IGNOU| MONEY, BANKING AND FINANCIAL INSTITUTIONS (ECO - 09)| SOLVED PAPER – (JUNE - 2021)| (BDP)| ENGLISH MEDIUM
BACHELOR’S DEGREE PROGRAMME
(BDP)
Term-End Examination
June - 2021
(Elective Course: Commerce)
ECO-09
MONEY, BANKING AND FINANCIAL
INSTITUTIONS
Time: 2 Hours
Maximum Marks: 50
Note: The paper contains three Section-A, B and C.
Given necessary instructions in each Section.
हिंदी माध्यम: यहां क्लिक करें
Section-A
Answer any two questions from this Section.
1. What do you mean by money market? Briefly describe the
structure and the defects of Indian money market. 4, 8
Ans:- Money market is a financial market where
short-term assets and open-ended funds are traded between institutions and
traders. The market offers high liquidity as assets can be easily converted
into cash.
The primary
purpose of the money market is to provide short-term financing for governments,
financial institutions, and other organizations. It enables governments, banks
and other large institutions to sell short-term securities to meet their
short-term cash flow needs.
Money markets
include:-
(i) Wholesale
level: Trading in large quantities between institutions and traders
(ii) Retail
level: Money market mutual funds purchased by individual investors and
money market accounts opened by bank customers.
Money markets
also promote liquidity and security and encourage saving and investment.
Structure of
Indian money market:-
The Indian
monetary market has two broad categories – the organized sector and the
unorganized sector.
(i)
Organized Sector: This sector includes governments, RBI, other commercial
banks, rural banks and even foreign banks. RBI regulates and regulates this
sector. Other corporations like LIC, UTI etc. also participate in this sector
but not directly. Other big companies and corporates also participate in this
sector through banks.
(ii)
Unorganized Sector: These are indigenous banks and local moneylenders and
hundis etc. Their activities are not regulated by RBI or any other body, hence
they are unorganized sector.
Shortcomings
or defects of Indian money market:-
Although the
Indian money market is considered to be an advanced money market among the
developing countries, it still suffers from many shortcomings or defects. These
imperfections limit the efficiency of our markets. Some important defects or
shortcomings of the Indian money market are as follows:-
(i) Lack of
integration: The Indian money market is broadly divided into organized and
unorganized sectors. The former includes legal financial institutions backed by
the RBI. The unorganized segment includes various institutions like indigenous
bankers, rural moneylenders, traders, etc. There is a lack of proper
integration between these two segments.
(ii) Multiple
rates of interest: The rates of interest in the Indian money market,
especially in banks, are very high. These rates vary for lending, borrowing,
government activities etc. Multiple rates of interest create confusion among
investors.
(iii)
Inadequate funds or resources: The Indian economy with its seasonal
structure faces a constant shortage of financial resources. Low income, low
savings and lack of banking habits among people are some of the reasons for
this.
(iv) Lack of
investment instruments: In the Indian money market, various investment
instruments like treasury bills, commercial bills, certificates of deposits,
commercial papers etc. are used. But these tools are inadequate considering the
population and market size.
(v) Lack of
commercial bills: In India, since many banks hold large amounts of money
for liquidity purposes, the use of commercial bills is very limited. Similarly,
since there are a large number of transactions. The scope of preferred
commercial bills in cash is limited.
(vi) Lack of
organized banking system: Even though we have a large network of commercial
banks in India, the banking system still suffers from major weaknesses like
NPAs, huge losses, poor efficiency. Lack of organized banking system is a major
problem for the Indian money market.
(vii) Less
number of dealers: Short-term assets have less number of dealers who can
act as intermediaries between the government and the banking system. Due to
less number of dealers the interaction between the ultimate lender and the
ultimate borrower becomes slow.
2. What are the basic types of exchange rate regimes?
Which one, in your opinion, is the most appropriate for the present-day conditions?
8, 4
Ans:- International trade is an important component
of the economy of any nation. Furthermore, international trade is highly
dependent on exchange rates. This is why the choice of the type of exchange
rate regime is so important. To a layman, all exchange rate regimes may appear
similar.
However, the
reality is that these regimes are quite different from each other.
For example, the
exchange rate system in a country like China is quite different from the
exchange rate system in a country like the United States.
The differences
between the different types of exchange rate regimes, as well as how they
affect the economy, are listed in this article.
Types of
exchange rate arrangements:-
In fact, only
two types of exchange rate regimes are possible. Fixed arrangement and
temporary arrangement.
However, there
are several differences between these two systems. Each of these systems is
usually linked to the degree of liberalization of the underlying economy.
Let's take a
closer look at these systems one by one. This will help us understand why
certain types of economies prefer certain exchange rate regimes.
(i) Fixed
Exchange Rate: A fixed exchange rate is a system in which the exchange rate
of a currency is not determined by the market. Instead, it is set by the
central bank. The exchange rate of this currency can be determined in a variety
of ways.
However, a
fixed exchange rate is a conservative system commonly used by conservative
countries such as China.
For example,
the exchange rate of one currency, i.e. the Chinese yuan, may be fixed in
relation to another currency such as the United States dollar.
Alternatively,
the exchange rate of a currency may be fixed in relation to a basket of
currencies such as the euro, dollar, yen, etc.
Finally, the
exchange rate of a currency may be determined in relation to the price of a
precious metal such as gold.
Once the
exchange rate is fixed, it is the central bank's job to ensure that price
changes in the underlying currency closely reflect price changes in the target,
with a small margin for error (usually +/- 1%). with. Is.
In practice,
countries do not actually have an ideal peg. It is very difficult to maintain
an ideal peg from an operational point of view.
Instead, these
countries choose a range that has an upper and lower limit. If the value of the
currency fluctuates within this range, the central bank takes no action.
However, as
soon as the limit is breached, the central bank takes immediate action. This
range can be very small i.e. 2% on either side, or as large as 75% on either
side. Also, the limit may or may not be disclosed to the general public.
It is
difficult to maintain an ideal peg as it becomes obsolete over time. This is
why many countries follow the crawling peg system. This is where the peg limit
is updated periodically based on factors such as inflation.
(ii) Floating
Exchange Rate: Floating exchange rate system is a more liberal system. For
this reason, most First World countries such as the United States, the United
Kingdom, and almost all countries in the European Union follow it.
In a floating
rate system, the exchange rate is determined by the free market. This means
that private parties are allowed to buy and sell foreign currencies, and the
resulting demand and supply determine the price. Like fixed rate systems,
floating rate systems also have some variations.
There are some
countries in the world that do not interfere in their currency trading and do
not impact its value. Such countries are said to be on free-float or clean
float.
On the other
hand, there are some other countries that manage the value of their own
currency. This means that theoretically, they have a floating rate arrangement.
However,
indirectly, they have a limit. If the value of a currency begins to rise beyond
a certain limit, the central bank conducts proprietary trading to stabilize the
value of the currency. This is called managed float or dirty float.
It is
important to understand that countries are not very honest about the type of
exchange rate regime they follow. This is why economists have come up with the
idea of de facto governance and legal governance.
A country can
claim to follow free flow. However, if the currency's value fluctuates too much
its central bank may be seen acting.
In this case,
de-jure system i.e. free float is being claimed. However, the actual system is
the one that is actually being followed, which in this case, is a managed float.
The bottom line
is that the exchange rate system is an important part of the entire economic
system. This is because it affects important factors such as capital mobility
and even exchange rates. The exchange rate system is the interface between the
domestic economy as well as the global economy. Therefore, it is an important
part of the financial system.
The exchange
rate regime most appropriate for current circumstances depends on the type of
economy:
(i) Managed
float: Economies that adjust their exchange rates based on developments in
variables such as reserves and position of payments.
(ii) Free
Float: Economies that allow markets and market forces to determine exchange
rates for their currencies.
A managed
floating exchange rate is neither completely free nor fixed. The value of a
currency is kept within a range against other currencies through the intervention
of the central bank. The government can intervene in the market exchange rate
in various ways and levels.
There are
three types of exchange rate systems:- free-floating, managed, fixed.
3. What do you mean by demand for money? Explain the various
motives for holding money with suitable diagrams. 2, 10
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