Class 12 Finance Chapter 7 Indian Money Market

Class 12 Finance Chapter 7 Indian Money Market Solutions English Medium As Per AHSEC New Syllabus to each chapter is provided in the list so that you can easily browse through different chapters ASSEB Class 12 Finance Chapter 7 Indian Money Market Solutions in English and select need one. AHSEC Class 12 Finance Solutions Download PDF. HS 2nd Year Finance Textual Solutions.

Class 12 Finance Chapter 7 Indian Money Market

Also, you can read the NCERT book online in these sections Solutions by Expert Teachers as per Central Board of Secondary Education (CBSE) Book guidelines. ASSEB Class 12 Banking Question Answer are part of All Subject Solutions. Here we have given HS 2nd Year Finance Textual Solutions English Medium for All Chapters, You can practice these here.

Indian Money Market

Chapter: 7

Unit – 2: Money Market and Foreign Exchange Market

A. Very Short Questions Answer:

1. In which year was the DFHI established? 

Ans: in 1988.

2. What is ‘ad hocs’? 

Ans: Ad Hocs are temporary Treasury Bills issued by the Government to the Central Bank to meet its temporary financial requirements. 

B. Short Answer Questions: 

1. What is indigenous bankers? 

Ans: Indigenous bankers are private individuals or firms who carry on banking business by accepting deposits and providing loans, mainly in rural and semi-urban areas. They also finance trade and agriculture. 

2. What is money lenders? 

Ans: Money lenders are individuals who lend money to borrowers, usually at a high rate of interest. They mainly provide loans to farmers, small traders, and individuals to meet their financial needs. 

3. Name two factors which causes shortages of funds in the Indian money market. 

Ans: (i) Seasonal demand for agricultural finance.

(ii) Large cash withdrawals and hoarding of money by the public. 

4. Write two defects of Indian money market. 

Ans: (i) Existence of an unorganised money market.

(ii) Shortage of adequate funds. 

5. What is Treasury bill? 

Ans: A Treasury Bill (T-Bill) is a short-term financial instrument issued by the Government to meet its temporary financial requirements. It has a maturity period of less than one year. 

6. What is commercial bill?

Ans: A Commercial Bill is a bill of exchange used in trade transactions. It is drawn by the seller on the buyer and can be discounted with banks before its maturity. 

7. What is commercial paper? 

Ans: A Commercial Paper (CP) is an unsecured short-term promissory note issued by companies to raise short-term funds. 

8. What is certificate of deposit? 

Ans: A Certificate of Deposit (CD) is a negotiable short-term deposit receipt issued by commercial banks and financial institutions for a fixed period at a specified interest rate. 

9. What is call money? 

Ans: Call Money is very short-term money borrowed and lent between banks and financial institutions, generally for a period of one day (24 hours). 

C. Long Answer Questions (Type-I): 

1. Write five defects of the Indian Money Market.

Ans: The main defects of the Indian Money Market are:

(i) Existence of an Unorganised Sector: A large part of the money market is controlled by indigenous bankers and money lenders who are not regulated by the Central Bank.

(ii) Shortage of Funds: There is often an inadequate supply of short-term funds due to seasonal demand and low savings.

(iii) Lack of Integration: The organised and unorganised sectors do not function in a coordinated manner.

(iv) Absence of a Developed Bill Market: The commercial bill market is not well developed, reducing the use of bills of exchange.

(v) Regional Imbalances: Money market facilities are concentrated in major cities, while rural and backward areas remain underdeveloped.

2. Write about any two instruments traded in the India Money Market. 

Ans: (i) Treasury Bill (T-Bill): A Treasury Bill is a short-term financial instrument issued by the Government to meet its temporary financial requirements. It has a maturity period of less than one year and is considered a safe investment.

(ii) Commercial Paper (CP): Commercial Paper is an unsecured short-term promissory note issued by financially sound companies to raise short-term funds. It generally has a maturity period ranging from a few days up to one year.

3. What is scheduled bank? Give the classification of scheduled banks. 

Ans: Meaning of Scheduled Bank: A Scheduled Bank is a bank whose name is included in the Second Schedule of the Reserve Bank of India Act, 1934. These banks are regulated by the Reserve Bank of India (RBI) and enjoy various facilities such as financial assistance and borrowing from the RBI.

Classification of Scheduled Banks: 

Scheduled Banks are broadly classified into two categories:

(a) Scheduled Commercial Banks (SCBs).

These banks carry on commercial banking activities and are further classified into:

(i) Public Sector Banks.

(ii) Private Sector Banks.

(iii) Foreign Banks.

(iv) Regional Rural Banks (RRBs).

(v) Small Finance Banks.

(vi) Payments Banks.

(b) Scheduled Co-operative Banks.

These banks provide banking services on a cooperative basis and are classified into:

(i) Scheduled State Co-operative Banks.

(ii) Scheduled Urban Co-operative Banks.

D. Long Answer Questions (Type-II): 

1. Discuss the structure of the India Money Market. 

Ans: Structure of the Indian Money Market:

The Indian Money Market is divided into two sectors: Organised Sector and Unorganised Sector.

(a) Organised Sector: The organised sector of the Indian Money Market consists of the following:

(i) Reserve Bank of India (RBI): The Reserve Bank of India is the central bank of our country. It was established in the year 1935. The RBI is the leader of the Indian Money Market. It regulates and controls the money market, formulates monetary policy, and ensures the smooth functioning of the banking system.

(ii) Scheduled Banks: Scheduled banks are the banks whose names are included in the Second Schedule of the Reserve Bank of India Act, 1934. These banks have a paid-up capital and reserves of not less than ₹5 lakh. Their affairs are conducted in a manner that protects the interests of depositors. They are also required to maintain a certain percentage of their deposits as Cash Reserve Ratio (CRR) with the RBI.

(iii) Co-operative Banks: Co-operative banks provide short-term and medium-term credit mainly to farmers, small traders, and rural people. They operate under the co-operative principles and play an important role in rural finance.

(iv) Development Financial Institutions (DFIs): Institutions such as NABARD, SIDBI, and EXIM Bank provide financial assistance to agriculture, small industries, and exports. They contribute to the development of different sectors of the economy.

(b) Unorganised Sector:

The unorganised sector includes indigenous bankers, moneylenders, chit funds, and other private financial institutions. These institutions operate outside the direct control and regulation of the RBI. They mainly serve rural and small borrowers and often charge higher rates of interest.

Conclusion: Thus, the Indian Money Market consists of both organised and unorganised sectors. While the organised sector functions under the supervision of the RBI and follows banking regulations, the unorganised sector operates independently and mainly caters to the financial needs of rural and small borrowers.

2. Discuss the defects of the India Money Market. 

Ans: Defects of the Indian Money Market:

(i) Division between Organised and Unorganised Sectors: There is little coordination between the two sectors, making RBI control difficult.

(ii) Existence of Unorganised Sector: Indigenous bankers and moneylenders are not directly controlled by the RBI and often charge high interest.

(iii) Unhealthy Competition: Competition among banks and financial institutions reduces the efficiency of the money market.

(iv) Inadequate Banking Facilities: Banking services are still insufficient, especially in rural areas.

(v) Shortage of Funds: Low savings, poor banking facilities, and weak banking habits lead to a shortage of funds.

(vi) Disparity in Interest Rates: Different financial institutions charge different interest rates, affecting the smooth functioning of the market.

(vii) Seasonal Fluctuation of Funds: Demand for credit increases during harvesting seasons and decreases during other periods.

(viii) Absence of a Well-Developed Bill Market: India does not have a fully developed bill market for smooth short-term financing.

(ix) Limited Money Market Instruments: The availability of instruments like treasury bills and commercial bills is limited.

Conclusion:

The Indian Money Market has improved over the years, but it still faces several challenges such as the unorganised sector, shortage of funds, and inadequate banking facilities. Removing these defects will help create a more efficient and well-developed money market that supports the country’s economic growth.

3. Discuss the various instruments traded in the Indian Money Market. 

Ans: Instruments Traded in the Indian Money Market: The Indian Money Market deals in various short-term financial instruments. 

The major instruments are:

(i) Treasury Bills (T-Bills): Short-term securities issued by the Government of India to meet temporary financial needs.

(ii) Commercial Bills: Bills of exchange used by businesses to finance trade and credit transactions.

(iii) Commercial Paper (CP): An unsecured short-term promissory note issued by financially sound companies to raise funds.

(iv) Certificate of Deposit (CD): A negotiable short-term deposit issued by banks and financial institutions at a fixed interest rate.

(v) Call Money: Very short-term loans borrowed and lent between banks, usually for one day.

(vi) Notice Money: Short-term loans with a repayment period of more than one day and up to 14 days.

(vii) Repurchase Agreement (Repo): A short-term borrowing arrangement where securities are sold with an agreement to repurchase them later.

(viii) Reverse Repo: A transaction in which the RBI borrows money from banks by selling securities with an agreement to buy them back later.

Conclusion:

The various money market instruments provide liquidity, meet short-term financial needs, and help maintain stability in the financial system. They also enable the RBI to implement monetary policy effectively.