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April 2020

Capital Markets: Challenges and Developments

 Indian Debt market, that never was


From UPSC perspective, the following things are important :

Prelims level : Asset-to-liability mismatch, Types of debt markets, Priority sector lending certificates, roll-over etc.

Mains level : Paper 3- What is the importance of debt market for the economy of a country? What are the factor responsible for the shallowness of the India's debt market?

India’s bond market suffers from several issues. This article discusses such issues, and also highlights the recent positive trends seen in the debt market owing to several steps taken by the government.

The Indian debt market, primarily of the fixed-income variety, can be broadly classified into:

  • 1. Money Market
  • Where the borrowing is for a tenor of less than a year.
  • Different types of money market instruments: Inter-Bank Term Money, repo transactions, Certificate of Deposits, Commercial Papers, T-Bills, etc. are some of the money market instruments.
  • Through these instruments, short term requirement of funds is met by banks, institutions and the state and central governments.
  • 2. Bank and Corporate Deposits
  • Bank fixed deposits (FDs) have been popular and widely subscribed to, as the feeling of no-default-risk.
  • Corporate deposits are FDs issued by a company (non-bank).
  • 3. Government Securities
  • G-Secs are sovereign-rated debt papers, issued by the government with a face value of a fixed denomination.
  • 4. Corporate & PSU Bond Market
  • Corporate bonds are issued by public sector undertakings (PSUs) and private firms.
  • These bonds are issued for a wide tenor between 1 year – 15 years.
  • These bonds carry a different risk profile and hence will have associated rating.

Debt market plays a significant role in the economy of a country. But India’s debt market suffers from shallowness. Some of the steps taken by the government to improve the situation have been showing positive trends. In the light of this development, the UPSC can frame a direct question, for ex. “What are the factors responsible for the shallowness of the debt market in India? Suggest ways to increase the depth of the debt market in India.”

What are the problems of India’s debt market?

  • Wholesale market: The Indian debt market is largely a wholesale market.
  • It is a wholesale market in a sense that a majority of institutional investors comprises of mainly banks, financial institutions, mutual funds, EPFO, insurance companies and corporates.
  • The concentration of these large players has resulted in the debt markets being fairly skewed, evolving into a wholesale & bilaterally-priced trades.
  • Lack of retail sell and transparency: It also lacks the retailness and the contractual transparency that the Indian capital markets have been able to build in the past 2 decades.
  • Skewed towards G-secs: Structurally, the debt market remains firmly skewed towards government securities (G-secs).
  • Also, the largest investor group in the G-secs market are the banks, due to their regulatory requirement to invest in SLR.
  • Low and unstable trading in the corporate bond market: The Indian corporate bond market has low & unstable trading volumes.
  • Sadly, the corporate bond market remains largely about top-rated financial and public sector issuances.
  • The domestic debt managers have forgotten that the logic of the business of finance is “to price the risk”.

Regulation and comparison with other countries

  • RBI regulates money markets & G-secs.
  • SEBI regulates the Corporate debt market & bond markets.
  • The domestic debt market in India amounts to about 67% of GDP.
  • The size of India’s corporate bond market is a mere 16% of GDP — compared with 46% in Malaysia, and 73% in South Korea.

The recent positive trend in the debt market

  • In the past few years, the domestic corporate bond market had seen increasing volumes, largely due to financial investments going into it, including retail participation.
  • Also, the banks had ceded space to NBFCs over past many years.
  • This is because banks found it easier to buy securitisation pools to achieve their PSL targets rather than develop competencies that NBFCs had built-in serving affinity groups, in smaller cities & towns.
  • And post the ILFS crisis, the markets have started shunning non-banks again.
  • Policy initiative by the government: The various policy initiatives undertaken in the last few years would take time to fructify and to stabilise.
  • These include the IBC, SEBI’s bond market policies, RBI’s large borrower framework for enhancing credit supply.
  • Some of these have already seen changes/addendums to the original draft, with the intent being to course-correct, for the stability of the markets.

Roll over of debt papers in India

  • We have seen liquidity problems in our markets every few years.
  • The concept of “roll-over” of debt paper was usual as our markets did not build long term papers.
  • With the ILFS slowdown, it was easy for name-calling on “ALM mismatch” concept.
  • Not much had been anyways done before and later to address the availability of debt to reduce the Asset-to-Liability mismatches.
  • Also, we have played it safe so far by even lending for large infra projects with shorter paper and hoped to roll it over at the end of the debt term.


This is the time that our regulators need to work along with the various governments, especially the states, for smoother ironing of fiscal hiccups and use this to redress any structural glitches. It’s time that there is actual intent to deepen the domestic debt market and to listen to the industry about their requirements.

Back2Basics: What is ASM?

  • Banks’ primary source of funds is deposits, which typically have short- to medium-term maturities.
  • They need to be paid back to the investor in 3-5 years.
  • In contrast, banks usually provide loans for a longer period to borrowers.
  • Home loans, for instance, can have a tenure of up to 20 years.
  • Providing such loans from much shorter maturity funds is called an asset-liability mismatch.
  • It creates risks for banks that need to be managed.
  • The most serious consequences of asset-liability mismatch are interest rate risk and liquidity risk.
  • Because deposits are of shorter maturity they are repriced faster than loans.
  • Every time a deposit matures and is rebooked if the interest rates have moved up the bank will have to pay a higher rate on them.
  • But the loans cannot be repriced that easily. Because of this faster adjusting of deposits to interest rates asset-liability mismatch affects net interest margin or the spread banks earn.

Priority Sector Lending (PSL)

  • Priority Sector Lending is an important role given by the (RBI) to the banks for providing a specified portion of the bank lending to few specific sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low-income groups and weaker sections etc.

Roll over of debt

  • When debt becomes due there is a need to either repay the principal or alternatively, to enter into a new agreement.
  • Structurally, funds from the second debt are used to repay the first debt.
  • Then you repay the second debt as required. Quite often these new terms will be agreed with the initial lender.
  • In essence, you’re ‘rolling’ the repayment obligation from one period into the next.
  • This all leads to rollover risk, which is the risk you that you won’t be able to find anyone willing to lend the value of the outstanding debt and/or offer a comparable rate as the first principle repayment obligation approaches.
  • This may be due to either movement in the borrowers perceived credit status and/or changes to the broader credit environment.
  • This was a key theme during the financial crisis of 2007 – 2008.
  • The reasons for refinancing may include the above, but also other themes such as debt consolidation (which doesn’t directly imply a change to the debt term).

FDI in Indian economy

The deal raises several concerns for privacy, net-neutrality and consumer welfare


From UPSC perspective, the following things are important :

Prelims level : 10 % condition for FDI.

Mains level : Paper 3-What are the implications of two dominant players in IT and telecom respectively coming together for data privacy and net neutrality?

Facebook’s decision to acquire a 9.99 per cent stake in the parent company of Reliance Jio could have several implications. It could impact retail stores which we are trying hard to protect by restricting FDI in retail. Second, it could have implications for net neutrality. Third, it would have implications for data privacy.

Implications for the country’s retail landscape

  • Recently, Reliance Industries and Facebook announced that the California-based social media giant will acquire a 9.99 per cent stake in Jio Platforms limited, the holding company of Reliance Jio, for $5.7 billion (Rs 43,574 crore).
  • At its core, the idea is to create an ecosystem around JioMart, enabling customers to access the local Kirana stores using WhatsApp, combining both offline and online retail.
  • This ability to connect millions of local businesses with end consumers, and provide them a seamless online transaction experience could radically alter the country’s retail landscape.
  • Both firms have stressed on the new opportunities for businesses of all sizes, and especially for the millions of small businesses across the country.
  • With the ongoing lockdown in the country only reaffirming the importance of the local Kirana store — major online delivery channels have struggled to reach consumers during this period — integration is bound to be an enticing proposition.

Opportunities for cross-selling

  • A scaling up of this model will also provide opportunities for cross-selling — significantly increasing the upside for firms and increasing the valuation of its retail arms.
  • At present, though, the reach of WhatsApp Pay is limited — just over a million Indians are reported to currently have access to the pay feature.
  • But this sort of model is popular in other Asian economies such as China, Korea and Japan where apps like WeChat have a wide range of product offerings, which induces consumer stickiness.
  • This arrangement also allows Jio to greatly expand its product offering to its more than 370 million-odd subscriber base.
  • The deal may also open up the entire WhatsApp consumer base of around 400 million — to Reliance, including those on other telecom platforms such as Airtel and Vodafone.

The following concern could arise from the deal and the UPSC can frame a question based on these concern, like ” Recently a global IT giant acquired a significant stake in an Indian telecom giant. Discuss the various issues which could arise from coming together of such dominant players.”

What are the concerns in such deals?

  • Implications for consumer welfare: Given the dominant market position of the players, concerns over the market structure and its implications for consumer welfare are bound to arise.
  • Questions over net neutrality: The tie-up also raises questions on net neutrality with the possibility of preferential treatment being granted.
  • Data privacy issue: Third, given the data privacy issues highlighted in the past by the Cambridge Analytica episode, for instance, there are apprehensions over the enormous amounts of data that will be collected by these entities.
  • This concern gains significance especially when India still does not have a personal data protection law.


Whenever two dominant players of respective fields come together, it gives rise to concern. The government must keep watch on the implications and how such a deal plays out in the future. If the concerns raised turn out to come true, maybe India should come out with the antitrust law of its own.


Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Don’t waste the oil crisis


From UPSC perspective, the following things are important :

Prelims level : WTO benchmark, Brent crude.

Mains level : Paper 3- What are the implications of oil price fluctuations for Indian economy?

This article discusses the factors that contributed to oil prices falling below zero, and where the prices are headed in the near future. There are suggestions for India to make the most of this oil crisis. In the last week, we covered the same topic but its focus was on increasing the storage capacity. This article also covers the geopolitical implications of oil prices remaining low for long.

What negative price of the benchmark US crude WTI mean?

  • The collapse in the price of WTI reflected a technical peculiarity of futures trading.
  • Paper traders would normally have had two options- 1) To let their contract expire and take physical delivery 2) To pass on the contract to someone else.
  • The US was running out of crude oil storage capacity and traders knew they could not “risk” taking delivery.
  • There was no physical space to hold the product.
  • So their only option was to sell the contract.
  • On the last day before the contracts expired, the traders in desperation “paid” to offload their risk.
  • There was no physical transaction of oil.
  • The current future price is back in positive territory.

The world running out of oil storage capacity

  • The world and not just the US was fast running out of storage capacity.
  • Production in excess of demand: This was because oil production was way in excess of demand.
  • The latter had crashed by almost 30 million barrels a day or mbd (the equivalent of OPEC’s entire production) because of the COVID-induced lockdown of transportation and industry.
  • The price of the other crude benchmarks had also dropped but not the same extent — the North Sea Brent fell, for instance, to $15/bbl, a level not seen since 1999.
  • The reason was that unlike the WTI, which is traded in the US and therefore dependent on US inland storage capacity, the other crudes have access to seaborne storage (oil tankers).
  • This latter capacity is, however, fast filling up and the price of these crudes may also hit historic lows.

So, where the oil prices are headed?

  • Oil prices will be volatile downwards until demand picks up and/or supply is further cut.
  • Demand will depend on the curve of post-COVID economic recovery.
  • Supply will rest on the outcome of further discussions amongst OPEC, Russia and, ironically, the US.
  • OPEC and Russia had earlier this month agreed to cut production by 10 mbd.
  • But clearly, this is not enough and further cutbacks have to be agreed on.
  • Whatever the scenario for economic recovery or supply constraints, there is a slim likelihood of crude oil prices reaching the average price levels of 2019 ($64) over the next 12 months or so.
  • More likely, they will be volatile downwards with $50 as the ceiling and with no floor.
  • This “low for longer” price outlook raises two issues for India’s policy-makers.

As India depends on imports for over 80% of its oil requirements, oil prices have wide implications for the financial health of India. Safe oil supply lines are essential for its energy security. Both these points are important from the UPSC point of view. Following two points deal with these two factors.

Two issues that India’s policy-makers need to consider-

1. Disruption of oil supply lines and problems of diaspora

  • Every oil producer with no exception will face a budgetary crisis.
  • Some, like Saudi Arabia, the UAE and Kuwait will finance their social and economic commitments by cutting costs, increasing debt and drawing down on their sovereign reserves.
  • Others like Iran, Iraq, Nigeria and Venezuela, who have no such cushion and whose credit ratings are junk, will confront deepening political and social crises.
  • Economic plan: India should build into its economic plans the possibility that its traditional oil supply routes could get disrupted.
  • And that its diaspora, whose remittances are of significance, could face disproportionate hardship as these economies retrench.

India has the largest diaspora in the world and sends as much as $80 billion back home as remittances. So, any impact on diaspora in oil economies has implication for India from this perspective as well.

2. Empower the oil traders and remove bureaucratic control

  • On the day prices hit negative territory, it is unclear whether the trading experts in our oil PSUs had the flexibility to even contemplate “buying” the WTI futures contract for June, taking delivery, shipping it to India and storing it someplace.
  • It is also not clear whether they had the authority to lock in low prices through forward contracts.
  • Storage capacity and WTI quality mismatch: There is a shortage of storage capacity in India and a mismatch between the quality of WTI and the requirements of our refineries.
  • India cannot leverage the current market conditions of low and volatile oil prices to our national advantage unless we empower the traders and leave them unencumbered from bureaucratic control.
  • Most importantly, protect them from the three Cs ( CVC, CBI and CAG) in case their trade goes awry.


This oil market crisis could be made to work to our advantage. We must not waste this opportunity. There is a need to remove the bureaucratic hurdles in our PSUs, increasing storage capacity and sound financial planning by the government to make the most of this oil crisis.

Back2Basics: What is WTI  and Brent crude benchmark?

  • West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing.
  • This grade is described as light crude oil because of its relatively low density, and sweet because of its low sulfur content.

Brent Crude

  • Brent Crude is a trading classification of sweet light crude oil that serves as one of the two main benchmark prices for purchases of oil worldwide.
  • This grade is described as light because of its relatively low density, and sweet because of its low sulphur content.

Futures contract

  • In finance, a futures contract is a standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future, between parties not known to each other.
  • The asset transacted is usually a commodity or financial instrument.

Foreign Policy Watch: India-United States

Why US’s offer of financial aid to Greenland has angered Denmark?


From UPSC perspective, the following things are important :

Prelims level : Greenland and its geographical features

Mains level : Neo-imperialism and its re-emergence


  • The US had last year sent a proposal to “purchase” Greenland from the Nordic nation.
  • This proposal follows plans by the US government to open a consulate in Nuuk, Greenland’s capital.
  • This move is being considered to be “extremely provocative” interference by the US.

Go for a detailed map reading of the Arctic region. It has been in news for several times this year.

Why is the US opening a consulate in Greenland?

  • The US is opening a consulate in Greenland after nearly seven decades of closing its first consulate after the Second World War.
  • Russia has been steadily expanding its military presence in the Arctic and China has done its bit on the economic front.

US’s interests in Greenland

1) Domestic interest

  • The US claims that its aid is to ensure “sustainable growth” in the autonomous island.
  • It also cited Russia’s “aggressive behavior and increased militarisation in the Arctic” and China’s “predatory economic interests” as reasons for the decision.
  • The US acquiring new territory under Trump would appeal to the nationalistic and imperialistic views of Americans.
  • Acquiring Greenland would also secure Trump’s position in US history of having been the third president to add land to the country’s territory.

2) Strategic interest

  • Due to climate change, the Arctic ice is melting at an accelerated rate, opening up water routes for military and maritime trade.
  • This is in addition to global superpowers and regional players vying for control over Greeland’s vast untapped natural resources.

3) Economic interest

  • Greenland is also a resource-rich landmass, strategically located between the Arctic Sea and the Atlantic Ocean, with some of the largest deposits of rare-earth metals, including iron-ore, uranium, and by-products of zinc, neodymium, praseodymium, dysprosium and terbium.
  • These rare-earth metals are used in the production of electric cars, mobile phones and computers.
  • For the longest time, China has been the world’s largest supplier of these rare-earth metals and has expanded its acquisitory plans by excavating mines across the African continent.
  • An acquisition of Greenland would make the US less reliant on China for these rare-earth metals.
  • Greenland, as a part of the Arctic region, also has large deposits of undiscovered oil and gas, resources that the US always wants more of.

The US obsession

  • Trump’s interest in Greenland is almost an extension of his world view and US foreign policy in his administration.
  • Purchasing another country or territory is unusual, but the US government has done this twice before.
  • Erstwhile President Thomas Jefferson acquired Louisiana from the French in 1803 and the second time when President Andrew Johnson purchased Alaska from Russia in 1867.

Back2Basics: Greenland

  • Greenland is the world’s largest island located between the Arctic and Atlantic oceans, east of the Canadian Arctic Archipelago.
  • It is an autonomous territory within the Kingdom of Denmark.
  • Though physiographically a part of the continent of North America, Greenland has been politically and culturally associated with Europe
  • The majority of its residents are Inuit, whose ancestors migrated from Alaska through Northern Canada, gradually settling across the island by the 13th century.

Capital Markets: Challenges and Developments

What is Operation Twist?


From UPSC perspective, the following things are important :

Prelims level : Operation Twist, OMOs

Mains level : Operation Twist

The Reserve Bank of India (RBI) has announced simultaneous purchase and sale of government bonds in a bid to soften long-term yields under its Operation Twist.

Operation Twist

  • Operation Twist is a move taken by U.S. Federal Reserve in 2011-12 to make long-term borrowing cheaper.
  • It first appeared in 1961 as a way to strengthen the U.S. dollar and stimulate cash flow into the economy.
  • It is the name given to a Federal Reserve monetary policy operation that involves the purchase and sale of bonds.
  • The operation describes a form of monetary policy where the bank buys and sells short-term and long-term bonds depending on their objective.

Its genesis

  • The name “Operation Twist” was given by the mainstream media due to the visual effect that the monetary policy action was expected to have on the shape of the yield curve.
  • If we visualize a linear upward sloping yield curve, this monetary action effectively “twists” the ends of the yield curve, hence, the name Operation Twist.
  • To put another way, the yield curve twists when short-term yields go up and long-term interest rates drop at the same time.

 Back2Basics: Open Market Operations

  • Open market operations are the sale and purchase of government securities and treasury bills by RBI or the central bank of the country.
  • The objective of OMO is to regulate the money supply in the economy.
  • When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.
  • OMO is one of the tools that RBI uses to smoothen the liquidity conditions through the year and minimise its impact on the interest rate and inflation rate levels.

Coronavirus – Disease, Medical Sciences Involved & Preventive Measures

Mobile Virology Research and Diagnostics Laboratory (MVRDL)


From UPSC perspective, the following things are important :

Prelims level : BSL ratings

Mains level : Not Much

The Defence Research and Development Organisation (DRDO) has developed a mobile virology research lab.

We can expect a  prelim question on BSL ratings as the term is widely appearing in news these days.

About the MVRDL

  • The MVRDL is the combination of a bio-safety level (BSL)-3 lab and a BSL-2 lab and was set up in a record time of 15 days.
  • It can process 1,000-2,000 samples a day.
  • The mobile lab will be helpful in carrying out a diagnosis of COVID-19 and in virus-culturing for drug screening, convalescent plasma-derived therapy, comprehensive immune profiling of patients towards vaccine etc.

What are Biosafety Level (BSL) Ratings?

  • A BSL is a set of biocontainment precautions required to isolate dangerous biological agents in an enclosed laboratory facility.
  • The levels of containment range from the lowest biosafety level 1 (BSL-1) to the highest at level 4 (BSL-4).
  • BSL-1 is suitable for work with well-characterized agents which do not cause disease in healthy humans.
  • BSL- 2 is suitable for work involving agents of the moderate potential hazard to personnel and the environment.
  • BSL-3 is appropriate for work involving microbes which can cause serious and potentially lethal disease via the inhalation route.
  • BSL-4 is the highest level of biosafety precautions and is appropriate for work with agents that could easily be aerosol-transmitted within the laboratory and cause severe to fatal disease in humans for which there are no available vaccines or treatments.

ISRO Missions and Discoveries

[pib] Super-luminous Supernova SN 2010kd


From UPSC perspective, the following things are important :

Prelims level : Supernovae

Mains level : Not Much

Indian researchers have found that SN 2010kd, a super-luminous supernova stands out with the amount of mass as well as Nickel ejected during explosion.

Space science-related terms these days are often focused on Gravitational waves, Black holes etc. But basic terminologies are very important and need to be taken care of. For example, a layman may hardly find any difference between Novae-Supernovae, Neutron star, Nebula etc. UPSC often tries to bust you with such basic differences.

What are Supernovae?

  • Supernovae are kind of energetic explosions were the core of massive stars (a few times to that of the mass of our Sun) goes to a catastrophic phase of explosion liberating huge amounts of energy and mass.
  • These events are visible through very far away distances much beyond our own solar system.
  • Super-luminous supernovae are a special type of stellar explosions having energy output 10 or more times higher than that of standard supernovae.

What is so distinct about SN 2010kd?

  • The mass ejection from SN 2010kd is metallic and is much more than seen in case of normal core-collapse supernovae.
  • The scientists found that SN 2010kd exploded with a larger velocity but decayed slower than other similar supernovae.
  • The observations show that parameters like rotation and metallicity play a crucial role in stellar explosions.

Innovations in Sciences, IT, Computers, Robotics and Nanotechnology

[pib] ‘NanoBlitz 3D’ tool to map properties of nano-materials


From UPSC perspective, the following things are important :

Prelims level :  NanoBlitz 3D

Mains level : NA

Indian scientists have developed an advanced tool for mapping nano-mechanical properties of materials like multi-phase alloys, composites, and multi-layered coatings.

Nanotechnology is a pathbreaking technology which can create many new materials and devices with a wide range of applications, such as in nanomedicine, nanoelectronics etc.  NanoBlitz 3D is another distinct development. We can expect a prelims question asking what the NanoBlitz 3D is , with confusing options like 3d printing tool etc.

 NanoBlitz 3D

  • Scientists from Advanced Research Centre for Powder Metallurgy and New Materials (ARCI) an autonomous institute under the Dept. of S&T have developed this tool.
  • It is an advanced tool for mapping nano-mechanical properties of materials like multi-phase alloys, composites, and multi-layered coatings.
  • The tool has been useful to yield excellent results on a wide range of material systems, including glass-fibre-reinforced polymer composites, dual-phase steels, softwood and shale.
  • An important aspect of this technique is its high-throughput, with just a few hours of testing required for generating more than 10,000 data points that can be processed using machine learning (ML) algorithms.

Festivals, Dances, Theatre, Literature, Art in News

Festivals in news: Ambubachi Mela


From UPSC perspective, the following things are important :

Prelims level : Ambubachi Mela

Mains level : NA

The Ambubachi Mela at Guwahati’s Kamakhya Temple has been cancelled this year due to COVID-19.

Many festivals this year have been cancelled for the first time in their recorded history. Few of them were – Thrisur Pooram Festival, Pandharpur Jatara and now, the Ambubachi Mela. Do read about the Medaram Jatara (held in February) as well. Take note of each of them and their speciality along with the respective state of celebration.

Ambubachi Mela

  • Ambubachi Mela, a four-day fair to mark the annual menstruation of the goddess at Kamakhya temple in Guwahati has begun.
  • Legends say the temple atop the Nilachal Hills, whose northern face slopes down to the Brahmaputra River, was built by the demon king Narakasura.
  • But records are available only from 1565 when Koch king Naranarayana had the temple rebuilt.
  • Kamakhya is one of 51 shaktipeeths or holy sites for the followers of the Shakti cult, each representing a body part of the Sati, Lord Shiva’s companion.
  • The temple’s sanctum sanctorum houses the yoni – female genital – symbolised by a rock.


  • Temple priests said the ritualistic fair celebrating the Goddess’ period is one of the reasons why taboo associated with menstruation is less in Assam compared to other parts of India.
  • The attainment of womanhood of girls in Assam is celebrated with a ritual called Tuloni Biya, meaning small wedding.

Similar place

  • A similar custom is followed at the Devi Temple at Chengannur town in Alleppey district of Kerala.
  • The temple is shut for the days the Goddess there is believed to undergo her period.