question_answer

Due to steep increase in Cash Reserve Ratio (CRR) by the RBI, HDFC Bank is facing acute shortage of cash which may result in imposition of penalty by RBI and a loss of goodwill. Being the financial advisor of the bank, advise that how can it meet these short-term obligations, along with reasons in support of your answer. Also mention any two values that are fulfilled by money market instruments.

Answer:

Being the financial advisor of the bank, we may advise the bank to raise funds through 'call money'. Call money is a money market instrument that is used by banks to borrow funds from one another for a period of 1 day to 15 days. It has following features due to which it may be used by HDFC Bank: (i) It is a short term finance repayable on demand. (ii) It is a tool for inter-bank borrowing. (iii) It is often used by banks to meet theik CRR requirement. Values fulfilled by money market instruments are: (i) Mobilisation of surplus funds and channelising them into most productive use. (ii) Ensures smooth functioning of money market.