Question 33 from UPSC CSE 2020 - ECONOMICS

Question

With reference to the Indian economy, consider the following statements:
1. 'Commercial Paper' is a short-term unsecured promissory note.
2. 'Certificate of Deposit' is a long-term instrument issued by the Reserve Bank of India to a corporation.
3. 'Call Money' is a short-term finance used for interbank transactions.
4. 'Zero-Coupon Bonds' are interest-bearing short-term bonds issued by the Scheduled Commercial Banks to corporations.
Which of the statements given above is/are correct?

IASCODEX · Accepted Answer

Correct Option: C. 1 and 3 only

Strategy: - Evaluate each statement by comparing it against standard definitions of Indian money market instruments.
- Confirm Statement 1 (Commercial Paper) and Statement 3 (Call Money) align with their respective definitions.
- Identify Statement 2 (Certificates of Deposit) and Statement 4 (Zero-Coupon Bonds) as incorrect due to clear definitional discrepancies (e.g., term length, issuer, interest structure).
- Eliminate options containing the incorrect statements to arrive at the correct combination.

Key Info: **Commercial Paper (CP)** -- An unsecured, short-term debt instrument issued primarily by corporates, primary dealers, and financial institutions. It is issued as a promissory note for periods ranging from 7 days up to 1 year and traded in the money market, typically to meet working capital requirements.

**Certificate of Deposit (CD)** -- A negotiable, short-term instrument issued by banks and financial institutions to individuals, companies, and trusts. CDs typically have maturities ranging from 7 days to one year (for banks) and up to three years (for financial institutions). They are not long-term, are not issued by the RBI, and are not specifically for corporations.

**Call Money** -- Refers to funds borrowed or lent on demand for one day in the inter-bank market. It is used primarily by banks to manage liquidity and meet statutory requirements such as CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio). The interest rate on such short-term loans is known as the call money rate.

**Zero-Coupon Bonds** -- Debt securities issued at a discount to their face value and redeemed at par at maturity, with no periodic interest payments. They are typically medium to long-term instruments and may be issued by governments, some corporates, or financial institutions--rarely by scheduled commercial banks to corporations. They are non-interest bearing in the sense of not offering periodic coupon (interest) payments; the return is realized at maturity.

IASCODEX · Answer

Option A: 1 and 2 only

IASCODEX · Answer

Option B: 4 only

IASCODEX · Answer

Option D: 2, 3, and 4 only