Daily Quiz #20 UPSC Prelims Marathon – September 24, 2019

Explanation: CDS is in operation in India since October 2011-launched in only corporate bonds. The eligible participants are commercial banks, primary dealers, NBFCs, insurance companies and mutual funds. CDS is a credit derivative transaction in which two parties enter into an agreement, whereby one party (called as the ‘protection buyer’) pays the other party (called as the ‘protection seller’) periodic payments for the specified life of the agreement. The protection seller makes no payment unless a credit event relating to a pre-determined reference asset occurs. If such an event occurs, it triggers the Protection Seller’s settlement obligation, which can be either cash or physical (India follows physical settlement). It means, CDS is a credit derivative that can be used to transfer credit risk from the investor exposed to the risk (called protection buyer) to an investor willing to take risk (called protection seller). It operates like an insurance policy. In an insurance policy, the insurance firm pays the loss amount to the insured party.

ANS: Economic vibrancy coupled with sophisticated state–of–the–art financial infrastructure has contributed to rapid growth in the equity market in India. In terms of market features and depth, the Indian equity market ranks among the best in the world. In parallel, the government securities market has also evolved over the years and expanded, given the increasing borrowing requirements of the government. In contrast, the corporate bond market has languished both in terms of market participation and structure. NBCs are the main issuers and very small amounts of finance are raised by companies directly. The Economic Survey 2010–11, cites many reasons for the less developed bond market in India-
•Predominance of banks loans;
•FII’s participation is limited;
•Pensions and insurance companies and household are limited participants because of lack of investor confidence; and
•Crowding out by government bonds.

Explanation: An apex level body, the FSDC, was set up by the GoI in December 2010. It was in line with the G-20 initiative which came in wake of the financial crises among the western economies triggered by the 2007–08 ‘sub-prime’ crisis of the USA. The council is chaired by the Finance Minister and has heads of financial sector regulatory authorities, the Finance Secretary and/or Secretary of the Department of Economic Affairs, Secretary of the Department of Financial Services, and the Chief Economic Adviser as members.

Explanation: The IMF Board decided in September 2010, to include 25 systemically important economies, including India, under the Financial Stability Assessment Programme (FSAP) for members with systemically important financial sectors. The joint IMF-World Bank Financial Stability Assessment Programme (FSAP) was conducted for India in January 2013 which assessed Indian financial system in relation to the highest international standards. The assessment recognizes that the Indian financial system remained largely stable on account of a sound regulatory and supervisory regime.

Explanation: The total foreign currencies (of different countries) an economy possesses at a point of time is its ‘foreign currency assets/reserves’. The Forex Reserves (short for ‘foreign exchange reserves’) of an economy is its ‘foreign currency assets’ added with its gold reserves, SDRs (Special Drawing Rights) and Reserve Tranche in the IMF.