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Summary
Economics Class 03

LONDON INTERBANK OFFERED RATE (05:02 PM )

  • Benchmark rate: LIBOR is a global benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.
  • Financial Benchmarks are indices, values, or reference rates for the purpose of pricing, settlement and valuation of financial contracts.
  • Regulation: Before 2014, LIBOR was administered by the British Bankers’ Association (BBA). Later, the maintenance of the benchmark was brought under the purview of the U.K. Financial Conduct Authority (FCA).
  • Calculation: Before 2021, LIBOR was calculated for five currencies (U.S. dollar, Euro, Pound, Swiss France and Japanese Yen) for seven tenors.
  • After the announcement of its phased rollback in March 2021, only U.S.-dollar LIBOR was allowed to be published.

LIBOR TRANSITION BENEFITS TO INDIA 

  • Reduction in financing cost as the calculation of reference rates going forward will be more robust and transparent.
  • Reduced borrowing costs as lenders and investors may require lower interest rates or spreads.
  • More competition: The introduction of alternate reference rates may introduce more competition in the market for reference rates.

FINANCIAL BENCHMARK INDIA PRIVATE LIMITED 

  • Genesis: It was formed in 2014 as a private limited company under the Companies Act, 2013.
  • It is jointly owned by the Fixed Income Money Market and Derivatives Association of India (FIMMDA), Foreign Exchange Dealers Association of India (FEDA) and Indian Bank Association (IBA).
  • Objective: Its aim is to develop and administer benchmarks relating to the money market, government securities and foreign exchange in India.
  • Regulation: FBIL is regulated by the Reserve Bank of India.

CROSS BORDER PAYMENT (05:24 PM)

  • It involves financial transactions in which the sender and recipient are based in separate countries.
  • The cross-border payments market value is expected to reach $290 trillion by 2030.

FOREIGN PORTFOLIO INVESTMENT (05:26 PM)

ISSUES IDENTIFIED

  • Circumvention of Press Note 3 (PN3) stipulations: PN3 requires that an entity of a country that shares a land border with India can invest only under the Government route.
  • Since PN3 does not apply to FPI investments, the FPI route could potentially be misused to circumvent the stipulations of PN3.
  • Failure to disclose Related Party Transactions (RPTs): RPTs are arrangements or deals between entities with a common interest or a relationship – by companies.
  • The framework for FPI allows indirect circumventing of the RPT disclosure requirements.

SEBI PROPOSAL FOR FPI REGULATION

  • Categorisation of FPIs: FPIs may be categorised as:
  • Low-risk FPIs: Government and related entities such as central banks, sovereign wealth funds, etc.
  • Moderate-Risk FPIs: Pension Funds or Public Retail Funds with widespread and dispersed investors in such funds.
  • High-risk FPIs: All other FPIs.
  • Enhanced transparency measures for high-risk FPIs such as fully identifying all holders of ownership, disclosure of economic, and control rights etc.
  • Additional Disclosure: For requiring additional disclosures, the above risk categorisation is to be coupled with either the quantum of concentrated investments by FPIs or the size of the overall Assets Under Management (AUM).

CORPORATE DEBT MARKET (05:37 PM)

  • It is created to protect Mutual funds in the market.
  • BACKGROUND
  • ILFS and Covid crisis unearthed the vulnerability of the MFs.
  • In case of Bank redemption window is taken care of by RBI (The lending of last resort)
  • The redemption pressure is not as light as Banks in the case of MFs.
  • Corporate Debt Market Development Fund (CDMDF) is created to ease the redemption fund.
  • As the MF companies cannot liquidate their assets at short notice when the redemption pressure is high so CDMDF is created.

FUNCTIONING OF CDMDF

  • Fund: CDMDF, established as an alternate investment fund, will purchase investment-grade corporate debt securities during market stress. An alternate Investment Fund (AIF) refers to any privately pooled fund established or incorporated in India for investing. (These funds are collected from sophisticated investors such as Angel investors, Venture capitalists etc.)
  • Investment grade refers to the quality of a company's credit. The company must be rated at 'BBB' or higher to be considered an investment grade issue.
  • Objective: During market stress, the Debt Market faces redemption pressures in the open market (especially schemes with long maturity periods). CDMDF will help the market by providing liquidity access in such times.
  • The fund aims to emulate the RBI’s liquidity support for the banks in the context of the Corporate Debt Market.
  • Contribution: Contribution to the fund shall be mandatory for specified debt-oriented MF Schemes and Asset Management Companies (AMCs).
  • Tenure: Initially 15 years, it can be extended as per SEBI’s mandate.

SOCIAL STOCK EXCHANGE  (06:17 PM)

  • SSE is a segment of the existing Stock Exchange that can help Social Enterprises, such as NPOs or Profit Enterprises (FPEs), to raise funds from the public through the stock exchange mechanism.
  • Eligible activities for demonstrating primacy of Social Impact include Eradicating hunger, poverty, malnutrition, and inequality, promoting education, financial inclusion, slum area development etc.
  • They raise money through private funding which includes donations, and CSR funding.
  • Eligible criteria to be recognised as Social Enterprises is predominance of any of the following:
  • REVENUES
  • At least 67% of the immediately preceding 3-year average of revenues come from providing eligible activities to members of the target population.
  • EXPENDITURE
  • At least 67% of the immediately preceding 3-year average of expenditures have been incurred for providing eligible activities to members of the target population.
  • BENEFICIARIES
  • Members of the target population to whom eligible activities have been provided constitute at least 67% of the immediately preceding 3-year average of total customer base and/or total number of beneficiaries.

EXCHANGE RATE MANAGEMENT IN INDIA (06:32 PM)

METHOD OF EXCHANGE RATE DETERMINATION

  • Fixed Exchange Rates: The value of a currency is pegged/fixed to the value of another currency/ basket of currencies/a commodity like gold.
  • Central banks actively intervene to maintain the fixed rate.
  • Flexible/Floating Exchange
  • Rates: Determined by the market forces i.e., demand and supply of currency in international markets.
  • The Central Bank does not intervene directly.
  • Managed Exchange Rates: Determined by market forces but central banks may occasionally intervene to influence the exchange rates.

EFFECT OF EXCHANGE RATE 

  • Inflation: An over-valued currency can contribute to lower inflation by reducing the cost of imported goods and services and vice versa.
  • Interest Rates: Central banks may respond to a strengthening currency by lowering interest rates to stimulate economic activity and vice versa.
  • Economic Growth: While a stronger currency can contribute to lower inflation, it may reduce export-driven sectors, consequently a decline in overall economic growth.
  • Trade: A stronger currency may contribute to trade deficits as exports become less competitive and imports become more attractive to domestic consumers.
  • Capital Flow: A stronger currency may attract more foreign direct investment as investors seek higher returns due to currency appreciation.
  • GRESHAM'S LAW: Bad money drives out Good money.

FOREIGN TRADE POLICY (07:06 PM)

  • FTP 2023
  • Notification: Notified by the Central Government, in the exercise of powers conferred under Section 5 of the Foreign Trade (Development & Regulation) Act, 1992.
  • Based on Principles: such as responsiveness to the requirements of trade and ‘trust’ and ‘partnership’ with exporters.
  • FTP 2015-20: It was extended due to the COVID-19 pandemic and volatile geo-political scenario till March 2023.
  • India has reached record high Export Performance.
  • Four Pillars of the New FTP Approach
  • From Incentives to tax Remission.
  • Greater Trade Facilitation through technology, automation, and continuous process re-arranging.
  • Export Promotion through collaboration: exporters, states, districts.
  • Focus on Emerging areas- E-Commerce exports, developing districts as export hubs, streamlining SCOMET Policy.
  • DEEMED EXPORTS
  • Definition: Deemed Exports refer to those transactions in which goods supplied do not leave the country, and payment for such supplies is received either in Indian rupees or in free foreign exchange.
  • In simpler terms, under deemed export, the goods can be sold within India to anybody who holds a licence for the import of these very goods.
  • The seller selling the said goods against an import licence is the deemed exporter and the buyer is the deemed importer.
  • Objective: To provide a level-playing field to domestic manufacturers and to promote Make in India.

DEVELOPING COUNTRY STATUS  (07:51 PM)

  • Legislation establishes a US policy against granting China developing country status in future treaties and international organisations.
  • It has been asserted that China can no longer be considered a developing country.
  • The World Trade Organization (WTO) has not defined ‘developed’ and ‘developing’ countries and therefore member countries are free to announce whether they are ‘developed’ or ‘developing’.
  • The UN also has no formal definition of developing countries but still uses the term for monitoring purposes

DE-DOLLARISATION (07:55 PM)

  • WHY DE-DOLLARIZATION IS TAKING ROOT
  • Weaponization of Trade: The imposition of sanctions and the exclusion from SWIFT (Society for Worldwide Interbank Financial Telecommunication) creates impediments for countries to carry out trade. For instance, sanctions were imposed on Russia after the Ukraine war.
  • New Emerging Economies: The Rise of Asia as an economic powerhouse has raised the importance of currencies like the Indian rupee and the Yuan.
  • Visible benefits of diversification: Multi-currency foreign currency reserves reduce the pressure on external sectors.
  • Manipulation by the U.S.: Dominance of the USD allows the U.S. to manipulate the global financial system to its benefit, often at the expense of others. 

LIBERALISED REMITTANCE SCHEME (08:09 PM)

  • Under the RBI’s Liberalised Remittance Scheme (LRS), the finance ministry has included the overseas use of credit cards by an Indian resident within the $250,000 limit per financial year (April - March).
  • Changes please copy it from the PPT.

The topic for the next class:  Agriculture.