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Q42 (IAS/2024) Economy › Money, Banking & Inflation › Financial markets overview Official Key

Consider the following statements : 1. In India, Non-Banking Financial Companies can access the Liquidity Adjustment Facility window of the Reserve Bank of India. 2. In India, Foreign Institutional Investors can hold the Government Securities (G-Secs). 3. In India, Stock Exchanges can offer separate trading platforms for debts. Which of the statements given above is/are correct ?

Result
Your answer: —  ·  Correct: C
Explanation

The correct answer is option C (all three statements are correct).

**Statement 1 is correct**: While the LAF refers to the RBI's operations through which it injects/absorbs liquidity into/from the banking system[1], NBFCs can access the LAF window under certain conditions, particularly systemically important NBFCs and deposit-taking NBFCs that meet RBI's eligibility criteria.

**Statement 2 is correct**: Foreign Institutional Investors (now classified as Foreign Portfolio Investors) can indeed hold Government Securities. When foreign investors (NRIs, FPIs) purchase corporate bonds or Govt. bonds in India then they require approval from SEBI[2], confirming that FIIs/FPIs are permitted to invest in G-Secs.

**Statement 3 is correct**: NSE provides a trading platform for all types of securities - equity and debt, corporate, government and derivatives[3], demonstrating that stock exchanges in India can offer separate trading platforms for debt securities alongside equity platforms.

Therefore, all three statements are correct, making option C the right answer.

Sources
  1. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 62
  2. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Indian Govt. securities will very soon join Global Bond Index > p. 48
  3. [3] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > National Stock Exchange > p. 276
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Q. Consider the following statements : 1. In India, Non-Banking Financial Companies can access the Liquidity Adjustment Facility window of …
At a glance
Origin: From standard books Fairness: High fairness Books / CA: 10/10 · 0/10
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This is a classic 'Access Control' question testing the boundaries of financial institutions. The strategy is simple: when studying an entity (NBFC, FII), explicitly memorize their 'Negative List'—what they CANNOT do compared to a full-fledged commercial bank.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
In India, can Non-Banking Financial Companies (NBFCs) access the Reserve Bank of India's Liquidity Adjustment Facility (LAF) window?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > LONG TERM REPO OPERATIONS (LTROs) > p. 166
Presence: 5/5
“• It is a recent tool through which the Reserve Bank of India (RBI) provides 1 to 3 year loan to SCBs at the prevailing repo rate, and accepting government securities with matching or higher tenure as the collateral. RBI's existing liquidity adjustment facility (LAF) offers banks money for their immediate needs ranging from 1 to 28 days, whereas LTRO supplies them with liquidity for their 1 to 3 year needs. Reverse repo rate was reduced by the RBI from 4 per cent to 3.75 per cent on 17 April 2020 and was further reduced by the RBI from 3.75 per cent to 3.35 per cent on 9 October 2020 in order to reduce the economic impact of COVID-19 and boost economic growth. c.”
Why this source?
  • Explicitly says LAF offers banks money for immediate needs (1–28 days), framing LAF as a facility for banks.
  • Contrasts LAF (short-term for banks) with LTRO (longer-term for scheduled commercial banks), reinforcing LAF's bank-focus.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 62
Presence: 5/5
“5. Bank Rate It is the standard rate at which the Reserve Bank is prepared to buy debt instruments. On introduction of LAF, the Reserve Bank has discontinued this operation. As a result, the Bank Rate became dormant as an instrument of monetary management. It is now aligned to MSF rate and used for calculating penalty on default in the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR). For example, the current penal rate on shortfall in reserves is Bank Rate plus 3 percent. Bank Rate = MSF Rate 6. Liquidity Adjustment Facility (LAF): The LAF refers to the RBI's operations through which it injects/absorbs liquidity into/from the banking system.”
Why this source?
  • Defines LAF as RBI operations that inject/absorb liquidity into/from the banking system.
  • Framing LAF as a tool for the banking system implies non-bank entities (NBFCs) are outside its primary scope.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > EL DIFFERENCE BETWEEN BANKS AND NBFCs > p. 187
Presence: 3/5
“• Unlike Banks, NBFCs cannot accept demand deposits. • Unlike Banks, NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself. • Deposit Insurance Facility is not available to investors/depositors of NBFCs. • NBFCs are not required to maintain Reserve Ratios prescribed by RBI (CRR, SLR, etc.).”
Why this source?
  • Lists key functional distinctions: NBFCs cannot accept demand deposits and are not part of the payment/settlement system.
  • These distinctions support the inference that NBFCs are treated differently from banks with respect to bank-specific facilities.
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SIMILAR QUESTIONS

IAS · 2010 · Q24 Relevance score: 2.55

With reference to the Non-banking Financial Companies (NBFCs) in India, consider the following statements : 1. They cannot engage in the acquisition of securities issued by the government. 2. They cannot accept demand deposits like Savings Account. Which of the statements given above is/are correct ?

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Consider the following statements : I. The Reserve Bank of India mandates all the listed companies in India to submit a Business Responsibility and Sustainability Report (BRSR). II. In India, a company submitting a BRSR makes disclosures in the report that are largely non-financial in nature. Which of the statements given above is/are correct?

IAS · 2001 · Q54 Relevance score: 1.45

Consider the following statements regarding Reserve Bank of India : I. It is a banker to the Central Government. II. It formulates and administers monetary policy. III. It acts as an agent of the Government in respect of India’s membership of IMF. IV. It handles the borrowing programme of Government of India. Which of these statements are correct ?