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Subject: Economics

  • What explains crude oil prices falling below the $0 mark?

    Context

    • Recently US oil markets created history when prices of West Texas Intermediate (WTI), the best quality of crude oil in the world, fell to “minus” $40.32 a barrel in New York.
    • Not only is this the lowest crude oil price ever known the previous lowest was immediately after World War II — but also well below the zero-mark.
    • At this price, the seller would be paying the buyer of crude oil $40 for each barrel that is bought.

    Crude oil price dynamics are undergoing dramatic changes this year. The ongoing pandemic has worsened the situation further. India has ample  opportunities to get benefited from the ongoing situation.

    But how can that be? How did prices fall below zero in the first place? Let us see:

    Global fall in crude oil prices

    • The first thing to understand is that, even before the Covid-19 induced global lockdown, crude oil prices had been falling over the past few months.
    • The reason was straightforward. The price of a commodity falls when supply is more than demand.
    • The global oil pricing is by no stretch an example of a well-functioning competitive market. In fact, it’s seamless operations crucially depend on oil exporters acting in consort.

    OPEC+ failure (earlier)

    • Historically, the OPEC, lead by Saudi Arabia, which is the largest exporter of crude oil in the world (single-handedly exporting 10% of the global demand), used to work as a cartel and fix prices in a favourable band.
    • It could bring down prices by increasing oil production and raise prices by cutting production.
    • In the recent past, the OPEC has been working with Russia, as OPEC+, to fix the global prices and supply.
    • This happy accord came to an end as Saudi Arabia and Russia disagreed over the production cuts required to keep prices stable.
    • As a result, OPEC undercutting each other on price while continuing to produce the same quantities of oil.

    What it costs to a country for cutting production

    • The production cut was made worse with the growing spread of Coronavirus, which, in turn, was sharply reducing economic activity and the demand for oil.
    • It must be understood that cutting production or completely shutting down an oil well is a difficult decision because restarting it is both costly and cumbersome.
    • Moreover, if one country cuts production, it risks losing market share if others do not follow suit.

    Demand-supply mismatch got worse

    • By the time the Saudi Arabia and Russia discord was sorted out last week, under pressure from US President, it was possibly too late.
    • Oil-exporting countries decided to cut production by 6 million barrels a day — the highest production cuts — and yet the demand for oil was shrinking by 9 to 10 million barrels a day.
    • This meant that the supply-demand mismatch continued to worsen right through March and April.
    • According to reports, all possible the mismatch resulted in almost all storage capacity being exhausted.

    What led to negative oil prices: Immediate causes

    • The contracts fir this month for WTI, the American crude oil variant, was due to expire. As the deadline came near, prices started plummeting. This was for two broad reasons.
    • There were many oil producers who wanted to get rid of their oil even at unbelievably low prices instead of choosing the other option shutting production.
    • The space to store the oil too got exhausted. Trains and ships, which were typically used to transport oil, too, were used up just for storing oil.
    • They figured that it would be more costly for them to accept the oil delivery, pay for its transportation and then pay for storing it, especially when there is no storage available than to simply take a hit on the contract price.

    Future prospects

    • It is important to note that it was the WTI price for May in the US markets that went so low.
    • Crude Oil prices elsewhere fell but by not so much. Moreover, at least for now, oil prices are pegged at around $20 a barrel.
    • It is likely that this was a one-off event and will not happen as producers are forced to cut back production further.
    • But one cannot rule out such a repeat, with COVID-19 continuing to spread, demand is falling every day.
    • In the end, it would be the demand-supply mismatch (adjusted for how much can be stored away) that will decide the fate of oil prices.

  • Amendment in the FDI Policy for curbing opportunistic takeovers/acquisitions of Indian companies

    The Government of India has reviewed the extant Foreign Direct Investment (FDI) policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19.

    Context

    • The Indian policy revision is meant for sectors and enterprises other than defence, space, atomic energy and sectors and activities “prohibited for foreign investment”.
    • It was understood that the Indian decision was a response to the news of an incremental purchase of shares in HDFC by the People’s Bank of China.

    FDI is an all-season hot topic for both prelims as well as mains. Reading the newscard will make you aware of its scope. We can expect a mains question like –  Recent amendment in the FDI Policy aims for curbing opportunistic takeovers/acquisitions of Indian companies. Elucidate.

    Background

    FDI in India

    • Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then FM Manmohan Singh.
    • There are two routes by which India gets FDI.
    1. Automatic route: By this route, FDI is allowed without prior approval by Government or RBI.
    2. Government route: Prior approval by the government is needed via this route. The application needs to be made through Foreign Investment Facilitation Portal, which will facilitate single-window clearance of FDI application under Approval Route.
    • India imposes a cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%.
    • In 2015 India overtook China and the US as the top destination for the Foreign Direct Investment.

    What is the amendment about?

    • The govt. has amended para 3.1.1 of extant FDI policy as contained in Consolidated FDI Policy, 2017.
    • In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership, such subsequent change in beneficial ownership will also require Government approval.

    The present position and revised position in the matters will be as under:

    Present Position

    • A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.
    • However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route.
    • Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

    Revised Position

    • A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.

    [spot the difference]

    • However, an entity of a country, which shares a land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country, can invest only under the Government route.
    • Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

    In response to China

    • China accused that India’s recently adopted policy goes against the principles of the World Trade Organisation (WTO).
    • It tends to violate WTO’s principle of non-discrimination, and go against the general trend of liberalisation and facilitation of trade and investment.

    Impact

    • The amended policy brings every kind of Chinese investors to India within the ambit of government approval reducing the space for private business negotiations.
    • The decision would face difficulties, especially if the government tried to attribute nationality to venture capital funds.

    Back2Basics: Foreign Direct Investment (FDI)

    • An FDI is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.
    • It is thus distinguished from a foreign portfolio investment by a notion of direct control.
    • FDI may be made either “inorganically” by buying a company in the target country or “organically” by expanding the operations of an existing business in that country.
    • Broadly, FDI includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans”.
    • In a narrow sense, it refers just to building a new facility, and lasting management interest.

  • [pib] Draft Electricity Act (Amendment) Bill, 2020

    The Ministry of Power has issued a draft proposal for amendment of Electricity Act, 2003 in the form of the draft Electricity Act (Amendment) Bill, 2020.

    Draft Electricity Act (Amendment) Bill 2020

    Major amendments proposed in the Electricity Act are as follows:

    Viability of DISCOMs

    • Cost reflective Tariff: To eliminate the tendency of some Commissions to provide for regulatory assets, it is being provided that the Commissions shall determine tariffs that are reflective of  cost so as to enable Discoms to recover their costs.
    • Direct Benefit Transfer: It is proposed that tariff be determined by Commissions without taking into account the subsidy, which will be given directly by the government to the consumers.

    Sanctity of Contracts

    • Establishment of Electricity Contract Enforcement Authority:  Such an authority headed by a retired Judge of the High Court is proposed to be set-up with powers of the Civil Court to enforce performance of contracts related to purchasing or sale or transmission of power between a generating, distribution or transmission companies.
    • Establishment of adequate Payment Security Mechanism for scheduling of electricity: It is proposed to empower Load Dispatch Centres to oversee the establishment of adequate payment security mechanism before scheduling dispatch of electricity, as per contracts.

    Strengthening the regulatory regime

    • Strengthening of the Appellate Tribunal (APTEL): It proposed to increase the strength of APTEL to seven apart from the Chairperson so that multiple benches can be set-up to facilitate quick disposal of cases.
    • Doing away with multiple Selection Committees: It is proposed to have one Selection Committee for selection of Chairpersons and Members of the Central and State Commissions and uniform qualifications for appointments of Chairperson and Members.
    • Penalties: In order to ensure compliance of the provisions of the Electricity Act and orders of the Commission, section 142 and section 146 of the Electricity Act are proposed to be amended to provide for higher penalties.

    Renewable and Hydro Energy

    • National Renewable Energy Policy: It is proposed to provide for a policy document for the development and promotion of generation of electricity from renewable sources of energy. It is also proposed that a minimum percentage of purchase of electricity from hydro sources of energy is to be specified by the Commissions.
    • Penalties: It is being further proposed to levy penalties for non-fulfilment of obligation to buy electricity from renewable and/or hydro sources of energy.

    Miscellaneous

    • Cross border trade in Electricity: Provisions have been added to facilitate and develop trade in electricity with other countries.
    • Franchisees and Distribution sub licensees: It is proposed to provide that the Distribution Companies, if they so desire, may engage Franchisees or Sub-Distribution Licensees to distribute electricity on its behalf in a particular area within its area of supply. However, it will be the DISCOM which shall be the licensee, and therefore, ultimately responsible for ensuring quality distribution of electricity in its area of supply.

  • What is Helicopter Money?

    With the coronavirus-hit economy falling deeper and deeper into a chasm with each passing day, Telangana chief minister KC Rao earlier this month has said helicopter money can help states come out of this crisis.

    Various monetary policy tools are being considered to boost consumer demand in the economy which is stricken by the coronavirus pandemic. Helicopter Money is one such tool.

    What is Helicopter Money?

    • This is an unconventional monetary policy tool aimed at bringing a flagging economy back on track.
    • It involves printing large sums of money and distributing it to the public. American economist Milton Friedman coined this term.
    • It basically denotes a helicopter dropping money from the sky.
    • Friedman used the term to signify “unexpectedly dumping money onto a struggling economy with the intention to shock it out of a deep slump.”
    • Under such a policy, a central bank “directly increases the money supply and, via the government, distributes the new cash to the population with the aim of boosting demand and inflation.”

    Is helicopter money the same as quantitative easing (QE)?

    • Quantitative easing involves the use of printed money by central banks to buy government bonds.
    • But not everyone views the money used in QE as helicopter money.
    • It sure means printing money to monetize government deficits, but the govt has to pay back for the assets that the central bank buys.
    • It’s not the same as bond-buying by central banks “in which bank-owned assets are swapped for new central bank reserves.
    • Helicopter money is also different from a central bank directly financing the debt of a government.

    Pros and cons of helicopter money

    Pros

    • Helicopter money does not rely on increased borrowing to fuel the economy, which means that it doesn’t create more debt and interest rates can remain unchanged.
    • Generally, helicopter money boosts spending and economic growth more effectively than quantitative easing because it increases aggregate demand – the demand for goods and services – immediately.
    • While government money drops that come from debt might not boost consumer spending, due to the debt needing to be repaid, it is often thought that ‘money finance’ will stimulate the economy.

    Cons

    • Unlike quantitative easing, using helicopter money as a tactic is not reversible, and many argue that it’s not a feasible solution to revive the economy.
    • A country’s central bank sets its interest rates to reach economic growth targets.
    • However, a helicopter drop means that a central bank cannot use interest rates to recover any costs, because the money is not linked to a borrowed asset (loan).
    • Instead, the money is given directly to the public. This may lead to over-inflation and cause damage to the central bank’s financials.
    • One of the main risks associated with helicopter money is that it could lead to a significant devaluation of the currency on the foreign exchange market.
    • As more money is printed and supply increases, the value of the domestic currency could significantly decrease.
    • It could also discourage speculators from buying the currency as it is less likely to perform well.

  • Economy in lockdown: On India’s worst-case scenario

    This op-ed discusses the latest projections by the IMF. The latest projection and suggestions by IMF are the bleak reminder of economic disruption we have been experiencing.

    IMF discards its previous projections

    • Less than two months ago, IMF had asserted that “global growth appears to be bottoming out” (i.e. announcing the worst is over).
    • But the pandemic induced ‘Great Lockdown’ has forced the IMF to junk all its previous projections for economic output in 2020.
    • Faced with the stark reality of sweeping shutdowns of almost entire economies worldwide, the fund last week acknowledged that the current “crisis is like no other”.
    • The IMF slashed its projection by 6.3 percentage points from its January forecast for 3.3% growth to a 3% decline.
    • This is the sharpest contraction in world output since the Great Depression of the 1930s.
    • Comparison with 2009 slowdown: In contrast, the recession of 2009 saw world output contract by a mere 0.1%.
    • The IMF was blindsided by the comments from Chinese authorities and WHO.
    • Which is clear from the fact that as recently as February 22, the fund’s chief, Kristalina Georgieva, told G20 Finance Ministers that “global growth would be about 0.1 percentage points lower” than forecast in January.
    • China’s GDP, she projected, would expand by 5.6% this year, 0.4 percentage points slower than assumed in January.

    Latest projections for China by the IMF

    • Last week, the IMF slashed China’s forecast to a growth of 1.2%, citing data on industrial production, retail sales, and fixed asset investment that, it said, suggested a contraction of about 8% in the first quarter.
    • China reported a 6.8% first-quarter contraction.
    • Still, in projecting an annual expansion in Asia’s largest economy, the fund is rather optimistically foreseeing a sharp rebound in activity over the rest of the year.

    The following data of the revised projections gives us an idea about the extent to which the crisis has been damaging the economy. There are also suggestions about the strategy to deal with the crisis and that includes a stimulus package.

    Projections and suggestions for India

    • On India, the IMF has cut its projection for growth in the fiscal year that started on April 1, from January’s 5.8%, to 1.9%.
    • This projection is base on two assumptions given below.
    • 1. This again appears predicated on the fund’s baseline scenario that assumes that the pandemic would ‘fade in the second half of 2020’, allowing containment efforts to be unwound and economic activity to normalise.
    • 2. Another key assumption by the IMF’s economists is the availability of policy support to nurture the revival once activity restarts.
    • Suggestion for India: Jettisoning its storied fiscal conservatism, the IMF’s chief economist, Gita Gopinath, has advocated ramping up a broad-based and coordinated stimulus once the disease has been contained.
    • Such measures would help avoid the errors of the Great Depression years when premature efforts to prune budget deficits prolonged the downturn.
    • Inadequate fiscal measures in India: In this context, India’s fiscal measures pale in terms of scale when compared with what several other nations have undertaken.

    Conclusion

    Given the size of the informal sector in India as well as the anticipated prolonged disruption in labour supply even in more formal parts of the economy, the Centre needs to proactively commit to a substantial stimulus package in order to ensure that once the economy reopens, it has the legs to run.

  •  Indian’s decision on FDI to stop predatory Chinese hunt for Indian companies

    This editorial discusses the implications of growing Chinese investment in India. After People’s Bank of China bought 1 per cent stake in HDFC bank, Indian government made prior government approval mandatory for investment from countries sharing border with India. Various aspects of the move are discussed here.

    No separating commerce and security in dealing with China

    • India’s move to prevent a predatory Chinese hunt for Indian companies comes at a time when the stock market has been badly bruised by the coronavirus.
    • It underlines the emerging perception in India that there is no separating commerce and security in dealing with China.
    • India’s concerns are similar to those being expressed elsewhere in the world.
    • A number of European countries have already moved in that direction.
    • In recent years, apprehensions have grown, in both the developing and developed world, that China is targeting their infrastructural, industrial and technological assets for control.
    • But many governments were willing to give the benefit of doubt to Beijing.
    • That willingness has rapidly eroded in the wake of the corona crisis that has devastated the Western world.

    Taking economic advantage of other nation’s misery

    • Although few world leaders want to join the US President in publicly attacking China.
    • Many of them know that Beijing bears some responsibility for letting a health emergency in one of its cities become a global pandemic.
    • That Chinese companies, with access to easy money and strong political support in Beijing, are now taking economic advantage of other nations’ misery has added insult to injury.
    • While most leaders are preoccupied with the corona crisis, they are not likely to let Beijing have its way.
    • Even in Britain, where the Boris Johnson government is now taking a second look.
    • Last week, the British Foreign Secretary, said there will be no going back to “business as usual” with China.

    China’s growing influence has been posing challenges for India on various fronts. Its growing footprint on India’s economy is one of such challenges. The UPSC frames question in relation to China from various angles. So, the penetration of China in India economy is also an important aspect from the Mains perspective.

    Rethinking the commercial engagement with China

    • Beyond the question of accountability for the spread of the coronavirus, many countries are rethinking the very nature of their commercial engagement with China.
    • Gaming the system by China: On a host of issues ranging from trade and investment to intellectual property protection, there is an inescapable sense that China has gamed the global system for unilateral gains.
    • India late in learning: India certainly has had a longer learning curve than the West in recognising the relationship between commerce and national security.
    • Since the early 1990s, Delhi bet that expanding economic cooperation with China will help mitigate political disputes.
    • But the differences have only become intractable even as China became stronger economically.
    • India gave China an easy pass into the WTO.
    • India’s trade deficit: It let cheap imports from China undermine India’s manufacturing sector and run up a massive trade surplus.
    • India allowed massive Chinese penetration of its telecom, digital and other advanced sectors only to discover the multiple negative consequences.
    • India’s new approach: The last few years have seen a new approach that has seen India oppose China’s Belt and Road Initiative and walk out of the RCEP negotiations citing the trade imbalance with China.

    Conclusion

    The decision on Chinese FDI can be seen as one of the piece of the puzzle India has to face on the various front. But the puzzle of dealing with a rising China’s strategic economic onslaught will test India for a long time.

  • How reverse repo rate became benchmark interest rate in the Indian economy?

    Context

    • The Indian economy’s slowdown during 2018 and 2019 is becoming much worse in 2020 with the spread of COVID-19 and the stalling of almost all economic activity.
    • Like most other central banks in the world, the RBI, too, has tried to cut interest rates to boost the economy.
    • However, unlike in the past, when the RBI used its repo rate as the main instrument to tweak the interest rates, today, it is the reverse repo rate that is effectively setting the benchmark.

    We can expect a straight forward question based on this newscard.  For example:  “Critically examine the efficacy of reverse repo rate as benchmark interest rate in the Indian economy. “

    What are repo and reverse repo rates?

    • The repo rate is the rate at which the RBI lends money to the banking system (or banks) for short durations.
    • The reverse repo rate is the rate at which banks can park their money with the RBI.
    • With both kinds of the repo, which is short for repurchase agreement, transactions happen via bonds — one party sells bonds to the other with the promise to buy them back (or repurchase them) at a later specified date.
    • In a growing economy, commercial banks need funds to lend to businesses.
    • One source of funds for such lending is the money they receive from common people who maintain savings deposits with the banks. Repo is another option.

    Repo as benchmark

    • Under normal circumstances, that is when the economy is growing; the repo rate is the benchmark interest rate in the economy.
    • This is because it is the lowest rate of interest at which funds can be borrowed and, as such, it forms the floor rate for all other interest rates in the economy.
    • For instance, the interest rate consumers would have to pay on a car loan or the interest rate they will earn from a fixed deposit etc.

    What has changed now?

    • Over the last couple of years, India’s economic growth has decelerated sharply.
    • This has happened for a variety of reasons and has essentially manifested in lower consumer demand.
    • In response, businesses held back from making fresh investments and, as such, do not ask for as many new loans.
    • Add to this, the pre-existing incidence of high non-performing assets (NPAs) within the banking system.
    • Thus, the banks’ demand for fresh funds from the RBI has also diminished. This whole cycle has acutely intensified with the ongoing lockdown.

    Consequences: Rise in Liquidity

    • As such, the banking system is now flush with liquidity for two broad reasons.
    • On the one hand, the RBI is cutting repo rates and other policy variables like the Cash Reserve Ratio to release additional and cheaper funds into the banking system so that banks could lend.
    • On the other, banks are not lending to businesses, partly because banks are too risk-averse to lend and partly because the overall demand from the businesses has also come down.

    So, how has reverse repo become the benchmark rate?

    • The excess liquidity in the banking system has meant that banks have been using only the reverse repo (to park funds with the RBI) instead of the repo (to borrow funds).
    • As of April 15, RBI had close to Rs 7 lakh crore of banks’ money parked with it.
    • In other words, the reverse repo rate has become the most influential rate in the economy.

    What has the RBI done?

    • Recognising this, the RBI has cut the reverse repo rate more than the repo (see graph) twice in the spate of the last three weeks.
    • The idea is to make it less attractive for banks to do nothing with their funds because their doing so hurts the economy and starves the businesses that genuinely need funds.

    Will the move to cut reverse repo, work?

    • It all depends on the revival of consumer demand in India.
    • If the disruptions induced by the outbreak of novel coronavirus continue for a long time, consumer demand, which was already quite weak, is likely to stay muted.
    • Businesses, in turn, would feel no need to borrow heavily to make fresh investments.
    • If consumer demand revives quickly, the demand for credit will build up as well.

    Concerns of lower reverse repo

    • From the banks’ perspective, it is also important for them to be confident about new loans not turning into NPAs, and adding to their already high levels of bad loans.
    • Until banks feel confident about the prospects of an economic turnaround, cuts in reverse repo rates may have little impact.

    Back2Basics: Long Term Repo Operations (LTRO)

    • The LTRO is a tool under which the RBI provides 1-3 year money to banks at the prevailing repo rate, accepting government securities with matching or higher tenure as the collateral.
    • Funds through LTRO are provided at the repo rate.
    • But usually, loans with higher maturity period (here like 1 year and 3 years) will have a higher interest rate compared to short term (repo) loans.
    • According to the RBI, the LTRO scheme will be in addition to the existing Liquidity Adjustment Facility (LAF) and the Marginal Standing Facility (MSF) operations.
    • The LAF and MSF are the two sets of liquidity operations by the RBI with the LAF having a number of tools like repo, reverse repo, term repo etc.

  • SDR general allocation by IMF

    • Finance Minister has said that India could not support a general allocation of new Special Drawing Rights (SDR) by the IMF because it might not be effective in easing coronavirus-driven financial pressures.
    • FM Nirmala Sitharaman has stated that such a global liquidity boost by the IMF could produce potentially costly side-effects if countries used the funds for “extraneous” purposes.

    Details of SDR mechanism:

    What is SDR?

    • The SDR is an interest-bearing international reserve asset created by the IMF in 1969 to supplement other reserve assets of member countries.
    • To participate in this system, a country was required to have official reserves.
    • This consisted of a central bank or government reserves of gold and globally accepted foreign currencies that could be used to buy the local currency.
    • It is based on a basket of international currencies comprising the U.S. dollar, Japanese yen, euro, pound sterling and Chinese Renminbi.
    • It is not a currency, nor a claim on the IMF, but is potentially a claim on freely usable currencies of IMF members.
    • The value of the SDR is not directly determined by supply and demand in the market but is set daily by the IMF on the basis of market exchange rates between the currencies included in the SDR basket.

    Who can hold SDRs?

    • SDRs can be held and used by member countries, the IMF, and certain designated official entities called “prescribed holders”.
    • It cannot be held, for example, by private entities or individuals.
    • Its status as a reserve asset derives from the commitments of members to hold, accept, and honour obligations denominated in SDR.
    • The SDR also serves as the unit of account of the IMF and some other international organizations.

    General allocation of SDRs

    • An SDR allocation is a low-cost way of adding to members’ international reserves, allowing members to reduce their reliance on more expensive domestic or external debt for building reserves.
    • The IMF has the authority under its Articles of Agreement to create unconditional liquidity through “general allocations” of SDRs to participants in its SDR Department (currently, all members of the IMF) in proportion to their quotas in the IMF.

    The SDR Interest Rate

    • The interest rate on SDRs, or the SDRi, provides the basis for calculating the interest rate that is charged to member countries when they borrow from the IMF and paid to members for their remunerated creditor positions in the IMF.
    • It is also the interest paid to member countries on their own SDR holdings and charged on their SDR allocation.
    • The SDRi is determined weekly based on a weighted average of representative interest rates on short-term government debt instruments in the money markets of the SDR basket currencies, with a floor of five basis points.

    How many SDRs have been allocated so far?

    The general SDR allocation of August 28, 2009 is by far the biggest allocation to date:

    • SDR 9.3 billion was allocated in yearly installments in 1970–72.
    • SDR 12.1 billion was allocated in yearly installments in 1979–81.
    • SDR 161.2 billion was allocated on August 28, 2009.

    What happens to the SDRs once they are allocated?

    • The IMF’s SDR Department keeps records of members’ SDR allocations and holdings; the SDR Department is also the channel through which all transactions and operations involving SDRs are conducted.
    • Once allocated, members can hold their SDRs as part of their international reserves or sell part or all of their SDR allocations.
    • Members can exchange SDRs for freely usable currencies among themselves and with prescribed holders; such exchange can take place under a voluntary arrangement or under designation by the Fund.
    • IMF members can also use SDRs in operations and transactions involving the IMF, such as the payment of interest on and repayment of loans, or payment for future quota increases.

    Issues with new allocations

    • New reserves are allocated according to members’ quotas — or shares in the IMF.
    • A great deal of the benefit in 2009 went to advanced economies that didn’t need help in accessing markets or financing fiscal deficits.
    • If the same system is being used now, only 40 per cent of the total would be given to the emerging economies. That is not good enough.

    Other reasons

    • The possible extraneous purposes FM could be referring to maybe misuse of resources for terror funding or some such purpose by neighbours.
    • This may seem far-fetched to some, but is par for the course for the government.
    • The other possibility is that India is merely trying to prove its loyalty to the Trump administration.
    • India has already requested to access the US Fed’s currency swaps.

  • How the RBI is handling ‘The Great Lockdown’?

    To deal with the crippling effects of the pandemic on the economy the government has unveiled certain fiscal measures. After announcing the first round of monetary measures the RBI has unveiled the second round of policy announcements to align itself with the government in its efforts to review the economy. Following are the measures announced by the RBI in its second such announcement.

    • The IMF has called the ongoing economic crisis due to Covid-19 as “The Great Lockdown” and termed it to be the worst recession since the Great Depression.
    • The total estimated loss to global economic growth is pegged at $9 trillion — more than three times India’s GDP.
    • However, while the rest of the world is certain to contract, India is hoping to be one of the few countries that expand their overall GDP, regardless of how small that increase may be.
    • In this regard, both the Centre and state governments, as well as the RBI, have been coming out with policy announcements that mitigate economic distress.

    UPSC can frame the question based on the measures announced by the RBI like “What measures were announced by the RBI to deal with Covid-19 impact on the economy?”. Also, pay attention to various terms and their effect on the economy from the macroeconomic point of view. That understanding helps us to answer the question based on basic concepts.

    What are the announcements made by RBI?

    A) Cutting Reverse-Repo Rate

    • To begin with, the RBI has cut the reverse repo rate further by 25 basis points (100 basis points make up one full percentage point).
    • The reverse repo rate now stands at 3.75 per cent while the repo rate is 4.40 per cent.
    • The idea behind repeatedly cutting reverse repo more than the repo is to incentivise banks to borrow from it at low rates and lend it forward to customers.

    B) Targeted Long Term Repo Operations

    • RBI has announced another TLTRO of Rs 50,000 crore but this time it has mandated that 50 per cent of this amount borrowed by the banks must go to small and mid-sized NBFCs and Micro Finance Institutions (MFIs).
    • Again, the benefits of this move are two-fold. One, it provides more liquidity.
    • More importantly, it also provides it targeted to those institutions that are most hit by the economic slowdown and, as such, most in need of funds to survive themselves.

    C) Credit to NBFCs and MFIs

    • All India financial institutions (AIFIs) such as the NABARD, etc. will be provided special refinance facilities for a total amount of Rs 50,000 crore by the RBI.
    • This credit will help the end consumer, especially in the rural sector, small industries, and housing finance companies.

    D) Expanding Ways and Means Advances (WMAs)

    • On the issue of providing liquidity and fulfilling its role as “the lender of last resort”, the RBI also announced that it will provide more funding to state governments — under the WMA facility.
    • The WMA is essentially is a facility by which state governments borrow from the RBI to meet the shortfall between their revenues and their expenditure.
    • But the WMA is a short-term measure, only meant for exigencies.

    E) Easing NPA norms

    • Apart from easing liquidity in the system like in the past, the other focus has been to provide an easier regulatory regime.
    • The global lockdown has almost completely halted economic activity.
    • Under the circumstances, it is natural that business will struggle to pay back their loans and there will be a steady accretion of non-performing assets (NPAs) across the board.
    • Similarly, to ensure that loans given to real estate projects, that are getting delayed due to the crisis, do not turn into NPAs, the RBI provided an extension of another year before they are recognised as NPAs.

    F) Easing LCR norms

    • Lastly, given the stress on the system and the demand for cash, the RBI has allowed Scheduled Commercial Banks to reduce their Liquidity Coverage Ratio from 100 per cent to 80 per cent with immediate effect.
    • The LCR essentially mandates the amount of cash that a bank is required to keep with itself.
    • At 100 per cent LCR, a bank would have been required to keep 100 per cent of the net cash it expects to flow out of the bank over the next 30 days.
    • With this being reduced to 80 per cent, banks would have more cash to deal with.

    Though no direct question on monetary policy was asked in the recent past,  understanding the basic concepts stands us in good stead while writing the related answer in the exam. So, the terms mentioned above like-TLTRO, WMAs etc. are important from exam point of view.

  • OBICUS Survey by RBI

    The Reserve Bank of India has launched the latest round of quarterly order books, inventories and capacity utilization survey (OBICUS) of the manufacturing sector.

    OBICUS is something new than we often get to hear from RBI…. Most recent was Ways and Means Advances. We can expect prelims question like- “Order books, inventories and capacity utilization survey (OBICUS) of the manufacturing sector is held by” – with options like NSSO, Labour Bureau etc.

    OBICUS

    • OBICUS survey on the manufacturing sector is published quarterly by the RBI since March 2008.
    • It provides an insight into the demand conditions faced by the Indian manufacturing sector.
    • It covers over 2500 public and private limited companies in the manufacturing sector.
    • The company-level data collected during the survey are treated as confidential and never disclosed.

    Items included in OBICUS

    • The information collected in the survey includes quantitative data on new orders received during the reference quarter, backlog of orders, pending orders, total inventories with a breakup between work-in-progress (WiP) and finished goods (FG) inventories and item-wise production.

    Significance of OBICUS

    • The survey provides valuable input for monetary policy formulation.
    • It represents the movements in actual data on order books, inventory levels of raw materials and finished goods and capacity utilization.
    • These are considered as important indicators to measure economic activity, inflationary pressures and the overall business cycle.
    • The survey also gives out the ratio of total inventories to sales and ratio of raw material (RM) and finished goods (FG) inventories to sales in percentages.