Banking Awareness Quiz : Set – 50

Ans: a

The term Open Market Operations: it simply means operations (selling/buying government securities) performed in the Open Market. OMO performs a major role in Monetary Policy.

Ans: a

In India, Reserve Bank of India (RBI), on behalf of Union government performs this Open Market Operation.

Ans: a

Adjust the liquidity condition in the market on a durable basis –

a. If there is excess liquidity in the market – RBI will sale the government securities, thereby sucking out the rupee liquidity

b. If the liquidity conditions are tight (i.e., less liquidity) – RBI will buy the government securities from the market, thereby releasing liquidity into the market. Government raises money from the market, when it needs money for governance purpose.

Ans: d

The two traditional type of OMO’s used by RBI:

Outright purchase (PEMO): Is outright buying or selling of government securities (Permanent).

Repurchase agreement (REPO): Is short term, and are subject to repurchase.

Ans: e

Yield Based Auction: A yield based auction is generally conducted when a new Government security is issued. Investors bid in yield terms up to two decimal places (for example, 8.19 per cent, 8.20 per cent, etc.). Bids are arranged in ascending order and the cut-off yield is arrived at the yield corresponding to the notified amount of the auction. The cut-off yield is taken as the coupon rate for the security. Successful bidders are those who have bid at or below the cut-off yield. Bids which are higher than the cut-off yield are rejected.

Price Based Auction: A price based auction is conducted when Government of India re-issues securities issued earlier. Bidders quote in terms of price per Rs.100 of face value of the security (e.g., Rs.102.00, Rs.101.00, Rs.100.00, Rs.99.00, etc., per Rs.100/-). Bids are arranged in descending order and the successful bidders are those who have bid at or above the cut-off price. Bids which are below the cut-off price are rejected.

Ans: e

Physical form: Government securities may be held in the form of stock certificates. A stock certificate is registered in the books of PDO. Ownership in stock certificates cannot be transferred by way of endorsement and delivery. They are transferred by executing a transfer form as the ownership and transfer details are recorded in the books of PDO. The transfer of a stock certificate is final and valid only when the same is registered in the books of PDO.

Demat form: Holding government securities in the dematerialized or scripless form is the safest and the most convenient alternative as it eliminates the problems relating to custody, viz., loss of security. Besides, transfers and servicing are electronic and hassle free.

Ans: e

Major players in the Government securities market include commercial banks and primary dealers besides institutional investors like insurance companies. Primary Dealers play an important role as market makers in Government securities market. Other participants include co-operative banks, regional rural banks, mutual funds, provident and pension funds. Foreign Institutional Investors (FIIs) are allowed to participate in the Government securities market within the quantitative limits prescribed from time to time. Corporates also buy/ sell the government securities to manage their overall portfolio risk.

Ans: b

As part of the OMOs, RBI will purchase government securities maturing in 2017 (bearing interest rate of 7.46 per cent), 2022 (8.15 per cent), 2025 (8.2 per cent), 2017 (8.6 per cent) and 2030 (7.88 per cent).