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Subject: Economics

  • Transaction fees on UPI in 2 weeks

    Why in the News

    A merchant discount rate of 0.3% on Unified Payments Interface (UPI) transactions of Rs 2,000 and above is expected to be announced within two weeks. Six years of zero pricing built a network that now carries most of India’s digital payment volume without generating the revenue to maintain it, and restoring a fee moves that cost onto merchants while keeping the transaction free for consumers.

    What is the merchant discount rate?

    1. About: The merchant discount rate (MDR) is a fee paid by businesses to payment processors for accepting digital payments, deducted from the amount the merchant receives.
    2. Who it is shared among: The fee funds the banks, payment service providers and network operators that carry a transaction between the payer and the merchant.
    3. Its history on UPI: An MDR of up to 0.3% of the transaction value applied to UPI person-to-merchant transactions until December 2019.
    4. Zero MDR: Zero MDR was introduced in January 2020 to accelerate digital payment adoption and encourage a shift from cash to digital payments.

    What is the UPI and Services Steering Committee?

    1. About: It is the body headed by the National Payments Corporation of India that will determine the merchant discount rate on UPI, its scope and its structure.

    What is Section 10A of the Payment and Settlement Systems Act, 2007?

    1. About: Section 10A is the provision granting statutory protection from charges to specified electronic payment modes, which is what prevented a fee being levied on UPI.
    2. What changed: The Taxation and Other Laws (Amendment) Bill, 2026 amended Section 10A to pave the way for an MDR on UPI transactions above a certain threshold.

    How will the fee actually be brought into effect?

    1. Step one, the gazette notification: The Department of Financial Services will likely issue a gazette notification within a week specifying which electronic payment modes continue to receive statutory protection from charges.
    2. Step two, the rate decision: The UPI and Services Steering Committee will then determine the MDR, its scope and its structure.
    3. The consumer assurance: The government assured during the parliamentary debate on the amending Bill that UPI transactions will remain free for consumers.

    Why is a fee being restored after six years of zero pricing?

    1. Volume outgrew the funding model: UPI transactions jumped sharply after the Covid-19 pandemic, and banks and payment intermediaries ramped up investment in payment infrastructure to carry that load.
    2. Industry pressure for sustainability: The scale of that investment produced industry calls for the restoration of charges to make the system financially sustainable.
    3. The interim substitute was a subsidy: The government introduced an incentive scheme providing banks and other ecosystem participants an incentive equivalent to 0.15% MDR on UPI transactions up to Rs 2,000.
    4. The parliamentary committee’s warning: The Parliamentary Standing Committee on Finance called for early implementation of a tiered MDR framework, warning that delays could leave payment service providers dependent on inadequate government subsidies and weaken investment in payment infrastructure.

    How does 0.3% compare with the cost of other payment instruments?

    1. Credit cards: The prevailing MDR on credit card transactions is 1% to 3% of transaction value.
    2. Debit cards: The prevailing MDR on debit card transactions runs up to 0.9%.
    3. UPI at the proposed rate: A reintroduced MDR of 0.3% above a threshold would still be substantially lower than either.
    4. The subsidy benchmark: The proposed rate is double the implicit rate the exchequer already bears through the incentive scheme on small-value payments.
    5. The volume the rate applies to: UPI processed 241.62 billion transactions worth Rs 314.23 lakh crore in 2025-26, so even a fraction of a percent applied above a threshold is a large revenue pool.

    Why does a free-to-consumer network still have to be paid for by someone?

    1. The cost does not disappear when the price is zero: Switching, settlement, fraud monitoring and dispute resolution have running costs, and zero MDR moved them from merchants onto banks and the exchequer.
    2. Subsidy funding is discretionary and can lapse: An incentive scheme depends on an annual budgetary allocation, which is what the Parliamentary Standing Committee on Finance identified as inadequate and unreliable.
    3. Merchants now bear what consumers do not: Keeping the consumer free means the fee lands on the acceptance side, on the same small merchants whose adoption zero MDR was designed to secure.
    4. The threshold is doing the distributive work: Applying the fee only at Rs 2,000 and above protects the low-value transactions that dominate UPI by count, and captures the higher-value transactions that dominate by value.

    What challenges does reintroducing MDR on UPI face?

    1. Merchant resistance at the acceptance point: Small merchants may refuse UPI above the threshold or steer customers to cash to avoid the fee. Eg. Cash-on-delivery persists across Indian e-commerce despite a decade of digital payment incentives.
    2. Transaction splitting to stay below the threshold: A hard cut-off gives both sides a reason to break one payment into two. Eg. A payment of Rs 2,500 broken into two of Rs 1,250 falls below the threshold and carries no fee.
    3. Erosion of the adoption gains zero MDR bought: The zero-price regime was introduced specifically to shift users from cash, and reversing it risks reversing part of that shift. Eg. Zero MDR was introduced in January 2020 for the stated purpose of accelerating digital payment adoption.
    4. Concentration risk in the underlying network: A small number of third-party applications carry most UPI volume, so pricing decisions transmit through a narrow set of intermediaries. Eg. The National Payments Corporation of India has repeatedly deferred its own market share cap on third-party application providers.
    5. Outage and reliability exposure at national scale: A single network carrying most retail payments makes any downtime a systemic event rather than a service failure. Eg. UPI accounted for 85% of India’s digital payment transactions by volume in 2025-26.
    6. Fraud and mule account misuse growing with volume: Higher-value transactions attract more sophisticated fraud, and the cost of investigation falls on the same intermediaries the fee is meant to fund. Eg. The Reserve Bank of India has repeatedly directed banks to tighten controls on accounts used to route proceeds of digital payment fraud.
    7. Cross-subsidy questions across instruments: Pricing UPI below cards while both run on shared bank infrastructure distorts the choice of instrument at the counter. Eg. Credit card MDR at 1% to 3% funds reward programmes that UPI cannot match at 0.3%.

    Conclusion

    Zero MDR delivered adoption at a scale no other retail payment system has reached, and it did so by placing the cost of the network on banks and on the exchequer rather than on its users. Restoring a 0.3% fee above Rs 2,000 converts that subsidy into a price, keeps consumers unaffected and tests whether merchants will absorb the cost at the acceptance point. The measure currently stands at the stage where Section 10A of the Payment and Settlement Systems Act, 2007 has been amended, and the next milestones are a gazette notification from the Department of Financial Services within a week and the rate decision by the UPI and Services Steering Committee within two weeks.

    “[2026] Which one of the following statements about Unified Payments Interface (UPI) and Central Bank Digital Currency (Digital Rupee) is NOT correct?

    (a) UPI is a real-time payment system but Digital Rupee is akin to sovereign paper currency

    (b) In case of UPI, settlement for end users happens instantly; in case of Digital Rupee, wallet balance gets transferred to another wallet (no traditional settlement)

    (c) UPI transactions are recorded by banks and reflected in bank statements; in case of Digital Rupee, no data is captured in bank statements

    (d) In both the cases (UPI and Digital Rupee), the liability lies with the users and their respective banks

  • Panel to review nuclear liability caps every 5 years

    Why in the News

    Draft rules released by the Department of Atomic Energy on 14 August 2026 require an expert group to review the graded caps on nuclear operators’ civil liability once every five years. The review reaches only the operator’s cap, and leaves untouched the removal of the supplier’s statutory liability that is now the subject of a challenge in the Supreme Court.

    What is the Sustainable Harnessing and Advancing Nuclear Energy for Transitioning India (SHANTI) Act, 2025?

    1. About: The SHANTI Act, 2025 replaces both the Atomic Energy Act, 1962 and the Civil Liability for Nuclear Damage Act, 2010 (CLNDA) in a single unified statute, and is the first comprehensive overhaul of India’s nuclear power regime since independence.
    2. What it opens: The Act allows private entities to own and operate nuclear power plants for the first time, covering construction, transport, storage, import, export and handling of nuclear material, with mandatory authorisation from the Atomic Energy Regulatory Board for every activity.
    3. What it retains for the State: The government keeps an exclusive monopoly over enrichment, isotope separation, spent fuel reprocessing and radioactive waste management, so the fuel cycle remains entirely in the public sector.
    4. What it changed on liability: The Act’s Second Schedule introduced graded liability caps based on the size of a nuclear installation, replacing the earlier flat cap of Rs 1,500 crore under the CLNDA.

    What is an operator’s right of recourse?

    1. About: A right of recourse is the operator’s ability, after paying compensation for nuclear damage, to recover that amount from another party responsible for the incident.
    2. Why it is contested: The scope of this right decides whether the financial consequence of a defective component rests with the plant operator or travels back to the equipment supplier.

    What does Rule 78 of the draft rules provide?

    1. A standing review, not an occasional one: Rule 78 requires the Central government to constitute a group of experts to review the maximum limits of the operator’s civil liability for nuclear damage once every five years.
    2. Composition of the expert group: The group draws from nuclear science and engineering, actuarial science, insurance and law, together with public-interest representatives.
    3. What it can recommend: The group may propose amendments to the Second Schedule of the Act, which is where the graded caps sit.
    4. How this differs from the earlier law: Section 6 of the now-repealed CLNDA also allowed the Centre to periodically review the operator’s liability and notify a higher amount. The draft rules add a defined time period within which that review must happen.

    What are the graded liability caps under the Second Schedule?

    1. Above 3,600 Megawatt-electric (MWe): Operators of reactors above 3,600 MWe face a maximum liability of Rs 3,000 crore. MWe measures the electrical output of a reactor as distinct from its thermal output.
    2. 1,500 MWe to 3,600 MWe: Operators in this band face a cap of Rs 1,500 crore.
    3. 750 MWe to 1,500 MWe: The cap falls to Rs 750 crore.
    4. 150 MWe to 750 MWe: The cap falls to Rs 300 crore.
    5. Up to 150 MWe and other facilities: For reactors up to 150 MWe, for fuel-cycle facilities other than spent-fuel reprocessing plants, and for the transportation of nuclear material, liability is capped at Rs 100 crore.

    How has the operator’s right of recourse against suppliers changed?

    1. The three grounds under the old law: Section 17 of the CLNDA gave the operator a right of recourse where the right was expressly provided for in a written contract, where the incident resulted from an act of the supplier or the supplier’s employee including supply of equipment or material with patent or latent defects or sub-standard services, and where the incident resulted from an act or omission of an individual done with intent to cause nuclear damage.
    2. What survives: The new law retains the contractual ground and the intentional damage ground.
    3. What has been dropped: The supplier defect ground has been omitted, and it was the provision that exposed nuclear equipment vendors to long-term and uncertain liability risk in the event of an accident.
    4. What replaces it: Operators may now seek recourse from suppliers only through what they negotiate into a contract, which moves the question from statute to bargaining power.
    5. What it unblocks: Removing the statutory supplier exposure directly addresses the objection that kept foreign vendors out of Indian projects for over a decade.

    Why is the liability framework being challenged in the Supreme Court?

    1. The grounds pleaded: A petition challenges the Act for allowing private sector and foreign companies to operate nuclear power plants in India, for capping the liability of these operators at what it calls an absurdly low level, and for exempting the supplier from any liability, in violation of the Constitution.
    2. The accountability objection: Opening the sector to private operators while capping their exposure shifts residual risk from the operator to the exchequer and ultimately to victims.
    3. The five-yearly review does not answer it: Rule 78 allows the operator’s cap to be revised upward over time. It creates no mechanism to restore a supplier’s statutory liability, which the Act has removed from the framework entirely.
    4. The competing objective: Liability certainty is the precondition foreign vendors set for entering Indian projects, so the same provision that draws the petition is the one that makes the capacity expansion arithmetic feasible.

    What challenges does India’s civil nuclear liability framework face?

    1. A cap fixed in nominal terms erodes with inflation: A rupee figure written into a Schedule loses real value between revisions, so the five-year cycle sets the pace at which protection decays. Eg. The flat cap under the Civil Liability for Nuclear Damage Act, 2010 stood unrevised from 2010 until the SHANTI Act, 2025 replaced it with graded caps.
    2. Caps far below the actual cost of a severe accident: Graded caps measured in thousands of crores do not approach the cost of a major release. Eg. Cleanup and compensation costs after the 2011 Fukushima accident in Japan ran to tens of trillions of yen, orders of magnitude above any cap in the Second Schedule.
    3. Thin domestic insurance capacity for nuclear risk: Operators must place cover for the capped amount in a market with few underwriters willing to carry nuclear exposure. Eg. The India Nuclear Insurance Pool was created in 2015 precisely because individual insurers would not write the risk alone.
    4. Contractual recourse depends on bargaining power: With the statutory supplier ground removed, a smaller operator negotiating with a global vendor has little leverage to secure recourse in the contract. Eg. Jaitapur negotiations with the French vendor stalled for years over tariff and liability terms even while the statutory provision was in force.
    5. Regulatory independence still being built out: The Atomic Energy Regulatory Board has only now received statutory authority, having previously reported to the Department of Atomic Energy it was meant to regulate. Eg. The SHANTI Act, 2025 grants the Board statutory status for the first time and places its expenditure under the Comptroller and Auditor General.
    6. Claims machinery untested at scale: A dedicated claims commission exists on paper without a demonstrated record of settling mass claims quickly. Eg. The Act establishes a Nuclear Damage Claims Commission with appeals to the Electricity Appellate Tribunal, neither of which has adjudicated a nuclear damage claim.
    7. Public acceptance and siting resistance: Liability caps read as a transfer of risk to communities near installations, which hardens local opposition to siting. Eg. Sustained local protest at Kudankulam in Tamil Nadu delayed commissioning of the first units for years.

    Conclusion

    The five-yearly expert review converts a static Schedule of liability caps into a periodically revisable one, which is a real improvement on a flat figure left unrevised for fifteen years. It does not address the change that drew the litigation, since the supplier’s statutory exposure has been removed rather than capped, and no review clause can restore it. The measure currently stands at the draft rules stage, and the source states no date for the close of the comment window or for notification of the final rules, with the constitutional challenge to the Act pending before the Supreme Court.

    “[2018, GS3, 15] With growing energy needs should India keep on expanding its nuclear energy programme? Discuss the facts and fears associated with nuclear energy.”

  • Core industrial sector growth slows to 5.4% in July as fertilizer, steel, iron ore, oil output falls

    Why in the News

    Growth in India’s nine core industrial sectors slowed to 5.4% in July 2026 from 6% in June, according to official data released on 20 August 2026. The headline number is being held up by cement, electricity and a low-base rebound in iron ore and coal, at a time when the input industries feeding manufacturing and the domestic energy producers are contracting.

    What is the Index of Core Industries?

    1. About: The Index of Core Industries (ICI) measures the combined production performance of nine industries that supply inputs and energy to the rest of the economy, and is released monthly by the Ministry of Commerce and Industry.
    2. The nine sectors: Coal, crude oil, natural gas, refinery products, fertilizers, steel, iron ore, cement and electricity.
    3. New series: A new series of the index was released in July 2026 with 2022-23 as the base year, replacing the 2011-12 base year, and July’s reading is the second print of the revamped index.
    4. Break in comparability: Because of the base year change, a historical comparison on the new series is possible only up to June 2025.

    How did each of the nine sectors perform in July 2026?

    1. Cement: Growth hit 13.1% in July, a seven-month high, up from 11.1% growth in July of last year.
    2. Iron ore: Growth slowed to 29.5% in July from 44.5% in June, the biggest shift among the nine sectors.
    3. Electricity: The sector grew 9% in July, slower than the 11.4% recorded in June.
    4. Coal: Growth reached 7.6% in July 2026, an eleven-month high, against a contraction of 12.3% in July last year.
    5. Steel: Growth slowed to 2.9% in July, the lowest in the 14 months for which data exists on the new series, down from 5.6% in June.
    6. Refinery products: The sector grew 2.7% in July, snapping a three-month streak of contractions and delivering its best performance in nine months.
    7. Natural gas: The sector contracted 3.7% in July 2026, part of an unbroken run of contractions across all 14 months for which data exists.
    8. Crude oil: The sector contracted 5.3% in July 2026, also contracting continuously across the same 14 months.
    9. Fertilizers: The sector contracted 8% in July against a contraction of 3.3% in June, having grown 1.9% in July of last year.

    Why does the headline growth rate overstate the underlying recovery?

    1. The fastest growing sector is rebounding off a collapse: Iron ore’s 29.5% growth sits on a base in which the sector contracted 16.4% in June and 7.1% in July of last year.
    2. Coal’s eleven-month high has the same explanation: The 7.6% reading follows a 12.3% contraction in July last year, so the level of output has not necessarily exceeded its earlier peak.
    3. A truncated series hides the longer trend: With comparison possible only back to June 2025, a fourteen-month record is the longest statement the data supports about any sector.
    4. Composite growth masks divergence: July’s 5.4% was still the second-fastest reading in seven months, even as three of the nine sectors were in contraction.

    What explains the contraction in fertilizers and in domestic energy output?

    1. Monsoon transmission into fertilizer demand: The 8% fertilizer contraction is attributed to a deficient and patchy monsoon and the resultant lower levels of sowing, which cut the demand fertilizer plants produce for.
    2. A structural decline in domestic hydrocarbons: Natural gas and crude oil have contracted in every one of the 14 months for which data exists, which is a production trend rather than a monthly disturbance.
    3. Refining recovered while extraction did not: Refinery products returned to growth in July even as the crude oil that feeds refineries kept contracting, which widens the gap filled by imports.
    4. Steel weakness alongside cement strength: Steel growth fell to a fourteen-month low in the same month that cement growth hit a seven-month high, so construction activity is not translating into metal demand.

    “[2015] In the ‘Index of Eight Core Industries’, which one of the following is given the highest weight?

    (a) Coal Production

    (b) Electricity generation

    (c) Fertilizer production

    (d) Steel production

  • In a 5-4 ruling, Supreme Court for tweaking the definition of industry, exempts pending matters

    Why in the News

    A nine-judge Bench of the Supreme Court held on 20 August 2026, by a 5:4 margin, that the expansive 1978 interpretation of the term industry will not govern the Industrial Relations Code, 2020. The ruling preserves that interpretation for disputes already pending under the Industrial Disputes Act, 1947 and withdraws it from every case that follows.

    What is the ‘triple test’ laid down in Bangalore Water Supply (1978)?

    1. Origin: A seven-judge Constitution Bench in Bangalore Water Supply and Sewerage Board v. A. Rajappa (1978), authored by Justice V.R. Krishna Iyer, read Section 2(j) of the Industrial Disputes Act, 1947 expansively.
    2. The three conditions: An undertaking qualifies as an industry where there is systematic activity, organised by cooperation between employer and employee, for the production or distribution of goods or services calculated to satisfy human wants and wishes.
    3. What the test ignores: Profit motive is irrelevant to the classification. Purely spiritual or religious activity stays outside the definition.
    4. Reach: The test brought hospitals, educational institutions and municipalities within the fold of industry, exempting only core sovereign activities such as the judiciary, law and order and defence, in order to protect the state’s functional autonomy.

    What is the Industrial Relations Code, 2020?

    1. About: The Industrial Relations Code, 2020 consolidates the law on trade unions, standing orders and the settlement of industrial disputes into a single statute, and came into force in November 2025.
    2. The operative provision: Section 2(p) of the Code carries its own definition of industry, taking over the function that Section 2(j) of the 1947 Act performed for 48 years.

    What did the Supreme Court actually hold on the reach of the 1978 definition?

    1. A clean slate for the new Code: The majority held that industry under Section 2(p) of the Industrial Relations Code, 2020 would not be burdened by the 1978 interpretation of Section 2(j) of the 1947 Act.
    2. No sheet anchor: The Chief Justice of India stated that the 1978 judgment and its conclusion would not act as the sheet anchor or the foundation for any future interpretation of Section 2(p).
    3. A refinement, not a reversal: The majority found that the essential framework of the 1978 interpretation had withstood the test of time, and that some of its constituent elements could have been articulated differently to better reflect the scope and contours of Section 2(j).
    4. Prospective operation: The refined triple test evolved in the opinion of the Chief Justice of India will operate prospectively, and the modified definition will not apply to pending cases.
    5. Pending disputes protected: All matters presently pending before courts, tribunals and labour authorities under the Industrial Disputes Act, 1947 are to be adjudicated in accordance with the triple test as laid down in Bangalore Water Supply.
    6. Maintainability settled: The majority held that the reference questioning the correctness of the 1978 ruling was maintainable.
    7. Text still awaited: The fine print of the ruling prescribing the new formulation of the definition has not yet been released.

    Why was the 1978 definition sent to a nine-judge Bench at all?

    1. Docket explosion: Later Benches found that the 1978 definition produced what they called a docket explosion, bringing far more cases to the labour courts.
    2. A failed legislative narrowing: Parliament attempted to narrow the definition through the Industrial Disputes (Amendment) Act, 1982, excluding several organisations from its scope.
    3. The 2005 admission: The Centre told the Court in 2005 that no alternative dispute resolution mechanism existed for employees who would fall outside the amended definition, so the 1978 position continued to hold.
    4. Divergent readings: Subsequent rulings interpreted the 1978 judgment differently, and the case was referred to a nine-judge Bench for reconsideration.

    What three questions did the reference place before the Bench?

    1. Correctness of the test: Whether the test laid down in Bangalore Water Supply remains the correct interpretation of industry, and whether later legislative developments have any bearing on it.
    2. Welfare schemes: Whether welfare schemes run by the government count as an industrial activity.
    3. Sovereign function: What constitutes a sovereign function of the state, and whether such functions fall outside the ambit of labour law altogether.
    4. When framed: The Court identified these three broad questions for consideration in February 2026.

    Why does preserving the 1978 test only for pending cases divide the workforce in two?

    1. Two regimes running side by side: A dispute already filed under the 1947 Act is decided on the wide 1978 definition. An identical dispute arising under the Code is decided on a definition that has not yet been written out.
    2. The Court’s own reason: The majority stated that it did not intend to displace the governing legal position on pending proceedings, since doing so would create artificial discrimination.
    3. What the wide net secured: The 1978 definition enabled workers across a wide range of jobs to obtain legal recourse on wages, working hours, strikes, collective bargaining and protection against arbitrary dismissal.
    4. What the clean slate removes: Workers whose disputes arise after the Code’s commencement lose the settled presumption that their workplace is an industry, and must establish it afresh under Section 2(p).

    What does the dissent argue about the State as an employer?

    1. Reference itself questioned: Justice B.V. Nagarathna found the reference against the 1978 verdict unwarranted and not maintainable, and held that the ruling required no interference or modification.
    2. Identity of the employer is irrelevant: The dissent held that merely because a function is performed by the State, it cannot be exempted from the definition of industry, so the test of who carries out the activity is not relevant.
    3. Nature of the activity governs: Social welfare activities and schemes undertaken by government departments or their instrumentalities can be construed as industrial activities for the purpose of Section 2(j), depending on the nature of the activity and all other relevant factors.
    4. Why it matters now: The dissent held that it was important, now more than ever, to retain the inclusive definition of industry to safeguard workers’ rights.
    5. Split within the majority side: Justice Joymalya Bagchi recorded disagreement with the majority on the reformulation of the triple test, and Justices Dipankar Dutta and Ujjal Bhuyan wrote dissenting opinions.

    What challenges follow from redefining ‘industry’ under the new Code?

    1. Coverage uncertainty until the operative text arrives: The modified formulation was pronounced without the wording that prescribes it being available, so adjudicating authorities have no text to apply. Eg. The hour-long pronouncement on 20 August 2026 ended with the fine print of the new formulation still awaited.
    2. Identical workplaces treated differently by filing date: The cut-off is the date of the proceeding, not the nature of the work, so two workers in the same undertaking can face different definitions. Eg. A dispute in a municipal water supply undertaking filed under the 1947 Act is decided on the triple test, and one arising afterwards is not.
    3. No fallback forum for excluded categories: Narrowing the definition removes workers from the industrial adjudication machinery without putting anything in its place. Eg. The Centre itself told the Court in 2005 that no alternative dispute resolution mechanism existed for employees who would fall outside a narrowed definition.
    4. Threshold effects that discourage firms from growing: The Code applies its stricter obligations only above stated headcounts, which gives firms a reason to stop hiring below the line. Eg. Standing orders now apply at 300 employees and prior approval for layoff, retrenchment and closure applies at 300 workers, both raised from far lower thresholds.
    5. The sovereign function boundary left to case-by-case litigation: The Court has framed the question of what a sovereign function is without settling a workable test for it. Eg. Whether a government-run welfare scheme is an industrial activity was one of the three questions placed before the Bench in February 2026.
    6. A definition built for a standard employment relation: The triple test turns on cooperation between employer and employee, which platform-mediated work does not fit. Eg. Gig and platform workers are addressed through the Code on Social Security, 2020 rather than through the industrial dispute machinery.

    Conclusion

    The Court has separated the past from the future of a single statutory term, keeping Justice Krishna Iyer’s wide definition alive for disputes already in the system and denying it any authority over the Code that now governs Indian industrial relations. The substantive contest has therefore moved from the judiciary to the text of Section 2(p) and to whoever interprets it first. The Industrial Relations Code, 2020 has been in force since November 2025, and the next milestone is the release of the full text of the judgment carrying the refined formulation of the triple test.

    “[2024, GS3, 15] Discuss the merits and demerits of the four ‘Labour Codes’ in the context of labour market reforms in India. What has been the progress so far in this regard?”

  • Steel mills face margin squeeze as global coking coal prices rise

    Why in the News

    Premium hard coking coal has averaged $236 per metric ton freight on board Australia in the first seven months of 2026, a jump of 25 percent over last year. Indian steelmakers import 95 percent of their coking coal and face competition from cheap Chinese steel at the selling end, so the input shock cannot be passed on to buyers.

    What is coking coal and why does it decide steelmaking costs?

    1. Definition: Coking coal is a low ash, low sulphur coal that is baked into coke, the carbon source that both fuels the blast furnace and chemically strips oxygen from iron ore. It is not interchangeable with the thermal coal used in power stations.
    2. Share of cost: Coking coal accounts for nearly 40 percent of steel production costs, which makes its price the single largest swing factor in a mill’s margin.
    3. Import dependence: India meets 95 percent of its coking coal needs through imports, with at least half shipped from Australia.
    4. Cost transmission: For blast furnace based steelmakers, every $10 a ton increase in coking coal prices adds approximately $7 to $9 per metric ton to steelmaking costs.

    What does freight on board (FOB) Australia mean?

    1. Price basis: Freight on board (FOB) is the price of the cargo at the loading port, before ocean freight and insurance are added. The $236 per metric ton benchmark is therefore the Australian port price, not the delivered Indian cost.

    Why have global coking coal prices risen this year?

    1. Australian supply disruptions: Output interruptions at Australian mines removed tonnage from a market where India sources at least half its requirement.
    2. Slower ramp up at new mines: New Australian capacity has come on stream more slowly than expected, so the supply gap was not filled.
    3. Middle East conflict: The conflict in the Middle East provided price support across the seaborne coal complex.
    4. Shanxi accident: A large accident at a coal mine in Shanxi, China removed further tonnage from the market in the most recent phase of the price rise.
    5. Benchmark movement: Premium hard coking coal averaged $236 per metric ton FOB Australia over the first seven months of 2026, 25 percent above the previous year, on the metallurgical coal and coke market assessment of the consultancy CRU.
    6. Outlook for the rest of the year: Costs are likely to remain high in the second half of 2026, partly due to the loss of supply following the Shanxi coal mine disaster, on the assessment of BMI, a unit of Fitch Solutions.

    How does the price rise transmit into Indian mills’ balance sheets?

    1. Direct cost pass through: Each $10 a ton rise in coking coal adds $7 to $9 per metric ton to blast furnace steelmaking cost, on the estimate of an executive at a large steel mill.
    2. Volume exposure widens the hit: Coking coal imports are expected to rise by 2 million to 3 million tons in 2026-27, from 64 million tons a year earlier, on the estimate of the commodities consultancy BigMint, so the higher price applies to a larger tonnage.
    3. Freight adds on top of the cargo price: Trade flows have tightened with high demand from India and higher diesel, freight and insurance costs, on the assessment of Moody’s Ratings, raising the delivered cost above the FOB benchmark.
    4. Margin compression is already reported: Executives at three leading steelmakers report squeezed margins with little headroom to raise steel prices.

    Why can Indian mills not pass the cost on to buyers?

    1. Cheap Chinese steel sets the ceiling: Competition from cheap Chinese steel leaves little headroom to raise domestic steel prices even as input costs rise.
    2. Tariffs have not stopped the inflow: Shipments from China have increased despite import tariffs on some grades, so the trade remedy has not restored pricing power.
    3. Demand is strong but price inelastic: Domestic demand is buoyant on the back of infrastructure spending and strong economic growth, and that demand is being served at prices anchored by imports.
    4. Cost push and price ceiling combine: The squeeze operates from both ends at once, on the input side by coking coal and on the output side by import competition.

    What does the squeeze mean for India’s steel capacity expansion?

    1. Capital expenditure at risk: Squeezed margins could impede investment and delay capacity expansion at a time when Indian steelmakers are stepping up spending.
    2. Demand case remains intact: The expansion plans are driven by infrastructure led domestic demand and strong economic growth, so a delay is a supply side failure rather than a demand failure.
    3. Import bill widens: Rising coking coal import volumes alongside rising prices widen the trade exposure of a sector already dependent on a single dominant supplier.

    What do the source geographies of India’s coking coal reveal about its exposure?

    1. Australia, the anchor supplier: Australia ships at least half of India’s coking coal and is expected to continue doing so, which makes an Australian supply interruption an Indian cost event.
    2. China, both a supply and a competition risk: The Shanxi mine accident tightened coking coal supply, and rising Chinese steel shipments simultaneously cap Indian mills’ selling prices.
    3. Russia, a discount that has faded: Russian coal accounted for 24 percent of India’s coking coal imports in recent years, and the discounts on it have diminished over the past two years.
    4. Mozambique and the United States, the diversification margin: Imports from Russia, Mozambique and the United States are all set to rise as India spreads its sourcing.
    5. The Middle East, a freight channel rather than a supply channel: The United States and Iran war raises diesel, freight and insurance costs on seaborne routes rather than removing coal tonnage.

    Challenges to India’s coking coal supply security

    1. Extreme import concentration: A 95 percent import share with at least half from one country leaves no domestic buffer against a single supplier’s disruption. e.g. Australian supply disruptions in 2026 alone lifted the premium hard coking coal benchmark to an average of $236 per metric ton.
    2. Domestic coking coal is largely unusable raw: Indian coking coal carries high ash content and needs washing and blending with imported low ash coal before it can enter a blast furnace. e.g. the Jharia coalfield in Jharkhand holds India’s only significant prime coking coal deposits and still cannot substitute imports without beneficiation.
    3. No pricing power at the selling end: Import competition caps steel prices, so cost shocks are absorbed in the margin rather than recovered from the customer. e.g. Chinese shipments into India rose in 2026 despite import tariffs on some grades.
    4. Freight and insurance are a second, uncorrelated shock: Shipping cost spikes hit the delivered price even when the cargo price is stable. e.g. the United States and Iran war raised diesel, freight and insurance costs on the routes carrying Indian bound coal.
    5. Capacity expansion is the first casualty: Compressed margins delay the capital expenditure cycle rather than current output, so the damage appears years later. e.g. Indian mills stepping up spending to serve infrastructure driven demand now face investment decisions taken under a squeezed margin.
    6. The scrap based alternative route is supply constrained: Electric arc and induction furnace steelmaking avoids coking coal but depends on scrap that India does not generate in sufficient volume. e.g. India continues to import ferrous scrap despite the Steel Scrap Recycling Policy, 2019.

    Conclusion

    India’s steel sector faces a cost shock it cannot pass on, because a 95 percent import dependence on coking coal sits alongside a domestic price ceiling set by cheap Chinese steel. Coking coal is set to remain expensive through the second half of 2026 following the Shanxi supply loss, and import volumes are projected to rise by 2 million to 3 million tons in 2026-27. The immediate risk is not to current production but to the capacity expansion India needs to meet infrastructure led demand. Reducing the exposure requires domestic beneficiation capacity and a wider supplier base, neither of which can be built within a single price cycle.

    Steel Sector in India

    1. Global standing: India is the world’s largest crude steel producer after China and the world’s largest producer of direct reduced iron, also called sponge iron.
    2. Two production routes: The blast furnace and basic oxygen furnace route depends on coking coal and iron ore, and the electric arc furnace, induction furnace and direct reduced iron route depends on scrap, natural gas or non coking coal.
    3. Policy target: The National Steel Policy, 2017 targets 300 million tonnes of crude steel capacity and per capita finished steel consumption of 158 kg by 2030-31.
    4. Structural dependence: India holds large thermal coal reserves but very limited prime coking coal, so the raw material constraint is qualitative rather than quantitative.
    5. Trade position: India moved to being a net importer of finished steel in recent years, which is why import competition now shapes domestic pricing.

    Government Initiatives for the Steel Sector

    1. Production Linked Incentive Scheme for Specialty Steel: Approved in 2021 to incentivise domestic manufacture of value added grades such as coated steel, high strength steel and electrical steel that India otherwise imports.
    2. Mission Purvodaya: Launched in 2020 to build an integrated steel hub in eastern India, drawing on the iron ore and coal belt of Odisha, Jharkhand, West Bengal, Chhattisgarh and Andhra Pradesh.
    3. Steel Scrap Recycling Policy, 2019: Sets up a framework of registered scrapping centres to raise domestic scrap availability and reduce reliance on imported scrap and on coking coal based production.
    4. Domestically Manufactured Iron and Steel Products Policy: Provides preference to domestically manufactured iron and steel in government procurement, to anchor demand for local mills.
    5. Steel Import Monitoring System: Requires advance registration of steel imports so that the government has near real time visibility of import volumes, grades and prices.
    6. Mission Coking Coal: A Ministry of Coal initiative to raise domestic raw coking coal production and washing capacity so that the import share falls over time.
    7. Green Steel Taxonomy: Notified in 2024 to define and star rate low emission steel, creating a domestic standard ahead of carbon border measures in export markets.

    Key Facts about Coking Coal and Indian Steel

    1. Jharia coalfield: Located in Jharkhand, it holds India’s only significant reserves of prime coking coal and has been affected by long running underground mine fires.
    2. Ash content problem: Indian coking coal typically carries ash levels well above the imported grades, which is why it must be washed and blended rather than used directly.
    3. Coke, not coal, enters the furnace: Coking coal is converted to metallurgical coke in coke ovens before charging into the blast furnace.
    4. Administering ministry: The steel sector is administered by the Ministry of Steel and coal by the Ministry of Coal, which is why coking coal policy sits across two ministries.
    5. Non coking coal use: The sponge iron route uses non coking coal, which India produces domestically in large volumes, and is the reason India leads the world in direct reduced iron.

    “[2020, GS1, 15 marks] Account for the present location of iron and steel industries away from the source of raw material, by giving examples.”

  • RBI moves to define revolving credit for the first time and bar non-banks from offering it

    Why in the News

    The Reserve Bank of India (RBI) has proposed the first ever regulatory definitions of a term loan and revolving credit, and any facility failing the term loan test would become revolving credit that non-banking financial companies can no longer offer. Revolving credit is the instrument that carried formal finance into rural India, where income is seasonal and expenses run months ahead of receipts. The regulator is now weighing that inclusion gain against the risk of debt recycling through digital credit lines.

    What is revolving credit?

    1. About: Revolving credit comes with a pre approved credit limit against which a borrower can draw, repay and reuse without applying afresh each time.
    2. Contrast with a term loan: A normal term loan is sanctioned once and repaid in fixed instalments, and the limit is not restored after repayment.
    3. Function for the borrower: It works as a financial buffer, letting households, farmers and small entrepreneurs manage short term cash needs, emergencies and income fluctuations.
    4. Function for the lender: It provides recurring income streams, better utilisation of existing credit infrastructure and higher returns on assets through repeated usage.

    Why does rural India need revolving rather than term credit?

    1. Weight in the economy: Rural India contributes 46 to 50 percent of gross domestic product, and its income is largely seasonal.
    2. The cash flow mismatch: Farmers incur expenses on seeds, fertilisers, labour and irrigation months ahead of the income stream, and structural rigidity in the formal credit framework does not match that timing.
    3. What revolving credit does: It bridges the gap by supplying liquidity as and when it is required rather than in a single sanctioned tranche.
    4. Protective function: It acts as a shield against financial shocks and against informal loan sharks.
    5. The instruments it produced: The Kisan Credit Card (KCC), overdraft facilities, self help group credit lines, microfinance linked loans and, increasingly, digital credit products.
    6. Beyond the farm: Rural micro enterprises depend on flexible working capital, and the self help group and bank linkage programme supported by NABARD has created one of the world’s largest community based credit ecosystems.

    What has the Kisan Credit Card delivered?

    1. Introduction: The KCC scheme was introduced in 1998-99 as the principal form of revolving credit in rural areas.
    2. Widening scope: It expanded beyond crop cultivation to allied activities such as dairy, fisheries and animal husbandry.
    3. Current spread: More than 7.72 crore KCCs are active nationwide.
    4. Who holds them: The majority of beneficiaries are small and marginal farmers.
    5. Broader effect: The share of rural households accessing institutional credit channels such as the KCC has risen significantly.

    How have non-banking financial companies become the main channel?

    1. Why they entered: Small ticket unsecured revolving loans carry higher interest rates on higher risk, so the untapped rural market offered both volume and yield.
    2. Product spread: Non-banking financial companies (NBFCs) expanded revolving credit through consumer credit lines, digital loans, merchant finance, working capital loans to micro, small and medium enterprises, and fintech partnerships.
    3. Last mile role: They became a pillar of last mile credit delivery in rural and semi urban areas where banks face high transaction costs, lack of collateral and information asymmetry.
    4. Scale: More than 9,000 registered NBFCs operate in India, the vast majority in the Base Layer, with overall outstanding credit of Rs 58.61 lakh crore by mid-2026.
    5. Composition of the rural footprint: It is driven by microfinance institutions, gold loan companies, vehicle financiers, and lenders to micro, small and medium enterprises and small ticket retail borrowers.
    6. The gap in it: Agriculture remains a relatively small component of overall NBFC lending.

    What does the microfinance data show?

    1. Portfolio outstanding now: The portfolio outstanding of the microfinance sector, comprising NBFC microfinance institutions and small finance banks, stood at Rs 2.77 lakh crore as at March-end 2026.
    2. The two preceding years: It was Rs 3.35 lakh crore a year earlier and Rs 3.78 lakh crore as at March-end 2024.
    3. Rate of contraction: Total microfinance portfolio outstanding fell by about 17 percent year on year to Rs 2.77 lakh crore by March 2026, per the SIDBI-Equifax report.
    4. Geographic concentration: The top five States, Bihar, Uttar Pradesh, Tamil Nadu, West Bengal and Karnataka, account for 57 percent of total portfolio outstanding.
    5. What the numbers indicate: A two year contraction of over a quarter in the portfolio, concentrated in five States, signals asset quality stress rather than a policy induced slowdown.

    What is the RBI proposing to change?

    1. First ever definitions: The RBI is proposing an amendment that defines term loan and revolving credit for the first time.
    2. The term loan test: A term loan may be disbursed in one or more tranches, but repayment must follow a fixed schedule.
    3. The reuse bar: Once repaid, the credit limit cannot be restored or reused.
    4. The residual category: Any facility that does not meet this definition will be treated as revolving credit.
    5. The operative restriction: Revolving credit, so defined, is what NBFCs can no longer offer.

    Why is the RBI concerned?

    1. Evergreening: The regulator has repeatedly flagged the rapid growth of unsecured retail credit, particularly through fintech and NBFC partnerships offering high risk products as revolving credit.
    2. Masked indebtedness: It remains sceptical of forms of revolving credit where repayment patterns conceal the true level of household indebtedness.
    3. Ease outpacing discipline: Technology has made borrowing easier and faster than financial discipline, and multiple borrowings through various applications with weak due diligence have elevated risk.
    4. Underwriting by algorithm: Some digital platforms relied on algorithms and alternative data without sufficient assessment of repayment capacity.
    5. Purpose of the borrowing: Unlike farm or business revolving credit, many digital credit lines financed consumption rather than income generation.
    6. Official assessment: The latest Economic Survey acknowledged the critical role of NBFCs in inclusion while warning that unchecked expansion can weaken household balance sheets.

    Can the restriction be tightened without pushing borrowers back to informal lenders?

    1. The regulator’s mandate: The RBI must tread a delicate balance between financial inclusion and financial stability, and both claims are legitimate.
    2. The case against a blanket bar: A blanket restriction may be counterproductive, since the microfinance space has historically been underserved and lending is already muted on asset quality pressures and limited funding access.
    3. The instruments at stake: The KCC and similar instruments are essential for growth, while unchecked and easy accessibility through digital platforms and consumer finance channels creates fresh vulnerability.
    4. The real policy problem: The challenge is to identify credit that helps in income generation and separate it from credit that finances consumption, since the two carry different repayment logic.
    5. The failure mode: Excessive regulatory tightening may push borrowers back towards informal lenders, defeating the very purpose of financial inclusion.

    Challenges to Revolving Credit in Rural India

    1. Debt recycling: A revolving limit lets a borrower repay one obligation by drawing on another without the stress becoming visible. e.g. a household clearing one digital credit line by drawing on a second application in the same month.
    2. Multi lending and over indebtedness: Several lenders extending limits to the same household produce a repayment burden none of them has measured. e.g. the microfinance portfolio contracting by about 17 percent year on year to Rs 2.77 lakh crore by March 2026.
    3. Geographic concentration of risk: A localised shock hits a disproportionate share of the sector’s book. e.g. Bihar, Uttar Pradesh, Tamil Nadu, West Bengal and Karnataka holding 57 percent of microfinance portfolio outstanding.
    4. Consumption financing: Credit that funds consumption creates no repayment capacity of its own. e.g. digital credit lines used for durables and lifestyle spending rather than for working capital.
    5. Weak underwriting: Alternative data and algorithmic scoring substitute for an assessment of cash flow. e.g. platforms sanctioning limits without verifying seasonal farm income.
    6. Exclusion of tenant cultivators: Revolving farm credit is tied to land records, so the actual cultivator is often ineligible. e.g. oral lessees who cannot produce title to obtain a Kisan Credit Card.
    7. Delinquency and capital cost: Unchecked expansion raises delinquencies and capital requirements together, so profitability depends entirely on risk controls. e.g. small finance banks tightening disbursement after the microfinance portfolio fell from Rs 3.78 lakh crore in March 2024.

    Conclusion

    Revolving credit solved a timing problem that term lending could not, which is why the Kisan Credit Card, self help group credit lines and NBFC credit lines became the core of rural financial inclusion. The RBI is now proposing the first regulatory definitions of a term loan and revolving credit, with the effect that non-banks would be barred from the residual revolving category. The stated concern is evergreening and masked household indebtedness through fintech linked digital credit rather than farm or enterprise credit. The measure is at the proposal stage, and its success will be judged by whether the definitional line separates income generating credit from consumption credit, since a blanket restriction would return underserved borrowers to informal lenders.

    “[2014, GS3, 12.5 marks] “In the villages itself no form of credit organization will be suitable except the cooperative society.”-All India Rural Credit Survey. Discuss this statement in the background of agricultural finance in India. What constraints and challenges do financial institutions supplying agricultural finance face? How can technology be used to better reach and serve rural clients?”

  • Transmission Constraints Emerge as the Binding Limit on India’s Renewable Expansion

    Why in the News

    Insufficient transmission lines have emerged as a major obstacle to India’s renewable energy expansion, with many solar projects being curtailed during daylight hours, a rating agency assessment released on 19 August 2026 found. The constraint has shifted the binding limit on India’s energy transition from how fast capacity can be built to how much of it the grid can actually carry, and new project bidding has collapsed in response.

    What is curtailment of renewable power?

    1. Forced reduction of output: Curtailment occurs when a power generator is forced to reduce or stop producing electricity because of oversupply and grid congestion, even though the plant is capable of generating.
    2. Why solar is hit hardest: Solar output peaks in the middle of the day, when several projects on the same corridor feed in simultaneously and demand is not correspondingly high, so the surplus cannot be evacuated.
    3. What it costs the generator: A curtailed unit is generation permanently lost, since sunlight cannot be stored without additional storage capacity, and the fixed cost of the asset continues to accrue against a smaller output.
    4. Scale of the problem: Around 37% of renewable energy capacity at substations affected by curtailment in the northern, western and southern regions operates under short term access arrangements, and this capacity faces 30% to 50% curtailment during the day.

    What is Temporary General Network Access?

    1. Short term use of spare grid capacity: Temporary General Network Access (T-GNA) is a short term arrangement that allows a renewable energy project to use available capacity on the inter-State transmission system, typically for periods ranging from a single time block to about 11 months.
    2. Why it is precarious: T-GNA gives no firm entitlement to evacuate power, so projects operating under it are particularly vulnerable to curtailment, which raises their operational costs and, on prolonged use, reduces the supplier’s revenues.

    What is the inter-State transmission system?

    1. The national transmission backbone: The inter-State transmission system is the network of high voltage lines and substations that carries power across State boundaries, planned centrally and operated as a single national grid, on which access rights are allotted separately from generation approvals.

    What is a Power Purchase Agreement?

    1. The contract that makes a project bankable: A Power Purchase Agreement (PPA) is the long term contract under which a distribution company or intermediary agrees to buy a defined quantity of power from a generator at an agreed tariff, and without a signed PPA a project has no assured revenue stream against which lenders will disburse.

    What is firm and dispatchable renewable energy?

    1. Renewable power with an assured supply obligation: Firm and dispatchable renewable energy (FDRE) is renewable generation contracted with an obligation to supply a specified quantum during specified hours, achieved by combining solar, wind and storage, so that the buyer receives a guaranteed profile rather than whatever the weather delivers.

    What is round the clock renewable power?

    1. Renewable supply across all 24 hours: Round the clock (RTC) power is a contracting structure in which the developer commits to supply renewable energy across every hour of the day at a specified availability, again by combining complementary sources with storage.

    How severe is the curtailment, region by region?

    1. The affected regions: Curtailment at substations has been recorded in the northern, western and southern regions, the three regions carrying the bulk of India’s solar and wind capacity.
    2. Share on temporary access: Around 37% of renewable capacity at affected substations across these three regions operates under T-GNA.
    3. The daily loss: Capacity operating under T-GNA faces 30% to 50% curtailment during daylight hours.
    4. Western region: About 55% of the affected capacity in western India was under T-GNA, and peak curtailment reached 8,617 MW as of 6 August 2026.
    5. Northern region: The corresponding peak curtailment figure for the northern region was 5,573 MW.
    6. What the concentration means: The western region, which hosts the largest solar and wind clusters, is also the region most dependent on temporary access, so the two vulnerabilities compound rather than offset.

    Why has new capacity bidding collapsed even as construction continues?

    1. Construction pipeline remains large: More than 150 GW of renewable projects were under construction as of 30 June 2026.
    2. Awards have fallen sharply: After 40.6 GW was awarded in 2024-25, awards fell to 14.7 GW in 2025-26 and stood at only 4.7 GW through 10 August 2026.
    3. Contracts awarded but not signed: Between 40 GW and 45 GW of capacity with bids already awarded remained without signed PPAs as of April 2026.
    4. Delays in firming PPAs: Delays in converting awarded bids into signed PPAs are identified as an impediment independent of the transmission constraint.
    5. Land acquisition: Land acquisition for both generation sites and transmission corridors continues to stall projects.
    6. Distribution company finances: The financial position of distribution companies limits their willingness to sign long term purchase obligations at all, since a new PPA adds a fixed payment liability to a stressed balance sheet.
    7. The bidding mix is changing: New bidding is shifting toward firm and dispatchable renewable energy and round the clock power, which require storage and therefore carry a higher tariff than plain solar.

    Is the binding constraint on India’s energy transition generation capacity or grid capacity?

    1. The generation side is not the problem: More than 150 GW is under construction and renewable energy including large hydro is projected to account for more than 35% of electricity generation by 2029-30, against 22% in 2024-25.
    2. The evacuation side is: Capacity is being commissioned faster than transmission corridors are being built, which is why up to half of the output of projects on temporary access is being discarded during the hours it is generated.
    3. The market has already priced the constraint: New awards fell from 40.6 GW to 4.7 GW in eighteen months, which is the developer response to a corridor that cannot carry what is already built.
    4. Storage is the second missing input: Timely execution of intra-State and inter-State transmission infrastructure, along with greater storage capacity, is identified as critical to sustaining renewable additions, because a line that is congested at noon is idle at night.
    5. Why this reframes the target: A target expressed in installed capacity measures what has been built, while a target expressed in share of generation measures what actually reaches consumers, and curtailment is precisely the gap between the two.

    How is transmission and renewable infrastructure financed in India?

    Source: Backgrounder, Infrastructure Financing.docx

    1. Why bank lending failed: Commercial banks funded 25 to 30 year infrastructure assets with one to three year deposits, and this asset liability mismatch produced stressed assets crossing Rs 10 lakh crore in Indian banking by 2017.
    2. National Bank for Financing Infrastructure and Development: Established in 2021 under a dedicated Act of Parliament as India’s first dedicated infrastructure development finance institution, providing non recourse long term financing with 20 to 30 year tenors that match infrastructure asset life.
    3. Its scale: As of December 2025 it had sanctioned approximately Rs 3.03 lakh crore and disbursed approximately Rs 1.09 lakh crore.
    4. Partial Credit Enhancement: It partially guarantees bonds issued by infrastructure companies and special purpose vehicles, upgrading their credit rating from BBB to AA or AAA so that insurance companies and pension funds can participate, with the first such facility sanctioned in February 2026.
    5. Sector specific development finance institutions: REC and PFC finance power generation, transmission and distribution by raising long term bonds and lending to State electricity boards and private power companies.
    6. POWERGRID InvIT: The first Infrastructure Investment Trust in the power sector, set up in 2020, with proceeds channelled into new and under construction transmission projects.
    7. How an InvIT recycles capital: The sponsor transfers only the right to collect revenues for a defined concession period and receives upfront capital which it reinvests in new projects, while ownership is never transferred and the asset reverts at the end of the concession.
    8. The SEBI safeguard: SEBI requires a minimum of 80% of InvIT assets to be in completed operational projects, which protects investors from construction risk, and InvITs may raise debt up to 49% of asset value.
    9. Infrastructure Risk Guarantee Fund: Announced in the 2026-27 Budget, it provides partial guarantees to lenders financing infrastructure projects, covering a portion of the loss on default so that lenders extend credit where they previously refused, while the partial cover preserves due diligence incentives.
    10. Sovereign green bonds: Issued by the Government of India since 2022-23 with proceeds ring fenced for renewable energy, clean transport and sustainable water management, establishing a sovereign benchmark for long term green paper.
    11. The recycling logic: The architecture is designed so that the government builds, the asset stabilises and generates revenue, the asset is monetised through an InvIT, and the capital returns to fund the next tranche of the National Infrastructure Pipeline without a fresh budget allocation each cycle.
    12. Monetisation targets: The National Monetisation Pipeline 2.0, announced in February 2026, targets Rs 16.72 lakh crore including private sector investment of Rs 5.8 lakh crore over 2025-26 to 2029-30, nearly three times the first pipeline’s target.

    Challenges to India’s Renewable Energy Expansion

    1. Transmission build lags generation build: A solar park can be commissioned in about a year while a high voltage corridor takes several years, so the two cannot be commissioned in step. e.g. peak curtailment in western India reached 8,617 MW as of 6 August 2026 on capacity that was already generating.
    2. Temporary access gives no firm evacuation right: Projects on T-GNA can be curtailed at the system operator’s discretion, which makes their revenue unpredictable and their debt harder to service. e.g. around 37% of affected capacity across three regions runs on T-GNA and faces 30% to 50% daytime curtailment.
    3. Storage capacity is inadequate to absorb the midday surplus: Without batteries or pumped hydro the same corridor is congested at noon and underused at night. e.g. the shift in new bidding toward firm and dispatchable and round the clock contracts is itself an admission that plain solar without storage no longer clears.
    4. Distribution company finances limit offtake: Loss making distribution utilities avoid signing new long term purchase obligations irrespective of tariff. e.g. 40 GW to 45 GW of awarded capacity remained without signed PPAs as of April 2026.
    5. Right of way and land acquisition for transmission corridors: Transmission lines cross many districts and require sustained land and forest clearances along the whole route. e.g. land acquisition is named alongside transmission constraints as an independent impediment to project completion.
    6. Geographic concentration of resource: Solar and wind resources are concentrated in a few States while demand centres lie elsewhere, so the transition is dependent on long distance evacuation. e.g. the western and northern regions together account for the two largest curtailment figures recorded.
    7. Tariff pressure from cheap early bids: Projects awarded at very low tariffs in earlier competitive rounds have thin margins that curtailment erases entirely. e.g. the collapse of awards from 40.6 GW in 2024-25 to 4.7 GW through August 2026 shows developers withdrawing rather than bidding lower.
    8. Grid stability with high variable renewable share: A grid carrying more than 35% renewable generation needs inertia, frequency response and balancing reserves that thermal plants currently supply. e.g. must run thermal capacity has to be retained and paid for even as it operates at low plant load factors.
    9. Module and cell supply chain dependence: Domestic content requirements raise capital costs while imported modules expose projects to trade policy shocks. e.g. changes in duty on imported solar cells and modules have repeatedly reset project economics after bids were submitted.
    10. Delayed payments to generators: Payment delays by distribution utilities strain developer working capital independently of curtailment. e.g. the late payment surcharge rules had to be framed specifically to enforce a payment discipline that contracts alone did not achieve.

    Conclusion

    India’s renewable programme has moved past the point where generation capacity is the constraint, and the evidence for that is a 150 GW construction pipeline coexisting with up to 50% daytime curtailment on capacity that is already running. The market has responded not by building more but by bidding less, with awards falling from 40.6 GW to 4.7 GW in eighteen months, and by shifting toward firm and dispatchable contracts that price the constraint into the tariff. Whether renewable energy reaches more than 35% of generation by 2029-30 now depends on the execution of intra-State and inter-State transmission lines and on storage capacity, not on the pace of solar commissioning.

    “[2022, GS3, 15 marks] Do you think India will meet 50 percent of its energy needs from renewable energy by 2030 ? Justify your answer. How will the shift of subsidies from fossil fuels to renewables help achieve the above objective? Explain.”

  • SEBI’s Closing Auction Session: Better Price Discovery, and the First Manipulation Case

    Why in the News

    The Closing Auction Session (CAS), introduced by the Securities and Exchange Board of India (SEBI) on 3 August 2026 to replace the average based method of fixing stock market closing prices, has raised mutual fund participation from 5% to 7% earlier to 25%. Within ten days of launch the regulator imposed a Rs 3.7 crore penalty on two entities for manipulating the same window, which exposes the trade off at the centre of the reform, that concentrating price discovery into a single transparent auction also concentrates the target for manipulation.

    How does the Closing Auction Session work?

    1. A fixed auction window: CAS is an official 20 minute auction held between 3:15 p.m. and 3:35 p.m., during which the exchange collects buy and sell orders from participants instead of executing continuous trades.
    2. A blind auction: Participants cannot see the full order book during the window, which prevents an order placed at the last instant from being priced against a visible book.
    3. Matching at the equilibrium price: At the end of the window all orders are matched at a single equilibrium price, defined as the price at which the maximum number of shares can be traded.
    4. Deferred execution: In contrast to continuous trading, where bids and offers match instantly, an auction can only result in a trade after the exchange ends it, which allows more time for supply and demand to find a new equilibrium.

    What is the Volume Weighted Average Price?

    1. An average of executed trades: The Volume Weighted Average Price (VWAP) is the average price of trades executed over a defined period, weighted by the quantity traded at each price, and it was the basis on which exchanges earlier fixed the closing price from the last 30 minutes of continuous trading.
    2. Why an average is vulnerable: Because it averages trades that have already happened, a few large trades placed at the end of the period can pull the average disproportionately without any change in the underlying supply and demand.

    What is order imbalance?

    1. The gap between buy and sell interest: Order imbalance is the gap between cumulative buy quantity and cumulative sell quantity at different price levels within the auction, and a low imbalance indicates that the discovered price represents a more stable consensus.

    What is tracking error?

    1. Deviation of a fund from its benchmark: Tracking error is the extent to which an index fund's or exchange traded fund's return diverges from the return of the index it is meant to replicate, and it widens when the closing price used to value the fund differs from the price at which the index is computed.

    Why did SEBI replace the VWAP based closing price?

    1. The closing price is a reference, not a number: The closing price of a security is used for portfolio valuation, index computation, derivative settlement, mutual fund net asset value calculation and institutional investment decisions, so it must reflect the expectations of both buyers and sellers.
    2. The old method's weakness: Exchanges determined the closing price largely through the VWAP of trades in the last 30 minutes of continuous trading, and a few large last minute trades could disproportionately affect the final average, creating the possibility of price distortion.
    3. When distortion was worst: The vulnerability was concentrated on large event days, specifically index rebalancing days and derivative expiry days, when order flow is heavily one sided.
    4. The measured evidence: For NIFTY 50 stocks, volatility in the last half hour exceeded the volatility observed between 09:15 and 14:30 by 1.8 times on MSCI index rebalancing days and by 1.5 times on FTSE index rebalancing days in 2024.
    5. The conceptual shift: CAS converts closing price determination from passive averaging of past trades into dynamic demand and supply discovery, and reduces price noise while improving the information efficiency of Indian equity markets.
    6. The regulatory gain: The SEBI Chairperson stated that CAS provides the regulator with greater capability to identify manipulation than the earlier VWAP based system.

    What does the spread of closing auctions across major exchanges establish about the model?

    1. The peer group: With this move the National Stock Exchange and the Bombay Stock Exchange have joined NASDAQ, the New York Stock Exchange, the London Stock Exchange, Euronext, the Hong Kong Stock Exchange, Singapore Exchange, the Tokyo Stock Exchange and the Australian Securities Exchange, all of which fix closing prices by auction.
    2. United States, NASDAQ Closing Cross: A single price auction at the close that publishes indicative closing prices and order imbalance information in the minutes before the cross, so that participants can supply liquidity against a visible imbalance.
    3. United States, New York Stock Exchange Closing Auction: Designated Market Makers publish imbalance information before the close and are obliged to offset residual imbalance, which places an accountable intermediary inside the auction.
    4. United Kingdom, London Stock Exchange: A closing auction with a randomised end to the uncrossing phase, so that no participant can time an order to the exact final instant.
    5. Hong Kong Stock Exchange: Reintroduced its Closing Auction Session in 2016 with price limits and a random closing period, after an earlier version launched in 2008 was suspended in 2009 following manipulation concerns, which is the closest precedent for India's present position.
    6. Japan, Tokyo Stock Exchange: Uses the Itayose single price call auction method to determine the closing price, matching all eligible orders at one price.
    7. Australian Securities Exchange: Runs a single price closing auction with a randomised start, again to defeat last instant order timing.
    8. What the set demonstrates: Closing auctions were initially adopted to achieve efficient price discovery and have since become a liquidity event in their own right, with the volume share of closing auctions increasing across both Europe and America.

    Who gains from a cleaner closing price?

    1. Passive funds first: India's passive funds, which have expanded from a relatively small base to a multi crore asset base driven by exchange traded funds and index funds, are likely to be the biggest beneficiaries initially, because they depend on accurate closing prices to replicate benchmarks.
    2. Mutual funds have already moved: The SEBI Chairperson stated that mutual funds' participation rate in CAS has risen sharply to 25%, compared with 5% to 7% earlier.
    3. Large orders execute without leaking information: The auction allows large investors to participate anonymously and execute at a commonly discovered price, which reduces information leakage and the price impact that usually accompanies large orders placed close to market closing time.
    4. Foreign institutional capital: Foreign investors managing billions of dollars prefer markets with predictable closing mechanisms, so aligning India with international practice can improve institutional inflows into Indian equities.
    5. Better execution technology: Execution algorithms that analyse order imbalance, liquidity patterns and equilibrium prices push Indian markets toward institutional quality trading practices.
    6. A stronger valuation benchmark: A well functioning CAS makes the closing price a stronger valuation benchmark by incorporating the bid spread, order imbalance, liquidity and investor conviction, rather than only executed trade prices.

    Does concentrating price discovery into one window reduce manipulation or relocate it?

    1. The case that it reduces manipulation: Matching at a single equilibrium price with a blind order book removes the ability of a few late trades to pull an average, and the regulator gains a complete record of every order placed and cancelled inside the window.
    2. The case that it relocates manipulation: Concentrating the entire closing price determination into 20 minutes creates one high value target, and the first enforcement action arrived within ten days of launch.
    3. The evidence for the second reading: The alleged manipulation involved placing very large orders and cancelling them within seconds, a technique that works precisely because the auction aggregates orders before matching them.
    4. What actually changed: The manipulation did not disappear, it became visible, since the regulator could identify the pattern from the order and cancellation record in a way the VWAP system did not permit.
    5. The unresolved part: Detection after the event does not prevent the closing price on that day from being distorted, and the closing price then flows into index computation, net asset values and derivative settlement before the enforcement order is issued.

    What did SEBI's first CAS manipulation order find?

    1. The penalty and the entities: SEBI imposed a penalty of Rs 3.7 crore on Copthall Mauritius Investment Ltd. and Mansi Share and Stock Broking Private Ltd. and barred them from the market for allegedly manipulating trades during the CAS.
    2. The date and the context: The alleged violations occurred on 13 August 2026, the day on which weekly derivative contracts linked to the Sensex expired.
    3. The reference price rule: SEBI fixes the maximum permitted deviation from the reference price at 3% within the CAS.
    4. The buy side conduct: One entity placed large buy orders constituting at least 85% of all buy orders made in the minutes before the Sensex closed, all of them above the 3% deviation mark, and simultaneously cancelled its latest buy order.
    5. The sell side conduct: The other entity placed large sell orders across eight Sensex constituents totalling about 12.65 lakh shares, of which more than seven lakh shares were placed 2.5% below the reference price and 4.6 lakh shares below 1%, and cancelled them within four to five seconds.
    6. The alleged effect: The manipulation led to three price spikes.
    7. The alleged motive: SEBI's preliminary findings state that placing and then cancelling these large buy and sell orders allowed the noticees to avoid losses or wrongfully profit from positions in derivative trades that would otherwise have expired worthless.
    8. The stage of proceedings: The noticees have been given 21 days to respond to the interim order.
    9. The regulator's stated posture: The SEBI Chairperson stated that anyone manipulating the CAS would face strict and immediate action, that CAS exists for transparency, and that those who think they can manipulate CAS in order to discredit it are mistaken.

    Challenges to the Closing Auction Session

    1. Cash and derivative markets close at different times: Cash market closing prices are set through CAS while equity derivatives continue trading beyond the window, creating a temporary gap between spot and futures prices. e.g. on Sensex weekly expiry days the mismatch is largest, and it was on the 13 August 2026 expiry that the first manipulation case arose.
    2. Arbitrage strategies lose their reference: Arbitrage traders who price the spot against the future cannot do so cleanly when one leg is settled by auction and the other by continuous trading. e.g. cash and carry arbitrage positions built on a VWAP close now carry an unhedged residual through the auction window.
    3. Algorithmic and institutional models were built on the old mechanism: Institutional traders and algorithmic firms must rebuild strategies that assumed a VWAP based close, factoring in auction imbalances, indicative prices and real time order flow. e.g. SEBI itself stated that the problem is a lack of understanding, because algorithms and other players historically based their models on the old mechanism.
    4. Index levels jumped across the auction in early sessions: Participants raised concerns over the sharp difference between index levels recorded before CAS and after the auction on the first two trading days, though SEBI ruled out foul play. e.g. this gap appeared immediately after the 3 August 2026 launch, before participation had stabilised.
    5. Illiquid securities cannot generate a representative price: The efficiency of CAS depends on sufficient order participation, and in less liquid securities limited buy and sell orders may produce a closing price that does not represent broader market sentiment. e.g. this is why the mechanism was launched only for stocks with futures and options contracts rather than the whole cash market.
    6. Retail investors do not recognise the new closing price: For many retail investors the closing price has traditionally meant the last traded price or a VWAP figure, so intraday traders and derivative participants may find the auction price confusing. e.g. an investor comparing a broker application's last traded price with the official closing price on the same screen sees two different numbers.
    7. Order cancellation is a manipulation channel the auction structure enables: Large orders placed to shift the indicative equilibrium and then withdrawn before matching are the classic auction manipulation technique. e.g. the 13 August 2026 case involved sell orders cancelled within four to five seconds of being placed.
    8. The 3% deviation band can itself be gamed: A cap on deviation from the reference price becomes a target that orders cluster against rather than a limit they respect. e.g. all of the buy orders in the first enforcement case were placed above the 3% deviation mark.
    9. Derivative expiry concentration magnifies the stake: Restricting the number of weekly expiries per exchange concentrated open interest into fewer expiry days, so the value riding on a single closing price rose. e.g. the alleged manipulation was targeted at derivative positions that would otherwise have expired worthless.
    10. Enforcement is after the fact: An interim order issued days later cannot restore a distorted closing price that has already flowed into net asset values, index levels and settlement. e.g. the Rs 3.7 crore order came with a 21 day response window, long after the 13 August settlement had been completed.

    Conclusion

    CAS replaces a passively computed average with an actively discovered equilibrium, and on the evidence of the first three weeks it is working as intended, with mutual fund participation quadrupling and the regulator able to reconstruct manipulation from the order record in a way the VWAP system did not allow. What the first enforcement case shows is that the reform relocates manipulation rather than eliminating it, moving it from a diffuse 30 minute average into a concentrated 20 minute auction where it is more consequential but also more visible. The correct test of the mechanism is not the volatility of its first fortnight but measurable improvement in market quality, specifically lower tracking errors, reduced closing price variance, narrower spreads, improved liquidity and stronger price efficiency.

    India's Securities Market

    1. What it is: The securities market is the set of institutions through which companies and governments raise capital by issuing securities and through which those securities are subsequently traded, valued and settled.
    2. Two segments: The primary market handles fresh issuance through public offers and private placements, while the secondary market handles trading of already issued securities on exchanges.
    3. Regulatory architecture: SEBI regulates the securities market, the RBI regulates the government securities and money markets, and the Insurance Regulatory and Development Authority of India and the Pension Fund Regulatory and Development Authority regulate the institutional investors that participate in it.
    4. Two national exchanges: The Bombay Stock Exchange, established in 1875, is Asia's oldest stock exchange, and the National Stock Exchange, which began operations in 1994, introduced screen based nationwide electronic trading.
    5. Global standing in derivatives: India accounts for a very large share of equity option contracts traded globally, and the National Stock Exchange has ranked as the world's largest derivatives exchange by number of contracts traded for several consecutive years.
    6. Dematerialised holding: Securities are held in electronic form through two depositories, the National Securities Depository Limited and the Central Depository Services Limited, established under the Depositories Act, 1996.
    7. Settlement cycle: India moved to a T plus 1 settlement cycle for all listed equities by January 2023, becoming one of the first large markets to do so, and has since introduced an optional same day settlement segment.
    8. Rising retail and passive participation: Growth in demat account openings, systematic investment plans and index linked products has made passive funds a structurally important source of demand, which is why the accuracy of the closing price now carries system wide consequences.
    9. Investor protection funds: Exchanges maintain Investor Protection Funds and SEBI operates an Investor Protection and Education Fund funded partly from disgorged amounts and penalties.

    Laws and Rules Governing India's Securities Market

    1. Securities and Exchange Board of India Act, 1992: Constitutes SEBI as a statutory body and gives it the powers to protect investor interests, promote market development and regulate the securities market.
    2. Section 11 confers the general power to regulate, and Section 11B the power to issue directions, including the interim orders under which market access is barred.
    3. Section 15HA provides the penalty for fraudulent and unfair trade practices, and Section 15J sets the factors for determining the quantum of penalty.
    4. Securities Contracts (Regulation) Act, 1956: Governs the recognition and regulation of stock exchanges, the definition of securities and the listing of securities.
    5. Securities Contracts (Regulation) Rules, 1957: Prescribe minimum public shareholding requirements and the conditions for continued listing.
    6. Depositories Act, 1996: Provides for the dematerialisation of securities and the constitution and regulation of depositories and depository participants.
    7. Companies Act, 2013: Governs public issues, prospectus disclosure, related party transactions and corporate governance obligations of listed companies.
    8. SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003: Prohibit manipulative and deceptive devices, including placing orders with no intention of executing them, which is the provision under which order and cancellation manipulation is pursued.
    9. SEBI (Prohibition of Insider Trading) Regulations, 2015: Prohibit trading on unpublished price sensitive information and require listed companies to maintain structured digital databases of such information.
    10. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: Fix continuous disclosure, board composition and related party approval requirements for listed entities.
    11. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011: Govern open offers on acquisition of control or of specified shareholding thresholds.
    12. SEBI (Intermediaries) Regulations, 2008: Govern registration and conduct of brokers, merchant bankers and other intermediaries, under which broking entities are proceeded against.
    13. Prevention of Money Laundering Act, 2002: Applies know your customer and beneficial ownership obligations to market intermediaries and foreign portfolio investors.

    Key Facts about SEBI and India's Exchanges

    1. CAS was launched on 3 August 2026, initially for stocks having futures and options contracts, and runs from 3:15 p.m. to 3:35 p.m.
    2. SEBI fixes the maximum deviation from the reference price within the CAS at 3%.
    3. Mutual fund participation in CAS rose to 25% from 5% to 7% earlier within the first weeks of operation.
    4. SEBI released its study on retail and non retail participation in the derivatives market for 2025-26 on 20 August 2026.
    5. An earlier SEBI study flagged that over 90% of trades by retail investors in the derivatives segment resulted in losses.
    6. SEBI's measures to curb excessive derivatives volatility include increasing lot sizes and limiting the number of expiries per exchange, while the Union Budget raised the Securities Transaction Tax on the segment.
    7. SEBI was established as a non statutory body in April 1988 and given statutory status by the SEBI Act, 1992 with effect from 30 January 1992.
    8. SEBI's headquarters is at the Bandra Kurla Complex in Mumbai, with regional offices in New Delhi, Kolkata, Chennai and Ahmedabad.
    9. Appeals against SEBI orders lie to the Securities Appellate Tribunal, and from there to the Supreme Court on a question of law.
    10. National Investors' Day, marking investor awareness, and the Investor Protection and Education Fund are both instruments through which SEBI discharges its investor protection mandate.

    Back2Basics: Securities and Exchange Board of India

    1. Governing Act: Constituted under the Securities and Exchange Board of India Act, 1992.
    2. Year established: Set up as an administrative body in April 1988 and given statutory powers with effect from 30 January 1992.
    3. Administrative ministry: Functions under the Department of Economic Affairs, Ministry of Finance.
    4. Threefold mandate: To protect the interests of investors in securities, to promote the development of the securities market, and to regulate the securities market.
    5. Composition: A Chairperson, two members from among officials of the Union Ministries dealing with finance and law, one member from the RBI, and five other members appointed by the Union Government, of whom at least three are whole time members.
    6. Appointment: The Chairperson and members are appointed by the Union Government, and the Chairperson can be removed only on the grounds specified in the Act.
    7. Jurisdiction: Covers stock exchanges, depositories, brokers, merchant bankers, mutual funds, foreign portfolio investors, credit rating agencies, listed companies and investment advisers.
    8. Quasi legislative power: Frames regulations binding on all market participants without requiring prior parliamentary approval, subject to laying before Parliament.
    9. Quasi judicial power: Conducts inquiries, passes interim and final orders, imposes monetary penalties, bars entities from the market and orders disgorgement of unlawful gains.
    10. Quasi executive power: Investigates, conducts search and seizure with the approval of a designated court, and calls for records from any person associated with the securities market.
    11. Appellate route: Its orders are appealable to the Securities Appellate Tribunal, a statutory tribunal constituted under the same Act.

    Challenges in India's Securities Market

    1. Retail losses concentrated in derivatives: Retail participation has grown fastest in the segment where retail outcomes are worst. e.g. a SEBI study found that over 90% of trades by retail investors in the futures and options segment led to losses.
    2. Speed advantage of co-located algorithmic trading: Firms with exchange co-located servers execute in fractions of the time available to other participants, raising questions of unequal access. e.g. the National Stock Exchange co-location matter, in which SEBI passed disgorgement orders, ran for years before resolution.
    3. Manipulation in small and mid cap counters: Thin float and low liquidity make price manipulation cheap in smaller listed companies. e.g. SEBI's action against Dhenu Buildcon Infra Ltd. for allegedly creating a Rs 1,000 crore unsecured loan through 46 transactions over eight days and converting part of it into equity through preferential allotment, leaving six entities with 99.70% of outstanding equity.
    4. Unregistered investment advice through digital channels: Social media based tip providers operate outside the registered investment adviser framework. e.g. SEBI has repeatedly issued orders against finfluencers running paid advisory channels without registration.
    5. Enforcement timelines outrun market timelines: Investigation, interim order, final order and appeal can take years while the price effect is realised in minutes. e.g. an interim order carrying a 21 day response window is issued after the affected settlement is complete.
    6. Corporate governance failures at listed entities: Related party transactions and fund diversion continue to surface after the fact. e.g. the Central Bureau of Investigation registered a case against Gensol Engineering Limited, Gensol EV Lease Limited and their promoters for allegedly causing a loss of Rs 672.74 crore to the Indian Renewable Energy Development Agency Limited.
    7. Concentration risk from passive investing: As index funds grow, index inclusion and rebalancing decisions move prices independently of company fundamentals. e.g. volatility on MSCI and FTSE rebalancing days for NIFTY 50 stocks ran 1.8 times and 1.5 times the normal session volatility in 2024.
    8. Cross border and offshore derivative exposure: Positions built through offshore derivative instruments and foreign entities complicate beneficial ownership tracing. e.g. the first CAS manipulation order named a Mauritius domiciled investment entity.
    9. Investor grievance redress capacity: The volume of complaints from a rapidly widening retail base outpaces the capacity of the online dispute resolution and grievance mechanisms. e.g. the SCORES platform and the Online Dispute Resolution portal were both introduced in response to backlogs rather than in anticipation of them.

    Way Forward

    1. Align the derivative and cash market close: Extend an auction based or reference linked close to the derivatives segment, so that the spot and futures legs settle against a consistent price and the expiry day arbitrage gap closes.
    2. Publish indicative equilibrium prices and imbalance during the window: Adopt the NASDAQ and New York Stock Exchange practice of disseminating indicative prices and order imbalance, so that participants can supply liquidity against a visible imbalance rather than trade blind.
    3. Randomise the auction close: Follow the London Stock Exchange and Australian Securities Exchange practice of a randomised uncrossing moment, so that an order timed to the final instant cannot determine the outcome.
    4. Penalise order and cancellation patterns directly: Frame an explicit order to trade ratio and cancellation threshold for the auction window, so that placing large orders with no intention of execution is actionable on the pattern itself rather than only on proof of derivative gain.
    5. Phase the extension to illiquid securities: Extend CAS beyond futures and options eligible stocks only where a minimum order participation threshold is demonstrated, so that thin counters are not given a closing price that no consensus supports.
    6. Run a structured transition programme for algorithmic participants: Publish auction microstructure documentation and offer a simulated environment, since the regulator has itself identified model dependence on the old mechanism as the core adjustment problem.
    7. Invest in retail investor communication: Explain through exchange and broker interfaces why the last traded price and the official closing price now differ, so that the change does not itself become a source of mistrust.
    8. Publish a market quality dashboard: Report tracking error, closing price variance, bid ask spreads and auction liquidity on a rolling basis, so that CAS is evaluated on the metrics the reform was designed to improve rather than on daily volatility.

    Matching Previous Year Question

    “[2025] Consider the following statements: I. India accounts for a very large portion of all equity option contracts traded globally, thus exhibiting a great boom. II. India's stock market has grown rapidly in the recent past, even overtaking Hong Kong's at some point in time. III. There is no regulatory body either to warn small investors about the risks of options trading or to act on unregistered financial advisors in this regard. Which of the statements given above are correct? (a) I and II only (b) II and III only (c) I and III only (d) I, II and III Answer: (a)”

  • Early Closure of the FCNR(B) Swap Window and the Cost of Absorbing Dollars

    Why in the News

    The Reserve Bank of India (RBI) advanced the closure of the Foreign Currency Non-Resident (Bank), or FCNR(B), swap window by a month, and the RBI Governor defended the move on 19 August 2026 as a calibrated and data driven response rather than a reversal. The decision exposes a shift in the objective of India's forex defence, from maximising dollar inflows to managing the rising domestic cost of absorbing them.

    What is the FCNR(B) deposit and what was the swap window?

    1. The deposit: FCNR(B) deposits allow non residents to hold money in an Indian bank in the foreign currency itself, so the depositor faces no rupee exchange risk on the principal.
    2. Permanent availability: These deposits are available at all times and are a standing category of non resident deposit, not a temporary scheme.
    3. The temporary swap facility: In June 2026 the RBI opened a temporary window allowing banks to swap these foreign currency deposits with the central bank, with the RBI bearing the full currency risk on them.
    4. What the window did: By taking the currency risk off bank balance sheets, the facility made it commercially attractive for banks to mobilise fresh foreign currency deposits and convert them into rupee resources.

    What are External Commercial Borrowings?

    1. Foreign currency loans to Indian entities: External Commercial Borrowings (ECBs) are commercial loans raised by eligible Indian resident entities from recognised non resident lenders, governed by RBI limits on amount, maturity, end use and all in cost.

    What are Overseas Foreign Currency Borrowings?

    1. Bank borrowing abroad: Overseas Foreign Currency Borrowings (OFCBs) are foreign currency funds raised abroad by Indian banks themselves, typically through their overseas branches, and brought back to support domestic foreign currency lending and liquidity.

    What is sterilisation?

    1. Neutralising the rupee side of a dollar purchase: Sterilisation is the operation by which a central bank absorbs the rupee liquidity it releases when it buys foreign currency, using instruments such as open market sales of government securities or cash reserve ratio changes, so that the forex purchase does not add to domestic money supply.
    2. Why it has a cost: The central bank earns a low return on the dollars it holds and pays a higher domestic rate on the instruments used to absorb the rupees, and that spread is the sterilisation cost, which rises the longer the position is held.

    Why did the RBI advance the closure of the window?

    1. Inflows exceeded expectations: Inflows had been stronger than the RBI and most market participants had expected, so the quantity objective of the facility was met ahead of schedule.
    2. Diminishing marginal utility of each dollar: The Governor stated that there is a diminishing marginal utility of every dollar that is swapped, because each additional dollar adds less to an already adequate reserve and inflow position.
    3. Rising marginal cost: At the same time there is an increasing marginal cost, because the rupee liquidity created has to be sterilised for a longer period, and that cost accumulates with the size and duration of the position.
    4. A decision from strength: The closure was taken from a position of strength rather than under stress, and forms part of the RBI's wider external sector management.
    5. Not a reversal: The Governor stated that it would not be correct to call it a U turn, that it is rather a calibration, and that the move demonstrated the central bank's ability to remain flexible and data dependent amid rapidly changing conditions.

    Does an early closure amount to a policy reversal or a calibration?

    1. The criticism: Remarks made after the Monetary Policy Committee meeting of 5 August 2026 were read by the market as ruling out an early closure, so bringing the date forward within two weeks was read as a reversal of stated guidance.
    2. The defence on wording: The Governor pointed to the use of the words as of now in the statement that there was no proposal to advance the last date, which conditioned the guidance on the information available at that moment.
    3. The defence on process: The RBI had also said it would keep stakeholders informed of any decision, which on the central bank's reading indicated that an early closure had not been ruled out.
    4. The underlying trade off: Data dependence requires a central bank to change course when the data changes, while forward guidance requires it to keep its word, and the two objectives pull against each other whenever conditions move faster than the guidance horizon.
    5. Why the distinction matters commercially: Banks and depositors price fixed tenure instruments against the announced window, so an advanced closure imposes a real cost on those who planned against the earlier date, regardless of how the change is described.

    What do the three schemes mean for India's balance of payments?

    1. The combined expectation: The RBI expects the three schemes together, FCNR(B), ECBs and OFCBs, to attract at least $80 billion.
    2. What the number signals: The Governor stated that this reflects the country's strong macroeconomic fundamentals and would further strengthen the balance of payments.
    3. The channel: All three are capital account inflows, so they finance the current account deficit and add to reserves without requiring an improvement in the trade balance itself.
    4. The currency backdrop: The rupee stood at 95.76 to the United States dollar and the Indian basket crude oil price at $92.11 a barrel as of 18 August 2026, which is the pressure the inflows are being mobilised against.
    5. The market backdrop: The Sensex closed at 76,909.68, down 325.78 points or 0.42%, and the Nifty at 24,078.30, down 76.60 points or 0.32%, on the day the remarks were made.

    What did the Governor prescribe for Indian banks to reach global scale?

    1. The stated ambition: The Prime Minister has set out the objective of having an Indian bank among the world's top five, and the Governor stated that Indian banks have the scale and ability to achieve a larger global footprint and are on the right path.
    2. Governance and institutional strength: Banks must continue improving governance and institutional strength and build a sound risk management culture.
    3. Customer trust: They must sustain good customer service and retain customer trust, which the Governor listed as a distinct requirement rather than a consequence of the others.
    4. Technology and cost: They need to invest continuously in technology, reduce costs, improve efficiency and expand their reach.
    5. People: They must continuously train and equip their staff to adapt nimbly to a growing economy and a fast evolving financial system.
    6. On mergers: Asked whether bank mergers would hasten the process, the Governor said what is needed is a good, strong banking system with healthy competition, that the government merged a few banks earlier, and that whether there is a case for further mergers is a call the government can take.

    Challenges to the RBI's Forex Inflow Schemes and External Sector Management

    1. Sterilisation cost accumulates on the central bank's own balance sheet: Every dollar absorbed requires rupee liquidity to be withdrawn at a domestic rate higher than the return earned on reserves, and the spread is a direct cost. e.g. sustained open market sales of government securities to absorb liquidity push up domestic yields at the same time as the government is running a large borrowing programme.
    2. The inflows are debt creating, not equity: ECBs, OFCBs and FCNR(B) deposits all create a repayment obligation in foreign currency, unlike foreign direct investment, so they improve the balance of payments today at the cost of a redemption cliff later. e.g. the $34 billion FCNR(B) mobilisation of 2013 produced a concentrated redemption in late 2016 that the RBI had to manage through a pre announced forward book.
    3. Currency risk transfers to the central bank, not away from the system: Under the swap facility the RBI bears the full currency risk, so a sharp rupee depreciation converts a banking sector exposure into a public balance sheet loss. e.g. with the rupee at 95.76 to the dollar, every further rupee of depreciation raises the rupee cost of returning the same dollar principal.
    4. Guidance reversals raise the risk premium on future schemes: Advancing a closure date after indicating no such proposal makes participants discount the next announced window. e.g. banks that had built deposit mobilisation campaigns around the original closure date carry stranded acquisition costs.
    5. Inflows can reverse faster than they arrived: Non resident deposits and portfolio linked borrowings respond to interest rate differentials and can exit within a quarter. e.g. foreign portfolio investors withdrew a record of about Rs 1.66 lakh crore from Indian markets in 2025.
    6. Oil dominates the current account the schemes are financing: India imports the bulk of its crude requirement, so a rise in the crude price widens the deficit faster than capital inflows can be mobilised. e.g. the Indian basket price at $92.11 a barrel on 18 August 2026 sits well above the levels around which recent import bills were budgeted.
    7. Tariff shocks can undercut the export side simultaneously: Trade restrictions imposed by a major partner reduce export earnings at the same time as capital inflows are being courted. e.g. the imposition of tariffs of up to 50% on Indian goods by the United States in August 2025 hit textiles and auto components, which are labour intensive export earners.
    8. Concentration of banking scale can weaken competition: Pursuing a top five global bank through further mergers reduces the number of competing lenders, which the Governor himself flagged by insisting on healthy competition. e.g. the amalgamation of ten public sector banks into four with effect from 1 April 2020 cut the number of public sector banks from 27 in 2017 to 12.

    Conclusion

    The early closure of the FCNR(B) swap window is best read not as a change of view on the rupee but as the point at which the RBI judged the marginal cost of absorbing another dollar to exceed its marginal benefit. With the three schemes expected to deliver at least $80 billion, the quantity objective is largely met, and the residual task is managing the sterilisation cost of the liquidity already created. The open question is whether the communication cost of advancing an announced date will raise the price of the next facility the RBI needs to open.

    India's External Sector: Capital Flows and the Rupee

    Source: Backgrounder, External Sector_ FDI,FPI, Weakening Rupee against Dollar.docx

    1. Foreign Direct Investment: Foreign Direct Investment (FDI) is investment made to acquire a lasting interest and significant control over an enterprise, defined as 10% or more of the post issue paid up equity capital of a listed company, or any stake in an unlisted company.
    2. Foreign Portfolio Investment: Foreign Portfolio Investment (FPI) is investment in financial assets for short term financial gain without control, defined as less than 10% of the paid up equity capital of a listed company.
    3. Divergent stability: FDI is long term, strategic and often tied to physical assets such as factories, while FPI is highly liquid, passive and prone to sudden reversals during global stress.
    4. Split regulation: FDI is regulated primarily by the RBI under the Foreign Exchange Management Act and by the Department for Promotion of Industry and Internal Trade through the Consolidated FDI Policy, while FPI is regulated by the Securities and Exchange Board of India under the SEBI (Foreign Portfolio Investors) Regulations, 2019.
    5. FDI entry routes: Investment enters either through the automatic route, requiring no prior approval and only reporting to the RBI, or the government approval route requiring prior clearance, for example food retail and defence above 74%.
    6. Prohibited sectors: FDI is barred in atomic energy, gambling and lotteries, chit funds and Nidhi companies, real estate other than townships and special economic zones, and tobacco.
    7. Recent flow stress: Net FDI turned negative for three consecutive months even as gross inflows remained strong, driven by higher outward direct investment by Indian companies and high repatriation by foreign companies operating in India.
    8. The harvest phase: Many investments made in the early 2000s have reached a stage where funds prioritise profit booking over expansion, so repatriation rises without any deterioration in the investment climate.
    9. Portfolio outflow scale: FPIs recorded a record outflow of about Rs 1.66 lakh crore, roughly $18.9 billion, in 2025, the largest since FPI investment began in India.
    10. Financialisation of FDI: A growing share of FDI is routed through Alternative Investment Funds rather than direct industrial equity, so headline FDI increasingly behaves like volatile portfolio money and delivers less technology transfer.
    11. Round tripping: A large share of inflows still originates from Mauritius and Singapore, which points to tax arbitrage rather than fresh industrial capital and inflates the headline number relative to its productive impact.

    Statutory and Regulatory Framework Governing India's External Sector

    1. Foreign Exchange Management Act, 1999: Replaced the earlier control based regime and governs all current and capital account transactions, with the RBI as the administering authority.
    2. Section 6 of the Foreign Exchange Management Act, 1999: Empowers the RBI, in consultation with the Union Government, to specify the permissible classes of capital account transactions and the limits on them, which is the source of the FCNR(B), ECB and OFCB frameworks.
    3. Reserve Bank of India Act, 1934: Vests the RBI with the management of the country's foreign exchange reserves and with the issue and regulation of currency.
    4. Foreign Exchange Management (Deposit) Regulations, 2016: Govern non resident deposit accounts, including the FCNR(B), Non-Resident External and Non-Resident Ordinary categories.
    5. External Commercial Borrowings Master Direction of the RBI: Fixes eligible borrowers, recognised lenders, minimum average maturity, all in cost ceilings and permitted end uses for ECBs.
    6. Prevention of Money Laundering Act, 2002: Applies reporting and beneficial ownership requirements to cross border financial flows through banks and market intermediaries.
    7. SEBI (Foreign Portfolio Investors) Regulations, 2019: Govern registration, categorisation and investment limits for foreign portfolio investors in Indian securities.
    8. Consolidated FDI Policy of the Department for Promotion of Industry and Internal Trade: Codifies sectoral caps, entry routes and conditionalities for foreign direct investment.

    Government and Central Bank Initiatives to Manage External Sector Stress

    Source: Backgrounder, External Sector_ FDI,FPI, Weakening Rupee against Dollar.docx

    1. Open market operation purchases of government securities: A programme of about Rs 2 trillion in open market purchases, conducted in tranches, was used to offset the domestic cash crunch caused by portfolio investors pulling out of Indian equities.
    2. Dollar rupee swap and forex sales: A $10 billion dollar rupee swap auction, alongside direct sale of dollars, was used to prevent the rupee from crashing through a threshold level during a period of dollar shortage.
    3. Trade diversification through free trade agreements: The India European Union Free Trade Agreement and the India United Kingdom Comprehensive Economic and Trade Agreement are being used to reduce dependence on a single dominant export market.
    4. National Single Window System: Integrates 32 central departments and more than 25 States into a unified clearance portal to reduce approval delays that deter foreign investors.
    5. Jan Vishwas amendments: Decriminalisation of a large set of minor industry offences and removal of imprisonment for technical violations, aimed at reducing the perception of regulatory risk.
    6. New labour codes: Nationwide implementation of the four labour codes to simplify compliance on wages and social security for foreign investors.
    7. Beneficial ownership screening: Stricter beneficial ownership checks and portal upgrades to ensure incoming FDI brings permanent technology rather than tax arbitrage capital.

    Key Facts about India's Foreign Exchange Framework

    1. The rupee stood at 95.76 to the United States dollar and the Indian basket crude oil price at $92.11 a barrel as of 18 August 2026.
    2. The three schemes of FCNR(B), ECBs and OFCBs are together expected to attract at least $80 billion.
    3. India follows a managed float exchange rate regime, in which the rupee's external value is market determined and the RBI intervenes only to curb excessive volatility, not to defend a level.
    4. India's exchange rate arrangement is classified by the International Monetary Fund on the basis of observed intervention behaviour, not on any officially announced peg.
    5. The Foreign Exchange Management Act, 1999 replaced the Foreign Exchange Regulation Act, 1973, converting foreign exchange violations from criminal offences into civil contraventions.
    6. Non resident Indians hold rupee denominated deposits through Non-Resident External and Non-Resident Ordinary accounts, and foreign currency denominated deposits through FCNR(B) accounts.
    7. Portfolio investors withdrew a record of about Rs 1.66 lakh crore, roughly $18.9 billion, from Indian markets in 2025.
    8. Foreign direct investment is defined at a threshold of 10% or more of the post issue paid up equity capital of a listed company, the internationally standard cut off separating direct from portfolio investment.

    Back2Basics: India's Foreign Exchange Reserves

    1. What they are: Foreign exchange reserves are external assets held and controlled by the RBI that are readily available to finance a balance of payments gap and to intervene in the currency market.
    2. Four components: Reserves comprise foreign currency assets, gold, Special Drawing Rights held with the International Monetary Fund, and the Reserve Tranche Position with the Fund.
    3. Foreign currency assets: The largest component, held mainly in sovereign bonds, treasury bills and deposits with other central banks and the Bank for International Settlements, denominated chiefly in United States dollars, euros, pounds sterling and yen.
    4. Gold: Held partly domestically and partly in custody abroad, and revalued periodically, so movements in the gold price alone change the headline reserve number without any transaction.
    5. Special Drawing Rights: An international reserve asset created by the International Monetary Fund, allocated to members in proportion to their quota, whose value is set from a basket of five currencies comprising the United States dollar, euro, Chinese renminbi, Japanese yen and pound sterling.
    6. Reserve Tranche Position: The portion of a member's quota subscription paid in reserve assets, which the member may draw on from the Fund without conditions.
    7. Adequacy measures: Reserve adequacy is judged by the number of months of imports covered, by the ratio of reserves to short term external debt on residual maturity, and by the ratio of reserves to broad money.
    8. The forward book: The RBI's net forward position in the currency market is disclosed separately, because outstanding forward sales are a claim on future reserves that the headline number does not capture.
    9. Custody and disclosure: Reserve data are published weekly in the RBI's Weekly Statistical Supplement, with the currency composition disclosed with a lag in the half yearly report on foreign exchange reserves.

    Challenges in India's External Sector

    Source: Backgrounder, External Sector_ FDI,FPI, Weakening Rupee against Dollar.docx

    1. Protectionism and policy shocks abroad: Tariff escalation and trade fragmentation divert capital toward friend shoring hubs or back to home markets. e.g. tariffs rising to 50% on key Indian goods in August 2025 directly hit export oriented manufacturing in textiles and automobiles.
    2. Competing destinations with faster approvals: Rival economies offer quicker clearances and wider free trade agreement networks for near shoring investors. e.g. Vietnam, Indonesia and Mexico have absorbed a large share of the China plus one relocation that India was positioned to attract.
    3. Policy unpredictability: Frequent regulatory pivots undermine investor trust in the stability of the rules. e.g. retrospective taxation disputes and changes in e-commerce marketplace rules in 2025 sustained a perception of high regulatory risk.
    4. Cumbersome approvals: Land and environmental clearances remain a bottleneck for greenfield investment. e.g. roughly 200 FDI proposals faced delays as of August 2025 because of screening requirements, and legacy cases such as the abandoned $12 billion POSCO project continue to define the land risk narrative.
    5. Skill mismatch in frontier sectors: Only about 5% of India's workforce is formally skilled, with acute shortages in wafer fabrication and artificial intelligence roles. e.g. semiconductor and electric vehicle investors face a talent gap that constrains how much high value FDI India can absorb.
    6. Weak contract enforcement: Long drawn arbitration and a backlog in commercial courts raise the perceived exit risk for investors. e.g. multi year tax arbitration such as the Cairn Energy dispute is repeatedly cited as evidence of an unpredictable legal exit.
    7. Round tripping and financialisation: A large share of inflows originates in low tax jurisdictions and an increasing share is routed through Alternative Investment Funds rather than industrial equity. e.g. persistent concentration of inflows from Mauritius and Singapore points to tax arbitrage rather than fresh productive capital.
    8. Weak external demand: Cooling global orders discourage export oriented investment in labour intensive sectors. e.g. purchasing managers' index readings in April 2025 recorded a sharp cooling in Indian export orders.

    Way Forward

    1. Publish a sterilisation cost disclosure: Report the carrying cost of intervention alongside the reserve number, so that decisions to open or close swap windows can be evaluated against a visible fiscal and balance sheet cost.
    2. Pre announce redemption management for debt creating inflows: Publish the maturity profile of FCNR(B), ECB and OFCB obligations and the forward cover arranged against them, so that a redemption cliff is priced in advance rather than discovered.
    3. Attach conditions and horizons to guidance: State the data conditions under which a stated window date could change at the time the guidance is issued, so that a data driven adjustment is not read as a reversal.
    4. Rebalance toward equity inflows: Reduce the reliance on debt creating flows by removing sectoral entry frictions and completing single window clearances, so that the same balance of payments support carries no repayment obligation.
    5. Diversify export markets through concluded agreements: Operationalise the European Union and United Kingdom trade agreements at the level of standards, rules of origin and customs procedure, so that the current account improves rather than being financed by capital.
    6. Deepen the onshore rupee derivatives market: Widen participation in exchange traded currency futures and the non deliverable forward segment, so that hedging demand is met onshore and the RBI is not the residual bearer of currency risk.
    7. Reduce the oil exposure structurally: Expand strategic petroleum reserve capacity, ethanol blending and electric mobility so that a $90 a barrel oil price does not automatically translate into an external financing requirement.
    8. Strengthen banks before consolidating them: Prioritise governance, risk management culture and technology investment, as the Governor set out, over amalgamation, so that scale is built on institutional strength rather than on balance sheet addition.

    Matching Previous Year Question

    “[2018, GS3, 15 marks] How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India?”

  • RBI’s MPC Minutes Signal a Turn from Easing to Tightening

    Why in the News

    The August 2026 MPC minutes show growing concern over rising inflation. Although the repo rate was kept unchanged at 5.25%, some members see a possible rate hike later in 2026-27 as inflation is projected to peak at 5.9% in Q3.

    MPC: Key Prelims Facts

    • Legal basis: RBI Act, 1934, amended in 2016.
    • Composition: 6 members
      • 3 from RBI
      • 3 external members appointed by the Central Government.
    • Chairperson: RBI Governor.
    • Voting: One vote per member; Governor has a casting vote in case of a tie.
    • Minutes: Published on the 14th day after the meeting.
    • Mandate: Set the policy repo rate to achieve the inflation target.

    August 2026 Policy Review

    • Repo rate: 5.25%, unchanged.
    • Growth forecast: Raised from 6.6% to 6.7%.
    • Inflation forecast: Lowered from 5.1% to 5%.
    • Q3 inflation projection: 5.9%.
    • Inflation is expected to decline after the Q3 peak, supporting the decision to wait rather than tighten immediately.

    Core Inflation

    • Core inflation = CPI inflation excluding food and fuel.
    • It captures relatively persistent, demand-driven price pressures that monetary policy can influence.
    • Core excluding precious metals additionally removes gold and silver, preventing bullion price movements from distorting the underlying inflation signal.

    Second-Round Inflation Effects

    • A first-round shock, such as higher oil prices, can spread through the economy:
    • Higher oil prices → higher input costs → higher production costs → higher prices of goods/services → broader inflation
    • This transmission is called a second-round effect.

    De-Anchoring of Inflation Expectations

    • When households and firms stop believing inflation will return to the 4% target, they may:
    • Expect high inflation → demand higher wages/prices → firms raise prices → inflation becomes self-sustaining
    • This is why MPC members are closely watching expectations and generalisation of price pressures.

    Why a Rate Hike May Be Difficult

    • Supply shocks: Interest rates cannot directly increase oil supply or food production.
    • Transmission lag: Monetary policy affects the economy with a time lag.
    • Food weight: Food shocks can substantially raise headline CPI.
    • Growth trade-off: Higher rates can weaken investment and consumption.
    • Exchange rate: Rate differentials and rupee depreciation can affect imported inflation.
    • Fiscal/administered prices: Taxes, MSP and administered fuel prices lie largely outside MPC control.
    • Changing CPI basket: Changes in CPI weights can affect historical comparisons.

    “[2024, GS3, 10 marks] What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation.”

    [2017] Which of the following statements is/are correct regarding the ‘Monetary Policy Committee (MPC)?
    1. It decides the RBI’s benchmark interest rates.
    2. It is a 12-member body including the Governor of RBI and is reconstituted every year.
    3. It functions under the chairmanship of the Union Finance Minister.
    Select the correct answer using the code given below:

    [A] 1 only

    [B] 1 and 2 only

    [C] 3 only

    [D] 2 and 3 only