Repo Market Fundamentals

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Questions and Answers

Which instrument serves as a short-term collateralized borrowing method using securities?

Bilateral Loan

Forward Contract

Repurchase Agreement (correct)

Swap Agreement

What are the transactions between market participants known as in the repo market?

Interbank Loan

Market Repo (correct)

Liquidity Adjustment Facility

Tender Offer

Which of the following is not a permitted security for Market Repo transactions?

Government Securities

Corporate Bonds

Common Stock (correct)

Treasury Bills

Who can participate in the Market Repo transactions?

All India Financial Institutions Signup and view all the answers

What must happen to securities purchased under a repo agreement during the contract period?

They cannot be sold, except by permitted entities. Signup and view all the answers

Which transactions are referred to as reverse repo?

When funds are lent against purchased securities. Signup and view all the answers

What is the category of repos undertaken with the Reserve Bank of India?

Liquidity Adjustment Facility - Repo Signup and view all the answers

Which condition affects the reporting of OTC Repo transactions on Government Securities?

They must be reported after execution within a specified timeframe. Signup and view all the answers

What is one of the primary aims of the reform endeavors discussed?

To foster trust and innovation in financial markets Signup and view all the answers

Which organization was created to provide a mechanism for clearing and settlement of financial transactions?

Clearing Corporation of India Limited (CCIL) Signup and view all the answers

What role has been enhanced for market representative bodies due to regulatory initiatives?

They have gained responsibilities for developing market segments. Signup and view all the answers

What does the Financial Benchmarks India Private Limited (FBIL) administer?

Financial benchmarks relating to various markets Signup and view all the answers

What impact has the reform on financial markets not included?

Higher trading fees for market participants Signup and view all the answers

The establishment of which infrastructure was a key milestone for market operations?

Clearing Corporation of India Limited (CCIL) Signup and view all the answers

Why is enhanced market surveillance particularly important after the reforms?

To ensure participants comply with fair conduct principles Signup and view all the answers

Which of the following is NOT a function of the bodies assigned greater responsibilities by the Reserve Bank?

Conducting international economic policy Signup and view all the answers

What is one benefit of an active corporate bond market for borrowers?

Offers a more efficient source of long-term capital Signup and view all the answers

How does a well-developed corporate bond market contribute to financial stability?

By distributing risk away from the banking system Signup and view all the answers

What has the RBI allowed banks to do to enhance participation in the corporate bond market?

Fund loans for long-term projects using bonds with a minimum maturity of seven years Signup and view all the answers

Which of the following is NOT a role of the RBI in the corporate bond market?

Encouraging large borrowers to raise funds only through bank loans Signup and view all the answers

What is implied by the term 'partial credit enhancement' (PCE) in the corporate bond market?

Supplementary guarantee to enhance credit quality Signup and view all the answers

What impact has SEBI had on the corporate bond market?

Improved the market microstructure for corporate bonds Signup and view all the answers

Which type of investors benefit from long-term financial assets in the corporate bond market?

Institutional investors such as insurance companies Signup and view all the answers

What challenge does the corporate bond market face compared to global peers?

Lags in development and participation Signup and view all the answers

What role do financial markets play in a market-oriented policy environment?

Transmitting monetary policy signals by the central bank Signup and view all the answers

Which market is primarily regulated by the Securities and Exchange Board of India (SEBI)?

Equity market Signup and view all the answers

What was a predominant characteristic of the financial markets in India before the reforms of the 1990s?

Functioning under financial restrictions driven by fiscal compulsions Signup and view all the answers

What is one of the main objectives of the regulatory role played by the Reserve Bank of India (RBI)?

Framing appropriate prudential and conduct regulations Signup and view all the answers

Which act provides the provisions for the regulatory framework for exchange-traded instruments in India?

Reserve Bank of India Act, 1934 Signup and view all the answers

What does the developmental role of the RBI focus on in the financial markets?

Enhancing market efficiency and orderly growth Signup and view all the answers

What type of market structure do most of India's financial markets predominantly operate under?

Over The Counter (OTC) Signup and view all the answers

What is the role of SEBI following RBI's issuance of the regulatory framework for exchange-traded instruments?

Issuing operational instructions for trade execution and settlement Signup and view all the answers

What is the primary purpose of the WI market in the distribution process for G-Secs?

To enhance the distribution process by extending the distribution period. Signup and view all the answers

What innovation regarding G-Secs was introduced by the Reserve Bank in April 2010?

The creation of STRIPS. Signup and view all the answers

Which change was made in 2018 regarding STRIPS to align them more with market needs?

Broadened eligibility to all fixed coupon securities issued by the Government of India. Signup and view all the answers

In which year was Securities Lending and Borrowing in G-Secs permitted?

2023 Signup and view all the answers

Who is eligible to lend under the Securities Lending and Borrowing mechanism for G-Secs?

All entities authorized to undertake repo transactions. Signup and view all the answers

What is the maximum period for borrowing/lending in the G-Sec mechanism?

As prescribed by the Reserve Bank. Signup and view all the answers

What was a key characteristic of the WI market before it expanded its guidelines?

It was limited to trades on the NDS. Signup and view all the answers

What did the initial introduction of STRIPS lack that affected market interest?

Alignment with current market requirements. Signup and view all the answers

What purpose does the Voluntary Retention Route (VRR) serve for Foreign Portfolio Investors (FPIs)?

Encourage long-term debt investment with operational flexibility Signup and view all the answers

Which of the following initiatives specifically facilitates FPIs' investment in infrastructure and real estate?

Investment in Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs) Signup and view all the answers

What does the Fully Accessible Route (FAR) allow eligible investors to do?

Invest in specified Government securities without macroprudential limits Signup and view all the answers

What is the 'When Issued (WI) Trading' market primarily concerned with?

Trading government securities that are announced but not yet issued Signup and view all the answers

Which of the following best describes the role of FPIs in hedging risks?

They use derivatives to hedge interest rate, foreign exchange, and credit risks. Signup and view all the answers

What recent development is associated with Indian Government Bonds (IGBs) as of September 2023?

They were announced for inclusion in major global bond indices. Signup and view all the answers

Which securities are included under the Fully Accessible Route (FAR) for investment?

5-, 7- and 10-year government securities and sovereign green bonds Signup and view all the answers

Which of the following is NOT a measure taken to facilitate operational ease for FPIs?

Limiting FPIs to domestic debt only Signup and view all the answers

Study Notes

Financial Market Development and Regulation

Financial markets are crucial in transmitting monetary policy signals in a market-oriented environment. India's financial market includes money markets, government securities, foreign exchange, and equity markets.
Pre-reform financial markets were restricted, driven by fiscal constraints.
Reforms in the early 1990s aligned banking regulations with international best practices, leading to the development of various market components and institutions.
SEBI regulates the equity market, while the Reserve Bank of India (RBI) regulates the money market, government securities, foreign exchange markets, and related derivatives (including credit derivatives).
Money and government security markets are predominantly over-the-counter (OTC).
Exchange-traded instruments aim to increase transparency, improve price discovery, and encourage broader retail participation.
The RBI plays both developmental and regulatory roles.
Developmental efforts focus on making capital raising more efficient, removing onshore/offshore segmentations, expanding participation, promoting innovation (broader range of products and instruments), ensuring market infrastructure integrity and resilience, and fair conduct by market participants.
Increased market surveillance is needed with greater participation and trading volumes.
RBI has tasked market representative bodies (FIMMDA, FEDAI, and PDAI) with developing specific market segments.

Money Market

The money market is a short-term financial market for assets that are close substitutes for money.
It acts as a crucial conduit for matching short-term funds.
A freely operating money market serves as a barometer for financial conditions, facilitates management of surplus funds, and helps borrowers find short-term funding.
Development of money markets is integral to the deregulation of financial reforms.
The RBI significantly promoted Indian money market development through reforms like removing interest rate ceilings on inter-bank call/notice money, introducing treasury bills, certificates of deposit, and repurchase agreements.
RBI also established institutions like Discount and Finance House of India (DFHI) and encouraged market-determined rates.
The RBI promotes participation by reducing barriers to entry.

Call, Notice and Term Money

This refers to unsecured lending and borrowing among scheduled commercial banks (SCBs), SFBs, payment banks, RRBs, cooperative banks, and PDs.
Call money is for one day, notice money is for two to fourteen days, and term money ranges from fifteen days to one year.
These transactions occur OTC and on NDS-Call-an electronic trading system.
Participants must report OTC trades in the NDS-Call platform within a certain timeframe after execution.
Rules for lending and borrowing of money limits are set by participating banks internally, subject to the reserve bank guidelines.

Repo Market

Repo is a short-term collateralized borrowing against securities.
Transactions are called repos (borrower's perspective) and reverse repos (lender's perspective).
Eligible securities for repo include government securities, treasury bills, commercial papers, certificates of deposits, debt ETFs, and corporate bonds.
Repos can be executed through CCIL's CROMS and TREPS platforms or bilaterally (OTC).

Commercial Paper (CP) and Non-Convertible Debentures (NCDs)

CPs are unsecured promissory notes.
NCDs are secured instruments.
Both have a maximum original/initial maturity of up to one year.
Rated corporate borrowers are eligible to issue them.
The issued CPs and NCDs need to be reported to CCIL's F-TRAC within a specified timeframe.

Government Securities (G-Sec) Market

The G-Sec market is a crucial market for determining risk-free interest rates.
Acts as a benchmark for other financial transactions.
Instruments issued by the government (treasury bonds, bills, etc.) are traded here, raising funds for governmental expenditure.
Improvements involve developing secondary market, reducing uncertainties surrounding auctions, facilitating price discovery, and ensuring greater liquidity.
The RBI encouraged further development through policy changes like automatic monetization abolition, introduction of auction processes, and passage of the Fiscal Responsibility and Budget Management Act (2003), increasing transparency in auction calendars, and allowing WI trading.

Foreign Exchange Market

India's foreign exchange market evolved from par value systems to basket-peg and managed-float systems.
Initially, the market was limited to intra-day trading by banks; developments over time have allowed a broader range of participants.
Regulation includes measures to increase transparency, enhance efficiency, improve competition amongst participants, and offer access to OTC derivatives market.
The Reserve Bank of India (RBI) has introduced several directions and norms to streamline the forex market, including directions for the prevention of market abuse and financial benchmarks.

Other regulations & information

The RBI has established an 'Alert List' of entities deemed as unauthorised e-trading platforms for forex transaction, for greater awareness and risk prevention.
Regulations involve measures for market manipulation and benchmark manipulation.
RBI has introduced measures to improve transparency, costs, transaction time, reduce risk, and strengthen market monitoring in financial market instruments.
New technologies, like LEIs, are needed to improve the quality and accuracy of financial data.

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Description

Test your knowledge on the repo market and its key concepts. This quiz covers collateralized borrowing methods, transaction categories, and roles of organizations within the market. Enhance your understanding of how repos operate, participants involved, and relevant regulations.