Rupee depreciation and its management
Synopsis: Rupee depreciation and its impact and solutions to protect from currency volatility risks.
Background of Rupee depreciation
- Recently, the rupee fell sharply by 105 paise. It is considered as one of the biggest single-session falls in 20 months.
- Currently, the rupee stands at 74.47 against the US dollar.
What are the reasons for rupee depreciation?
A combination of factors are responsible for rupee depreciation, such as
- One, concerns over Covid-19 has created uncertainty in the market. This affected the FDI(Foreign Direct Investment) and FII(Foreign Institutional Investment). So the rupee weakens further.
- Two, RBI’s Government Securities Acquisition Programme (G-SAP) that seeks to buy bonds worth Rs 1 lakh crore might be one of the reasons. It is a quantitative easing policy followed by RBI. The policy supported the government’s increased borrowing Programme through the infusion of liquidity.
- Three, the strengthening of the dollar against the euro also contributed to rupee depreciation.
- Four, RBI’s status-quo on policy rates is not helping to increase demand in the local economy. This will further impact the rupee.
- Further, the value of the rupee will also be impacted by the high bond yields in the US and the inflow of dollars into the US.
What are the impacts of Rupee depreciation?
It has both positive and negative impacts. For instance,
- Depreciation has a positive impact for an NRI. As they are sending money back home they will get more rupees per dollar.
- Similarly, Depreciation will have negative impacts on fuel costs and education cost in abroad. For example,
- One, A depreciating rupee increases the cost of crude import. A rise in cost of crude raises fuel prices and inflation. Crude import accounts for almost 20% of India’s imports.
- Two, higher education in the US might cost an annual fee of US$ 50,000. A 5% depreciation in the rupee (For example, from 72.5 to 76.125) will raise the cost for one year from Rs 36.26 lakh to Rs 38.06 lakh (Net loss Rs 1.8 lakh)
How to eliminate the Rupee depreciation and currency risk?
There are multiple options to cover the currency volatility risk. They are,
- Investing in international funds that invest in global markets through fund of funds. While the Indian investors invest in rupees, in the fund of funds the money gets invested in dollars at the current exchange rate. In case of rupee depreciation, this fund will fully protect against the currency depreciation risk.
- In this case, if a person planning for a quick investment (4-5 months) in foreign currency, there are two options to eliminate currency risk.
- One, creating a deposit account in the US and transferring the fund abroad.
- Two, going for a currency hedge in the exchanges by investing in future contracts that will mature in 4-5 months. For example,
- A future contract worth $50,000, maturing in July at the rate of 74.5, will pay Rs 37.25 lakh.
- If in December, the rupee depreciates to $77, Then the contract will yield a profit of Rs 1.25 lakh.
Source: Indian Express
Finance Minister launched “Central Scrutiny Centre” and “IEPFA App”
What is the news?
The Finance Minister has virtually launched the Central Scrutiny Centre(CSC). She also launched the mobile app for the Investor Education and Protection Fund Authority(IEPFA).
About Central Scrutiny Centre:
- Central Scrutiny Centre is an initiative of the Ministry of Corporate Affairs. It aims to scrutinize the forms filled by companies under straight-through processes.
- Objective: The objective is to ensure that data quality is free from flaws.
- Features of the Central Scrutiny Centre:
CSC will primarily do the following things,
- Firstly, it will Scrutinize the filings made by users under straight-through processes
- Secondly, the CSC will identify data quality issues and irregularities.
- Further, It will communicate the data quality issues to the concerned Registrar of Companies. Then the corrective steps can be taken to restore the authenticity and correctness of data.
About the Investor Education and Protection Fund Authority(IEPFA) App:
- It is a mobile app. It aims to achieve the goal of financial literacy, spreading awareness and education among investors.
- The IEPFA App will have the facility of tracking the status and progress of the IEPF claim and refund process.
- The app will also provide a mechanism for investors and common citizens to report on suspected fraudulent schemes.
Investor Education and Protection Fund (IEPF):
- IEPF has been established under the Companies Act,1956 by the Companies (Amendment) Act,1999.
- Purpose: IEP Fund has been established for the promotion of investors awareness and protection of the interests of investors.
- If the amounts such as dividends, applications money, matured deposits, etc. remained unpaid or unclaimed for a period of 7 years, then they will be transferred to the IEPF.
- Credited to: The amounts credited to IEPF are maintained under the consolidated fund of India (Article 266 of the Constitution).
- Utilisation of Fund:
- The fund is utilized for promoting investor awareness and protection of investor interests.
- Based on the order of the court, the Fund can also be utilized for distribution of any disgorged amount among eligible applicants who suffered losses due to wrong actions by any person.
- IEPF has been set up under the Ministry of Corporate Affairs as a statutory body under the Companies Act 2013.
- Aim: It aims to administer the Investor Education and Protection Fund.
- Chairperson: Secretary Ministry of Corporate Affairs is the Chairperson of the authority.
Source: Business Today
Rajya Sabha Clears “National Bank for Financing Infrastructure and Development Bill, 2021”
What is the News?
Rajya Sabha clears the National Bank for Financing Infrastructure and Development (NBFID) Bill, 2021.
About National Bank for Financing Infrastructure and Development (NBFID) Bill,2021
- Aim: The Bill seeks to establish the NBFID as the principal development financial institution(DFIs) for infrastructure financing.
- DFIs are set up for providing long-term finance for segments involving risk beyond the acceptable limits of commercial banks and other ordinary financial institutions.
Structure of the NBFID:
- NBFID will be a corporate body with authorised share capital of Rs. 1 lakh crores.
- Initially, the central government will own 100% shares of the institution. This share may subsequently be reduced up to 26%.
- Financial Objective: To directly or indirectly lend, invest, or attract investments for infrastructure projects located entirely or partly in India.
- Developmental Objective: Includes facilitating the development of the market for bonds, loans, and derivatives for infrastructure financing.
NBFID will work toward financial as well as developmental objectives.
Financial Functions include:
- Firstly, extending loans and advances for infrastructure projects.
- Secondly, taking over or refinancing such existing loans.
- Thirdly, attracting investment from private sector investors and institutional investors for infrastructure projects.
- Fourthly, organising and facilitating foreign participation in infrastructure projects.
- Fifthly, facilitating negotiations with various government authorities for dispute resolution in the field of infrastructure financing.
- Lastly, providing consultancy services in infrastructure financing.
Developmental functions include:
- Facilitating the development of the market for bonds, loans, and derivatives for infrastructure financing
Management of NBFID:
- A Board of Directors will govern the NBFID. The Chairperson will be appointed by the central government in consultation with RBI.
Source of funds:
- NBFID may raise money in the form of loans or otherwise both in Indian rupees and foreign currencies. It may also raise finances by the issue and sale of various financial instruments including bonds and debentures.
- NBFID may also borrow money from: (i) central government, (ii) Reserve Bank of India (RBI), (iii) scheduled commercial banks, (iii) mutual funds, and (iv) multilateral institutions such as the World Bank and Asian Development Bank.
Support from the central government:
- The central government will provide grants worth Rs 5,000 crore to NBFID by the end of the first financial year.
- The government will also provide a guarantee at a concessional rate of up to 0.1%. This facility will be available for borrowing from multilateral institutions, sovereign wealth funds, and other foreign funds.
Prior sanction for investigation and prosecution:
- No investigation can be initiated against employees of the NBFID without the prior sanction of:
- the central government in case of the chairperson or other directors, and
- managing director in case of other employees.
- Courts will also require prior sanction for taking cognizance of offences in matters involving employees of NBFID.
- The Bill also provides for any person to set up a DFI by applying to RBI.
- RBI may grant a licence for DFI in consultation with the central government. RBI will also prescribe regulations for these DFIs.
Source: The Hindu
Government announced “Single Security Market Code”
What is the news?
Government has announced the setting up of a Single Security Market Code.
- Coverage: It will consolidate the provisions of SEBI Act,1992, Depositories Act, 1996, Securities Contracts (Regulation) Act,1956, and Government Securities Act,2007.
- Impact: This move will improve the ease of doing business in the country’s financial markets. Moreover, it will cut down compliances cost and do away with friction between various stakeholders.
Institutional body for bond market:
- News: Government has proposed the establishment of a permanent institutional body. It will purchase investment-grade debt securities both in stressed and normal times. Thus, It will help in the development of the bond market.
- Impact: This would bring confidence among participants in the corporate bond market during times of stress and will improve the secondary market liquidity.
Source: The Hindu
India’s Sovereign Ratings don’t reflect its fundamentals
Gs3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
Synopsis: The Economic Survey 2020-21 concludes that sovereign credit ratings are biased, and they do not reflect the Indian economy’s fundamentals.
- Currently, India’s sovereign rating is rated under a very low investment grade.
- Though it will not impact market performance, rupee value against the dollar, or on G-Sec yield. But it can impact the FPI inflow into equity and debt instruments.
On what basis the economic survey has made this remark?
- As per the survey, it is for the first time in history, India, which is the fifth-largest economy in the world, has been rated as low in the investment-grade (BBB-/Baa3).
- Historically, the fifth-largest economies have been mostly rated AAA. It reflects the economic size and its ability to repay debt. China and India are the only exceptions to this rule.
What is the solution to address this issue?
- The economic survey suggested reworking the sovereign credit rating methodology to make it more transparent and less subjective.
- It also called for co-operation among developing economies to address this bias and subjectivity, inherent in sovereign credit rating methodology.
What are the other factors affecting investment according to the Economic survey?
- The Economic survey pointed out the issue of over-regulation in the Indian economy. The survey suggested simplification of regulatory processes along with transparent decision-making processes.
- The survey also highlighted the problem of asymmetric information between the regulator and the banks which was noticed during the forbearance regime. (short-term relief for borrowers to postpone loan payments-Witnessed during the Pandemic)
- The survey suggested conducting an Asset Quality Review exercise immediately after the forbearance is withdrawn.
India’s willingness to pay debts is demonstrated often through its zero sovereign default history. So, the current sovereign ratings are not a representation of India’s growth and commitments.
Decriminalisation of offences under LLP Act
Why in News?
The Company Law Committee has recommended decriminalizing 12 offences under the Limited Liability Partnership(LLP) Act. It has also said that LLPs should be allowed to issue non-convertible debentures(NCDs) to raise funds. It will help them in improving the ease of doing business for LLP firms.
- Limited Liability Partnership(LLP): It is an alternative corporate business form in which some or all partners (depending on the jurisdiction) have limited liabilities.
- Under this, partners are not responsible or liable for another partner’s misconduct or negligence. This is an important difference from the traditional unlimited partnership in which each partner has joint liability.
- Act: All limited liability partnership in India is governed under the limited liability partnership act of 2008. The Ministry of Corporate Affairs implements the Act.
Recommendations of the committee:
- Decriminalising offences: The committee has recommended decriminalizing several offences related to timely filings, including annual reports and filings on changes in partnership status of the LLP, not related to fraud.
- It is to be noted that none of these offences attracts imprisonment. Instead, these offences attract fines.
- Penalties instead of Fines: Committee recommended the companies should be made to pay penalties instead of fines.
- This is because fines are counted in the criminal charges. It results in a convicted person being disqualified or becoming ineligible for various posts.
- Authority to impose Penalty: The Registrar of Companies should have the authority to levy penalties for any contravention of provisions of the LLP Act.
- LLPs to issue NCDs: LLPs which are currently not allowed to issue debt securities should be allowed to issue non-convertible debentures (NCDs) to facilitate the raising of capital and financing operations. The move is likely to benefit startups and small firms in sectors which require heavy capital investment.
What are Non-convertible debentures(NCDs)?
- Debentures are long-term financial instruments which acknowledge a debt obligation towards the issuer. Some debentures have a feature of convertibility into shares after a certain point of time at the discretion of the owner. The debentures which can’t be converted into shares or equities are called non-convertible debentures (or NCDs).
- NCDs are used as tools to raise long-term funds by companies through a public issue.To compensate for this drawback of non-convertibility, lenders are usually given a higher rate of return compared to convertible debentures.
- Besides, NCDs offer various other benefits to the owner such as high liquidity through stock market listing, tax exemptions at source and safety since they can be issued by companies which have a good credit rating.
Source: Indian Express
Why in News?
According to the Reserve Bank of India(RBI), the cost of issuing green bonds in India has generally remained higher compared to other bonds. It is largely due to asymmetric information.
About Green Bonds:
- It is a debt instrument just like any other normal bond, issued by an issuer for raising funds.
- The only difference is that these instruments are designed specifically for funds to support specific projects benefitting the environment.
- Green bonds typically come with tax incentives to enhance their attractiveness to investors.
- The World Bank issued the first official green bond in 2009.
Green Bonds in India:
- Yes Bank was the first Indian Bank to issue Green Infrastructure Bonds (GIBs) in India in 2015.
- SEBI has allocated the following eight categories with the tag of green projects:
- a) renewable energy b) clean transportation c) sustainable water management d) climate change e) energy efficiency f) sustainable waste management and g) land use and h) biodiversity conservation.
Issues with Green Bond in India:
- Green bonds constituted only 0.7% of all the bonds issued in India since 2018.
- As of March 2020, Bank lending to renewable energy constituted 7.9% of outstanding bank credit to the power sector.
- The average coupon rate for green bonds in India with maturities between 5 to 10 years has generally remained higher than the corporate and government bonds with similar tenure.
- Better information management system in India may help in reducing maturity mismatches, borrowing costs and lead to efficient resource allocation in Green Bonds.
SEBI moots entry norms to set up stock exchanges
News: Securities and Exchange Board of India (SEBI) has proposed a new framework for ownership of Market Infrastructure Institutions(MII) to facilitate new entrants to set up stock exchanges and depositories.
- What is Market Infrastructure? It is a system administered by a public organisation or other public instrumentality, or a private and regulated association or entity, that provides services to the financial industry for trading, clearing and settlement, matching of financial transactions and depository functions.
- Examples: Examples of MIIs include stock exchanges, depositories and clearing corporations. These are systemically important institutions whose failure could lead to bigger cataclysmic collapses bringing down the economy.
- A resident promoter setting up an MII may hold up to 100% shareholding, which will be brought down to not more than (either 51% or 26%) in 10 years.
- A foreign promoter from Financial Action Task Force FATF member jurisdictions setting up an MII may hold up to 49% shareholding, which shall be brought down to not more than (either 26% or 15%) in 10 years.
- Foreign individuals or entities from other than FATF member jurisdictions may acquire or hold up to 10% in an MII.
- Any person other than the promoter may acquire or hold less than 25% shareholding.
- At least 50% of ownership of the MII may be represented by individuals or entities with experience of five years or more in the areas of capital markets or technology related to financial services.
What are Municipal Bonds?
Source: The Indian Express
News: Vadodara Municipal Corporation(VMC) is expected to launch municipal bonds and will become the third Urban Local Body(ULB) in Gujarat to use municipal bonds to raise money.
- Ahmedabad was the first city in South Asia to launch a municipal bond in 1998 which was completely subscribed.
- The Surat Municipal Corporation was the second city in Gujarat to announce bonds in 2018.
What are Municipal Bonds?
- Municipal Bonds is a kind of debt instrument where investors offer loans to local governments.
- Purpose: They are issued by civic bodies for specific projects and usually have a 10-year tenure. The ULB pays the annual interest on the bonds to the investor at the decided rate.
- Difference: The difference between a bank loan and a municipal bond is that any institution can secure a bond only if it has favourable credit ratings.
- Benefits: The bond helps raise funds from the stock market. The bond also increases the number of investors available to the civic body, as compared to a loan from a single bank.
How is the Central Government promoting Municipal Bonds?
- Under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) scheme, urban local bodies (ULBs) are encouraged to tap the bond market.
- AMRUT Scheme: It was launched in 2015 by the Ministry of Housing and Urban Affairs.It aims to ensure universal coverage of drinking water supply and substantial improvement in coverage and treatment capacities of sewerage and septage along with storm water drainage, non-motorized urban transport and green spaces & parks.
- The government also pays ULBs Rs 13 crore for every Rs 100 crore raised via bonds subject to a ceiling of Rs 26 crore for each.This incentive takes care of the repayment that the ULB must make to the lender including the interest component.
Zero-coupon bonds: Innovative govt tool to fund PSBs, keep the deficit in check
Source: The Indian Express
News: The government has used Zero-Coupon Bonds to recapitalize Punjab & Sind Bank by issuing the lender Rs 5,500-crore worth of non-interest bearing bonds valued at par.
- What are Traditional Zero-Coupon Bonds? These are debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value. The difference between the purchase price of a zero-coupon bond and the par value indicates the investor’s return.
- What kind of Bonds are issued to Punjab & Sind Bank? These are non-interest bearing, non-transferable special Government of India(GOI) securities having a maturity of 10-15 years and issued specifically to Punjab & Sind Bank.
- How are they different from traditional Zero-Coupon Bonds? Though zero-coupon, these bonds are different from traditional zero-coupon bonds on one account — as they are being issued at par, there is no interest; in previous cases, since they were issued at discount, they technically were interest bearing.
India and UN-Based Better Than Cash Alliance organizes learning on fintech solutions
Source: Click here
News: India and UN-Based Better Than Cash Alliance organized a joint Peer learning exchange on fintech solutions for responsible digital payments at the last mile.
- Better Than Cash Alliance: It was created in 2012 as a partnership of governments, companies and international organizations that accelerates the transition from cash to responsible digital payments.
- Launched by: It was launched by the United Nations Capital Development Fund, the United States Agency for International Development, the Bill & Melinda Gates Foundation, Citigroup, the Ford Foundation, the Omidyar Network and Visa Inc..
- Members: The Alliance has 75 members which are committed to digitizing payments.
- Objectives: The Alliance Secretariat works with members on their journey to digitize payments by:
- Providing advisory services based on their priorities.
- Sharing action-oriented research and fostering peer learning on responsible practices.
- Conducting advocacy at national, regional and global level.
Exclusive arbitration body for financial disputes
Context: India needs a special arbitration body for financial disputes.
Why financial institutions resort to litigation instead of arbitration for settling disputes?
- Courts are more powerful: Litigation, offers a more potent forum for recovery of money and resolving financial disputes as the judges are vested with stronger powers than an arbitrator. such as interim measures, summary judgments, warrants for non-appearance, etc., which are not available in arbitration.
- Creates more pressure on defaulter: In addition, the public nature of disputes in courts allows the banks to create pressure on the defaulters to discharge their debts as public disclosure hinders their future investment prospects.
Why settling financial disputes through courts is disadvantageous?
- Judges lack technical knowledge: The judges in these jurisdictions are not competent enough to understand complex transactions and financial instruments. After 2009-09 financial crisis, the financial institutes felt a need for adjudicators who possess a deep knowledge of finance and an understanding of complex transactions.
- Litigation negatively impacts economy as a whole: Moreover, financial disputes of large size often lead to public distress, resulting in negative impacting listed stocks which could consequently lead to collapse of economies, if big financial institutions are involved.
What is the advantage of resorting to arbitration over litigation?
- Confidentiality: Arbitration maintains privacy of proceedings and ensures that the adjudicator is a person with expertise in finance
- Relatively Easy enforcement: It is easier to enforce an arbitral award as opposed to a court judgment which can be appealed multiple times.
Why India needs a special arbitration body?
- No special body for financial arbitration exists in India and such arbitrations continue to be adjudicated by retired judges, who are generalists and do not possess a specialized knowledge of finance and financial markets.
- Considering the rise of financial disputes in India, including defaults by some of the biggest Indian corporations such as Anil Ambani’s Reliance Group, Vijay Mallya’s Kingfisher and Nirav Modi’s Firestar Diamonds, there is a need for providing a specialised institution to deal with financial arbitrations.
What we can Learn from the International experience?
- In America, the Financial Industry Regulatory Authority (FINRA) provides assistance and advice for dispute resolution involving securities.
- Similarly, The Panel of Recognised Market Experts in Finance (P.R.I.M.E. Finance) was set up in The Hague, Netherlands, in 2012 for providing a panel of arbitrators specialising in banking and finance, offering arbitration rules tailor-made for financial arbitrations and providing financial experts for assistance during such arbitrations.
- The Institute of Chartered Accountants of India (ICAI) is one such institution which possesses a body of some of the most prominent financial experts in India. Perhaps, the government should create a panel in consultation with the ICAI for facilitation of financial arbitrations.
Explained: What are Negative Bond Yields?
News: The demand for negative yield bonds is on rise in the global market.
Source: Click Here
- Negative-yield bonds: These are debt instruments that offer to pay the investor a maturity amount lower than the purchase price of the bond. These are generally issued by central banks or governments and investors pay interest to the borrower to keep their money with them.
- Why do investors buy Negative Yield Bonds?
- Pledge asset: Bonds are often used to pledge as collateral for financing and as a result need to be held regardless of their price or yield.
- Currency Gain: Some investors believe they can still make money even with negative yields. For example, foreign investors might believe the currency’s exchange rate will rise, which would offset the negative bond yield.
- Deflation Risk: Domestically, investors might expect a period of deflation, or lower prices in the economy, which would allow them to make money by using their savings to buy more goods and services.
- Safe Haven Assets: Investors might also be interested in negative bond yields if the loss is less than it would be with another investment.
RBI sets up Reserve Bank Innovation Hub(RBIH)
Source: Click here
News: Reserve Bank of India(RBI) has announced the setting up of an Innovation Hub under the chairmanship of Kris Gopalakrishnan.It has also selected two entities for testing products under regulatory sandbox structure.
- Aim: To create an ecosystem that would focus on promoting access to financial services and products and will also promote financial inclusion.
- The Hub will collaborate with financial sector institutions, technology industry and academic institutions and coordinate efforts for exchange of ideas and development of prototypes related to financial innovations.
- It would also develop internal infrastructure to promote fintech research and facilitate engagement with innovators and start-ups.
- Regulatory Sandbox: It is an infrastructure that helps financial technology (FinTech) players live test their products or solutions before getting the necessary regulatory approvals for a mass launch.
Divestment in fossil fuels
What do you mean by Divestment movement in Fossil fuels?
- Divestment is the process by which money put into stocks and bonds of certain companies is withdrawn. A divestment is the opposite of an investment.
- For example, recently Goldman Sachs announced that it would no longer finance new oil drilling in the Arctic National Wildlife Refuge and coal mines such as mountain-top mining
- In this case, divestment has been directed against companies that extract, refine, sell and make profits from fossil fuels.
- The purpose is to restrict fossil fuel companies’ ability to function to limit their impact on climate change.
- As of 2019, it is estimated that more than $11 trillion in assets has been committed to divestment from fossil fuels.
What is the role of Climate activist in divestment process?
- Systematic organised drives for divestment from fossil fuel companies have been undertaken by a large network of activists including Rainforest Action Network, 350.org, Go Fossil Free, university students and faculty etc.
- They systematically attacked equity, investments, loans, or credit, available to the fossil fuel industry.
What are the challenges?
- After the Paris Agreement of 2015, where countries agreed to try to limit average global warming to well below 2oC, global banks continue to finance the fossil fuel industry.
- Finances has been increasing to fossil fuel sub-sectors such as oil from tar sands, Arctic oil ang gas etc. For example, coal power financing led by Chinese banks.
- Companies might be divesting not for ethical reasons but because it considers fossil companies to be risky.
What is the way forward?
- India’s contribution to the stock of greenhouse gases is less than two tonnes of CO2/capita.
- Yet, with the costs of production and storage of renewables are falling policymakers should utilise this oppurtunity and foresee to make a just transition away from coal in the near future.
- This process will be complex and necessarily involve many sectors and activities including land restoration, local jobs, and timely transfer of storage technologies for renewable energy, apart from dealing with entrenched vested and political interests