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SFG 2025 Level 2 Test 2 Sol - 221152 Eng

The document contains solutions to various questions related to economic concepts, including Central Bank digital currencies, short selling in capital markets, Cash Management Bills, and the National Bank for Financing Infrastructure and Development. It also discusses camelids and banking systems such as full reserve and non-banking financial companies. Each question is accompanied by an explanation of the correct answer and relevant sources.

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0% found this document useful (0 votes)

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SFG 2025 Level 2 Test 2 Sol - 221152 Eng

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SFG 2025 | Level 2 | Test - #2 - Solutions |

Q.1) With reference to Central Bank digital currencies, consider the following statements:
1. It is possible to make payments in a digital currency without using the US dollar or SWIFT system.
2. A digital currency can be distributed with conditions programmed into it such as a time- frame for
spending it.
Which of the statements given above is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2

Ans) c
Exp) Option c is the correct answer.
Statement 1 is correct. It is possible to make payments in digital currencies without using US dollar or
SWIFT system.
Statement 2 is correct. A CBDC is programmable to the point that the currency can be made to expire,
thus forcing consumers to use it up to a certain date. For example, the digital yuan is programmable to the
extent that the currency can be designed to expire, forcing users to spend it all by a specific date. It means
that the digital currencies can be programmed to be spent within a predetermined time range.
Source: UPSC CSE Pre 2023
Subject:) Economy
Topic:) Monetary Policy
Subtopic:)

Q.2) In context to the capital market in India, which of the following correctly explains the meaning of ‘short
selling’?
It refers to the selling of shares
a) at a loss due to the fear of further decline in stock prices.
b) at a price lower than their face value.
c) outside the stock exchanges.
d) which the seller does not own himself.

Ans) d
Exp) Option d is the correct answer.
Short selling refers to selling of shares without possessing them. Short selling is defined as selling a stock
which the seller does not own at the time of trade.
Short selling is when someone sells an asset they don’t actually own, hoping that its price will drop in the
future. The seller borrows the asset from a broker, sells it right away, and then plans to buy it back later at
a lower price to return it to the broker. Short selling is allowed in India.
For example: Suppose an investor thinks that a company is overvalued at Rs. 200 per share and that its
price is due to go down. The Investor borrows 10 shares of the company from a broker and then sells the
shares for the market price of Rs. 200. Later, the investor buys back the 10 shares at Rs. 125 after the stock
price has gone down and returns the borrowed shares to the broker. He would earn a net profit without
investing a single rupee.
Source:)
https://economictimes.indiatimes.com/definition/short-selling?from=mdr
Subject:) Economy
Topic:) Money Market/Capital Market
Subtopic:)

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[1]
SFG 2025 | Level 2 | Test - #2 - Solutions |

Q.3) Consider the following statements about Cash Management Bills (CMBs):
1. In India, the state Governments cannot issue CMBs.
2. The investments made by scheduled commercial banks in CMBs are eligible to be counted under their
Statutory Liquidity Ratio requirements.
Which of the statements given above is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2

Ans) c
Exp) Option c is the correct answer.
Cash Management Bills are short-term money market instruments issued to meet the temporary mismatch
in cash flows of the Government. They are discounted instruments issued for maturities less than 91 days.
Statement 1 is correct. State Governments cannot issue Cash Management Bills in India. Only the Central
Government is allowed to issue it. Cash Management Bills are discounted instruments issued for maturities
of less than 91 days. They are issued at a discount to the face value and are tradable.
Statement 2 is correct. The cash management bill will be treated as Government of India Treasury Bill and
accordingly shall be treated as Statutory Liquidity Ratio securities. Thus, Banks can consider investment
in CMBs as a valid investment in government securities for SLR purposes, as recognised under Section 24
of the Banking Regulation Act, 1949.
Source:) https://www.rbi.org.in/commonman/english/scripts/Notification.aspx?Id=891
https://dea.gov.in/pressrelease/issuance-government-india-cash-management-bills
https://www.rbi.org.in/commonman/english/scripts/FAQs.aspx?Id=711
Subject:) Economy
Topic:) Money Market/Capital Market
Subtopic:)

Q.4) Consider the following statements about the National Bank for Financing Infrastructure and
Development (NaBFID):
1. It is a statutory body under the Ministry of Finance, Government of India.
2. It primarily issues short-term loans to the corporates to meet their working capital requirements.
3. It is allowed to raise funds by issuing bonds in the financial market.
Which of the statements given above is/are correct?
a) 1 only
b) 1 and 3 only
c) 2 and 3 only
d) None of the above

Ans) b
Exp) Option b is the correct answer.
The National Bank for Financing Infrastructure and Development (NaBFID) is a specialized Development
Finance Institution in India aimed at supporting the country's infrastructure sector.
Statement 1 is correct. NaBFID is a statutory body under the Department of Financial Services, Ministry
of Finance, Government of India. It was set up in 2021 by an Act of the Parliament-The National Bank for
Financing Infrastructure and Development Act, 2021. It is regulated by the Reserve Bank of India as an All
India Financial Institution, under Section 45L and 45N of the Reserve Bank of India Act, 1934.

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SFG 2025 | Level 2 | Test - #2 - Solutions |

Statement 2 is incorrect. NaBFID primarily issues long-term loans to the corporates to meet their credit
requirements for building infrastructure. It has been established to support the development of
infrastructure in the country, which are long gestation projects having long-term credit needs.
Statement 3 is correct. NaBFID can raise funds by issuing bonds in the financial market. It also gets
grants from the Central Governments and loans from multilateral agencies like the World Bank.
Source:) https://www.nabfid.org/
https://www.business-standard.com/industry/news/infra-lender-nabfid-plans-record-rs-400-bn-
fundraising-for-jan-mar-quarter-125011000193_1.html
https://m.economictimes.com/markets/bonds/nabfid-set-to-raise-at-least-rs-1000-crore-via-20-
year-bond-issue/articleshow/112416372.cms#:~:text=Bonds-
,NaBFID%20set%20to%20raise%20at%20least%20Rs%201%2C000%20crore%20via,now%20dependent%
20on%20government%20grants.
https://m.economictimes.com/news/economy/infrastructure/nabfid-eyes-tieups-with-multilateral-
funding-agencies/articleshow/117991982.cms
https://financialservices.gov.in/beta/en/NaBFID-
act#:~:text=National%20Bank%20for%20Financing%20Infrastructure,of%20Finance%20%7C%20Govern
ment%20of%20India
Subject:) Economy
Topic:) Money Market/Capital Market
Subtopic:)

Q.5) The United Nations has named 2024 as the International Year of Camelids to emphasize their vital role
in the lives of global communities. In this context, consider the following statements regarding ‘Camelids’:
1. All camelids have humps on their back.
2. All camelids are carnivorous in nature.
3. All camelids have stomachs with three compartments.
4. Wild camelids are solitary creatures.
Which of the statements given above is/are correct?
a) 1 and 2
b) 1, 3 and 4
c) 3 only
d) 2 and 3

Ans) c
Exp) Option c is the correct answer.
Camelids are a family of mammals belonging to the Camelidae family. This family includes various species,
notably Bactrian camels, dromedaries, llamas, alpacas, vicuñas, and guanacos.
Statement 1 is incorrect: Camelids are large animals with long necks, slender legs, and in some cases, a
hump on their back. Humps on their back is not the essential characteristics of Camelids, for instance
llamas' camels belonging to camelids do not have humps.

[3]
SFG 2025 | Level 2 | Test - #2 - Solutions |

Statement 2 is incorrect: All camelids are strictly herbivores in nature. They feed primarily but not
exclusively on grass. They are generally found in arid or semi-arid areas with a remarkable ability to
conserve water.
Statement 3 is correct: Ruminants like sheep, goats, cattle, and deer have stomachs divided into four parts,
letting them chew food multiple times. Unlike them, camelids have stomachs with three compartments
with their own specific function.
Statement 4 is incorrect: Camelids are usually found in herds. Wild camelids generally live in groups.
These are polygynous, each containing a harem male and his females.
Source: Forum IAS Quarterly January 2024- March 2024 - Pg no 34
https://animaldiversity.org/accounts/Camelidae/#:~:text=gen%C2%ADer%C2%ADally%20live%20in-
,groups,-.%20These%20are%20polyg%C2%ADy%C2%ADnous
Subject:) Current Affairs
Topic:) Species in News
Subtopic:)

Q.6) Consider the following statements:

Statement-I: Full reserve banking provides greater stability against bank runs than fractional reserve
banking.
Statement-II: Unlike in Fractional Reserve Banking, in Full Reserve Banking the banks are not allowed to
lend out money that they receive from customers in the form of demand deposits.

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SFG 2025 | Level 2 | Test - #2 - Solutions |

Which one of the following is correct in respect of the above statements?

a) Both Statement I and Statement II are correct and Statement II explains Statement I.
b) Both Statement I and Statement II are correct, but Statement II does not explain Statement I.
c) Statement I is correct, but Statement II is incorrect.
d) Statement I is incorrect, but Statement II is correct.

Ans) a
Exp) option a is the correct answer.
Full Reserve Banking: Banks are required to keep 100% of customer deposits in reserve and cannot lend
out demand deposits.
Fractional Reserve Banking: Banks keep only a fraction of deposits as reserves and lend out the rest to
generate profits.
Bank Run: A bank run occurs when a large number of customers withdraw their deposits from a bank at
the same time due to fear that the bank might collapse.
Statement I is correct. Under full reserve banking, banks can effectively serve the customers if they want
to withdraw all of their demand deposits. Because in full reserve banking all the deposits are not given as
loans and kept as reserve. Hence in case of any bank run situation, full reserve banking can help to
effectively deal with the situation. But in Fractional Reserve Banking only a very small part of demand
deposits are kept as reserve. In case of any situation of bank run, the banks will find it difficult to satisfy the
withdrawal demands of the customers.
Statement II is correct.
Full-reserve banking, also known as 100% reserve banking, refers to a system of banking where banks are
not allowed to lend out money that they receive from customers in the form of demand deposits. Demand
deposits are deposits that customers can withdraw from the bank at any point in time without any prior
notice. So, under full-reserve banking, banks are mandated to hold all money that they receive as demand
deposits from customers in their vaults at all times. In this case, banks simply act as custodians to
depositors’ money and may charge a fee from depositors for the service of safekeeping that they offer to
the depositors. This is in contrast to today’s banking system in which banks pay interest to customers on
their demand deposits. In other words, under full-reserve banking, banks are expected to hold reserves
backing 100% of their liabilities in the form of demand deposits.
Statement II explains Statement I. Since Full Reserve Banking does not allow banks to lend from demand
deposits, it ensures that money deposited as demand deposits is always available for withdrawal, thereby
providing better protection against bank runs.
Source:https://www.thehindu.com/specials/text-and-context/full-reserve-banking-where-banks-act-
solely-as-custodians-of-customers-
money/article67121146.ece#:~:text=For%20representative%20purposes.,(Un)conditional%20lending ;
Indian Economy - Ramesh Singh 16th edition – Banking in India – Page 220
Subject:) Economy
Topic:) Banking
Subtopic:)

Q.7) Consider the following statements:

Non-Banking Financial Companies (NBFCs):
1. must be registered as special financial institutions under Banking Regulation Act, 1949.
2. cannot issue cheques drawn on themselves.
3. are not part of the Payment and Settlement System.
4. cannot accept demand deposits

[5]
SFG 2025 | Level 2 | Test - #2 - Solutions |

How many of the above given statements are correct?

a) Only one
b) Only two
c) Only three
d) All four

Ans) c
Exp) option c is the correct answer.
NBFCs are financial institutions that provide services similar to banks but do not have a banking license.
They are regulated by the Reserve Bank of India (RBI) and registered under the Companies Act, 2013.
Statement 1 is incorrect: A Non-Banking Financial Company (NBFC) is a company registered under the
Companies Act, 1956/2013 and engaged in the business of loans and other financial services. Further, some
NBFCs which are not regulated by other regulators, are required to be registered with the Reserve Bank of
India (RBI) under Section 45-IA of the RBI Act, 1934, to commence or continue business as a non-banking
financial institution.
Statements 2, 3 and 4 are correct. NBFCs are different from banks in several ways::
1. NBFCs cannot accept demand deposits; however they can accept time deposits
2. NBFCs do not form part of the payment and settlement system
3. NBFCs cannot issue cheques drawn on themselves;
Knowledge Base:
Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to
depositors of NBFCs, unlike in the case of banks.
Source: ForumIAS Red book - Indian Economy - Banking System in India - Difference Between Banks and
NBFC – Page – 176 ;
https://www.rbi.org.in/commonman/english/scripts/FAQs.aspx?Id=1167#:~:text=NBFCs%20do%20not
%20form%20part%20of%20the,and%20cannot%20issue%20cheques%20drawn%20on%20itself;&text=R
esiduary%20Non%2DBanking%20Company%20is%20a%20class%20of,not%20being%20Investment%2C
%20Asset%20Financing%2C%20Loan%20Company. ; Indian Economy - Ramesh Singh 16th edition –
Banking in India – Page 219
Subject:) Economy
Topic:) Banking
Subtopic:)

Q.8) In the context of primary capital markets, which of the following refers to the actual amount of money
for which the company issued shares to the shareholders and payment was made by the shareholders?
a) Authorised Share Capital
b) Paid-Up Share Capital
c) Subscribed Share Capital
d) Issued Share Capital

Ans) b
Exp) Option b is the correct answer.
Different terms define the various stages of a company issuing shares on the stock market and receiving
funds in lieu of it.
Option a is incorrect. Authorised Share Capital refers to the limit upto which shares can be issued by a
company. It is also known as Nominal Capital and is usually fixed in the Memorandum of Association and
Articles of Association of the Company.

[6]
SFG 2025 | Level 2 | Test - #2 - Solutions |

Option b is correct. Paid-Up Share Capital refers to the actual amount of money for which the company
issued shares to the shareholders and payment was made by the shareholders. A difference may arise
with the authorized share capital as all shares authorized might not be issued or issued shares might be
partly paid up.
Option c is incorrect. Subscribed Share Capital refers to the total value of shares that investors have
agreed to buy from a company. It indicates money actually paid by the shareholders and potential
funds. Thus, Paid-up capital is always less than or equal to subscribed capital.
Option d is incorrect. Issued Share Capital refers to the amount which is sought by the company to be
raised by issuing shares which cannot exceed the authorized capital of the company.
Source:) Page 265, Chapter: Securities Market in India, Indian Economy by Ramesh Singh, 16th edition.
Subject:) Economy
Topic:) Money Market/Capital Market
Subtopic:)

Q.9) With reference to banking sector in India, consider the following pairs:

Ratio Indicates

1. Credit Deposit Ratio Percentage of loans a bank has issued relative to its total
deposits.

2. Liquidity Coverage The percentage of current and saving deposits in the total
Ratio deposits of the bank.

3. Provisioning Coverage Percentage of funds that a bank sets aside for covering losses
Ratio due to bad debts.

How many of the above pairs are correctly matched?

a) Only one
b) Only two
c) All three
d) None

Ans) b
Exp) Option b is the correct answer.
Pair 1 is correctly matched: The Credit Deposit Ratio (CDR) measures the proportion of a bank's deposits
that have been used to extend loans. A high CDR indicates that a bank is actively lending, which can
stimulate economic activity. However, a very high CDR can also signal that a bank might be overextended
and vulnerable to liquidity risks. A low CDR suggests that a bank is holding a large portion of its deposits in
reserve or investing in other assets, rather than lending.
Pair 2 is incorrectly matched: The Liquidity Coverage Ratio (LCR) is a regulatory requirement that
mandates banks to hold a sufficient quantity of high-quality liquid assets (HQLA) to withstand short-
term liquidity shocks. HQLA includes assets that can be easily and quickly converted into cash, such as
government securities and central bank reserves.
Current Account Saving Account (CASA) ratio is a ratio that shows the share of current and savings account
deposits in the total deposits of a bank.
Pair 3 is correctly matched: The Provisioning Coverage Ratio (PCR) indicates the percentage of non-
performing assets (NPAs) that a bank has covered with provisions. The PCR reflects a bank's ability to

[7]
SFG 2025 | Level 2 | Test - #2 - Solutions |

absorb losses from bad loans. A higher PCR indicates that a bank is better prepared to handle potential loan
losses.
Source: https://www.business-standard.com/finance/news/banks-credit-deposit-ratio-on-
downward-trend-at-79-5-on-sept-20-124110701266_1.html
https://economictimes.indiatimes.com/wealth/invest/worried-about-safety-of-your-fixed-deposit-in-
a-small-finance-bank-heres-the-11-ways-to-check-how-safe-the-bank-
is/articleshow/99508273.cms?from=mdr
https://www.cnbctv18.com/finance/rbi-has-not-mandated-any-number-for-banks-cd-ratio-gov-
shaktikanta-das-clears-the-air-18838431.htm
Subject:) Economy
Topic:) Banking
Subtopic:)

Q.10) Consider the following pairs:

Geographical Indication (GI) tag Associated states
1. Majuli Mask Assam
2. Rupa Tarakasi (Silver Filigree) Odisha
3. Risa Textile Meghalaya
How many of the pairs given above are correctly matched?
a) Only one
b) Only two
c) All three
d) None

Ans) b
Exp) Option b is the correct answer.
Pair 1 is correctly matched: In March 2024, the Geographical Indications (GI) Registry of India awarded
the Majuli mask of Assam a GI tag to recognize the mask-making tradition's cultural heritage and historical
significance. The craft dates back to the 15th century and is made on bamboo frames, with unique clay.
Pair 2 is correctly matched: Cuttak Rupa Tarakasi (silver filigree) of Odisha was granted a Geographical
Indication (GI) tag on March 15, 2024. The Cuttack Rupa Tarakasi is known for its intricate craftsmanship,
unique designs, and good quality crochet craft. Filigree is ornamental work, especially of fine wire of gold,
silver, or copper applied chiefly to gold and silver surfaces.
Pair 3 is incorrectly matched: Risa Textile of Tripura was granted a Geographical Indication (GI) tag. Risa
is primarily used as a female upper garment, but can also be worn as headgear, a stole, or as a gift to express
respect. It's often worn during festivals and social gatherings.
Source: FORUMIAS Quarterly Magazine. Jan March 2024 Page 55
https://timesofindia.indiatimes.com/travel/travel-news/majuli-in-assam-gets-the-prestigious-gi-tag-
for-its-mask-making-and-manuscript-painting/articleshow/108204811.cms
https://www.deccanherald.com/india/tripura/tripuras-handwoven-cloth-risa-gets-gi-tag-cm-manik-
saha-announces-2920193
Subject:) Current Affairs
Topic:) Geographical Indication Tags
Subtopic:)

Q.11) In the context of finance, the term “beta” refers to:

a) the process of simultaneous buying and selling of an asset from different platforms

[8]
SFG 2025 | Level 2 | Test - #2 - Solutions |

b) an investment strategy of portfolio manager to balance risk versus reward

c) a type of systemic risk that arises where perfect hedging is not possible
d) a numeric value that measures the fluctuations of a stock to change in the overall stock market.

Ans) d
Exp) Option d is the correct answer.
Beta: A stock’s expected movement in relation to overall market movements is measured by a concept
called beta. A stock with a beta greater than 1 is considered to be more volatile than the broader market,
while the stock with a beta less than 1 is considered to be less volatile.
The Capital Asset Price Model (CAPM), a model that calculates a stock’s return, uses beta as its primary
factor. The beta calculation can be used to assess the stock’s volatility and systematic risk associated to it.
Source: UPSC CSE Pre 2023
Subject:) Economy
Topic:) Money Market/Capital Market
Subtopic:)

Q.12) Consider the following types of banks :

1. Foreign banks with less than 20 branches in India
2. Small finance banks
3. Urban cooperative banks
Priority Sector Lending (PSL) norms set by Reserve Bank of India apply to how many of the above types of
banks?
a) Only one
b) Only two
c) All three
d) None

Ans) c
Exp) Option c is the correct answer.
Priority Sector Lending (PSL) norms are a key regulatory requirement set by the Reserve Bank of India (RBI)
to ensure that certain sectors of the economy receive adequate credit.
Option 1 is correct: PSL norms also apply to foreign banks operating in India. Foreign banks with fewer
than 20 branches need to lend 40 percent of adjusted net bank credit (ANBC) to Priority Sectors; out of
which up to 32% can be in the form of lending to exports and not less than 8% can be to any other priority
sector.
Option 2 is correct: PSL norms are applicable to small finance banks and they are required to allocate 75%
of their adjusted net bank credit (ANBC) to the priority sector.
Option 3 is correct: PSL norms are applicable to urban cooperative banks , but with certain modifications
tailored to their operational model.
Source:) https://m.economictimes.com/markets/stocks/news/rbi-revises-priority-sector-lending-
guidelines/articleshow/77927451.cms
Subject:) Economy
Topic:) Monetary Policy
Subtopic:)

Q.13) Consider the following statements in the context of Additional Tier-1 (AT-1) bonds:
Statement I: Investors investing in these bonds generally receive a higher yield than investment in
traditional bonds.

[9]
SFG 2025 | Level 2 | Test - #2 - Solutions |

Statement II: They are perpetual bonds with no maturity date.

Which one of the following is correct in respect of the above statements?
a) Both Statement I and Statement II are correct and Statement II explains Statement I.
b) Both Statement I and Statement II are correct, but Statement II does not explain Statement I.
c) Statement I is correct, but Statement II is incorrect.
d) Statement I is incorrect, but Statement II is correct.

Ans) b
Exp) Option b is the correct answer.
Additional Tier-1 (AT-1) bonds are a type of perpetual debt instrument issued by banks to enhance their
capital base.
Statement I is correct: AT-1 bonds offer higher yields compared to traditional bonds due to their higher
risk profile. Since AT-1 bonds can be written off, converted into equity, or have their interest payments
skipped in times of financial distress, they carry more risk. To compensate for this, banks offer higher
interest rates (coupon rates) on AT-1 bonds.
Statement II is correct: AT-1 bonds are designed as perpetual bonds, meaning they do not have a fixed
maturity date like regular bonds. Unlike government or corporate bonds that mature after a specific period
(e.g., 5, 10, or 20 years), AT-1 bonds continue indefinitely unless the issuing bank chooses to call them back
(redeem them).
But Statement II is not the correct reason for Statement I as AT-1 bonds offer higher yields compared
to traditional bonds due to their higher risk profile
Source:) SBI junks plans to raise Rs 12k cr via AT-1 bonds - Market News | The Financial Express
https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2024/07/202407301562
266528.pdf (Page 3)
Understanding AT-1 Bonds- Meaning, Features and Working of AT-1 Bonds- ICICI Direct
Subject:) Economy
Topic:) Money Market/Capital Market
Subtopic:)

Q.14) Which of the following is/are benchmarks that banks in India can use for setting lending rates under
the External Benchmark-based Lending Rate (EBLR) system?
1. Reserve Bank of India policy Repo rate.
2. 3 months Treasury bill yield published by Financial Benchmarks India Private Ltd.
3. Yield on corporate bonds.
Select the correct answer using the code given below:
a) 1, 2, and 3
b) 1 and 2 only
c) 1 and 3 only
d) 1 only

Ans) b
Exp) Option b is the correct answer.
The External Benchmark-based Lending Rate (EBLR) system, introduced by the RBI in October 2019,
requires banks to link their floating-rate loans to an external benchmark to improve transparency and
transmission of monetary policy.
As per RBI guidelines, banks can use any of the following external benchmarks for setting lending rates:

[10]
SFG 2025 | Level 2 | Test - #2 - Solutions |

Option 1 is correct : The repo rate is the rate at which the RBI lends short-term funds to commercial
banks.Since it is a key monetary policy tool and is directly controlled by the RBI, it serves as a reliable
benchmark for lending rates.
Option 2 is correct: Treasury bills (T-bills) are short-term government securities issued by the RBI.
Government of India 3-Months and 6-Months Treasury Bill yields published by Financial Benchmarks
India Private Ltd (FBIL)
Since it is market-determined and reflects short-term interest rate movements, the RBI allows banks to
use it as a benchmark.
Option 3 is incorrect: Corporate bond yields are not a permissible external benchmark under the
framework. The yield of corporate bonds changes from company to company. There is no uniform yield
rate for all corporate bonds. Corporate bond yields are influenced by a multitude of factors, including:
Market sentiment, Credit risk of individual companies and Supply and demand dynamics in the corporate
bond market. The RBI has limited direct control over these factors. In contrast, the RBI directly controls
the repo rate and significantly influences Treasury Bill yields through its monetary policy operations.
Source:)https://www.thehindu.com/business/external-benchmark-based-lending-must-
rbi/article29334249.ece
https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11677&Mode=0
Subject:) Economy
Topic:) Monetary Policy
Subtopic:)

Ans) b
Exp) Option b is the correct answer.
India has three known meteorite impact craters, also called astroblemes, which is a Greek word that means
"star wound". They are Lonar crater in Maharashtra, Ramgarh crater in Rajasthan and Dhala crater in
Madhya Pradesh.
Option 1 is correct: Lonar Crater is in Maharashtra. This crater is about 1.2 kilometers wide and was
formed by a meteorite impact about 52,000 years ago. It's one of only four craters in the world to form in
basalt rock, and it has a lake in its center. The crater's low hills are covered with trees and are home to local
wildlife, including peafowl.
Option 2 is correct: Ramgarh Crater is in Rajasthan. This crater is about 3.5 kilometers in diameter and
was formed by a meteorite impact about 150 million years ago. A lake about one kilometer long and 250
meters wide eventually formed in the crater.
Option 3 is incorrect: Pandavula Gutta is an archaeological site in Telangana, renowned for its ancient rock
paintings. It's believed to date back to the Mesolithic era.
Option 4 is incorrect: Morodharo is a recently discovered Harappan-era fortified settlement located in the
Kutch district of Gujarat, India. It's situated near the famous Dholavira site.

[11]
SFG 2025 | Level 2 | Test - #2 - Solutions |

Source: FORUMIAS Quarterly Magazine. Jan March 2024 Page 56

Subject:) Current Affairs
Topic:) Sites in India
Subtopic:)

Q.16) As per the Reserve Bank of India (RBI), which of the following are among the criteria required for the
transition of Small Finance Banks (SFBs) into Universal Banks?
A Small Finance Bank must:
1. have a minimum audited net worth of ₹1,000 crore at the end of the previous quarter.
2. must have its shares listed on a recognized stock exchange.
3. must maintain a minimum capital adequacy ratio of 10%.
Select the answer using the code given below:
a) 1 and 2 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2, and 3

Ans) a
Exp) Option a is the correct answer.
Small Finance Banks (SFBs) are specialized financial institutions in India, established to enhance financial
inclusion by providing essential banking services to underserved and unbanked segments of the
population. They are registered as public limited companies under the Companies Act, 2013, and are
licensed under the Banking Regulation Act, 1949.
The eligibility criteria for an Small Finance Bank to transition into a Universal bank is as follows:
1. scheduled status with a satisfactory track record of performance for a minimum period of five years;
2. shares of the bank should have been listed on a recognised stock exchange; So it is one of the criteria,
Option 2 is correct.
3. having a minimum net worth of ₹1,000 crore as at the end of the previous quarter (audited); So it is
one of the criteria, Option 1 is correct.
4. meeting the prescribed CRAR requirements for SFBs; For Small Finance banks it is 15% and not 10%
thus, Option 3 is incorrect.
5. having a net profit in the last two financial years; and
6. having GNPA and NNPA of less than or equal to 3 percent and 1 percent respectively in the last two
financial years.
Knowledge Base:
Key Features of SFBs:
1. Deposit Acceptance: SFBs can accept all types of deposits, including savings, current, and fixed deposits,
similar to traditional commercial banks.
2. Credit Provision: They primarily focus on lending to sectors such as small business units, micro and
small industries, small and marginal farmers, and other unorganized sector entities. Notably, at least
50% of their loan portfolio must consist of loans and advances up to ₹25 lakh.
3. Financial Services: Beyond traditional banking, SFBs can engage in non-risk sharing financial activities,
including the distribution of mutual funds, insurance products, and pension products.
Source:) https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12676&Mode=0
https://bfsi.economictimes.indiatimes.com/news/banking/how-small-finance-banks-can-gain-from-
upgrade-to-a-universal-

[12]
SFG 2025 | Level 2 | Test - #2 - Solutions |

bank/109864608#:~:text=To%20qualify%20for%20this%20transition,the%20last%20two%20financial%2
0years.
Subject:) Economy
Topic:) Monetary Policy
Subtopic:)

Q.17) Consider the following statements about the Society for Worldwide Interbank Financial
Telecommunication (SWIFT):
1. It is a messaging system that facilitates safe and secure financial transactions but does not settle such
transactions.
2. It is owned by the 63 central banks representing countries from around the world.
Which of the statements given above is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2

Ans) a
Exp) Option a is the correct answer.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) was founded in 1973 and is
registered in Belgium.
Statement 1 is correct. SWIFT is a messaging system that facilitates safe and secure financial
transactions, but does not settle such transactions. Thus, it itself does not move any money. It has given
a 11-digit ID to each member financial institutions to help in the identification of the bank name, country,
city, branch etc.
Statement 2 is incorrect. SWIFT is registered as a cooperative and is owned and controlled by the
member financial institutions. Currently, it is used by more than 11,000 financial institutions in more than
200 countries.
Rather, the Bank for International Settlement (BIS) is owned by 63 central banks, representing countries
from around the world that together account for about 95% of world GDP.
Source:) Page 191, Chapter: Banking System in India, ForumIAS Red Book on Indian Economy.
https://www.swift.com/about-us/legal/compliance-0/swift-and-
sanctions#:~:text=Swift%20is%20overseen%20by%20the%20G%2D10%20central%20banks%20(Belgium,
the%20National%20Bank%20of%20Belgium.
https://www.bis.org/
Subject:) Economy
Topic:) Banking
Subtopic:)

Q.18) Which one of the following can increase the money multiplier in an economy?
a) Increased banking habits of the people
b) Increase in the interest rates by Central bank
c) Higher cash reserve ratio (CRR)
d) Increase in the yield of Government Bonds

Ans) a
Exp) Option a is the correct answer.

[13]
SFG 2025 | Level 2 | Test - #2 - Solutions |

In economics, the money multiplier is the ratio of the money supply to the monetary base. It explains how
an increase in the monetary base leads to a larger increase in the money supply. Increased banking habits
mean more deposits, allowing banks to lend more, thereby increasing the money multiplier. Banks
receive deposits from customers and keep a portion on reserve. The remaining funds are lent out to
borrowers. The borrowers deposit the money they receive back into banks. This process repeats, creating
more money.
Source:) Ramesh Singh (16th edition)
Ch: 11 - Banking in India (Pg: 231)
https://forumias.com/blog/question/the-money-multiplier-in-an-economy-increases-with-which-
one-of-the-following-2/
Subject:) Economy
Topic:) Banking
Subtopic:)

Q.19) With reference to the Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act, 2002, consider the following statements:
1. It is applicable only to scheduled commercial banks and does not cover cooperative banks.
2. The act provides the legal basis for the set up of Asset Reconstruction Companies.
3. A borrower has the right to appeal against actions taken under SARFAESI before the Debt Recovery
Tribunal (DRT) within 30 days.
Which of the statements given above are correct?
a) 1 and 3 only
b) 2 and 3 only
c) 1 and 2 only
d) 1, 2, and 3

Ans) b
Exp) Option b is the correct answer.
The SARFAESI Act, 2002, allows banks and Asset Reconstruction Companies (ARCs) to take control of a
borrower’s business management if they fail to repay secured loans. Banks and ARCs can appoint
professionals or take other steps to restore the financial health of the defaulting company.
Statement 1 is incorrect: Initially, the SARFAESI Act was earlier applicable only to scheduled commercial
banks, but after a 2013 Supreme Court ruling, it was extended to cooperative banks as well.
Statement 2 is correct: Asset Reconstruction Companies are registered under the RBI and regulated under
the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002
(SARFAESI Act, 2002).
The SARFAESI Act, 2002 (Section 3) has a provision of Registration of Asset reconstruction companies.
Statement 3 is correct: A borrower has the right to appeal against actions taken under SARFAESI before
the Debt Recovery Tribunal (DRT) within 30 days of receiving notice. If dissatisfied with the DRT’s decision,
the borrower can further appeal to the Debt Recovery Appellate Tribunal (DRAT).
Knowledge Base:
Additional Information:
Key Provisions of SARFAESI Act:
1. Allows banks and ARCs to recover bad loans without court intervention.
2. Permits change in management of defaulting companies to aid recovery.
3. Enables securitization of bad loans to reduce NPAs.
Exemptions Under SARFAESI:

[14]
SFG 2025 | Level 2 | Test - #2 - Solutions |

1. Agricultural land cannot be seized under the Act.

2. Loans below ₹1 lakh and unsecured loans are not covered.
Source:)
https://www.rbi.org.in/commonman/english/scripts/Notification.aspx?Id=877#:~:text=In%20view%20
of%20announcement%20in,the%20borrower%20and%20related%20matters.
https://www.scconline.com/blog/post/2020/05/05/sarfaesi-act-applicable-to-cooperative-banks-
constitution-bench/
https://www.indiacode.nic.in/bitstream/123456789/2006/1/A2002-54.pdf
Subject:) Economy
Topic:) Banking
Subtopic:)

Q.20) With reference to the International Court of Justice (ICJ), consider the following statements:
1. It is a principal organ of the United Nations.
2. Judges of the ICJ are not eligible for re-election after their term expires.
3. Judges of ICJ are not the representatives of their respective national governments.
Which of the statements given above are correct?
a) 1 and 2 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3

Ans) c
Exp) Option c is the correct answer.
South Africa recently appealed to the International Court of Justice (ICJ) for an urgent ruling, asserting that
Israel breached its obligations under the 1948 Genocide Convention.
Statement 1 is correct: The International Court of Justice (ICJ) is the principal organ of the United Nations
(UN). It was established in June 1945 and headquartered in Hague (Netherlands).
Statement 2 is incorrect: The ICJ is composed of 15 judges and elected for a term of nine years. In order
to ensure a measure of continuity, one third of the Court is elected every three years. Judges of ICJ are
eligible for re-election.
Statement 3 is correct: Judges of ICJ are not the representatives of national governments, unlike other
organs of international organizations. No member of the Court can be dismissed unless, in the unanimous
opinion of the other Members, he/she no longer fulfills the required conditions. Note that no ICJ member
judge has been dismissed till now.
Source: Forum IAS Quarterly January-March 2024- Pg no 15
Subject:) Current Affairs
Topic:) International Organization
Subtopic:)

Q.21) In India, the central bank’s function as the ‘lender of last resort’ usually refers to which of the
following?
1. Lending to trade and industry bodies when they fail to borrow from other sources.
2. Providing liquidity to the banks having a temporary crisis.
3. Lending to governments to finance budgetary deficits.
Select the correct answer using the code given below.
a) 1 and 2
b) 2 only

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SFG 2025 | Level 2 | Test - #2 - Solutions |

c) 2 and 3
d) 3 only

Ans) b
Exp) Option b is the correct answer.
A lender of last resort is an institution, usually a country’s central bank, that offers loans to banks or other
eligible institutions that are experiencing financial difficulty or are considered highly risky or near
collapse.
The lender of last resort functions to protect individuals who have deposited funds and to prevent
customers from withdrawing out of panic from banks with temporary limited liquidity. Commercial banks
usually try not to borrow from the lender of last resort because such action indicates that the bank is
experiencing a financial crisis.
Source: UPSC CSE Pre 2021
Subject:) Economy
Topic:) Monetary Policy
Subtopic:)

Q.22) In the context of Indian economy, consider the following:

1. Currency with the public.
2. Demand Deposits (DDs) with banks.
3. Time Deposits (TDs) with banks.
4. Certificates of Deposit issued by Banks.
5. Deposits of international agencies such as the International Monetary Fund with RBI.
How many of the above are included under the monetary aggregate of Broad Money (M3)?
a) Only two
b) Only three
c) Only four
d) All five

Ans) d
Exp) Option d is the correct answer.
Broad Money (M3) is a key monetary aggregate used to measure the total money supply in an economy. It
represents a broader definition of money that includes both highly liquid assets and less liquid time
deposits. The Reserve Bank of India (RBI) monitors M3 to assess liquidity conditions and formulate
monetary policy effectively.
M3 is defined as:
𝑀3 (Broad Money)= 𝑀2+Term (Time) Deposits (above one year) with Banks+ Call/Term Borrowings from
Non-depository Financial Corporations
Where:
M2 = M1 (Narrow Money) + Time Liabilities Portion of Savings Deposits + Certificates of Deposit issued
by Banks + Short-term Term Deposits (up to 1 year)
M1 (Narrow Money) = Currency with the Public + Demand Deposits with Banks + ‘Other’ Deposits with
RBI
Other deposits with RBI comprise mainly: (i) deposits of quasi-government and other financial institutions
including primary dealers, (ii) balances in the accounts of foreign Central banks and Governments, (iii)
accounts of international agencies such as the International Monetary Fund, etc.
Therefore, all the components are included in Broad Money (M3).

[16]
SFG 2025 | Level 2 | Test - #2 - Solutions |

Source:) Ramesh Singh (16th edition)

Ch: 11 - Banking in India (Pg: 231)
https://mospi.gov.in/102-monetary-and-financial-statistics
Subject:) Economy
Topic:) Monetary Policy
Subtopic:)

Q.23) With reference to Reserve Bank – Integrated Ombudsman Scheme (RB-IOS), 2021, consider the
following statements:
1. It aims to provide cost-free redressal of customer complaints against RBI regulated entities.
2. The Credit Information Companies come under the ambit of the scheme.
Which of the statements given above is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2

Ans) c
Exp) Option c is the correct answer.
The RB-IOS, 2021 integrates three previous ombudsman schemes into a single, unified framework for
easier grievance redressal.The scheme merges multiple ombudsman schemes (Banking Ombudsman,
NBFC Ombudsman, and Digital Transactions Ombudsman) into one unified framework. Customers can
file complaints through a single point of contact.
Statement 1 is correct: Reserve Bank – Integrated Ombudsman Scheme (RB-IOS), 2021 aims to provide a
cost-free and expeditious redressal mechanism for customer complaints involving deficiencies in services
rendered by entities regulated by the Reserve Bank of India (RBI).
Statement 2 is correct:The RB-IOS 2021 is not only limited to the banks . The scheme applies to:
1. Banks: All commercial banks, including Public Sector Banks, Private Sector Banks, Foreign Banks, Local
Area Banks, Small Finance Banks, Payment Banks, Regional Rural Banks, Scheduled Primary (Urban) Co-
operative Banks and Non-scheduled Primary (Urban) Co-operative Banks with deposit size of ₹50 Crore
and above.
2. NBFCs registered with RBI with assets of ₹100 crore and above.
3. Credit Information Companies (CICs).
Source:) https://www.rbi.org.in/commonman/English/scripts/FAQs.aspx?Id=3407
Subject:) Economy
Topic:) Monetary Policy
Subtopic:)

Q.24) With reference to the Non-Resident External (NRE) Account, consider the following statements:
1. It is a facility for Non-Resident Indians to deposit their earnings from abroad.
2. Both deposits into and withdrawals from the account can only be done in foreign currency.
3. Under NRE Accounts, the Non-Resident Indians can only open Term deposit accounts.
Which of the statements given above is/are correct?
a) 1 only
b) 1 and 2 only
c) 2 and 3 only
d) 1, 2 and 3

[17]
SFG 2025 | Level 2 | Test - #2 - Solutions |

Ans) a
Exp) Option a is the correct answer.
An NRE (Non-Resident External) account is a banking facility provided in India for Non-Resident Indians
(NRIs) to deposit their earnings from abroad. On the other hand, an NRO (Non-Resident Ordinary) account
is also a banking option for NRIs in India, designed specifically to manage their income generated within
India, such as rental income, dividends, pensions, interest, and other forms of revenue.
Statement 1 is correct: A Non-Resident External (NRE) Account is a banking facility designed for Non-
Resident Indians (NRIs) to safely deposit their foreign earnings in India.
Non resident Ordinary (NRO) account of an NRI is to manage the income earned in India.
Statement 2 is incorrect: NRE accounts allow deposits in any permitted foreign currency i.e. any freely
convertible currency, which are then converted into Indian Rupees (INR) upon credit. Withdrawal can be
in only Indian currency. Thus Deposit can be done in permitted foreign currency but withdrawal in
Indian currency.
Statement 3 is incorrect: Under NRE (Non-Resident External) accounts, NRIs can open Savings, Current,
Recurring, Fixed Deposit accounts. So it is not limited to Term deposit accounts only.
Source:) Ramesh Singh (16th edition) Ch: 11 - Banking in India (Pg: 234)
https://www.rbi.org.in/commonman/english/scripts/FAQs.aspx?Id=3
Subject:) Economy
Topic:) Banking
Subtopic:)

Q.25) Recently, the Reserve Bank of India released a report on the finances of Panchayati Raj Institutions
for 2022-23. In this context, consider the following source of revenues of panchayats:
1. Non-tax revenue.
2. Tax revenue.
3. Grants from the Union Government.
4. Grants from the State Governments.
Which of the following is the correct decreasing order in terms of their share to the total average revenue
of PRIs?
a) 4-3-1-2
b) 4-3-2-1
c) 3-4-1-2
d) 3-4-2-1

Ans) c
Exp) Option c is the correct answer.
Recently, the Reserve Bank of India released a report on the finances of Panchayati Raj Institutions for
2022-23. According to the report, the average revenue per Panchayats (including taxes, non-taxes, and
grants) stood at 21.23 lakh in 2022-23.
Option c is correct: The decreasing order of given options in terms of their share to the total average
revenue of Panchayats are as follows: Grants from the Union Government > Grants from the State
Governments > non-tax revenue > Tax revenue.
Option 1: The Panchayats’ non-tax revenue, primarily from Panchayati Raj programmes and interest
earnings, constituted 3.3% of the total revenue receipts.
Option 2: The Panchayats’ tax revenues (Local taxes and fees) accounted for merely 1.1% of their total
revenue.

[18]
SFG 2025 | Level 2 | Test - #2 - Solutions |

Options 3 and 4 : The Panchayats’ get 80% of the total revenue from the Central government grants and
15% from State government grants.
Source: ForumIAS Quarterly January- March 2024 - Pg no 22
Subject:) Current Affairs
Topic:) Local Government
Subtopic:)

Q.26) With reference to Urban Cooperative Banks (UCBs) in India, consider the following statements:
1. They are exempted from obtaining licenses from RBI for commencing banking operations.
2. They can issue equity shares and preference shares.
3. They are not allowed to lend money for agricultural purposes.
Which of the statements given above is/are correct?
a) 1 and 3
b) 2 only
c) 2 and 3
d) 1 and 2

Ans) b
Exp) Option b is the correct answer.
The Urban Cooperative Banks (UCBs) are a type of cooperative bank that primarily serve urban and semi-
urban areas. They cater to the financial needs of small businesses, low- and middle-income groups, and
self-employed individuals by providing deposit and credit facilities. The first urban cooperative credit
society in India was registered in Canjeevaram (Kanchipuram), Tamil Nadu, in October 1904, following the
enactment of the Cooperative Credit Societies Act, 1904.
Statement 1 is incorrect: UCBs are registered under the Co-operative Societies Act of the respective state
governments or under the Multi-State Co-operative Societies Act, 2002, in case they operate in more
than one state.
For commencing banking business, a primary (urban) cooperative bank, as in the case of commercial
bank, is required to obtain a licence from the Reserve Bank of India, under the provisions of Section 22
of the Banking Regulation Act, 1949
Statement 2 is correct: An urban cooperative bank can, with prior approval of the RBI, issue equity
shares, preference shares, or special shares to its members or to any other person residing within its area
of operation, by way of public issue or private placements.
Statement 3 is incorrect: The Urban Co-operative Banks (UCBs), till 1996, were allowed to lend money only
for non-agricultural purposes. This distinction does not hold today. Effective from November 1996, urban
cooperative banks have been given freedom to finance direct agricultural operations.
Source:) https://rbi.org.in/history/Brief_Fun_UrbanCoopBanks.html
http://pdvpmtasgaon.edu.in/uploads/dptsncommerce/ChapterNo-II.pdf
https://www.rbi.org.in/commonman/english/scripts/Notification.aspx?Id=882
https://www.rbi.org.in/commonman/English/scripts/urbanbankdept.aspx#:~:text=Reserve%20Bank%
20of%20India&text=The%20Urban%20Banks%20Department%20of,Urban%20Cooperative%20Banks%2
0(UCBs).
Subject:) Economy
Topic:) Banking
Subtopic:)

[19]
SFG 2025 | Level 2 | Test - #2 - Solutions |

Q.27) With reference to Pradhan Mantri Mudra Yojana, consider the following statements:
1. It aims to facilitate collateral free loans of up to 1 crore to small and micro businesses.
2. Under the scheme, commercial banks are mandated to provide a minimum 25% loans to the agriculture
sector.
3. Loans under the yojana can be issued by both Commercial Banks and Non-Banking Financial Companies
(NBFCs).
Which of the statements given above is/are correct?
a) 1 and 2 only
b) 2 only
c) 1 and 3 only
d) 3 only

Ans) d
Exp) Option d is the correct answer.
Launched in 2015, the Pradhan Mantri MUDRA Yojana (PMMY) is a flagship scheme of the Government of
India aimed at providing affordable credit to micro and small enterprises. It has played a crucial role in
empowering non-corporate, non-farm small and micro businesses by offering loans.
Statement 1 is incorrect: The Pradhan Mantri Mudra Yojana (PMMY) facilitates collateral-free loans to
small and micro businesses up to maximum of 20lakh (not 1 crore) under four categories based on their
funding needs and growth stage. These categories include Shishu (loans up to ₹50,000), Kishore (loans
above ₹50,000 and up to ₹5 lakhs), Tarun (loans above ₹5 lakhs and up to ₹10 lakhs), and Tarun Plus (loans
above ₹10 lakhs and up to ₹20 lakhs).
Statement 2 is incorrect: The scheme primarily supports micro and small enterprises in non-
agricultural sectors, including manufacturing, trading, and services. However, allied agricultural
activities (such as dairy, poultry, and beekeeping) are eligible to obtain the loan under the scheme. There
is no such specific mandate regarding the agriculture sector in the Mudra scheme.
Statement 3 is correct: Loans under the Yojana are available through all branches of Commercial Banks,
Small Finance Banks (SFBs), and Regional Rural Banks (RRBs) across the country under the scheme.
Additionally, Non-Banking Financial Companies (NBFCs) and Microfinance Institutions (MFIs) that
specialize in financing micro-enterprises engaged in small business activities also provide Mudra loans.
Source: Ramesh Singh (16th edition)- Ch: 11 - Banking in India (Pg: 236)
https://www.myscheme.gov.in/schemes/pmmy
https://www.mudra.org.in/FAQ
Subject:) Economy
Topic:) Banking
Subtopic:)

Q.28) Reserve Bank of India (RBI) uses various Monetary Policy tools to control the inflation in the economy.
In this context, consider the following information:
Monetary Policy Description RBI’s approach to
instrument control inflation
1. Repo Rate Interest rate at which RBI lends money to commercial Increase
banks by keeping collaterals
2. Reverse Repo Rate Interest rate at which banks deposit their funds with Decrease
the RBI with collateral requirement.
3. Bank Rate Interest rate at which RBI lends money to commercial Increase
banks without keeping collaterals

[20]
SFG 2025 | Level 2 | Test - #2 - Solutions |

4. Standing Deposit Interest rate at which banks deposit their funds with Decrease
Facility the RBI without any collateral requirement.
In how many of the above rows is the given information correctly matched?
a) Only one
b) Only two
c) Only three
d) All four

Ans) b
Exp) Option b is the correct answer.
Monetary policy is a macroeconomic strategy implemented by the central bank to regulate the money
supply, inflation, and interest rates in the economy. In India, the Reserve Bank of India (RBI) is entrusted
with this responsibility under the provisions of the Reserve Bank of India Act, 1934.
Row 1 is correct: Repo rate is the interest rate at which commercial banks borrow funds from the RBI in
case of a shortage of liquidity, using government securities as collateral under a repurchase agreement.
This mechanism is primarily used by banks for overnight or short-term borrowing.
To control inflation, the RBI increases the repo rate, making borrowing costlier and reducing the money
supply in the economy.
Row 2 is incorrect: The reverse repo rate is a monetary policy tool that allows banks to deposit their excess
funds with the RBI in exchange for securities, with an agreement to repurchase them at a predetermined
price on a future date.
When the RBI raises the reverse repo rate, banks earn a higher interest rate on these deposits,
encouraging them to park more funds with the RBI. This reduces the money supply in the market, as banks
have fewer funds available for lending. Thus to control inflation RBI will increase the reverse repo rate.
Row 3 is correct: The Bank Rate is the standard interest rate at which the Reserve Bank of India (RBI)
provides long-term loans to commercial banks and financial institutions. Unlike the Repo Rate, it does not
involve a repurchase agreement, collateral, or the sale of securities. Since the Bank Rate influences long-
term borrowing costs, the RBI increases it to curb inflation, making credit more expensive and reducing
excess liquidity in the economy.
Row 4 is incorrect: In 2022, the Monetary Policy Committee (MPC) introduced the Standing Deposit
Facility (SDF), allowing banks to park their excess funds with the RBI without the need for collateral, such
as government securities.. By increasing the SDF rate, the RBI absorbs excess liquidity from the banking
system, making it an effective tool to manage inflationary pressures.
Source: Forum IAS - Economy Red Book- Ch: 4 - Monetary Policy
Subject:) Economy
Topic:) Monetary Policy
Subtopic:)

Q.29) With reference to Operation Twist, consider the following statements:

Statement I: Through Operation Twist, RBI aims to reduce interest rates on long-term government bonds.
Statement II: Operation Twist of RBI involves the simultaneous purchase of short-term government bonds
and the sale of long-term government bonds.
Which one of the following is correct regarding the above statements?
a) Both Statement I and Statement II are correct, and Statement II is the correct explanation for
Statement I.
b) Both Statement I and Statement II are correct, but Statement II is not the correct explanation for
Statement I.

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SFG 2025 | Level 2 | Test - #2 - Solutions |

c) Statement I is correct, but Statement II is incorrect.

d) Statement I is incorrect, but Statement II is correct.

Ans) c
Exp) Option c is the correct answer.
Operation Twist is a monetary policy strategy implemented by the Reserve Bank of India for the first time
in 2020 under Open Market Operations (OMO). This approach helps lower bond yields without impacting
the overall money supply.
Statement I is correct: The main goal of Operation Twist is to reduce long-term borrowing costs, fostering
investment and economic growth. By using the proceeds from short-term bond sales to purchase long-
term government securities, the central bank helps lower interest rates on long-term bonds.
Statement II is incorrect: It involves the simultaneous purchase of long-term government bonds to
reduce long-term interest rates and the sale of short-term bonds to maintain liquidity and control short-
term rates.
Thus, simultaneous purchase and sale of bonds under Operation Twist bring down long-term borrowing
costs.
Source: Forum IAS - Economy Red Book- Ch: 4 - Monetary Policy
https://www.thehindu.com/business/Industry/reaction-to-operation-twist-as-expectedpersistently-
high-inflation-impedes-
growth/article30506489.ece#:~:text=The%20simultaneous%20buy%2Dsell%20of%20government%20bo
nds%2C%20known%20as%20Operation,not%20on%20the%20longer%20end.
Subject:) Economy
Topic:) Monetary Policy
Subtopic:)

Q.30) With reference to the recently added wetlands from India to the list of Ramsar sites, consider the
following pairs:

Wetlands Associated states

1. Karaivetti Bird Sanctuary Odisha

2. Magadi Kere Conservation Reserve Karnataka

3. Aghanashini Estuary Kerala

How many of the above given pairs are correctly matched?

a) Only one
b) Only two
c) All three
d) None

Ans) a
Exp) Option a is the correct answer.
India has increased its tally of Ramsar sites (Wetlands of International Importance) to 80 from existing 75
by designating five more wetlands as Ramsar sites.
Pair 1 is incorrect: Karaivetti Bird Sanctuary is located in the state of Tamil Nadu (not Odisha) . Recently,
two wetlands in Tamil Nadu such as Karaivetti Bird Sanctuary in Ariyalur district of Tamil Nadu and
Longwood Shola Reserve Forest in the Nilgiris district of Tamil Nadu were added to the list of Ramsar sites.

[22]
SFG 2025 | Level 2 | Test - #2 - Solutions |

Pair 2 is correct: Magadi Kere Conservation Reserve is in Karnataka and was recently added to the list
of Ramsar sites. The bar-headed goose is one of the birds which migrate to this wetland.
Pair 3 is incorrect: Aghanashini Estuary is located in Karnataka close to Gokarna and has been declared
as Ramsar sites. Aghanashini Estuary is formed at the confluence of Aghanashini River with the Arabian
sea.
Source: Forum IAS Quarterly January-March 2024 - Pg no 36 & 37
Subject:) Current Affairs
Topic:) Wetlands
Subtopic:)

Q.31) For anything to be recognised as money, it needs to have which of the following characteristics?
1. Act as an intermediate in the exchange process
2. Standard unit for quoting prices
3. Must be easily divisible
4. Have higher value in alternative uses
Select the correct answer using the codes given below.
a) 1, 2 and 4
b) 2 and 3 only
c) 1, 2 and 3
d) 1, 3 and 4

Ans) c
Exp) Option c is the correct answer.
Money can be defined as anything that is generally accepted by the people of a society or territory for the
payment of goods and services bought or for the payment of debts.
Some of the most common functions of money include the following:
● Money is a medium of exchange. Money is a measuring tool. A standard for deferred payment.
● Money must be able to be easily divided into smaller units or denominations in order for one to be
able to carry out even the smallest of transactions.
● Money should have a standardized unit for quoting prices.
● Money should act as an intermediate in the exchange process.
Source: UPSC CAPF 2021
Subject:) Economy
Topic:) Monetary Policy
Subtopic:)

Q.32) Consider the following pairs:

Terms Description
1. Kerb Trading Trading that takes place outside the purview of
exchanges after official trading hours.
2. Share Warrants Investment strategy wherein money is
borrowed in a currency with low interest rates
and reinvests the proceeds in higher-yielding
assets elsewhere.
3. Carry Trade Entities which give buyers the right to buy
shares of a company at a specific price on a
future date.

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SFG 2025 | Level 2 | Test - #2 - Solutions |

How many of the pairs given above are correctly matched?

a) Only one
b) Only two
c) All three
d) None

Ans) a
Exp) Option a is the correct answer.
Pair 1 is correct. Kerb trading is trading that takes place outside the purview of exchanges after official
trading hours. They take place after the normal trading hours. It includes premarket trading and after-
hours sessions.
Pair 2 is incorrect. Share Warrants are issued by public limited companies to raise funds. They give
buyers the right to buy shares at a specific price on a future date. In India, buyers have to give 25% of the
price at the time of buying a share warrant.
Pair 3 is incorrect. Carry trades refer to operations wherein an investor borrows in a currency with low
interest rates and reinvests the proceeds in higher-yielding assets elsewhere. The goal is to profit from
the difference in interest rates while hoping for favourable exchange rate movements.
Source:) Page 263-265, Chapter: Securities Market in India, Indian Economy by Ramesh Singh, 16th edition.
https://www.weforum.org/stories/2024/08/explainer-carry-trades-and-how-they-impact-global-
markets/
https://www.business-standard.com/article/markets/kerb-deals-to-the-fore-again-
103012801069_1.html
Subject:) Economy
Topic:) Money Market/Capital Market
Subtopic:)

Q.33) With reference to the Reserve Bank of India (RBI), consider the following functions:
1. Issuing commemorative coins.
2. Collection and compilation of data relating to foreign exchange reserves
3. Regulating all the Merchant Banks in India.
4. Operating the NEFT (National Electronic Funds Transfer) system.
How many of the above are functions of the Reserve Bank of India (RBI)?
a) Only one
b) Only two
c) Only three
d) All four

Ans) b
Exp) option b is the correct answer.
The Reserve Bank of India (RBI) is the central bank of India, responsible for formulating monetary policy,
managing financial stability, and ensuring smooth banking operations.
Option 1 is incorrect. In India, the RBI issues currency notes of ₹2 and above under the RBI Act, 1934. The
Government of India is the issuing authority for coins, including commemorative coins, and the Reserve
Bank of India (RBI) puts them into circulation.
Option 2 is correct. The Reserve Bank of India , RBI has the primary responsibility of collection,
compilation and dissemination of data relating to foreign exchange reserves. The data are based on actual
balances as per RBI record.

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SFG 2025 | Level 2 | Test - #2 - Solutions |

Option 3 is incorrect. Merchant banks are regulated by the Securities and Exchange Board of India
(SEBI). SEBI is the primary regulator of the securities market in India, which includes merchant banking
activities.
Option 4 is correct. National Electronic Funds Transfer (NEFT) is a nation-wide centralised payment
system owned and operated by the Reserve Bank of India (RBI). It is an electronic method of transferring
money online. It enables transferring funds from the account maintained with any bank to any other bank
branch.
Source: ForumIAS Red book - Indian Economy - Banking System in India - Functions of RBI – Page – 179 ;
https://www.rbi.org.in/commonman/english/Scripts/Organisation.aspx#:~:text=Regulator%20and%2
0supervisor%20of%20the,banking%20services%20to%20the%20public. Indian Economy - Ramesh Singh
16th edition – Banking in India – Page 219 ;
https://www.rbi.org.in/commonman/english/scripts/FAQs.aspx?Id=3158#:~:text=The%20Government
%20of%20India%20is,per%20the%20Coinage%20Act%2C%202011.
https://mospi.gov.in/sites/default/files/Statistical_year_book_india_chapters/Exchange.pdf
Subject:) Economy
Topic:) Monetary Policy
Subtopic:)

Q.34) Consider the following financial instruments:

1. Options
2. Swaps
3. Commercial Paper
4. Futures
5. Forwards
How many of the above are examples of derivatives?
a) Only two
b) Only three
c) Only four
d) All five

Ans) c
Exp) Option c is the correct answer.
Derivatives are financial instruments that derive their value from an underlying asset. It is a contract
between two parties and it derives its value from an underlying asset.
Option 1 is correct. Options are derivatives which give the holder the right to buy/sell underlying assets
at a predetermined price within or at the end of a specified period.
Option 2 is correct. Swap are derivatives in which an agreement is concluded between two parties with
the goal to exchange a sequence of cash flows over a certain duration.
Option 3 is incorrect. Commercial papers are not considered derivatives. They are a type of unsecured,
short-term debt instrument issued by corporations, essentially a promissory note, making them a basic
fixed income security, not a derivative product which derives its value from an underlying asset.
Option 4 is correct. Futures are derivatives, a legally binding agreement to buy or sell a particular
commodity asset on a future date at a predetermined price.
Option 5 is correct. Forwards are over the counter derivatives that enable the buying or selling of an
underlying security on a future date, at an agreed price.
Source:) Page 80, Chapter: Financial Market, ForumIAS Red Book on Indian Economy.
https://m.economictimes.com/definition/derivatives#:~:text=Definition%3A%20A%20derivative%20is
%20a,%2C%20options%2C%20forwards%20and%20swaps.

[25]
SFG 2025 | Level 2 | Test - #2 - Solutions |

https://www.rbi.org.in/commonman/english/scripts/Notification.aspx?Id=798
https://economictimes.indiatimes.com/wealth/invest/what-are-forward-
contracts/articleshow/63948764.cms?from=mdr
Subject:) Economy
Topic:) Money Market/Capital Market
Subtopic:)

Q.35) Which of the following statements correctly explains the term ‘Juice Jacking’, recently seen in the
news?
a) It is a type of cyberattack that uses email to entice a victim to share his sensitive information.
b) It is a form of cyberattack where hackers flood servers or networks with fake traffic to exhaust
resources and bandwidth.
c) It is a form of cyberattack where hackers manipulate public USB charging ports to steal data from
connected devices.
d) It is a type of cyberattack that prevents or limits users from accessing their system.

Ans) c
Exp) Option c is the correct answer.
Option c is correct. Juice Jacking is a form of cyberattack where hackers manipulate public USB charging
ports to steal data from connected devices by infecting them with malware or altering hardware. Hackers
utilize this attack to steal users’ passwords, credit card details, addresses, and other sensitive data stored
on the targeted device. This form of attack has become increasingly concerning, with reported incidents
occurring in various public spaces including airports, hotels, and shopping centers. RBI has stressed the
need to safeguard personal and financial data when using mobile devices.
Option a is incorrect. Phishing is a type of cyberattack that uses email, SMS, phone, social media, and
social engineering techniques to entice a victim to share sensitive information — such as passwords or
account numbers — or to download a malicious file that will install viruses on their computer or phone.
Option b is incorrect. A denial-of-service attack floods systems, servers, or networks with traffic to
exhaust resources and bandwidth. As a result, the system is unable to fulfill legitimate requests. Attackers
can also use multiple compromised devices to launch this attack. This is known as a distributed-denial-of-
service (DDoS) attack.
Option d is incorrect. Ransomware is a type of malware that prevents or limits users from accessing
their system, either by locking the system's screen or by locking the users' files until a ransom is paid.
Source: ForumIAS Quarterly Magazine January to March Page 49
https://www.thehindubusinessline.com/info-tech/juice-jacking-rbi-issues-warning-against-charging-
mobile-phones-using-public-ports/article67895091.ece
Subject:) Current Affairs
Topic:) Juice Jacking
Subtopic:)

Q.36) With reference to the Corporate Bonds in India, consider the following statements:
1. When a person buys a Corporate Bond, he gets a partial ownership in the issuing company.
2. As the market interest rate increases, generally the yield on corporate bonds also increases.
3. A company incorporated outside India cannot issue corporate bonds in India.
Which of the statements given above are correct?
a) 1 and 2 only
b) 1 and 3 only
c) 2 and 3 only

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SFG 2025 | Level 2 | Test - #2 - Solutions |

d) 1, 2 and 3

Ans) c
Exp) Option c is the correct answer.
Corporate Bonds are debt instruments issued by corporate entities to raise funds from the security market.
Corporate bonds are debt securities issued by private and public corporations.
When one buys a corporate bond, one lends money to the "issuer," i.e. the company that issued the bond.
Bonds are considered fixed-income securities due to the predetermined and fixed payment structure they
offer to investors. The holder of a corporate bond receives interest from the corporation periodically for a
fixed period of time. He gets back the principal along with the interest due at the end of the maturity period.
If your bonds are listed, you can also sell it in the secondary market before its maturity.
Statement 1 is incorrect. A corporate bond does not give an ownership interest in the issuing company,
unlike when one purchases the company's equity stock. A holder of a corporate bond becomes a lender to
the issuing company. He also does not enjoy any voting rights.
Statement 2 is correct. Bond price is the price at which investors buy and sell bonds in the secondary
market. Bond Price has an inverse relationship to market interest rates. When interest rates rise, bond
prices usually fall, and vice-versa.
The yield represents the return on investment for a bond. Bond prices move in the opposite direction to
the Bond yields. If a bond's price increases, it is now more expensive for a potential new investor to buy.
The bond's yield will then fall because the return an investor expects from purchasing this bond is now
lower.
Thus, when interest rates rise, the bonds offer higher yields because their price is low. Conversely, falling
interest rates decreases the bonds yields.
Statement 3 is correct. In India, both public and private companies can issue corporate bonds. A company
incorporated in India, but part of a multinational group, can also issue corporate bonds. However, a
company incorporated outside India cannot issue corporate bonds in India. A statutory corporation like
LIC can also issue corporate bonds.
Knowledge Base:
A bond holder gets preference over the shareholders of the company in getting back face value of his
investment. Corporate bonds are generally less risky than equity shares.
Source:)
Indian Economy by Ramesh Singh (16th edition)
Chapter 13- Security Market in India, Page: 271
https://www.nism.ac.in/2023/11/understanding-bonds-and-bond-market/
https://investor.sebi.gov.in/pdf/reference-material/corporatebonds.pdf
Subject:) Economy
Topic:) Money Market/Capital Market
Subtopic:)

Q.37) In context to the digital payment infrastructure in India, consider the following statements:
1. The Unified Payments Interface (UPI) is built over the Immediate Payment Service (IMPS) infrastructure.
2. ‘UPI Lite X’ allows for offline payments without internet connectivity.
3. The ‘UPI 123 PAY’ which is an instant payment system for feature phones, allows a per day transaction
limit of Rs.5,000.
Which of the statements given above are correct?
a) 1 and 2 only
b) 1 and 3 only
c) 2 and 3 only

[27]
SFG 2025 | Level 2 | Test - #2 - Solutions |

d) 1, 2 and 3

Ans) a
Exp) Option a is the correct answer.
Unified Payments Interface (UPI) is an instant payment system developed by the National Payments
Corporation of India (NPCI).
Statement 1 is correct. UPI is built over the Immediate Payment Service (IMPS) infrastructure and allows
to instantly transfer money between any two parties' bank accounts. IMPS offers an instant, 24*7 interbank
electronic fund transfer.
Statement 2 is correct. UPI Lite allows users to make low-value transactions without using a UPI PIN. It
permits only small-value payments of up to ₹1000 per transaction and has a daily limit of ₹4,000. UPI Lite
is an "on-device wallet".
UPI LITE X allows offline payments without internet connectivity. Users can make real-time payments
without the Internet because it is an "on-device wallet.” UPI LITE & LITE X wallet are the same, except
LITE X adds offline payment functionality to UPI LITE.
Statement 3 is incorrect. UPI 123PAY is an instant payment system for feature phone users who can use
Unified Payments Interface (UPI) payment service in a safe and secure manner.
Per transaction limit of UPI payment on UPI 123PAY from feature phone: per transaction limit is Rs 5000
Per day transactions limit of UPI payment on UPI 123PAY from feature phone: per day transactions limit
is Rs 1,00,000.
Source:)
https://economictimes.indiatimes.com/wealth/save/upi-upi-lite-upi-123pay-upi-lite-x-what-are-the-
transaction-limits-for-these-upi-payments/what-is-upi/slideshow/114075158.cms
https://www.npci.org.in/what-we-do/upi-lite/upi-lite-x/faqs
https://www.bhimupi.org.in/PDF/bhim/ipo_upi.pdf
Subject:) Economy
Topic:) Monetary Policy
Subtopic:)

Q.38) With reference to the ‘Chit Funds’ in India, consider the following statements:
1. It is a type of pooled fund where members make periodical subscriptions to the fund.
2. Unlike a Nidhi Company, a Chit Fund company can distribute funds both to its members as well as
outsiders.
3. Similar to Nidhi companies, Chit fund companies are regulated by the Ministry of Corporate Affairs,
Government of India.
Which of the statements given above is/are correct?
a) 1 and 2
b) 1 only
c) 2 and 3
d) 3 only

Ans) b
Exp) Option b is the correct answer.
Chit Fund is a pooled fund where a group of individuals invest a certain amount through periodic
installments over a specified period of time. The chit fund provides access to savings and borrowings for
people with limited access to banking facilities.
Statement 1 is correct. Chit funds have regular members who make periodical subscriptions to the fund.
Chit Funds activity involves contributions by members in installments. The periodic collection is given

[28]
SFG 2025 | Level 2 | Test - #2 - Solutions |

to some members of the chit funds selected on the basis of previously agreed criterion. The beneficiary is
selected usually on the basis of bids or by draw of lots or by auction.
Statement 2 is incorrect. Both Nidhi Company and Chit fund can distribute funds only to its members
and not to outsiders. Nidhi Company acts as a mutual benefit society, accepting deposits and lending
money to its members. There is no such compulsion that every member must get the money in turns as it
is in chit funds. In Chit Fund each member of the chit group is entitled to the chit amount by turns, and all
members are liable to continue their subscriptions until the end of the chit cycle.
Statement 3 is incorrect. Chit Fund Companies are regulated by the respective State Governments and
Nidhi Companies are regulated by the Ministry of Corporate Affairs, Government of India.
Chit Funds are registered by State Governments under the Chit Funds Act, 1982 – an Act administered by
the Ministry of Finance but with responsibilities of implementation resting with the States.
Source:)
https://www.rbi.org.in/commonperson/English/Scripts/FAQs.aspx?Id=1167
https://pib.gov.in/newsite/PrintRelease.aspx?relid=115736
Forum IAS - Economy Red Book
Chapter: 6 - Financial Market
Subject:) Economy
Topic:) Money Market/Capital Market
Subtopic:)

Q.39) In context to financial markets in India, consider the following activities:

1. Impact Investing
2. Front Running
3. Circular Trading
4. Cross Margining
5. Dabba Trading
Which of the above mentioned activities are prohibited in India?
a) 1, 3 and 4
b) 1, 2 and 5
c) 2, 3 and 5 only
d) 2, 3, 4 and 5

Ans) c
Exp) Option c is the correct answer.
Option 1 is incorrect. Impact Investing is an investment strategy that aims to generate specific social or
environmental effects in addition to financial gains. The impact investment provides capital to address
the world’s most pressing challenges in sectors including energy, microfinance, healthcare, sustainable
agriculture, infrastructure and housing. It is allowed in India.
Option 2 is correct. Front running is a malpractice where a dealer, or broker purchases some shares using
information related to orders of investors. Brokers have access to information related to orders of
investors in advance. If they illegally use this information to trade in securities to obtain profits on their
personal account, such a practice is called front running. It is illegal in India.
Option 3 is correct. A circular trade happens when two or more persons join hands and start trading in
a scrip among themselves. Circular trading creates a false notion of active stock transaction, thus
influencing the stock price.
It is a practice to artificially inflate the volume of the stock and its price without any real change in
transaction.

[29]
SFG 2025 | Level 2 | Test - #2 - Solutions |

Circular trading is prohibited in India.

Option 4 is incorrect. Cross margining is a concept whereby a trader can transfer excess margin from
one account to another account to satisfy margin maintenance requirements.
This process enables market participants to use all of their available margin across all of their accounts.
This raises the liquidity by reducing margin requirements and lowering net settlements. NSE had started a
cross-margining facility in January 2020.
Option 5 is correct. Dabba trading is an illegal and unregulated form of trading in securities. In dabba
trading, traders place deals in securities without the trades actually being executed on any official SEBI
recognized stock exchange. Dabba trading is done by betting on the stock prices to make a profit without
actually getting into the buying and selling of stocks in the stock market.
These trades are settled internally by the dabba operator and are outside the purview of stock exchanges
and regulatory bodies.
Source:)
https://www.business-standard.com/about/what-is-insider-trading
https://economictimes.indiatimes.com/definition/front-running?from=mdr
https://groww.in/blog/is-insider-trading-legal-in-india
https://www.livemint.com/market/stock-market-news/sebi-permits-short-selling-across-all-
categories-f-o-stocks-also-eligible-11704461894797.html
https://investor.sebi.gov.in/dabba_trading.html
https://economictimes.indiatimes.com/markets/stocks/news/sebis-cross-margining-move-to-
ensure-big-margin-benefits-on-derivative-trade/articleshow/71991889.cms?from=mdr
Subject:) Economy
Topic:) Money Market/Capital Market
Subtopic:)

Q.40) With reference to Mitakshara and Dayabhaga Schools of Civil Law, consider the following statements:
1. In Mitakshara School, a son inherits a share of ancestral property at birth, while in Dayabhaga law, a son
acquires ownership right on the death of his father.
2. Mitakshara school is primarily followed in West Bengal and Assam, while Dayabhaga school is followed
in the rest of India.
Which of the statements given above is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2

Ans) a
Exp) Option a is the correct answer.
The Hindu Law was created to satisfy every need and welfare of the people. Mitakshara and Dayabhaga are
the two important schools of Hindu Law which have given us the required information about the present
legislated laws regarding inheritance.
Statement 1 is correct: Mitakshara school operates on the principle that property rights are acquired by
birth. Under Mitakshara, a son inherits a share of ancestral property from the moment he is born, even if
his father is alive. Dayabhaga school is based on the principle that property rights are conferred upon
death. According to Dayabhaga, the property of the deceased is divided among the heirs only after their
death.
Statement 2 is incorrect: The Mitakshara school is followed in most parts of India, while the Dayabhaga
school is primarily followed in West Bengal and Assam.

[30]
SFG 2025 | Level 2 | Test - #2 - Solutions |

Source: FORUMIAS Quarterly Magazine. Jan March 2024 Page 50

https://www.legallore.info/post/mitakshara-and-dayabhaga-schools-of-hindu-law-their-points-of-
difference
https://www.legalserviceindia.com/legal/article-5600-schools-of-hindu-law.html
Subject:) Current Affairs
Topic:) Mitakshara and Dayabhaga Schools of Civil Law
Subtopic:)

Q.41) With reference to Convertible Bonds, consider the following statements:

1. As there is an option to exchange the bond for equity, Convertible Bonds pay a lower rate of interest.
2. The option to convert to equity affords the bondholder a degree of indexation to rising consumer
prices.
Which of the statements given above is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2

Ans) c
Exp) Option c is the correct answer.
Statement 1 is correct: Convertible bonds tend to offer a lower coupon rate or rate of return in exchange
for the value of the option to convert the bond into common stock. Investors will generally accept a lower
coupon rate on a convertible bond, compared with the coupon rate on an otherwise identical regular bond,
because of its conversion feature. This enables the issuer to save on interest expenses, which can be
substantial in the case of a large bond issue.
Statement 2 is correct: The option to convert to equity affords the bondholder a degree of indexation to
rising consumer prices as equity prices can differ widely from the given interest and the difference in that
can be used as a hedge for inflation.
Source: UPSC CSE Pre 2022
Subject:) Economy
Topic:) Money Market/Capital Market
Subtopic:)

Q.42) With reference to Banking operations in India, what is the primary objective of the Variable Rate Repo
(VRR)?
a) To inject short-term liquidity into the banking system.
b) To give loans to banks without any requirement for collaterals.
c) To provide long term loans to banks typically with a tenure of more than 3 years.
d) To provide loans to banks at an interest rate lower than Reverse Repo rate.

Ans) a
Exp) option a is the correct answer.
The Variable Rate Repo (VRR) is a liquidity adjustment tool used by the Reserve Bank of India (RBI) to
inject short-term liquidity into the banking system. VRR has features like:
1. Auction-Based Lending: Unlike the standard repo rate, where banks borrow at a fixed rate, in VRR, banks
bid for funds at different interest rates through an auction process conducted by RBI.

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SFG 2025 | Level 2 | Test - #2 - Solutions |

2. Market-Determined Interest Rates: The rate at which banks borrow is not fixed but is determined by
market forces based on demand and supply of liquidity. The interest rate in VRR is generally lower than
the Repo Rate (though not less than Reverse Repo Rate).
3. Collateral Requirement: Like a normal repo operation, banks must pledge government securities as
collateral to borrow funds under VRR.
4. Short-Term Nature: VRR typically has a tenure ranging from 7 days to 14 days, making it a short-term
liquidity injection tool.
Source: https://indianexpress.com/article/business/reserve-bank-of-india-variable-rate-repo-
auction-vrr-9406068/
Subject:) Economy
Topic:) Monetary Policy
Subtopic:)

Q.43) Consider the following statements about the Financial Stability and Development Council:
1. It is a statutory body.
2. It is headed by the Governor of the Reserve Bank of India.
3. Its primary function is to frame the guidelines based on which grants-in-aid are given by the centre to
states.
Which of the statements given above is/are correct?
a) 1 only
b) 1 and 2 only
c) 2 and 3 only
d) None of the above

Ans) d
Exp) Option d is the correct answer.
The Financial Stability and Development Council (FSDC) was constituted in 2010.
Statement 1 is incorrect. FSDC is non-statutory apex council under the Ministry of Finance constituted
by the Executive Order in 2010.
Statement 2 is incorrect. The Council is chaired by the Union Finance Minister and its members are
Governor, Reserve Bank of India; Finance Secretary and/or Secretary, Department of Economic Affairs;
Secretary, Department of Financial Services; Chief Economic Adviser, Ministry of Finance; Chairman,
Securities and Exchange Board of India; Chairman, Insurance Regulatory and Development Authority and
Chairman, Pension Fund Regulatory and Development Authority.
Statement 3 is incorrect. To frame the guidelines based on which grants-in-aid are given by the centre
to states is one of the terms of reference of the Finance Commission to make recommendations to the
President on the principles governing grants-in-aid to states.
FSDC deals with issues relating to financial stability, financial sector development, inter–regulatory
coordination, financial literacy, financial inclusion and macro prudential supervision of the economy
including the functioning of large financial conglomerates.
Source:) https://pib.gov.in/newsite/PrintRelease.aspx?relid=95543
https://www.nabard.org/ftrcontent.aspx?id=492
https://forumias.com/blog/question/consider-the-following-statements-1-financial-stability-and-
development-councilfsdc-is-a-statutory-body-2-it-is-chaired-by-governor-of-reserve-bank-of-india3-
one-of-the-objectives-of-the-council-i/
Subject:) Economy
Topic:) Monetary Policy
Subtopic:)

[32]
SFG 2025 | Level 2 | Test - #2 - Solutions |

Q.44) Consider the following options:

1. Deposits of Commercial Banks held with RBI
2. Foreign Exchange Reserves held by RBI
3. Loans given by RBI to the Government
4. Currency notes issued by the RBI
How many of the above are assets of the Reserve Bank of India (RBI)?
a) Only one
b) Only two
c) Only three
d) All four

Ans) b
Exp) Option b is the correct answer.
The Reserve Bank of India's (RBI) balance sheet reflects its financial position. Assets represent what the RBI
owns or is owed, while liabilities are its obligations
Option 1 is incorrect:Deposits held by Commercial banks are liabilities of the RBI, not assets. Commercial
banks are required to maintain a portion of their deposits with the RBI. These deposits represent funds that
the RBI owes back to the commercial banks.
Option 2 is correct: Foreign Exchange reserves are a crucial asset of the RBI. They include foreign
currencies, gold, and Special Drawing Rights (SDRs). RBI also earns income from the Forex reserves
through changes in gold rates and currency exchange rates .
Option 3 is correct:The RBI provides loans and advances to both the central and state governments. These
loans represent claims on the government and are therefore assets.
Option 4 is incorrect: The currency notes issued by the Reserve Bank are the Reserve Bank’s liability
and this constitutes the liabilities of the Issue Department. Total notes issued are the sum of Notes in
circulation and Notes held in the Banking Department of the Bank.
Source:) https://www.thehindu.com/business/Economy/where-do-the-rbis-earnings-come-
from/article29310531.ece
https://rbi.org.in/scripts/publicationsView.aspx?id=15762#1
Subject:) Economy
Topic:) Monetary Policy
Subtopic:)

Q.45) India recently signed a trade agreement with the European Free Trade Association (EFTA). In this
context, which of the following groups of countries are members of EFTA?
a) Austria, Iceland, Greece and Iceland.
b) Germany, Liechtenstein, Italy and France.
c) Iceland, Liechtenstein, Norway and Switzerland.
d) Norway, Denmark, Sweden and Finland.

Ans) c
Exp) Option c is the correct answer.
The European Free Trade Association (EFTA) was founded by the Stockholm Convention in 1960. EFTA has
actively pursued trade relations with third countries in and beyond Europe. Recently, India has signed a
free trade agreement with the European Free Trade Association (EFTA).
Option c is correct: The European Free Trade Association (EFTA) is the intergovernmental organization
of Iceland, Liechtenstein, Norway and Switzerland.

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SFG 2025 | Level 2 | Test - #2 - Solutions |

In 2022, the combined EFTA-India merchandise trade surpassed USD 6.1 billion. The primary imports to
the EFTA States consisted of organic chemicals (27.5%). The machinery (17.5%) and pharmaceutical
products (11.4%), constituted the main exports to India.
Source: ForumIAS Quarterly January- March 2024 - Pg no 24
Subject:) Current Affairs
Topic:) European Free Trade Association
Subtopic:)

Q.46) The perimeter of a square is equal to that of a rectangle, and the area of the square is 1296 sq.cm. The
area of the rectangle is numerically 8 times its perimeter. What is the ratio of the longer side to the shorter
side of the rectangle?
a) 4 : 3
b) 3 : 2
c) 2 : 1
d) 4 : 1

Ans) c
Exp) Option c is the correct answer.
Area of square = 1296 sq.cm. ⇒ Side of square = 36 cm
Perimeter of square = 4*36 = 144 cm
∴ Perimeter of rectangle = 144 cm
Let the longer side of the rectangle be ‘a’ cm and the shorter side be ‘b’ cm.
Perimeter of rectangle = 144 = 2 (a + b)
⇒ 72 = a + b ⇒ b = 72 ‒ a
Area of the rectangle = a × b
∴ 8 × 144 = a (72 ‒ a)
∴ 1152 = 72a ‒ a2
∴ a2 ‒ 72a + 1152 = 0
∴ (a ‒ 48)(a ‒ 24) = 0
∴ a = 48 cm or 24 cm and b = 24 cm or 48 cm
Let a > b ⇒ a = 48 and b = 24
a : b = 48 : 24 = 2 : 1
Hence option c is the correct answer.
Subject:) CSAT
Topic:) Quantitative Aptitude
Subtopic:)

Q.47) Two natural numbers 'm' and 'n' are such that their product is equal to 7 times their sum. If m > 7, find
the number of possible values of 'n'.
a) 1
b) 2
c) 3
d) Infinite

Ans) c
Exp) Option c is the correct answer
It is given that –
m × n = 7(m + n)

[34]
SFG 2025 | Level 2 | Test - #2 - Solutions |

Rearranging,
m × n – 7n = 7m
Factoring n,
n = (7m) / (m – 7)
Rewriting,
n = [(7m – 49) / (m – 7)] + [49 / (m – 7)]
Thus,
n = 7 + (49 / (m – 7))
Since 'n' is a natural number, (49 / (m – 7)) must be a non-negative integer. Also, we know m > 7.
This is possible only if (m – 7) is a factor of 49. It happens when m = 8, 14, or 56. The corresponding values
of n are 56, 14, and 8.
Hence c
Subject:) CSAT
Topic:) Quantitative Aptitude
Subtopic:)

Q.48) If 'ROHAN' is coded as '96815' in a certain code language then what will be the code for 'KIRAN' in that
code language?
a) 29815
b) 28755
c) 29915
d) 32145

Ans) c
Exp) Option c is the correct answer
The pattern followed in the coding is done as the Alphabetical position of the Letters. In case of double
digit Alphabetical position, the code is the sum of the digits.
As for ROHAN
R→18→ 1+8=9
O→15→ 1+5=6
H→8→ 8
A→1→ 1
N→14→ 1+4=5
Hence the code “96815”
Similarly , for KIRAN
K→ 11→1+1=2
I→9→9
R→18→1+8=9
A→1→1
N→14→1+4=5
Hence, 'KIRAN' will be coded as '29915'
Subject:) CSAT
Topic:) Logical and Verbal Reasoning
Subtopic:)

[35]
SFG 2025 | Level 2 | Test - #2 - Solutions |

Directions for the following 2 (two) items:

Read the following two passages and answer the items that follow the passages. Your answers to these
items should be based on the passages only.

Passage I
Affirmative action began as a government remedy to the effects of long-standing discrimination against
minority groups and consists of policies, programs, and procedures that give preference to minorities and
women in job hiring, admission to institutions of higher education, the awarding of government contracts,
and other social benefits. The typical criteria for affirmative action are race, disability, gender, ethnic origin,
and age.

Q.49) Which one of the following statements best reflects the most logical and rational inference that can
be made from the passage?
a) The educational and employment opportunities of minority groups are largely improved by governmental
policies that give them preferential treatment.
b) Affirmative action guarantees preferential treatment to minorities based on their race, disability, gender,
and age.
c) Affirmative action is an active effort to improve employment or educational opportunities for minority
groups and women.
d) Government policies for preferential treatment to minorities can remedy the effect of long-standing
discrimination in society.

Ans) c
Exp) Option c is the correct answer
Option a is incorrect – This statement partially captures the idea of affirmative action but oversimplifies it
by focusing only on the outcome (improvement of opportunities) rather than the process (active effort
through policies, programs, and procedures). The passage also mentions that affirmative action consists of
various measures beyond just preferential treatment, such as programs and procedures aimed at
addressing discrimination. Hence this option is incorrect.
Option b is incorrect – This statement is misleading because affirmative action does not "guarantee"
preferential treatment; rather, it is an effort to level the playing field and counteract historical
discrimination. The passage emphasizes that affirmative action consists of policies and programs designed
to improve opportunities, rather than simply guaranteeing preferences based on certain criteria. Hence
this option is incorrect.
Option c is correct – This statement correctly captures the essence of the passage. The passage defines
affirmative action as a government-led effort that includes policies, programs, and procedures aimed at
improving opportunities for minorities and women in areas like job hiring and education. This option
concisely reflects that affirmative action is a deliberate initiative to correct disparities caused by historical
discrimination.
Option d is incorrect – While this statement is somewhat related to the passage, it is not the best choice
because it focuses too much on "preferential treatment" rather than the broader concept of affirmative
action. The passage emphasizes that affirmative action includes various measures, not just preferential
treatment, and is aimed at addressing long-standing discrimination in multiple ways. Hence Option d is
incorrect.
Subject:) CSAT
Topic:) Reading Comprehension
Subtopic:)

[36]
SFG 2025 | Level 2 | Test - #2 - Solutions |

Passage II
Last month, the Deep Carbon Observatory announced an interesting fact: the mass of the microbes living
beneath Earth’s surface amounts to 15 to 23 billion tons of carbon, a sum some 245 to 385 times greater
than the carbon mass of all humans. That’s amazing. A growing number of papers published in the last
decade indicate that bacteria living – many of them in a hydrated, active state -- in sediments, in rocks,
and in pockets and fissures buried deep underground are old beyond belief – 300 million years. They are
not alive in the sense that the bacteria in your gut are alive. Rather, dried up and in suspended animation.
To sum up, Earth’s crust appears to be simply lousy with idling, ancient bacteria parked in power-save
mode, ready at nearly a moment’s notice to throw the gearshift into drive.

Q.50) Which one of the following statements best reflects the most logical and rational inference that can
be made from the passage?
a) A number of papers claim the existence of an amazing mass of microbes as old as 300 million years living
inside the earth ready to come to life at a moment’s notice.
b) In a shocking announcement, the Deep Carbon Observatory said that the mass of subterranean microbes
and their age were hundreds of times greater than those of all humans.
c) Inside the Earth, microbes approach immortality in a state of being almost dead, but slightly alive and
ready for revivification at a moment’s notice.
d) Inside Earth, there is an amazing mass of ancient bacteria parked in suspended animation ready to spring
to life even after millions of years.

Ans) d
Exp) Option d is the correct answer
Option a is incorrect - This option states, “…as old as 300 million years living inside the earth….” This is a
misrepresentation. It gives the impression that microbes were actively living for 300 million years.
However, the passage emphasizes that these microbes have been in a state of suspended animation for
that duration. The significance of their "suspended animation" is lost in this option. Hence Option a is
incorrect.
Option b is incorrect - This option does not capture the author’s position accurately. Instead of focusing
on the main idea of the passage, it emphasizes the announcement made by the Deep Carbon Observatory,
which is only incidental to the author’s position. The passage is more about the microbes themselves
rather than the announcement. Also the passage mentions that the announcement was an interesting
fact, not a shocking one. Hence Option b is incorrect.
Option c is incorrect - This option is figuratively correct in describing the microbes as "almost dead, but
slightly alive," but it misses a crucial aspect of the passage—the “amazing” mass of the microbes inside the
Earth. Since the passage emphasizes both the vast number and the state of these microbes, this option
is incomplete. Hence Option c is incorrect.
Option d is correct - This option effectively summarizes the passage and captures the author’s position. It
highlights both the enormous mass of ancient bacteria and their ability to remain in suspended
animation, ready to spring back to life even after millions of years.Hence this statement best reflects the
most logical and rational inference that can be made from the passage. Hence Option d is correct.
Hence d.
Subject:) CSAT
Topic:) Reading Comprehension
Subtopic:)

[37]

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SFG 2025 Level 2 Test 2 Sol - 221152 Eng

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SFG 2025 Level 2 Test 2 Sol - 221152 Eng

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SFG 2025 | Level 2 | Test - #2 - Solutions |

Q.6) Consider the following statements:

Which one of the following is correct in respect of the above statements?

Q.7) Consider the following statements:

How many of the above given statements are correct?

How many of the above pairs are correctly matched?

Q.10) Consider the following pairs:

Q.11) In the context of finance, the term “beta” refers to:

b) an investment strategy of portfolio manager to balance risk versus reward

Q.12) Consider the following types of banks :

Statement II: They are perpetual bonds with no maturity date.

Q.15) Consider the following sites in India:

Source: FORUMIAS Quarterly Magazine. Jan March 2024 Page 56

1. Agricultural land cannot be seized under the Act.

Q.22) In the context of Indian economy, consider the following:

Source:) Ramesh Singh (16th edition)

Q.29) With reference to Operation Twist, consider the following statements:

c) Statement I is correct, but Statement II is incorrect.

Wetlands Associated states

1. Karaivetti Bird Sanctuary Odisha

2. Magadi Kere Conservation Reserve Karnataka

3. Aghanashini Estuary Kerala

How many of the above given pairs are correctly matched?

Q.32) Consider the following pairs:

How many of the pairs given above are correctly matched?

Q.34) Consider the following financial instruments:

Q.39) In context to financial markets in India, consider the following activities:

Circular trading is prohibited in India.

Source: FORUMIAS Quarterly Magazine. Jan March 2024 Page 50

Q.41) With reference to Convertible Bonds, consider the following statements:

Q.44) Consider the following options:

Directions for the following 2 (two) items:

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