; ratings are expert opinions, not legal mandates. Statement 2 is incorrect; pro-cyclicality means ratings are downgraded during downturns, exacerbating the crisis, not stabilizing it. Statement 3 is correct; this is a major criticism, as long-term resilience and development potential are often undervalued.

Question 30

Regarding proposals to reform the global financial architecture, consider the following statements:
Statement-I: A key proposal involves an enhanced role for Multilateral Development Banks (MDBs) in mitigating the negative impacts of sovereign credit ratings.
Statement-II: The proposed enhancement is for MDBs to function as public-sector Credit Rating Agencies, providing alternative sovereign ratings for developing nations.

Accepted Answer

Statement-I is correct; Statement-II is incorrect.. Statement-I is correct; a key reform idea is for MDBs to help countries facing rating downgrades. Statement-II is incorrect; the proposed role for MDBs is to provide credit enhancements and guarantees to de-risk investments, not to become Credit Rating Agencies themselves. This would be a swap of their fundamental classification and mandate from development finance to credit rating.

Question 31

With reference to the global system of sovereign credit ratings, consider the following statements:
1. The 'issuer-pays' model, where the entity being rated pays for the service, is often cited as a potential source of conflict of interest.
2. The International Monetary Fund (IMF) has the mandate to regulate and penalize global Credit Rating Agencies for methodological flaws.
3. The global sovereign rating market is characterized by a high degree of market concentration.
Which of the statements given above is/are correct?

Accepted Answer

1 and 3 only. Statement 1 is correct. The 'issuer-pays' model is a widely discussed issue where the entity seeking a rating pays the rating agency. This can create an incentive for agencies to provide more favorable ratings to attract and retain clients, leading to a potential conflict of interest. Statement 2 is incorrect. There is no single global regulator for Credit Rating Agencies (CRAs) with the authority to penalize them. Regulation is primarily conducted at the national or regional level, for instance, by the Securities and Exchange Commission (SEC) in the US and the European Securities and Markets Authority (ESMA) in the EU. The IMF's role is surveillance and providing technical assistance, not direct regulation of CRAs. Statement 3 is correct. The global credit rating market is highly concentrated and often described as an oligopoly, dominated by the 'Big Three' agencies: Standard & Poor's (S&P), Moody's, and Fitch Ratings.

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