Economics • Banking & FinanceMedium
What is the main purpose of introducing 'Certificate of Deposit (CD)' as a money market instrument in India?
A. To enable banks to mobilize bulk funds from individuals, corporates, and institutions at market-determined rates.✓ Correct Answer
B. To provide long-term equity capital for infrastructure projects.
C. To facilitate retail payments through mobile applications.
D. To finance government fiscal deficits through direct subscriptions.
💡 Solution & Explanation
Certificates of deposit were introduced in India in 1989 on the recommendation of the Vaghul Working Group to enable scheduled commercial banks and financial institutions to mobilize bulk funds at flexible, market-determined interest rates. Alternative choices like long-term equity or retail mobile payments pertain to venture capital funds and digital payment gateways respectively, rather than wholesale money market instruments. Understanding money market instruments is vital because treasury bills and commercial papers form the foundation of short-term liquidity management for the Reserve Bank of India.
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