NISM Series X-A · Unit 1 of 12 · about 8% of the paper
Introduction to the Indian financial market: NISM Series X-A notes and practice questions
The financial system, its institutions and regulators. Who regulates what, and how savings flow to investment.
What to know in Unit 1
- Financial system components.
- Regulators: SEBI, RBI, IRDAI, PFRDA.
- Money, capital and forex markets.
Key terms, examples and exam traps
Financial system
The financial system consists of institutions, markets, instruments and regulators that move savings to productive uses.
Example. Banks, markets and insurers together channel household savings into investments.
Exam trap. This statement is false: The financial system consists of banks only.
Financial market
A financial market is where financial assets are created and traded, and it is divided into money market, capital market and foreign exchange market.
Example. Equity shares, short-term paper and currencies each trade in their own market.
Exam trap. This statement is false: Financial markets deal only in physical commodities.
RBI
The Reserve Bank of India is the central bank. It regulates banks, manages monetary policy and the money market, and issues currency.
Example. The authority that sets the repo rate also regulates banks.
Exam trap. This statement is false: The RBI regulates mutual funds.
IRDAI
The Insurance Regulatory and Development Authority of India regulates insurers and intermediaries and protects policyholders.
Example. A complaint about an insurance company's conduct is escalated to this body.
Exam trap. This statement is false: IRDAI regulates stock exchanges.
PFRDA
The Pension Fund Regulatory and Development Authority regulates the National Pension System and pension funds.
Example. The body that oversees NPS fund managers and subscribers.
Exam trap. This statement is false: PFRDA regulates mutual funds.
Repo rate
The repo rate is the rate at which the RBI lends short-term funds to banks against government securities, and it is the main policy rate.
Example. When the central bank raises the rate at which banks borrow, loan rates tend to rise.
Exam trap. This statement is false: A repo rate cut makes loans costlier.
Inflation and interest rates
When inflation rises, central banks tend to raise rates to cool demand, which affects bond prices and borrowing costs.
Example. Rising prices lead to higher policy rates and lower bond prices.
Exam trap. This statement is false: High inflation always leads to lower interest rates.
Primary dealer
Primary dealers are institutions that underwrite and trade government securities and support the central bank in managing borrowing.
Example. An institution that bids at government auctions and makes a market in G-secs.
Exam trap. This statement is false: Primary dealers sell only equity shares.
Stock exchanges and depositories
Exchanges provide the trading platform; depositories hold securities in electronic form; clearing corporations settle trades.
Example. A trade flows through an exchange, a clearing corporation and a depository.
Exam trap. This statement is false: Depositories execute trades on exchanges.
Foreign portfolio investor
A foreign portfolio investor is an overseas entity that invests in Indian securities, registered under SEBI's regulations.
Example. An overseas fund buys listed Indian shares and bonds.
Exam trap. This statement is false: An FPI is an Indian retail investor.
Credit rating agency
A credit rating agency assesses the creditworthiness of issuers and their debt instruments and is regulated by SEBI.
Example. An independent agency rates a company's bonds as AA+.
Exam trap. This statement is false: A credit rating agency issues the bonds.
Money supply and liquidity
Liquidity in the system is influenced by the RBI's tools such as CRR, SLR and open market operations.
Example. The central bank buys securities to inject liquidity into the system.
Exam trap. This statement is false: Liquidity is controlled only by the stock exchanges.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which term is described here? The financial system consists of institutions, markets, instruments and regulators that move savings to productive uses.
- Free-look period
- Financial system
- Goal prioritisation
- Rule of 72
Q2. Which statement best describes “Stock exchanges and depositories”?
- Holding period return is the total return over the period an investment is held, including income and price change, as a percentage of the initial value.
- Exchanges provide the trading platform; depositories hold securities in electronic form; clearing corporations settle trades.
- The replacement ratio is the percentage of pre-retirement income needed after retirement to maintain the lifestyle, often taken as 60% to 80%.
- The debt market is where fixed-income securities such as bonds and treasury bills are issued and traded.
Q3. Which statement best describes “Inflation and interest rates”?
- The Sukanya Samriddhi account is a small savings scheme for the girl child with tax benefits and a long lock-in until maturity or marriage after 18.
- When inflation rises, central banks tend to raise rates to cool demand, which affects bond prices and borrowing costs.
- Starting early gives compounding more time, so a smaller monthly investment can build a larger corpus than a later start with a bigger sum.
- A will is a legal document by which a person decides how her property is to be distributed after death, and it takes effect only on death.
Q4. Which term is described here? Primary dealers are institutions that underwrite and trade government securities and support the central bank in managing borrowing.
- Standard deviation
- Annual audit
- NPS as a product
- Primary dealer
Q5. Which term is described here? A credit rating agency assesses the creditworthiness of issuers and their debt instruments and is regulated by SEBI.
- Residential status
- Credit rating agency
- Personal accident cover
- Stock exchanges and depositories
Q6. Which term is described here? The repo rate is the rate at which the RBI lends short-term funds to banks against government securities, and it is the main policy rate.
- Section 80C
- Demat and trading accounts
- Annuity versus perpetuity
- Repo rate
Frequently asked questions
How much of NISM Series X-A comes from Unit 1?
Unit 1 (Introduction to the Indian financial market) usually carries about 8% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series X-A Unit 1?
Financial system components. Regulators: SEBI, RBI, IRDAI, PFRDA. Money, capital and forex markets.
Are these NISM Series X-A practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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