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GS Economy Economic Concepts
Q.

Consider the following statements:

1. Reserve Bank of India allowed stock exchanges to start the T+1 Settlement system for completion of share transactions.

2. T+1 settlement system will help in reducing the number of outstanding unsettled trades at any instant.

3. A shortened cycle not only reduces settlement time but also frees up the capital required to collateralize that risk. 

Which of the statement(s) given above is/are correct?
Explanation:

ANSWER: (B)

  • Recently, Securities and Exchange Board of India (SEBI) allowed stock exchanges to start the T+1 system as an option in place of T+2 for completion of share transactions.
  • It has been introduced on an optional basis in a move to enhance liquidity. SEBI is a statutory body established in 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.
  • In T+2, if an investor sells shares, the settlement of the trade takes place in two working days (T+2) and the broker who handles the trade will get the money on the third day, but will credit the amount in the investor’s account only by the fourth day.
  • In effect, the investor will get the money only after three days.
  • In T+1, settlement of the trade takes place in one working day and the investor will get the money on the following day.
  • The move to T+1 will not require large operational or technical changes by market participants, nor will it cause fragmentation and risk to the core clearance and settlement ecosystem.

Benefits of T+1 Settlement:

  • Reduced Settlement Time: A shortened cycle not only reduces settlement time but also reduces and frees up the capital required to collateralise that risk.
  • Reduction in Unsettled Trade: It also reduces the number of outstanding unsettled trades at any instant, and thus decreases the unsettled exposure to Clearing Corporation by 50%.
  • The narrower the settlement cycle, the narrower the time window for a counterparty insolvency/bankruptcy to impact the settlement of a trade.
  • Reduction in Blocked Capital: Further, the capital blocked in the system to cover the risk of trades will get proportionately reduced with the number of outstanding unsettled trades at any point of time.
  • Reduction in Systemic Risks: A shortened settlement cycle will help in reducing systemic risk.

 

Q.

Consider the following statements:

1. A surplus current account means that the nation is a lender to other countries and a deficit current account means that the nation is a borrower from other countries. 

2. The capital account deals with the change in ownership of a country’s assets, and the current account reflects the change in a country’s net income.

3. Developing nations typically run very large capital account deficits in proportion to their GDP, which are financed by loans and grants on the current account.

Which of the statements given above is/are correct?
Explanation:

ANSWER: (B) 

Current Account 

  • The current account includes the transaction of goods, services, primary income, and secondary income between the residents and the rest of the world. 

Capital Account 

  • Capital Account records all international transactions of assets. An asset is any one of the forms in which wealth can be held, for example: money, stocks, bonds, Government debt, etc.
  • Statement 1 is correct.

The current account runs a deficit when the imports exceed exports; hence, there is a net outflow of foreign exchange. A surplus current account means that the nation is a lender to other countries and a deficit current account means that the nation is a borrower from other countries.

  • Statement 2 is correct.

While capital account deals with the change in ownership of a country’s assets, the current account reflects the change in a country’s net income.

  • Statement 3 is not correct.

Developing nations typically run very large current account deficits in proportion to their GDP, which are financed by loans and grants on the capital account.

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