Financial markets and instruments: previous-year questions
36 real UPSC Prelims questions (2011–2026) with the official answer and a clear explanation. 21 of them came in the last five papers.
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Questions per year, counted from the official papers.
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With reference to Non-Fungible Tokens (NFTs), consider the following statements :
- 1. They enable the digital representation of physical assets.
- 2. They are unique cryptographic tokens that exist on a blockchain.
- 3. They can be traded or exchanged at equivalency and therefore can be used as a medium of commercial transactions.
Which of the statements given above are correct ?
Answer (a) & explanation
Statements 1 and 2 are correct (a). Statement 2 is right: a Non-Fungible Token is a unique cryptographic token recorded on a blockchain, such as Ethereum. Statement 1 is right: an NFT can stand for ownership of digital art, music, game items, or even physical assets like property or luxury goods. Statement 3 is wrong: non-fungible means no two tokens are alike, so they cannot be swapped at par. That is why NFTs cannot work as money, unlike rupees or Bitcoin, which are fungible: any one unit equals any other.
Notice the tax angle: India treats NFTs and crypto as virtual digital assets, with a flat 30% tax on gains and 1% TDS on transfers since 2022. The RBI's own digital currency is the e-rupee.
statement 3 describes fungible tokens. The name itself tells you NFTs are not equivalent to each other.
Answer as per the official UPSC answer key.
Indian Government Bond Yields are influenced by which of the following?
- 1. Actions of the United States Federal Reserve
- 2. Actions of the Reserve Bank of India
- 3. Inflation and short-term interest rates
Select the correct answer using the code given below.
Answer (d) & explanation
All three influence Indian bond yields (d). A bond yield is the return investors demand for holding a bond; it moves opposite to the bond's price. Item 1 is right: if the US Federal Reserve raises rates, US bonds pay more, foreign investors sell Indian bonds, and Indian yields rise. Item 2 is right: RBI moves on the repo rate, and its bond purchases through open market operations, move yields directly. Item 3 is right: higher inflation and higher short-term rates make investors ask for a higher return on long bonds.
Notice that Indian government bonds joined JP Morgan's emerging market bond index in 2024, which drew foreign inflows. The 10-year G-Sec yield is India's benchmark interest rate.
Answer as per the official UPSC answer key.
With reference to India, consider the following statements :
- 1. Retail investors through demat account can invest in 'Treasury Bills' and 'Government of India Debt Bonds' in primary market.
- 2. The 'Negotiated Dealing System-Order Matching' is a government securities trading platform of the Reserve Bank of India.
- 3. The 'Central Depository Services Ltd.' is jointly promoted by the Reserve Bank of India and the Bombay Stock Exchange.
Which of the statements given above is/are correct?
Answer (b) & explanation
Statements 1 and 2 are correct (b). Statement 1 is right: retail investors can bid for Treasury Bills and government bonds in primary auctions through their demat accounts and stock exchanges, as non-competitive bidders. Statement 2 is right: NDS-OM (Negotiated Dealing System–Order Matching) is the RBI's electronic, screen-based platform for trading government securities. Statement 3 is wrong: CDSL was promoted by the BSE together with banks such as SBI, Bank of Baroda and HDFC Bank, not by the RBI.
Notice the RBI Retail Direct scheme (2021), which lets individuals open a gilt account directly with the RBI. India's other depository is NSDL, promoted by IDBI, UTI and NSE.
Answer as per the official UPSC answer key.
In India, under cyber insurance for individuals, which of the following benefits are generally covered, in addition to payment for the loss of funds and other benefits ?
- 1. Cost of restoration of the computer system in case of malware disrupting access to one's computer
- 2. Cost of a new computer if some miscreant wilfully damages it, if proved so
- 3. Cost of hiring a specialized consultant to minimize the loss in case of cyber extortion
- 4. Cost of defence in the Court of Law if any third party files a suit
Select the correct answer using the code given below :
Answer (b) & explanation
Items 1, 3 and 4 are covered (b). Personal cyber insurance in India covers losses from online fraud and attacks, as shaped by IRDAI guidelines. Item 1 is right: it pays to restore data and the computer system after malware blocks access. Item 3 is right: in cyber extortion, such as ransomware, it pays for a specialist consultant to limit the loss. Item 4 is right: it pays legal defence costs if a third party sues, say for a privacy breach. Item 2 is wrong: it does not buy a new computer after deliberate physical damage; that falls under ordinary property insurance.
Notice CERT-In, India's agency for cyber incidents, and the national cybercrime helpline 1930. Other covers include identity theft and phishing losses.
Answer as per the official UPSC answer key.
What is the importance of the term "Interest Coverage Ratio" of a firm in India ?
- 1. It helps in understanding the present risk of a firm that a bank is going to give loan to.
- 2. It helps in evaluating the emerging risk of a firm that a bank is going to give loan to.
- 3. The higher a borrowing firm's level of Interest Coverage Ratio, the worse is its ability to service its debt.
Select the correct answer using the code given below :
Answer (a) & explanation
Statements 1 and 2 are correct (a). The Interest Coverage Ratio = earnings before interest and tax (EBIT) divided by the interest payable. It shows how many times a firm's profit covers its interest bill. Statement 1 is right because banks use it to judge a borrower's present risk. Statement 2 is right because a falling ratio warns of emerging risk before the firm defaults. Statement 3 is wrong because a higher ratio means a better, not worse, ability to service debt. A ratio below 1 means the firm cannot meet its interest from its earnings.
Notice related ratios: the debt-to-equity ratio and the Debt Service Coverage Ratio. Firms with a ratio below 1 for years are often called "zombie" companies.
Answer as per the official UPSC answer key.
With reference to the Indian economy, consider the following statements :
- 1. 'Commercial Paper' is a short-term unsecured promissory note.
- 2. 'Certificate of Deposit' is a long-term instrument issued by the Reserve Bank of India to a corporation.
- 3. 'Call Money' is a short-term finance used for interbank transactions.
- 4. 'Zero-Coupon Bonds' are the interest bearing short-term bonds issued by the Scheduled Commercial Banks to corporations.
Which of the statements given above is/are correct ?
Answer (c) & explanation
Statements 1 and 3 are correct (c). Statement 1 is right: Commercial Paper is a short-term unsecured promissory note issued by companies, usually for 7 days to a year. Statement 3 is right: call money is very short-term lending between banks, from overnight (call) up to 14 days (notice money). Statement 2 is wrong: a Certificate of Deposit is a short-term deposit receipt issued by banks and some financial institutions, not by the RBI. Statement 4 is wrong: a zero-coupon bond pays no interest; it is sold at a discount and redeemed at face value.
Notice that these are all money market instruments, along with Treasury Bills and repos. The Treasury Bill itself is a zero-coupon instrument.
a "zero-coupon" bond described as "interest bearing". The name itself says no coupon.
Answer as per the official UPSC answer key.
Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly?
Answer (d) & explanation
A Participatory Note is used (d). A P-Note is an offshore derivative instrument issued by a SEBI-registered Foreign Portfolio Investor. Its value is tied to Indian shares or bonds. This lets an overseas investor gain from the Indian market without registering with SEBI directly. A Certificate of Deposit (a) is a short-term deposit issued by banks. Commercial Paper (b) is short-term unsecured debt issued by companies. A Promissory Note (c) is a written promise to pay money.
Because P-Notes can hide the real owner, they raise concerns about round-tripping and black money. Notice that SEBI has tightened KYC and disclosure rules. The Hindenburg–Adani row (2023) brought offshore fund ownership into the news again.
Answer as per the official UPSC answer key.
Consider the following statements :
- 1. The Reserve Bank of India manages and services Government of India Securities but not any State Government Securities.
- 2. Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
- 3. Treasury bills offer are issued at a discount from the par value.
Which of the statements given above is/are correct ?
Answer (c) & explanation
Statements 2 and 3 are correct (c). Statement 1 is wrong because the RBI manages public debt for the Centre by law (RBI Act, Section 21) and for State Governments by agreement (Section 21A). It auctions their State Development Loans (SDLs). Statement 2 is right because Treasury Bills are issued only by the Centre. States raise short-term money through other means, such as Ways and Means Advances. Statement 3 is right: T-bills are zero-coupon instruments sold at a discount and repaid at face value, and the difference is the investor's return.
Today's T-bills come in 91, 182 and 364-day maturities. Notice the RBI Retail Direct platform (2021), which lets ordinary people buy G-secs and T-bills directly.
Answer as per the official UPSC answer key.
Who among the following can join the National Pension System (NPS) ?
Answer (c) & explanation
State Government employees who join after their State notifies NPS can join (c). The National Pension System, regulated by PFRDA, is open to Indian citizens, resident or non-resident, so (a) is wrong. The age range was 18–60 then and is now 18–70, not 21–55, so (b) is wrong. It is compulsory for Central Government employees joining on or after 1 January 2004, but the Armed Forces are kept out, so (d) is wrong twice over. Each State joins from the date it notifies NPS, so (c) is correct.
The Unified Pension Scheme (UPS), in force from April 2025, now lets central employees under NPS choose an assured pension of 50% of their average last-year basic pay. Notice that some States, such as Rajasthan and Himachal, have gone back to the old pension scheme.
option (d) slips in "including those of Armed Forces". One added group spoils the whole option.
Answer as per the official UPSC answer key.
With reference to 'National Investment and Infrastructure Fund', which of the following statements is/are correct ?
- 1. It is an organ of NITI Aayog.
- 2. It has a corpus of ₹4,00,000 crore at present.
Select the correct answer using the code given below :
Answer (d) & explanation
Neither statement is correct (d). The National Investment and Infrastructure Fund (NIIF), set up in 2015, is a fund manager registered with SEBI as an Alternative Investment Fund. It was set up by the Ministry of Finance (Department of Economic Affairs), not NITI Aayog, so statement 1 is wrong. Its planned corpus was ₹40,000 crore, with the government putting in up to 49% and the rest coming from investors such as Abu Dhabi's ADIA, Temasek and AIIB. Statement 2 adds an extra zero.
It runs a Master Fund, a Fund of Funds and a Strategic Opportunities Fund. Notice the other infrastructure-finance bodies: NaBFID (2021) is a development finance institution, and the National Infrastructure Pipeline listed the projects.
the extra zero. Count the digits in big figures.
Answer as per the official UPSC answer key.
With reference to 'Stand Up India Scheme', which of the following statements is/are correct?
- 1. Its purpose is to promote entrepreneurship among SC/ST and women entrepreneurs.
- 2. It provides for refinance through SIDBI.
Select the correct answer using the code given below.
Answer (c) & explanation
Both statements are correct (c). Stand-Up India (April 2016) promotes entrepreneurship among SC/ST and women (1). Every bank branch should give at least one SC/ST and one woman borrower a loan of ₹10 lakh to ₹1 crore for a greenfield enterprise. SIDBI runs the scheme and provides refinance to banks (2), along with credit guarantee support through NCGTC.
The scheme has since been extended to 2025, and loans can also go to farm-allied activities. Notice how it sits beside Start-up India and MUDRA: MUDRA serves the smallest micro units, while Stand-Up India targets slightly bigger first-time ventures from groups that find credit hardest to get.
Answer as per the official UPSC answer key.
Pradhan Mantri MUDRA Yojana is aimed at
Answer (a) & explanation
MUDRA brings small entrepreneurs into the formal financial system (a). Pradhan Mantri MUDRA Yojana (2015) gives collateral-free loans to non-farm micro and small enterprises through banks, NBFCs and MFIs. It has slabs called Shishu (up to ₹50,000), Kishore (up to ₹5 lakh) and Tarun (up to ₹10 lakh). Since 2024, Tarun Plus goes up to ₹20 lakh. It is not a crop loan scheme (b), which is the Kisan Credit Card's job. It is not a pension scheme (c), which is NSAP's, and it does not fund NGOs (d).
MUDRA stands for Micro Units Development and Refinance Agency, a SIDBI arm that refinances lenders. Notice how the target is the "missing middle": the unfunded, informal small business.
Answer as per the official UPSC answer key.
Regarding 'Atal Pension Yojana', which of the following statements is/are correct?
- 1. It is a minimum guaranteed pension scheme mainly targeted at unorganized sector workers.
- 2. Only one member of a family can join the scheme.
- 3. Same amount of pension is guaranteed for the spouse for life after subscriber's death.
Select the correct answer using the code given below.
Answer (c) & explanation
Statements 1 and 3 are correct (c). Atal Pension Yojana (2015), run by PFRDA under the NPS setup, guarantees a monthly pension of ₹1,000 to ₹5,000 from age 60. It is aimed mainly at unorganised sector workers who join between 18 and 40 (1). After the subscriber dies, the spouse gets the same pension for life (3), and then the nominee receives the built-up corpus. Statement 2 is wrong because there is no one-per-family limit. Any eligible citizen with a savings bank account can join.
Since October 2022, income-tax payers cannot join. Notice how it differs from PM-SYM, a 50:50 matched-contribution scheme that pays a fixed ₹3,000 to unorganised workers. APY is now one of India's largest micro-pension schemes.
"only one member of a family". That limit belongs to no pension scheme; do not mix it up with household-based schemes.
Answer as per the official UPSC answer key.
'Pradhan Mantri Jan-Dhan Yojana' has been launched for
Answer (c) & explanation
PMJDY (August 2014) is the National Mission for Financial Inclusion (c). It offers a zero-balance bank account for every household, with a RuPay debit card, accident insurance and an overdraft facility. It is not a housing-loan scheme (a); that role belongs to PM Awas Yojana. It does not mainly promote women's SHGs (b), which is the work of DAY-NRLM, and it is not a cash-aid scheme for particular communities (d).
With over 55 crore accounts, Jan Dhan became the base of the JAM trinity (Jan Dhan, Aadhaar, Mobile) for Direct Benefit Transfer. Notice how a simple bank account became the pipe for welfare delivery.
Answer as per the official UPSC answer key.
With reference to “Aam Admi Bima Yojana”, consider the following statements :
- 1. The member insured under the scheme must be the head of the family or an earning member of the family in a rural landless household.
- 2. The member insured must be in the age group of 30 to 65 years.
- 3. There is a provision for free scholarship for up to two children of the insured who are studying between classes 9 and 12.
Which of the statements given above is/are correct ?
Answer (c) & explanation
Statements 1 and 3 are correct (c). Aam Admi Bima Yojana (2007, run by LIC) insured the head or an earning member of a rural landless household (1), and its add-on Shiksha Sahyog Yojana paid a scholarship to up to two children studying in classes 9 to 12 (3). Statement 2 is wrong: the age band was 18 to 59 years, not 30 to 65. So options (a), (b) and (d) fail.
Notice the later history: AABY was merged with the Janashree Bima Yojana and, from 2017–18, its cover shifted to the PM Jeevan Jyoti Bima Yojana and PM Suraksha Bima Yojana (both 2015). Trap: age bands are a favourite way UPSC makes a scheme statement wrong.
Answer as per the official UPSC answer key.
Microfinance is the provision of financial services to people of low-income groups. This includes both the consumers and the self-employed. The service/services rendered under microfinance is/are :
- 1. Credit facilities
- 2. Savings facilities
- 3. Insurance facilities
- 4. Fund Transfer facilities
Select the correct answer using the codes given below the lists :
Answer (d) & explanation
All four are correct (d). Microfinance is more than small loans: it brings the full basket of financial services to low-income people, including credit (1), savings (2), insurance (3) and fund transfer or remittances (4). So options (a), (b) and (c) are too narrow. India delivers these through self-help groups, the SHG–Bank Linkage Programme (NABARD, 1992), NBFC-MFIs and Small Finance Banks.
Notice the wider idea: Muhammad Yunus's Grameen Bank (Nobel Peace Prize 2006) popularised group lending without collateral. The RBI's 2022 framework treats any collateral-free loan to households earning up to ₹3 lakh a year as microfinance. Trap: equating microfinance with microcredit only.
Answer as per the official UPSC answer key.