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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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Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
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

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.
Statement 2
In India, are Foreign Institutional Investors (FIIs) permitted to hold or invest in Government Securities (G-Secs)?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 97
Presence: 5/5
“If the warrant holder does not exercise his option to subscribe to equity shares, then the initial amount (some percent of the total amount paid by the warrant holder to purchase the warrant) paid stands forfeited.• Foreign investment can be broadly classified into two ways: • Foreign Direct Investment (FDI) is the investment through 'capital instruments' by a person resident outside India: • In an unlisted Indian company; or• In 10 percent or more of the equity capital of a listed Indian company• Foreign Portfolio Investment (FPI) is any investment made by a person resident outside India in 'capital instruments' where such investment is less than 10 percent of the equity capital of a listed Indian company.• Foreign Portfolio Investors (FPIs) can also invest in Central and State Government securities/bonds and corporate bonds and are treated as debt.• Foreign Direct Investment can come through two routes viz. automatic and government approval route.”
Why this source?
  • Explicitly states that foreign portfolio investors (FPIs) can invest in Central and State Government securities/bonds.
  • Classifies such investments as debt, confirming that government bonds are a permitted instrument for foreign portfolio investment.
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
Presence: 4/5
“This investment by foreigners will be treated as Govt. of India's external Debt.• More investment by foreigners in the Govt. of India bonds will lead to a lesser interest rate on Govt. bonds and hence lesser yield and this will also increase liquidity (more trade and easy conversion into cash) in Indian Govt. securities. This will also ease pressure on Govt. borrowing from the domestic market and hence domestic interest rate and yield will also come down.• Right now, when foreign investors (NRIs, FPIs) purchase corporate bonds or Govt. bonds in India then they require approval from SEBI. But if an investor wants to invest in Govt. securities through Global Bond Index, then this prior approval from SEBI needs to be removed.• Earlier there was a cap/ceiling as to how much non-residents (foreign) investors can invest in bonds in India.”
Why this source?
  • Describes that when foreign investors (NRIs, FPIs) purchase corporate or Government bonds in India they require approval from SEBI, implying such purchases are allowed under regulation.
  • Refers to historical caps and regulatory changes for foreign investment in government bonds, showing an existing framework permitting such investment.
Statement 3
In India, are stock exchanges allowed to operate separate trading platforms for debt securities?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > National Stock Exchange > p. 276
Presence: 5/5
“It was set up in 1992 and was India's first fully automated electronic exchange with a nationwide presence. It is also India's first dematerialised (non-paper) stock exchange. NSE is the largest exchange in the country in terms of trading volumes. Headquarters of NSE is located in Mumbai. NSE allows for new listings, IPOs, debt issuances and Indian Depository Receipts (IDRs) by overseas companies raising capital in India. NSE provides a trading platform for all types of securities - equity and debt, corporate, government and derivatives. The index of NSE is NIFTY, which is based on the value of the equity shares of 50 well-established/stable companies.”
Why this source?
  • NSE is described as providing a trading platform for all types of securities, explicitly including debt (corporate and government).
  • Implies stock exchanges can host trading venues that handle debt securities alongside other instruments.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.25 GIFT (Gujarat International Financial Tech) City > p. 104
Presence: 4/5
“• IFSC is deemed to be a foreign territory and entities approved as IFSC unit are treated as non-resident in India. Therefore, RBI ODI (Overseas Direct Investment, which means investments outside India) Rules are applicable on investments in IFSC. Accordingly, Indian parties are allowed under Automatic route to make investment in IFSC entities and that shall be treated as ODI.• Individual person resident in India is allowed to invest up to USD 2, 50,000 per financial year under Liberalized Remittance Scheme (LRS) outside India or in IFSC.• Bombay Stock Exchange (BSE) has established its subsidiary in IFSC called India International Exchange (India-INX) where any foreign company can list its securities (shares/bonds/derivatives).”
Why this source?
  • BSE established a subsidiary in the IFSC (India-INX) where securities including bonds can be listed.
  • Demonstrates an exchange operating a separate platform/venue (subsidiary in IFSC) that lists debt instruments.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > STOCK EXCHANGE > p. 275
Presence: 3/5
“Stock exchange is a platform where buyers and sellers trade securities such as shares, bonds, derivatives, etc. Such trade takes place through an electronic means. Price of a security is affected by the demand and supply of the security. It may be noted that such security for being traded must be 'listed' in that stock exchange. After an IPO, a company can get listed on the stock exchange, but they have to meet the listing requirements of the stock exchange which seek to prevent fraudulent practices and prohibit insider trading. Stock exchanges are important for mobilising savings and capital, raising funds for corporates and promoting economic growth.”
Why this source?
  • Defines a stock exchange as a platform where bonds (debt) are traded alongside shares and derivatives.
  • Supports the general role of exchanges in facilitating debt securities trading.
Pattern takeaway: UPSC Economy questions often hinge on 'Institutional Privilege'. The pattern is consistent: Statement 1 usually tests a restriction (Who is excluded?), while Statements 2 and 3 test liberalization (What is allowed?).
How you should have studied
  1. [THE VERDICT]: Sitter. Directly solvable from standard texts (Vivek Singh/Singhania) under 'Banking' and 'Financial Markets' chapters.
  2. [THE CONCEPTUAL TRIGGER]: Financial Market Architecture: Specifically, the distinction between 'Banking System' privileges (LAF access) and 'Market Participant' rights (FII investment).
  3. [THE HORIZONTAL EXPANSION]: Memorize the Access Matrix: 1) Primary Dealers (PDs) CAN access LAF (even though some are NBFCs, they are the exception). 2) Payment Banks CANNOT lend but can buy G-Secs. 3) Regional Rural Banks (RRBs) CAN access LAF. 4) FPIs have a 'Voluntary Retention Route' (VRR) for G-Secs. 5) SDF (Standing Deposit Facility) is the new floor, collateral-free.
  4. [THE STRATEGIC METACOGNITION]: Do not just read definitions. Study via 'Comparative Exclusion': Ask 'Why is an NBFC not a Bank?' Answer: No Demand Deposits, No Settlement System access, No LAF access (generally).
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Liquidity Adjustment Facility (LAF) is for the banking system
💡 The insight

LAF operations inject or absorb liquidity specifically into the banking system and provide short-term funds to banks, not to non-bank entities.

High-yield for questions on RBI monetary tools and access conditions: distinguishes which institutions qualify for central bank liquidity windows and helps answer policy and regulatory comparison questions. Connects to topics on money market operations and institutional access rules.

📚 Reading List :
  • 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
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > LONG TERM REPO OPERATIONS (LTROs) > p. 166
🔗 Anchor: "In India, can Non-Banking Financial Companies (NBFCs) access the Reserve Bank of..."
📌 Adjacent topic to master
S1
👉 Functional differences between Banks and NBFCs
💡 The insight

NBFCs cannot accept demand deposits, are outside the payment-and-settlement system, and are not required to maintain CRR/SLR, distinguishing them from banks.

Essential for GS banking/regulation questions: explains why NBFCs may be excluded from certain bank-specific privileges and obligations. Links to regulatory scope of RBI, deposit insurance, and access to central bank facilities.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > EL DIFFERENCE BETWEEN BANKS AND NBFCs > p. 187
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > NON-BANKING FINANCIAL COMPANIES > p. 184
🔗 Anchor: "In India, can Non-Banking Financial Companies (NBFCs) access the Reserve Bank of..."
📌 Adjacent topic to master
S1
👉 Short-term vs long-term RBI liquidity tools (LAF vs LTRO)
💡 The insight

LAF supplies short-term (1–28 day) liquidity to banks while LTRO offers longer-term (1–3 year) repo loans to scheduled commercial banks.

Useful for distinguishing RBI instruments by tenor and target institution when answering policy, economy, and banking questions. Helps tackle comparative MCQs and descriptive questions on RBI liquidity management.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > LONG TERM REPO OPERATIONS (LTROs) > p. 166
  • 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
🔗 Anchor: "In India, can Non-Banking Financial Companies (NBFCs) access the Reserve Bank of..."
📌 Adjacent topic to master
S2
👉 FPIs/FIIs can invest in government securities
💡 The insight

Foreign portfolio investors are allowed to hold central and state government bonds in India.

High-yield: many questions test which types of foreign capital can access G‑secs; this concept links capital flows with sovereign debt instruments and helps answer MCQs and short-answer questions on permitted foreign investments.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 97
  • 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
🔗 Anchor: "In India, are Foreign Institutional Investors (FIIs) permitted to hold or invest..."
📌 Adjacent topic to master
S2
👉 Regulatory role of SEBI in foreign portfolio investment
💡 The insight

Foreign institutional/portfolio investors must register with or obtain approval from SEBI to invest in Indian securities including bonds.

Crucial for topics on financial regulation and capital account management; explains approval versus automatic routes and is often tested in questions about market access and regulatory safeguards.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > a. Foreign Institutional Investment (FII) > p. 478
  • 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
🔗 Anchor: "In India, are Foreign Institutional Investors (FIIs) permitted to hold or invest..."
📌 Adjacent topic to master
S2
👉 Foreign investment in G-secs treated as debt/external debt
💡 The insight

Purchases of Government of India bonds by non-residents are treated as external debt and as debt instruments.

Important for balance of payments and public finance questions; helps analyze how foreign holdings of sovereign bonds affect external debt statistics, yields, and domestic borrowing conditions.

📚 Reading List :
  • 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
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 97
🔗 Anchor: "In India, are Foreign Institutional Investors (FIIs) permitted to hold or invest..."
📌 Adjacent topic to master
S3
👉 Securities traded on stock exchanges (equity, debt, derivatives)
💡 The insight

Stock exchanges in India trade multiple instrument types including debt instruments such as corporate and government bonds.

High-yield for questions on financial markets and capital formation; links to topics on market structure, investor access, and instruments like ETFs. Mastering this helps answer questions about market functions, instrument classification, and policy impacts.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > National Stock Exchange > p. 276
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > STOCK EXCHANGE > p. 275
🔗 Anchor: "In India, are stock exchanges allowed to operate separate trading platforms for ..."
🌑 The Hidden Trap

The 'Standalone Primary Dealer' (SPD) Trap: While general NBFCs cannot access LAF, SPDs (which are registered as NBFCs) CAN access the LAF window to support their market-making role. UPSC will likely ask: 'Do Primary Dealers have the same access to RBI windows as Scheduled Commercial Banks?'

⚡ Elimination Cheat Code

Apply the 'Settlement Logic': LAF is used to adjust liquidity mismatches in the Payment & Settlement system. Since NBFCs are generally NOT part of the Payment & Settlement system (they can't issue self-drawn cheques), they logically have no business accessing the overnight LAF window. Thus, Statement 1 is False.

🔗 Mains Connection

Link FII in G-Secs to Mains GS-3 (External Sector): The inclusion of Indian G-Secs in global bond indices (like JP Morgan's) increases FII inflows. This stabilizes the Rupee but exposes the economy to 'Hot Money' volatility and 'Imported Inflation' risks.

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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 ?

IAS · 2021 · Q23 Relevance score: 2.20

With reference to India, consider the following statements : 1. Retail investors through demat account can invest in 'Treasury Bills' and 'Government of India Debt Bonds' in primary market. 2. The Negotiated Dealing System-Order Matching' is a government securities trading platform of the Reserve Bank of India. 3. The 'Central Depository Services Ltd.' is jointly promoted by the Reserve Bank of India and the Bombay Stock Exchange. Which of the statements given above is/are correct?

IAS · 2025 · Q4 Relevance score: 2.11

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 ?