During the period of Diwali, people prefer to keep money at home and hence do not deposit money in the bank. There are also frequent withdrawals from the ATM in the form of cash. Due to this, banks all over the country may face the problem of low liquid cash. Identify the money market instrument that the bank can use to solve their financial problem.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Certificate of Deposit
Option (1) Treasury Bill — Incorrect. It is issued by the Reserve Bank for the government to meet its short-term needs. It is not a bank’s way to raise funds from the market.
Option (2) Commercial Paper — Incorrect. It is issued by large and creditworthy companies to raise short-term funds, not by banks.
Option (3) Certificate of Deposit — Correct. Certificates of deposit are issued by commercial banks during periods of tight liquidity, when deposit growth is slow but the demand for credit is high. This is the bank’s Diwali situation.
Option (4) Commercial Bill — Incorrect. It is a bill of exchange used by business firms to finance credit sales. It is not a bank’s tool for raising cash.
Note: Although the chapter ‘Financial Markets’ was dropped from the NCERT textbooks during rationalisation, it has stayed in the NTA syllabus every year since 2022, except for 2025, and it is part of the syllabus again from 2026. This question is therefore based on the pre-rationalised NCERT, an extract from which is given below. NCERT (Pre-rationalised Edition):
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