💥Mains Ready By December. Smash Mains & Smash PYQ Admissions Open
Talk to Mentor

Civilsdaily

Login

Subject: External Sector

  • Extension to the RoDTEP Scheme

    Central Idea

    • In light of a continuous seven-month decline in goods exports until August, the government has taken action to bolster outbound shipments.
    • The Remission of Duties and Taxes on Exported Products (RoDTEP) scheme’s applicability has been extended for nine more months, now in effect until June 30, 2024.

    About RoDTEP Scheme

    Objective To refund central, state, and local duties or taxes on exported products.

    The rebate does not apply to duties and taxes that have already been exempted, remitted, or credited.
    Launch Date Introduced in January 2021.

    Replacement for the Merchandise Export Scheme, which was deemed non-compliant with WTO Rules.
    Rates of Tax Refund Tax refund rates under RoDTEP vary from 0.5% to 4.3% across different sectors.
    Claim Process Exporters can claim the rebate as a percentage of the Freight On Board (FOB) value of their exports.
    Issuance of Rebates Rebates are issued in the form of transferable duty credits or electronic scrips (e-scrips).
    Significance of the Scheme Enhances the competitiveness of Indian products in global markets by refunding various taxes.

    Expected to have a substantial impact on India’s trade volumes, export figures, and competitiveness.

    Enables Indian exporters to meet international export standards and access GST refunds efficiently.

     

  • Greshams Law: What happens when governments fix Currency Exchange Rates?

    gresham's law

    Central Idea

    • The law, named after English financier Thomas Gresham, came into play most recently during the economic crisis in Sri Lanka last year.
    • The Central Bank of Sri Lanka has fixed the exchange rate between the Sri Lankan rupee and the U.S. dollar

    About Gresham’s Law

    • Thomas Gresham: The law is named after Thomas Gresham, an English financier who advised the English monarchy on financial matters. It extends beyond paper currencies and applies to commodity currencies and various goods.
    • Bad money drives out good: This maxim illustrates a phenomenon that occurs when government-fixed exchange rates diverge from market exchange rates, causing undervalued currency to be withdrawn from circulation.
    • Arbitrarily Fixed Prices: Gresham’s Law operates whenever governments arbitrarily set prices, causing a commodity to become undervalued compared to its market exchange rate. This undervaluation drives the commodity out of the formal market.
    • Black Market: In such scenarios, the only way to acquire the undervalued commodity is through the black market, as it is no longer available through official channels.
    • Goods Outflow: Countries can also experience the outflow of certain goods when their prices are forcibly undervalued by the government.

    Application to Commodity Money

    • Gold and Silver Coins: Gresham’s Law is particularly evident when a government fixes the exchange rate of commodity money, like gold and silver coins, well below their market value. In response, people may hoard or melt these coins to obtain their intrinsic value, which is higher than the government-set rate.

    Recent Example in Sri Lanka

    • Economic Crisis in Sri Lanka: Gresham’s Law was observed during the economic crisis in Sri Lanka, where the central bank fixed the exchange rate between the Sri Lankan rupee and the U.S. dollar.
    • Rupee Overvaluation: The government mandated that the price of the U.S. dollar should not exceed 200 Sri Lankan rupees, even though the black market rate indicated a higher value. This overvaluation of the rupee led to a decline in the supply of dollars and pushed the U.S. dollar out of the formal foreign exchange market.
    • Black Market Transactions: Individuals seeking U.S. dollars for foreign transactions were compelled to purchase them from the black market at rates exceeding 200 Sri Lankan rupees per dollar.

    Conditions for Gresham’s Law to Apply

    • Government-Imposed Fixed Rates: Gresham’s Law operates when government authorities establish and enforce fixed exchange rates between currencies.
    • Effective Implementation: Effective enforcement of these rates by authorities is essential for the law to take effect.

    Anti-thesis Concept: Thiers’ Law

    • “Good Money Drives Out Bad”: In the absence of government-imposed exchange rate fixes, the opposite phenomenon occurs. People tend to abandon currencies they perceive as of lower quality in favour of those they consider better, leading to the dominance of “good money.”
    • Thiers’ Law: This concept, known as Thiers’ Law and named after French politician Adolphe Thiers, complements Gresham’s Law.

  • Strengthening export control measures for Dual-Use Items

    dual-use items

    Central Idea

    • The government has recently announced its commitment to enhancing the control of dual-use items to prevent their misuse by non-state actors and terrorists.
    • Dual-use items refer to goods that can be utilized for both civilian and military purposes.

    Understanding Dual-Use Items

    • Dual-use items are commodities with the potential for application in both civilian and military contexts.
    • They are heavily regulated due to their capacity to be initially intended for civilian use and later repurposed for military or even terrorist activities.
    • Some examples include global positioning satellites, missiles, nuclear technology, chemical and biological weapons, night vision technology, thermal imaging equipment, specific models of drones, precision-engineered aluminium pipes, and certain types of ball bearings.

    Control Mechanisms for Dual-Use Items

    • International Cooperation: Most industrialized nations have established export controls on specific categories of designated dual-use technologies.
    • Multilateral Agreements: Various international treaties and agreements govern the export of these items.
    • India’s Participation: India is a signatory to major multilateral export control regimes like the Missile Technology Control Regime (MTCR), Wassenaar Arrangement (WA), Australia Group (AG), and Nuclear Suppliers Group (NSG). It is also party to key conventions such as the Chemical Weapons Convention (CWC) and Biological and Toxic Weapons Convention (BWC).
    • DGFT’s Role: In India, the Director General of Foreign Trade (DGFT) plays a pivotal role as a facilitator of exports and imports. The DGFT maintains a specialized list known as SCOMET (Specialty Chemicals, Organisms, Materials, Equipment, and Technologies) to regulate dual-use items.

    What is the SCOMET List?

    • SCOMET item is an acronym for Special Chemicals, Organisms, Materials, Equipment, and Technologies.
    • These are dual-use items that can be used for both civilian and military applications. India’s Foreign Trade Policy regulates the export of items on the SCOMET List.
    • Exporting these items and technologies falls under strict regulations. It can either be prohibited or permitted only under a license.
    • The SCOMET control list aligns with the control lists of various multilateral export control regimes and conventions.

    Necessity of Controlling Dual-Use Items

    • India’s Commitment: India is firmly committed to non-proliferation efforts related to dual-use items.
    • Integral Component: Export control over these items forms an integral part of India’s broader export control system.
    • Compliance: It ensures that sensitive and dual-use goods, including those covered by the Missile Technology Control Regime (MTCR), are traded in full compliance with India’s obligations under various international regimes.

    Conclusion

    • The government’s commitment to enhancing export control measures for dual-use items reflects its dedication to global non-proliferation efforts and the responsible trade of sensitive technologies.
    • Collaborative efforts among governments, industries, and stakeholders remain crucial in achieving effective export control of these items.

  • China’s Deflation: A cause for concern?

    deflation

    Central Idea

    • China’s recent bout of deflation, marked by a decline in consumer prices for the first time in over two years, has sparked debates about its implications and causes.
    • This article delves into the intricacies of deflation, its potential impact on economic growth, and the unique circumstances driving deflation in China.

    Understanding Deflation

    • Deflation Defined: Deflation refers to a sustained decrease in the general price level of goods and services within an economy.
    • Historical Context: Historically, the terms “inflation” and “deflation” were linked to changes in the money supply, with “inflation” representing a rise and “deflation” a fall in money supply.

    Concerns Associated with Deflation

    • Economic Slowdown: Many economists view deflation as an indicator of dwindling demand for goods and services, potentially leading to an economic slowdown.
    • Demand-Supply Dynamics: Falling prices may prompt consumers to delay purchases, hampering demand and triggering a ripple effect throughout the economy.
    • Resource Utilization: A certain level of inflation is deemed necessary for optimal resource utilization, ensuring full economic potential is realized.

    Varied Perspectives on Deflation

    • Positive Instances: Some economies have experienced deflation during periods of robust growth. Japan witnessed increased real income levels despite persistent deflation.
    • Economic Crises: Deflation can arise during economic crises when cautious spending and resource reallocation occur.
    • Consumer Demand and Prices: Some economists argue that consumer demand dictates prices, rather than the other way around.

    China’s Deflation Scenario

    • Policy Measures: China’s central bank maintained low interest rates to stimulate demand amid the post-pandemic recovery.
    • Property Sector Turmoil: China’s pre-pandemic property sector challenges, affecting GDP contribution, may be a root cause of the current deflationary trend.
    • Complex Factors: While liquidity may not be the core issue, comprehensive analysis of money supply and monetary transmission is necessary to determine the underlying cause.

    Deflation and India

    Period Causes Impact on India
    Great Depression (1930s) Global economic downturn, reduced demand Agricultural and industrial contraction, falling prices
    Post-Independence (1950s-1960s) Supply-side constraints, monetary policy Agricultural fluctuations, efforts to control inflation
    Global Oil Crisis (1970s) Surge in oil prices, cost-push inflation Economic slowdown, increased costs, reduced demand
    Economic Reforms Era (1990s) Transition to market-oriented economy, policy measures Sectoral slowdown, reduced demand, short-term deflation
    Global Financial Crisis (2008-2009) Global financial crisis, economic slowdown Reduced consumer spending, limited deflationary impact

     

    Repercussions of Chinese Deflation

    [A] Positive Impacts:

    • Cheaper Imports: If Chinese goods become cheaper due to deflation, it could lead to lower import costs for India, benefiting consumers and businesses that rely on Chinese imports.
    • Lower Input Costs: Reduced prices for raw materials and intermediate goods from China could lower production costs for Indian industries that depend on these inputs.
    • Global Supply Chains: If Chinese deflation reduces the cost of production within global supply chains, Indian businesses integrated into these chains might experience cost savings.
    • Improved Trade Balance: Cheaper Chinese imports can contribute to a more favorable trade balance for India, especially if it leads to reduced import bills.

    [B] Negative Impacts:

    • Export Competition: Cheaper Chinese exports due to deflation could increase competition for Indian exports in international markets, potentially affecting certain Indian industries.
    • Import Dumping: A flood of cheap Chinese goods into the Indian market could harm domestic producers, leading to job losses and economic strain.
    • Investment Flows: A slowdown in China’s economy caused by deflation might lead to reduced investor confidence and affect foreign direct investment (FDI) flows to India.
    • Currency Effects: If China’s central bank devalues its currency to boost exports in response to deflation, it could lead to a stronger Indian rupee, impacting India’s export competitiveness.
    • Commodity Prices: Reduced demand for commodities from China due to deflation could lead to lower global commodity prices, affecting Indian exporters of raw materials.

    Conclusion

    • China’s encounter with deflation amidst efforts to boost demand and stabilize its economy presents a multi-faceted challenge.
    • Understanding the nuances of deflation, its interaction with demand dynamics, and China’s unique economic landscape are vital.
    • As China navigates its path forward, policymakers must consider the interplay of factors, including the property sector’s impact and broader economic goals.

    Back2Basics:

    Terminologies related to PRICE RISE
    Inflation Sustained increase in the general price level of goods and services in an economy over time, leading to reduced purchasing power of money.
    Deflation Sustained decrease in the general price level of goods and services, often resulting in reduced consumer spending and economic stagnation.
    Hyperinflation Extremely rapid and uncontrollable increase in prices, eroding the value of money and disrupting economic stability.
    Stagflation Simultaneous occurrence of stagnant economic growth, high unemployment, and high inflation, contrary to traditional economic theories.
    Creeping Inflation Gradual increase in the general price level at a rate of 1-3% annually, considered normal and manageable.
    Galloping Inflation High inflation ranging from 10% to several hundred percent per year, eroding savings and economic planning.
    Demand-Pull Inflation Rise in prices due to demand exceeding supply, often occurring during periods of strong economic growth.
    Cost-Push Inflation Increase in prices caused by higher production costs, such as rising wages or raw material expenses.
    Built-In Inflation Cycle of rising prices and wages as workers demand higher wages to match inflation, contributing to a continuous cycle.
    Structural Inflation Inflation resulting from supply and demand imbalances due to structural factors like technology changes or market conditions.
    Open Inflation When rising prices are publicly acknowledged and factored into economic decisions, including wage negotiations.
    Suppressed Inflation Prices rise but are officially reported at a lower rate due to government intervention, subsidies, or price controls.
    Repressed Inflation Artificially keeping prices low through government controls despite demand exceeding supply, leading to potential future price spikes.
    Disinflation Decrease in the rate of inflation, indicating the general price level is still rising but at a slower rate, often a transition to more stable inflation levels.

     

  • What flipped the decline of India’s FOREX reserves?

    forex

    Central Idea

    • India’s forex reserves were at $578.4 billion as of March 2023—a fall of over $28 billion since March 2022, $19.7 billion of which was due to valuation changes, as per RBI.
    • The depreciation of the US dollar and increased capital flows contributed to a surge in reserves this year.

    What is Foreign Exchange (Forex) Reserve?

    • Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves.
    • They are commonly used to support the exchange rate and set monetary policy.
    • In India’s case, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights.
    • Most of the reserves are usually held in US dollars, given the currency’s importance in the international financial and trading system.
    • Some central banks keep reserves in Euros, British pounds, Japanese yen, or Chinese yuan, in addition to their US dollar reserves.

    India’s forex reserves cover:

    1. Foreign Currency Assets (FCAs)
    2. Special Drawing Rights (SDRs)
    3. Gold Reserves
    4. Reserve position with the International Monetary Fund (IMF)

    Current Scenario: Impact of US Rate Hikes and Capital Inflows

    • US Rate Hikes and Capital Flows: The US Federal Reserve’s rate hikes have triggered a flow of foreign investments into the US treasury, leading to capital outflows from India.
    • Potential Capital Inflows: So far this year, the US Fed has raised rates by 75 basis points. This could potentially increase capital inflows into emerging markets like India.
    • Improved Balance of Payment (BoP): India’s Balance of Payment has improved significantly, with the current account deficit projected to be less than 2% of GDP.
    • Resumption of Equity Capital Flows: There is a resumption in equity capital flows, and India continues to attract substantial investments compared to other emerging market peers.

    Global Standing of India’s Forex Reserves

    • Rank among Nations: India ranks fourth among countries with the highest forex reserves, following China, Japan, and Switzerland.
    • Differences in Reserve Accumulation: Most countries maintain large and persistent current account surpluses, owing to a competitive exports market. However, India, Brazil, and the US have accumulated reserves primarily through capital flows rather than a significant current account surplus.

    RBI’s Strategy for Diversifying Forex Reserves

    • Internationalizing the Rupee: The RBI aims to reduce reliance on foreign currencies by internationalizing the Indian rupee.
    • Exploring Use of Asian Clearing Union Currencies: The RBI is exploring the use of currencies from member states of the Asian Clearing Union, including the rupee, for payment and settlement among themselves.
    • Agreement with Sri Lanka: An agreement with the Central Bank of Sri Lanka enables the use of the rupee as a designated foreign currency, promoting trade between the two countries and facilitating rupee transactions for Indian tourists in Sri Lanka.

    Conclusion

    • While India’s forex reserves have seen fluctuations due to various factors, the country’s sustained efforts to diversify and strengthen its reserves position indicate a proactive approach by the RBI.
    • The ongoing focus on attracting foreign investments, coupled with measures to internationalize the rupee, may contribute to a more stable and resilient forex reserve management system in the future.

  • Niti Aayog’s Export Preparedness Index, 2022

    export
    PC: Live Mint

    Central Idea

    • Tamil Nadu has emerged as the most export-competitive state in India, securing the top spot in the Export Preparedness Index 2022 by Niti Aayog.

    Export Preparedness Index (EPI)

    • EPI is a comprehensive tool aimed at gauging the export readiness of India’s states and union territories (UTs).
    • The index analyses various parameters, enabling the identification of strengths and weaknesses in each region and offering valuable insights for effective policy formulation.
    • EPI focuses on four pillars:
    1. Policy: This pillar evaluates the effectiveness of a state’s trade policy, providing strategic direction for both exports and imports.
    2. Business Ecosystem: The efficiency of a business ecosystem is crucial for attracting investments and fostering an enabling infrastructure for startups and entrepreneurship.
    3. Export Ecosystem: This pillar assesses the business environment specific to exports, determining the level of support and facilitation provided to exporters.
    4. Export Performance: The sole output-based parameter, this pillar examines the reach of export footprints in states and UTs, measuring their actual export achievements.
    • 10 Sub-pillars include: Export Promotion Policy; Institutional Framework; Business Environment; Infrastructure; Transport Connectivity; Export Infrastructure; Trade Support; R&D Infrastructure; Export Diversification; and Growth Orientation.

    States performance

    • Export-Competitive State: Top Contenders: Maharashtra, Karnataka, and Gujarat (last year’s leader) followed closely, while Haryana claimed the fifth position.
    • Coastal States’ Dominance: Coastal states dominated the top rankings, with four out of the top five positions occupied by them. Andhra Pradesh also secured the ninth spot.
    • Gujarat- Leading Merchandise Exporter: Gujarat holds the top position as the leading merchandise exporter, accounting for one-third of India’s total merchandise exports.
    • Top Five Exporting States: Maharashtra, Tamil Nadu, Karnataka, and Uttar Pradesh complete India’s top five exporters.
    • Seven States’ Dominance: An impressive 75% of India’s total exports are contributed by just seven states.

    Reasons for export boost

    • Export Promotion Policies: The top-performing states have implemented export promotion policies at both state and district levels.
    • Diversified Export Basket: These states have a diverse export basket, showcasing their global footprint.
    • Promoting Unique Products: Successful states focus on promoting products unique to their region. Tamil Nadu and Karnataka lead in exporting geographical indication (GI) products.

    India’s Export Performance

    • Resilient Exports: Despite pandemic challenges and supply-side issues, India’s goods exports remained robust, reaching an all-time high of $447 billion in FY23.
    • Target for FY24: The government refrained from setting a specific export target for FY24 due to global headwinds but may aim for $450 billion to $500 billion in goods exports.
    • Services Exports: Services exports amounted to $323 billion in FY23, bringing India’s overall exports to $770 billion.

  • India- UAE Local Currency Settlement System (LCSS)

    uae dirham rupee india lcss local currency

    Central Idea

    • India and the United Arab Emirates (UAE) signed a pact during PM Modi’s visit to Abu Dhabi.
    • It established a framework for promoting the use of the Indian rupee (INR) and UAE Dirham (AED) in cross-border transactions.

    Local Currency Settlement System (LCSS)

    • LCSS Establishment: The framework aims to establish a Local Currency Settlement System (LCSS) between India and the UAE.
    • Domestic Currency Transactions: LCSS enables exporters and importers to invoice and pay in their respective domestic currencies.
    • Foreign Exchange Market Development: LCSS facilitates the development of an INR-AED foreign exchange market.
    • Transaction Optimization: The use of local currencies optimizes transaction costs and settlement time.
    • Remittance Benefits: LCSS benefits remittances from Indians residing in the UAE.

    Interlinking of Payment Systems: UPI-IPP Linkage

    • Payment System Linkage: The Memorandum of Understanding (MoU) includes the linking of India’s Unified Payments Interface (UPI) with the UAE’s Instant Payment Platform (IPP).
    • Card Switches and Messaging Systems: It explores linking the card switches (RuPay switch and UAESWITCH) and messaging systems of both countries.
    • Efficient Cross-Border Fund Transfers: UPI-IPP linkage facilitates fast, convenient, safe, and cost-effective cross-border fund transfers.
    • Mutual Acceptance of Domestic Cards: The agreement enables the mutual acceptance of domestic cards and processing of card transactions.

    Impact of the Move

    • Trade boost: Bilateral trade between India and the UAE reached around $85 billion in FY23.
    • Exchange Rate Risk Management: The agreement helps Indian exporters’ hedge exchange rate risks in rupee-based trade.
    • Internationalization of the Rupee: It supports India’s efforts to internationalize the rupee and reduce dependence on the US dollar.
    • Interest from Other Countries: Countries in Africa, the Gulf region, Sri Lanka, and Bangladesh have shown interest in trading in rupee terms.

    Significance for Exporters

    • Denominating in Local Currencies: Denominating export contracts and invoices in local currencies minimizes exchange-rate risks and aids in competitive pricing.
    • Enhanced Cooperation: Enhanced cooperation between the banking systems of India and the UAE supports trade and economic activity.
    • Major Export Categories: Major Indian exports to the UAE include mineral fuels, pearls, precious stones, electrical machinery, and equipment.
    • Trade Growth and Destination: The UAE is India’s second-largest export destination, and India-UAE trade reached $85 billion in 2022.

    Benefits for Remittances

    • Reduced Transaction Costs: The agreement reduces high transaction costs and exchange rate margins associated with remittances.
    • Affordable and Efficient Remittances: It makes remittances more affordable and efficient, particularly for low-wage earners.
    • Increased Remittance Inflows: In 2022, India experienced a 24.4% increase in remittances to $111 billion, accounting for 3.3% of GDP.
    • Contribution of GCC Countries: Remittance inflows from Gulf Cooperation Council (GCC) countries contribute significantly to India’s total remittance inflows.

    Larger Impact

    • Reducing Dollar Dependence: The agreement promotes the use of local currencies, reducing dependence on the US dollar in international transactions.
    • Strengthening Economic Ties: Strengthened economic ties between India and the UAE encourage investments, remittances, and trade growth.
    • Rupee Internationalization: The agreement aligns with India’s goal of internationalizing the rupee and expanding its global acceptance.
    • Similar Cross-Border Efforts: Similar efforts, such as collaboration with Singapore’s PayNow, have been undertaken to facilitate cross-border transactions.

    Conclusion

    • The agreement positively impacts bilateral trade, facilitates remittances, and supports India’s goal of internationalizing the rupee.
    • By reducing transaction costs and enhancing financial connectivity, the agreement strengthens economic relations between India and the UAE, fostering trade growth and cooperation.

  • India’s export of Russian oil to West

    oil

    Central Idea

    • The article discusses India’s increased imports of Russian oil and the potential circumvention of sanctions imposed on Russian oil products.

    Why in news?

    • An EU parliamentarian accused India of profiting from cheaply bought Russian oil and indirectly supporting the Russian economy.
    • India justified its purchase by emphasizing its energy demands and the challenges of higher prices due to its reliance on energy imports and significant poverty levels.

    Reasons: Sanctions against Russian Oil

    • After Russia’s invasion of Ukraine, Western countries and Europe aimed to reduce their dependency on Russian energy imports to weaken the Russian economy.
    • Measures were taken, such as Germany suspending the launch of the Nord Stream natural gas pipeline and Canada and the US banning the import of Russian crude oil.
    • Stricter sanctions were imposed on Russia, including a “price cap” from trading Russian oil above $60 per barrel.
    • The price cap aimed to cripple Moscow’s economy and limit its ability to fund the war in Ukraine.
    • However, Russia increased its oil exports to India and China as a response.

    India’s role in meeting West’s energy demand

    • India, exempt from the sanctions on Russian oil, has seen a significant increase in fuel imports from Russia, which is then refined and supplied to Europe and the US.
    • The refined oil from Russian crude, once processed in India, is not considered of Russian origin.
    • India’s oil imports have helped it meet its own energy demands and also assist Western nations facing energy crises due to the Russia-Ukraine conflict.
    • India has become a net exporter of refined petroleum products, supplying the West to alleviate current energy shortages.

    Impact of Indian imports on Western markets

    • Indian refiners have ramped up exports of refined petroleum products, including diesel and vacuum gas oil (VGO), to Europe and the US.
    • VGO is a feedstock in the refining process that can be further processed to produce gasoline, diesel, and other fuel products.
    • Diesel exports to Europe from India have increased by 12-16% in the last fiscal year.
    • The US has become a major recipient of Indian VGO shipments, receiving 11,000-12,000 barrels per day (bpd) or 65-81% of India’s VGO exports.
    • These exports from India have helped ease the energy tightness and supply constraints in Western markets.

     

    Get an IAS/IPS ranker as your personal mentor for UPSC 2024 | Schedule your FREE session and get the Prelims prep Toolkit!

  • RBI advises banks to transit away from LIBOR

    Central Idea: The RBI has issued an advisory to banks and other RBI-regulated entities regarding the transition away from London Interbank Offered Rate (LIBOR) July 1.

    What is London Interbank Offered Rate (LIBOR)?

    Explanation
    Definition LIBOR is a benchmark interest rate used in financial transactions such as loans, derivatives, and bonds.

    It is the interest rate at which banks can borrow funds from other banks in the London interbank market.

    It serves as a benchmark rate for various financial transactions worldwide.
    Calculation Method LIBOR rates are calculated based on submissions from a panel of major banks in London.

    These banks estimate their borrowing costs for various currencies and tenors.

    The submissions are used to calculate an average rate, which is published daily by the Intercontinental Exchange (ICE), the administrator of LIBOR.
    Currencies and Tenors LIBOR is calculated for different currencies and tenors ranging from overnight to one year.

    The currencies include USD, EUR, GBP, JPY, CHF, and others.

    The tenors represent the time periods for which the rates are quoted.
    Importance It has been widely used since the 1980s as a benchmark for financial contracts worth trillions of dollars globally.

    It serves as a reference rate for various loans, derivatives, and other financial instruments.

     

    Why is RBI moving away from LIBOR?

    Like many other countries, has been working towards transitioning away from LIBOR. The primary reasons for this transition include:

    • Manipulation risks: Following the global financial crisis in 2008, there were concerns about the reliability and potential manipulation of LIBOR.
    • Discontinuation of LIBOR: The regulatory authority in the UK that oversees LIBOR, announced in 2017 that it will no longer compel banks to submit the necessary data to calculate LIBOR after the end of 2021.
    • Adoption of alternative Reference Rates: Various countries, including India, have identified and adopted alternative reference rates that are more reliable and based on actual market transactions. Ex RBI introduced the Secured Overnight Financing Rate (SOFR).
    • Alignment with International Standards: Many countries have already initiated the shift to alternative reference rates, necessitating India’s alignment to maintain consistency and harmonization in international financial markets.
    • Risk Mitigation: RBI’s move aims to mitigate the potential risks associated with an unreliable or manipulated benchmark rate.

    Related terminologies

    Mumbai Interbank Forward Outright Rate (MIFOR): MIFOR is a benchmark rate used in Indian financial markets. It represents the forward premium or discount on the USD-INR exchange rate based on the LIBOR rate.

    Fallbacks: They are provisions inserted into contracts to establish alternative reference rates if the original benchmark rate (such as LIBOR) becomes unavailable or unreliable.

     

    Get an IAS/IPS ranker as your personal mentor for UPSC 2024 | Schedule your FREE session and get the Prelims prep Toolkit!

  • Europe de-recognizes 6 Indian clearing corporations

    Central Idea

    • The European Securities and Markets Authority (ESMA) has de-recognised 6 clearing corporations in India as Third Country Central Counterparty (TC-CCP) with effect from April 30.
    • However, it allowed European banks to continue business with them till April 2023 without penal consequences.

    What are Clearing Corporations?

    • Clearing corporations, also known as central counterparties (CCPs), are financial institutions that act as intermediaries between buyers and sellers in financial markets.
    • They help to manage the risk of default by ensuring that each party involved in a trade has the necessary funds or securities to fulfil their obligations.
    • Clearing corporations also ensure that trades are settled in a timely and efficient manner.
    • In the context of this article, clearing corporations refer to those involved in the clearing and settlement of trades in India’s cash and derivatives market.

    Decisions by ESMA

    • ESMA has withdrawn recognition of six Indian clearing corporations including- CCIL, Indian Clearing Corporation Ltd, NSE Clearing Ltd, Multi Commodity Exchange Clearing, India International Clearing Corporation, and NSE IFSC Clearing Corporation.
    • ESMA asked Indian regulators to sign an agreement to give it the power to monitor and supervise the clearing corporations.
    • Indian regulators refused to give supervisory power to foreign entities in Indian clearing corporations.
    • ESMA recognised these clearing corporations as Third Country Central Counterparty (TC-CCP) in the EU region.

    India’s rebuttal

    • ESMA had asked the RBI and the Securities and Exchange Board of India (SEBI) to sign an agreement giving it the power to monitor and supervise the clearing corporations.
    • Indian regulators did not agree to give supervisory power to a foreign entity on Indian clearing corporations.

     

    Get an IAS/IPS ranker as your personal mentor for UPSC 2024 | Schedule your FREE session and get the Prelims prep Toolkit!