Note4Students
From UPSC perspective, the following things are important :
Prelims level: CAD
Mains level: Paper 3- Forex reserves and its significance
Context
The ascending stock of forex reserves has led to the view this will enable the sole devotion of monetary policy to domestic objectives.
Assessing the significance of forex reserves
Let’s look into the experinec of China and India in this regard.
1) Learning from China’s experience
- In 2016, China had a strong external position—current account surplus and more than $3tn forex reserves.
- However, investors’ expectations on renminbi (RMB) value began to shift due to rising concerns about its growth outlook, domestic rate cuts and eventual depreciation, and imminent tightening of US monetary policy, resulting in net capital outflows of $725 billio (bn) over the year.
- This put sustained pressure upon the RMB.
- Eventually, China resorted to capital control measures, which slowed the outflow and supported the RMB in the first half of 2017.
2) India’s own historical record
- India’s own historical record shows that, high or low, forex reserves didn’t prevent investors from reappraising positions.
- India experienced this in case of oil prices (2018) or taper fears (2013).
- The CAD was moderate, at 1.1% and 1.4% of GDP in two quarters to December 2017.
- But as oil prices climbed, current account projections were rapidly revised to 2.5-3% of GDP in less than a quarter seeing the jump in the import bill, lagging exports and continuous outflow of portfolio capital.
- Reserves totalled $424 bn then (end-March 2018); foreign currency assets were $399 billion.
- Against a mere $9 bn capital outflow, the peak-to-trough decline in reserves was $19 bn in April-June 2018, with 5% depreciation of the rupee.
- The sharper, $21 bn fall in mid-April to July 20, 2018 equalled the reserves decline in April-August 2013 taper episode when the rupee depreciated three times more or 15%!
- Forex reserves were much lower in 2013 ($255 bn range) and it had taken only a quarter for the current account gap to widen from 4.0% of GDP in April-June 2012 to 5.4% and a record 6.7% in subsequent two quarters to December 2012!
Key takeaways
- History shows that no level of reserves is a foolproof guarantee for macroeconomic stability or interest rate immunity.
- The important lesson these episodes hold is that repressive attempts do not always convince markets or prevent shifts in expectations and often compel large, abrupt adjustment.
- Investors reassess positions, including global factors, whatever the reserves’ stock.
- The crucial role of reserves is psychological, i.e. market confidence and liquidity insurance that is immediate and unconditional that allows central banks to buy time, whether for a gradual adjustment, soft landing, or as the case may be.
Distortion in bond market and RBI’s role in it
- RBI has been systematically suppressing bond yields, particularly the 10-year benchmark, the reference rate for banks.
- So effective was the repression that the bond market became irrelevant as yields altogether stopped responding to inflation or fiscal developments.
- The 207-basis-point jump in retail inflation in a month in May, which exceeded expectations, caused not even a flicker in the yield premium for example.
- This did not prevent responses elsewhere though – the overnight indexed swap (OIS), which signals future interest rate movements, increased 20-30 basis points at different tenures with fresh inflation risks.
- Clearly, the market reading was inconsistent with RBI’s, whose rigid adherence to a particular level (6% in the case of the old, 10-year bond) was disregarded outright.
- The monetary policy cue was not being accepted, failing to soothe ruffled feathers about inflation.
Risk involved in RBI’s policy
- If the global financial cycle were to suddenly turn, risk-aversion set in, or oil prices shoot up to risky levels, investors will undoubtedly look at actual differentials, not the one set in stone by RBI.
- There will be exchange rate pressures, which RBI can no doubt manage with liberal reserves.
- But the duration and degree of adjustment is not in RBI’s control, identically to the bond market one, where it has infinite capacity to keep local yields where it wants.
- There’s a limit to how much foreign currency it can sell—the $609bn reserve holding is finite.
- Currency depreciation can, therefore, worsen a bad situation as higher inflation pressurises domestic interest rates to rise.
- RBI’s issuance of the new 10-year benchmark bond at 6.10%, which came as a surprise against its previous inflexibility, indicates RBI has internalised the above risks.
- The disparate movements were undermining RBI, whose commitment to continue the accommodative monetary policy as long as necessary to revive and sustain growth has been reassuring.
Conlcusion
When the economy is open, financially integrated and subject to cross-country dynamics, it is more prudent to let market forces play out a bit than persist with a stance that could turn unsustainable despite the high reserves.
Back2Basics: What is Current Account Deficit (CAD) ?
- The current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports.
- The current account includes net income, such as interest and dividends, and transfers, such as foreign aid, although these components make up only a small percentage of the total current account.
- The current account represents a country’s foreign transactions and, like the capital account, is a component of a country’s balance of payments (BOP).
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: SCO members
Mains level: Paper 2- Afghanistan after the US withdrawal
Context
A regional conclave of foreign ministers taking place in Dushanbe this week under the banner of the Shanghai Cooperation Organisation (SCO) should give us a sense of the unfolding regional dynamic on Afghanistan.
SCO addressing challenges in Afghanistan
- Geography, membership and capabilities make the SCO an important forum to address the post-American challenges in Afghanistan.
- The SCO was launched 20 years ago by China and Russia to promote inner Asia stability.
- The current members of the SCO are China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, Pakistan, and India.
- The SCO has four observer states — Iran, Afghanistan, Mongolia and Belarus.
- The idea of a regional solution to Afghanistan has always had much political appeal.
- But divergent regional strategic perspectives limit the prospects for a sustainable consensus on Afghanistan.
Implications of the US exit for the region
- The quiet satisfaction in Moscow, Beijing, Tehran and Rawalpindi at the US’s exit from Afghanistan, however, is tinged by worries about the long-term implications of Washington’s retreat
- Regional players have to cope with the consequences of the US withdrawal and the resurgence of the Taliban.
- Neither Moscow nor Beijing would want to see Afghanistan becoming the hub of international terror again under the Taliban.
- For China, potential Taliban support to the Xinjiang separatist groups is a major concern.
- Iran can’t ignore the Sunni extremism of the Taliban and its oppressive record in dealing with the Shia, and Persian-speaking minorities.
- Pakistan worries about the danger of the conflict spilling over to the east of the Durand Line, and hostile groups gaining sanctuaries in Afghanistan.
Three factors that drive India’s Afghan policy
- The US exit means a new constraint on Delhi’s ability to operate inside Afghanistan.
- There is also the danger that Afghanistan under the Taliban could also begin to nurture anti-India terror groups.
- If India remains active but patient, many opportunities could open up in the new Afghan phase.
- Three structural conditions will continue to shape India’s Afghan policy.
- One is India’s lack of direct physical access to Afghanistan.
- This underlines the importance of India having effective regional partners.
- Second, it remains to be seen if Pakistan’s partnership with China and the extension of the China Pakistan Economic Corridor into Afghanistan can address Pakistan’s inability to construct a stable and legitimate order in Afghanistan.
- Third, the contradiction between the interests of Afghanistan and Pakistan is an enduring one.
- While many in Pakistan would like to turn Afghanistan into a protectorate, Afghans deeply value their independence.
- All Afghan sovereigns, including the Taliban, will inevitably look for partners to balance Pakistan.
Way forward for India
- India must actively contribute to the SCO deliberations on Afghanistan, but must temper its hopes for a collective regional solution.
- At the same time, Delhi should focus on intensifying its engagement with various Afghan groups, including the Taliban, and finding effective regional partners to secure its interests in a changing Afghanistan.
Conclusion
India should pursue the regional solution to Afghanistan challenge after the US exit while increasing the engagement with the various players in Afghanistan including the Taliban.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Kongu Nadu
Mains level: Regionalism issue in India
A list of new Union Cabinet ministers issued has triggered a debate in political circles in Tamil Nadu, as well as on social media, by referring to ‘Kongu Nadu’, the informal name for a region in the western part of the state.
Where is Kongu Nadu?
- ‘Kongu Nadu’ is neither a place with a PIN code nor a name given formally to any region.
- It is a commonly used name for part of western Tamil Nadu.
- In Tamil literature, it was referred to as one of the five regions of ancient Tamil Nadu.
- There were mentions of ‘Kongu Nadu’ in Sangam literature as a separate territory.
- The name derives from Kongu Vellala Gounder, an OBC community with a significant presence in these districts.
- The region includes prominent businesses and industrial hubs at Namakkal, Salem, Tirupur and Coimbatore.
Is there any ground for the allegations about a planned bifurcation?
- Unlike Telangana or Uttarakhand, there has never been demand or discussions about a separate Kongu Nadu in the modern political history of Tamil Nadu.
- The debate, therefore, lacks any political or social context.
Back2Basics: Sangam Age
- The ‘Sangam’ describes a period from the sixth century BC to the third century AD encompassing today’s Tamil Nadu, Kerala, the southern parts of Karnataka and Andhra Pradesh, and northern Sri Lanka.
- The Tamil Sangams or Cankams were assemblies of Tamil scholars and poets that, according to traditional Tamil accounts, occurred in the remote past.
- It is named for scholarly congregations in and around the city of Madurai, located about 400 km southwest of Chennai.
- It generally refers to a collection of poems, composed by Tamil poets, both men and women developed in the ancient Southern state of India.
- It mostly deals with emotional and material topics such as love, war, governance, trade and bereavement.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Lightening and Thunderstorms
Mains level: Not Much
With the monsoon making a slow revival over several parts of India, except the northwest region, there is a rise in lightning-linked deaths.
What is lightning?
- Lightning is a very rapid — and massive — discharge of electricity in the atmosphere, some of which is directed towards the Earth’s surface.
- These discharges are generated in giant moisture-bearing clouds that are 10-12 km tall.
- The base of these clouds typically lies within 1-2 km of the Earth’s surface, while their top is 12-13 km away.
- Temperatures towards the top of these clouds are in the range of minus 35 to minus 45 degrees Celsius.
How does it strike?
- As water vapour moves upward in the cloud, the falling temperature causes it to condense.
- Heat is generated in the process, which pushes the molecules of water further up.
- As they move to temperatures below zero degrees Celsius, the water droplets change into small ice crystals. They continue to move up, gathering mass — until they are so heavy that they start to fall to Earth.
- This leads to a system in which, simultaneously, smaller ice crystals are moving up and bigger crystals are coming down.
- Collisions follow and trigger the release of electrons — a process that is very similar to the generation of sparks of electricity.
- As the moving free electrons cause more collisions and more electrons, a chain reaction ensues.
- This process results in a situation in which the top layer of the cloud gets positively charged, while the middle layer is negatively charged.
Making of the thunder
- The electrical potential difference between the two layers is huge — of the order of a billion to 10 billion volts.
- In very little time, a massive current, of the order of 100,000 to a million amperes, starts to flow between the layers.
- An enormous amount of heat is produced, and this leads to the heating of the air column between the two layers of the cloud.
- This heat gives the air column a reddish appearance during lightning. As the heated air column expands, it produces shock waves that result in thunder.
How does this current reach the Earth from the cloud?
- While the Earth is a good conductor of electricity, it is electrically neutral.
- However, in comparison to the middle layer of the cloud, it becomes positively charged.
- As a result, about 15%-20% of the current gets directed towards the Earth as well.
- It is this flow of current that results in damage to life and property on Earth.
- There is a greater probability of lightning striking tall objects such as trees, towers or buildings.
- Once it is about 80-100 m from the surface, lightning tends to change course towards these taller objects.
- This happens because air is a poor conductor of electricity, and electrons that are travelling through air seek both a better conductor and the shortest route to the relatively positively charged Earth’s surface.
What precautions should be taken against lightning?
- Lightning rarely hits people directly — but such strikes are almost always fatal.
- People are most commonly struck by what are called “ground currents”.
- The electrical energy, after hitting a large object (such as a tree) on Earth, spreads laterally on the ground for some distance, and people in this area receive electrical shocks.
- It becomes more dangerous if the ground is wet (which it frequently is because of the accompanying rain), or if there is metal or other conducting material on it.
- Water is a conductor, and many people are struck by lightning while standing in flooded paddy fields.
- For the reasons given above, taking shelter under a tree is dangerous. Lying flat on the ground too can increase risks.
- People should move indoors in a storm; however, even indoors, they should avoid touching electrical fittings, wires, metal, and water.
Answer this PYQ in the comment box:
Q.During a thunderstorm, the thunder in the skies is produced by the:
- meeting of cumulonimbus clouds in the sky
- lightning that separates the nimbus clouds
- violent upward movement of air and water particles
Select the correct option using the codes given below (CSP 2011):
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) None of the above
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Difference between Orbital and Suborbital Flight
Mains level: Space tourism
Virgin Group founder Richard Branson became the first billionaire to fly to the edge of space and back, riding aboard his own Virgin Galactic spacecraft in a suborbital flight.
What is Suborbital Flight?
- When an object travels at a horizontal speed of about 28,000 km/hr or more, it goes into orbit once it is above the atmosphere.
- Satellites need to reach that threshold speed in order to orbit Earth.
- Such a satellite would be accelerating towards the Earth due to gravity, but its horizontal movement is fast enough to offset the downward motion so that it moves along a circular path.
- Any object travelling slower than 28,000 km/hr must eventually return to Earth.
- These are suborbital flights, because they will not be travelling fast enough to orbit Earth once they reach there.
- Such a trip allows space travellers to experience a few minutes of “weightlessness”.
Analogical example
- For an analogy, consider a cricket ball thrown into the air.
- Given that no human hand can give it a speed of 28,000 km/hr (about 8 m/sec), the ball will fly in an arc until its entire kinetic energy is swapped with potential energy.
- At that instant, it will lose its vertical motion momentarily, before returning to Earth under the influence of gravity.
- A suborbital flight is like this cricket ball, but travelling fast enough to reach the “edge of space”, and yet without enough horizontal velocity to go into orbit.
- If an object travels as fast as 40,000 km/hr, it will achieve escape velocity, and never return to Earth.
Why the buzz?
- With Branson and Jeff Bezos kicking off private space flight, several companies are looking for customers wanting to go on suborbital or even orbital journeys.
- At Branson’s Virgin Galactic, around 600 people have already paid deposits for tickets that are priced up to $250,000 (Rs 1.86 crore).
- However, Bezos’s Blue Origin, which uses the reusable New Shepard rocket, is yet to announce commercialization plans, according to the BBC.
- There is also excitement among scientists who want to use suborbital flights for microgravity research.
- Such flights would be far less expensive than carrying experiments and people to the International Space Station.
- Suborbital flights could also be an alternative to parabolic flights in airplanes that space agencies currently use to simulate zero gravity.
Safety concerns
- The Branson flight comes seven years after his company’s first rocket, called Enterprise, crashed during a test flight, killing one of the pilots on board.
- The other survived after parachuting out.
- The current rocket is also not certified by the US Federal Aviation Administration, which is prohibited to do so by law until 2023.
- This is because the US government does not want to burden companies like Virgin Atlantic with regulations during their “learning” period, when they can innovate by trying out different designs and procedures.
- Passengers who go on such trips need to sign “informed consent” forms, similar to the ones before going for skydiving or bungee jumping.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Cryptocurrencies
Mains level: Issues with Cryptocurrencies
Last week, Twitter CEO announced his payments firm Square would soon build a hardware wallet to store bitcoin.
Bitcoin Hardware Wallet
- The wallet will be a type of plug-in device, much like a USB pen drive that stores, manages and secures a user’s crypto assets.
- Each digital asset is linked to a cryptographic password called a ‘private key’ to allow users to access it.
- This key safeguards cryptocurrencies from theft and unauthorized access.
- The asset owner, with the help of a secure hardware wallet, can access the private key to buy and sell crypto assets from anywhere.
- Most hardware wallets allow users to manage multiple accounts; some even allow users to connect to their Google or Facebook accounts.
- Popular hardware wallets include Trezor, Ledger, KeepKey and Prokey.
How is it different from a software wallet?
- Cryptocurrency keys can be stored in two kinds of wallets – software and hardware.
- Software wallets are like smartphone apps that digitally store private keys.
- Most software wallets don’t charge users to store private keys but may collect a commission for trading via the app.
- These wallets can be vulnerable to malware.
- Hardware wallets and physical devices act like cold storage for confidential keys. The passwords are protected by a PIN, making it difficult for hackers to extract private keys as the information is not exposed to the Internet.
The upsides of a hardware wallet
- Hardware wallets are said to be convenient as they can be connected to trading exchanges to complete transactions.
- Hardware wallets are often stored in a protected microcontroller and cannot be transferred out of the device, making them secure.
- Their isolation from the Internet also mitigates the risk of the assets being compromised. Moreover, it does not rely on any third-party app.
Limitations
- Since the wallet is in physical form, the device could be stolen or destroyed.
- They could be used by malicious actors to steal confidential data.
- The device can also be expensive as compared to software wallets.
- Some hardware wallets can also have complex features, making it difficult for first-timers to understand.
Answer this PYQ in the comment box:
Q.With reference to “Blockchain Technology”, consider the following statements:
- It is a public ledger that everyone can inspect but which no single user controls.
- The structure and design of block chain is such that all the data in it are about crypto currency only.
- Applications that depend on basic features of blockchain can be developed without anybody’s permission.
Which of the statement given above is/are correct?
(a) 1 only
(b) 2 only
(b) 1 and 2 only
(d) 1 and 3
Back2Basics: Cryptocurrencies
- A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database.
- It uses strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership.
- It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
- Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: G-Secs
Mains level: Not Much
The RBI has announced a scheme under which retail investors will be allowed to open retail direct gilt accounts (RDG) directly with the central bank.
Retail Direct Scheme
- The scheme is a one-stop solution to facilitate investment in government securities (G-secs) by individual investors.
- Under RDG schemes, accounts can be opened through a dedicated online portal, which will provide registered users access to primary issuance of government securities and to NDS-OM.
What is a gilt account?
- A “Gilt Account” means an account opened and maintained for holding Government securities, by an entity or a person including ‘a person resident outside India’ with a “Custodian” permitted by the RBI.
About Government Securities
- These are debt instruments issued by the government to borrow money.
- The two key categories are:
- Treasury bills (T-Bills) – short-term instruments which mature in 91 days, 182 days, or 364 days, and
- Dated securities – long-term instruments, which mature anywhere between 5 years and 40 years
Note: T-Bills are issued only by the central government, and the interest on them is determined by market forces.
Why G-Secs?
- Like bank fixed deposits, g-secs are not tax-free.
- They are generally considered the safest form of investment because they are backed by the government. So, the risk of default is almost nil.
- However, they are not completely risk-free, since they are subject to fluctuations in interest rates.
- Bank fixed deposits, on the other hand, are guaranteed only to the extent of Rs 5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
Retail investors and G-Secs
- Small investors can invest indirectly in g-secs by buying mutual funds or through certain policies issued by life insurance firms.
- To encourage direct investment, the government and RBI have taken several steps in recent years.
- Retail investors are allowed to place non-competitive bids in auctions of government bonds through their Demat accounts.
- Stock exchanges act as aggregators and facilitators of retail bids.
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