With reference to the Indian economy, “Collateral Borrowing and Lending Obligations” are the instruments of:
(a) Bond market
(b) Forex market
(c) Money market
(d) Stock market
Correct Answer: (c) Money market
- Collateral Borrowing and Lending Obligations (CBLO) are instruments of the money market. They are used for short-term borrowing and lending, typically ranging from one day to one year, and are operated by the Clearing Corporation of India Ltd (CCIL).
Analysis of Options:
- Bond market: This market deals with debt securities, including government and corporate bonds, which are used to raise long-term capital. Bonds provide fixed returns and are considered safer investments compared to equities.
- Forex market: The foreign exchange market is a global decentralized market for trading currencies. It involves the buying, selling, and exchanging of currencies at current or determined prices and is the largest financial market in the world.
- Money market: This market deals with short-term borrowing and lending, typically for periods up to one year. Instruments in this market include Treasury bills, commercial paper, and CBLO. The money market provides liquidity to financial institutions and helps in managing short-term funding needs.
- Stock market: This market involves the buying and selling of shares of publicly traded companies. It includes various financial instruments such as stocks, derivatives, bonds, and mutual funds. The stock market is known for its volatility and potential for high returns.
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- Definition: Collateral Borrowing and Lending Obligations (CBLO) are short-term money market instruments that allow financial entities to borrow and lend funds against the collateral of eligible securities, primarily government securities.
- Participants: Entities that participate in the CBLO market include nationalized banks, private banks, foreign banks, cooperative banks, insurance companies, mutual funds, primary dealers, non-banking financial companies (NBFCs), and corporate entities.
- Functioning: The CBLO market operates through the Indian Financial Network (INFINET) and the Negotiated Dealing System (NDS). Borrowers provide collateral in the form of government securities, and the CCIL matches borrowing and lending orders submitted by members.
- Regulation: The Reserve Bank of India (RBI) promotes collateralized borrowing and lending operations. CBLO transactions are subject to certain regulatory requirements, including the maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) by scheduled commercial banks.
- Benefits: CBLO provides a secure and efficient mechanism for managing short-term liquidity needs. It offers flexibility in terms of borrowing and lending periods and helps in maintaining financial stability by providing a reliable source of short-term funding.
