Monetary Policy And RBI’s Issue

Monetary Policy And RBI's Issue

In the second part of the two-part series, we will have a look at what monetary policy is. Did you know that recently RBI conducted auctions for government bonds but did not accept any bids? Let us understand this issue in context of the Monetary policy to get a better understanding of RBI’s issue.

If you missed the first part, you can read it here: Understanding Fiscal Policy.

Crux of the Matter

What Is Monetary Policy?
Monetary policy refers to the actions taken by a nation’s central bank to control the money supply to achieve macroeconomic goals that promote sustainable economic growth. Like Fiscal Policy, Monetary policy can be classified as expansionary or contractionary.

This policy consists of management of money supply and interest rates, which aids in achieving macroeconomic objectives such as controlling consumption, liquidity, inflation, etc.

These are achieved by modifying the interest rates, regulating foreign exchange rates, buying or selling government bonds, etc.

Components Of Interest Rate Lever
Repo Rate
It is a rate at which the central bank of a country lends money to commercial banks. An increase in repo rate results in an increase in the interest rate at which banks can borrow and thereby at which the public can borrow and save. This eventually leads to the public borrowing less and decreasing money and credit flow in the economy as people may not want to borrow at high costs.

A decrease in repo rate generally results in a decrease in interest rates. This eventually leads to an increase in credit and money flow in the economy as people can borrow cheaply.

As of 6th August 2020, RBI kept the repo rate unchanged at 4%.

Credit Reserve Ratio (CRR)
It is a certain percentage of the total bank deposits that a bank has to keep with the Central Bank (here RBI). Banks cannot utilize this amount for any commercial or economic activity and it remains in the current account, not earn any interest.

An increase in CRR, strips the banks of cash, and resultantly banks cannot lend more loans. On the other hand, a decrease leads to surplus cash in the hands of a bank to incentivise them to lend more.

As of March 2020, CRR was 3%.

Statutory Liquidity Ration (SLR)
SLR is the percentage of total bank deposits that a bank has to invest in securities, primarily central and state government’s. As opposed to in CRR, in SLR deposits banks earn interest on the investments, albeit a lower one.

Similar to CRR, increase in SLR leaves the bank with less cash to lend, which can possibly fetch a higher interest. A decrease leaves a bank with more cash to lend at rates higher than what government securities fetch.

As of April 2020, SLR was 18.00%

CRR, SLR, etc also ensure that banks don’t become insolvent.

Government Securities And OMOs
G-Sec or Government Security is a tradeable, fixed interest bearing debt instrument issued by a central or state government. Treasury Bills are short term securities, with a maturity of less than a year, whereas bonds/notes are long term securities.

Government’s banker RBI buys and sells G-Sec to manage the money supply in the economy – the process known as Open Market Operations.

To increase the money supply in the economy, RBI will purchase bonds, and to decrease the money supply (also to raise money for the government), RBI will sell the bonds.

RBI’s Recent Issue With OMOs
On September 24, RBI rejected all bids worth ₹66,473 crores – six times the offer of ₹10,000 crores – saying the yields demanded by participants were high. Experts say that if RBI accepted the yield, it would have meant that government will have to borrow at a higher cost. As the government’s banker, RBI would obviously not want that.

The RBI thinks that the yield asked for by market was higher than what RBI would have liked; on the other hand, the market is saying that with no rate cut and large scale OMO, the rates should have been higher as inflation and government borrowing concerns remain.
Harihar Krishnamoorthy,
Treasury Head, First Rand Bank

  • The Keynesian Revolution was a fundamental reworking of economic theory concerning the factors determining employment levels in the overall economy. The revolution was set against the then orthodox economic framework, namely neoclassical economics.
  • Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on national output in the short run and on price levels over longer periods.
  • Sher Shah Suri was the founder of the Suri Empire in India, with its capital in Sasaram in modern-day Bihar. He is often credited for introducing the currency of rupee or rupiyah.

Aircraft From Airbus Set To Have Zero Emission!

Aircraft From Airbus Set To Have Zero Emission!

Global aviation industry has committed to cut carbon emissions to half their 2005 levels by 2050, as per the Paris Agreement for Climate Change. The Aerospace Pioneer, Airbus has now launched 3 new concepts for the world’s first zero-emission commercial aircrafts serviceable by 2035. So what is the tech behind it?

Crux of the Matter

What Is This Emission Free Fuel?
All 3 aircraft concepts proposed by Airbus use hydrogen gas or ZEROe fuel. So the only emission when burned, is water vapor. Hydrogen can be:

  • Combusted directly through modified gas turbine engines.
  • Converted to electric energy via fuel cells.
  • Used to produce synthetic kerosene, when combined with CO2.

What Is The Concept Of The First Aircraft
Also called the Short Haul Turboprop aircraft, it would be powered by a pair of modified gas turboprop engines, with six-bladed propellers, designed to burn liquid hydrogen. The aircraft also uses electric batteries charged by the engines, in order to give power boost to the engines when required.

  • Capacity: 100 passengers
  • Travel Distance: Upto 1,000 nautical miles or 1,850 km
  • Purpose: short-distance trips.

How Is It Different From The Current Models?
The seats at the back of the aircraft have been removed to make space for the hydrogen tanks, resulting in less passenger space. This results in less passenger space and is comparable to the Airbus A220-100 design.

Why Is Tank Design Crucial?
Hydrogen becomes liquid at -425 °F, so the tank will have to be designed to ensure that temperature is maintained from takeoff to landing.

What’s The Concept Of Second Airbus?
It’s the Transcontinental Turbofan aircraft and would be the fitting successor of Airbus A320. As with the prior model, the liquid hydrogen fuel in this aircraft would be stored in tanks installed behind the rear pressure compartment, and distributed to the engines on the wings.

  • Capacity: 120-200 passengers
  • Travel Distance: Upto 2000 nautical miles or 3700 km
  • Purpose: Longer distance trips, for going across the Atlantic Ocean.

What If There Is A Gas Leak?
There is a chimney built into the vertical stabilizer to vent the hydrogen gas in case of a leak. A stabilizer is a structure designed to reduce aerodynamic side slip and provide directional stability.

The Most Unusual One – Third Aircraft Concept
Also called the Blended Wing Aircraft, it looks like a giant flying wing. This configuration has been tested with Airbus’ MAVERIC demonstrator.

  • Capacity: 200 passengers
  • Travel Distance: 3700 km.

What’s Great About This Design?
While the other two models look like conventional passenger jets, this aircraft has wings that merge with a fuselage or main body of the aircraft that is much wider. This allows more room and efficient configuration options to accommodate more passengers and store and distribute hydrogen fuel.

Look Forward To More Aerospace Partnerships
One of the airlines, easyJet has already publicly supported the ZEROe concepts and has started working in partnership with Airbus to research more about hybrid and electric aircraft designs and infrastructure.

  • The Airbus A380 is a wide-body aircraft manufactured by Airbus. It is the world’s largest passenger airliner. The A380 project was announced in 1990 to challenge the dominance of the Boeing 747 in the long haul market.
  • The Volkswagen emissions scandal began in 2015, when the United States Environmental Protection Agency (EPA) issued a notice of violation of the Clean Air Act to the Volkswagen Group. The agency had found that Volkswagen had intentionally programmed turbocharged direct injection (TDI) diesel engines to activate their emissions controls only during laboratory emissions testing.
  • Fly-by-wire is a system that replaces the conventional manual flight controls of an aircraft with an electronic interface. Airbus’ A320, was known for being the first commercial jet to use a digital fly-by-wire control system.

Understanding Fiscal Policy

Understanding Fiscal Policy

Even though it received bids six times the offer, RBI recently turned down bids for government securities citing higher yield as unacceptable. Selling and buying of government securities is a part of RBI’s Monetary Policy. Fiscal Policy being its sister policy, it remains in as much talk. In this two part series, we will understand what fiscal and monetary policy are and what is RBI’s current dilemma around Monetary Policy. Let’s understand fiscal policy in this part.

Crux of the Matter

What Is Fiscal Policy?
Fiscal policy is a means through which the government of the nation adjusts its spending levels and tax rates to monitor and influence a nation’s economy.

Fiscal policy is based on the Keynesian theory given by British economist, John Maynard Keynes. It states that the government can influence macroeconomic productivity levels by increasing or decreasing tax levels and the amount that the government spends.

Tools Of Fiscal Policy
The government can boost consumer spending and aggregate demand by reducing taxes on individuals and businesses – called expansionary fiscal policy. Similarly, increasing tax on individuals and businesses can reduce consumer spending and aggregate demand – called contractionary fiscal policy.

The government can also boost consumer demand through influx of money (expansionary) in the economy through various means like spending money on infrastructure projects or reduce it in times of rapidly rising inflation by cutting spending (contractionary).

What Is Fiscal Deficit Then?
Fiscal surplus/deficit = Government’s Revenue – Government’s Expenditure. Fiscal surplus is when revenue is higher than expenditure, and deficit is when expendityure is higher than revenue. Experts say that, a big reason for India’s fiscal deficit has been its struggles with tax collection. Take a look at these numbers.

Tax GDP Ratio
India’s tax collection lags behind most emerging nations. Since the majority of Indians do not pay income taxes, Indian tax revenues remain largely dependent on indirect tax collections (such as GST).

  • The Keynesian Revolution was a fundamental reworking of economic theory concerning the factors determining employment levels in the overall economy. The revolution was set against the then orthodox economic framework, namely neoclassical economics.
  • Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on national output in the short run and on price levels over longer periods.
  • Sher Shah Suri was the founder of the Suri Empire in India, with its capital in Sasaram in modern-day Bihar. He is often credited for introducing the currency of rupee or rupiyah.

FinCEN Files And International Crimes

FinCEN Files And International Crimes

An American news website, Buzzfeed recently released its investigation reports of FinCEN files. Financial Crimes Enforcement Network (FinCEN) is a US-government body that keeps track of money laundering and similar illegal financial activities. Buzzfeed’s investigation reveals how numerous global banks, financial institutes, companies, and individuals were involved in such illegal financial activities. Let us find out which big names are out and what did they do. Did you know it also included the names of Indian financial institutes?

Crux of the Matter

What Is FinCEN?
Financial Crimes Enforcement Network (FinCEN) works under the US Department of Treasury. Its aim is to collect and analyze financial records to keep a track of money laundering, terrorist financing, etc. They keep track of domestic as well as international doubtful financial transactions in US dollars ($).

What Are FinCEN Files?
FinCEN files are a collection of 2,657 documents. A whistleblower leaked files to Buzzfeed News, which distributed them to 108 news organizations in 88 countries.

A bank reports a suspicious transaction or a client to FinCEN in Suspicious Activity Reports (SARs); 2,121 files of the total leaked are SARs. These documents containing
guarded secrets of many banks were sent to US authorities between 1999-2017.

Documents reportedly reveal how big banks allowed money laundering worth $2 trillion. It also revealed how Russian oligarchs or businessmen supplied money to the West and avoided sanctions that prevent them from using banks.

Leaked files gave insight into what banks know about the vast flows of dirty money across the globe.

Fergus Shiel, International Consortium of Investigative Journalists (ICIJ)

What Did It Reveal?

  • Fraudsters used HSBC to move millions of dollars of stolen money around the world. HSBC despite knowing about the Ponzi scheme of transfer of millions of stolen dollars, just filled SARs and didn’t intervene to stop it.
  • JP Morgan was accused of allowing a company to move more than $1 billion through a London account without knowing its owner.
  • UK’s governing Conservative Party secretly received £1.7 million from a Russian oligarch with close ties to President Putin.
  • One of Vladimir Putin’s closest associates used Barclays bank in London to supply money to the West and avoided sanctions that prevent him from using banks.
  • SARs of over 3000 UK-based companies – more than any other countries – found in the leaked documents.
  • Roman Abramovich, the owner of Chelsea, used an offshore company to fund footballers not owned by his club.
  • Standard Chartered was moving money which was used to fund terrorism.
  • Deutsche Bank found moving money of money launderers, organized criminals, terrorists, and drug traffickers.

India Under Radar?
Files revealed the names of at least 44 Indian correspondent banks involved in the money transfer. SBI, Kotak Mahindra, HDFC Bank, Punjab National Bank, Canara Bank, etc have been named. Files contain critical information on doubtful money transactions carried out in these banks from a bankrupt steel plant, a multinational conglomerate, an IPL sponsor, etc. The report says that Indian banks received $482,181,226 from outside the country and transferred $406,278,962 from India.

  1. WikiLeaks is an international non-profit organization that publishes news leaks and classified media provided by anonymous sources. Its website, initiated in 2006 in Iceland by the organization Sunshine Press, claimed in 2015 to have released online 10 million documents in its first 10 years.
  2. The Steele dossier, also known as the Trump–Russia dossier, is a political opposition research report written from June to December 2016 containing allegations of misconduct, conspiracy, and co-operation between Donald Trump’s presidential campaign and the government of Russia during the 2016 election. The draft dossier was published in full by BuzzFeed News on January 10, 2017, noting that it was unverified.
  3. The Pulitzer Prize is an award for achievements in newspaper, magazine, and online journalism, literature, and musical composition within the United States. It was established in 1917 by provisions in the will of Joseph Pulitzer, who had made his fortune as a newspaper publisher and is administered by Columbia University.

What Is Sugar Tax?

What Is Sugar Tax?

Nations across the world are imposing sugar tax or soda tax on sweetened beverages to tackle the problem of diabetes type II and obesity. Let’s understand what sugar tax is and its impact.

Crux of the Matter

Sugar Tax
Sugar tax or soda tax is a tax on carbonated soft drinks, sports drinks, and energy drinks. It has been introduced with the aim to reduce the consumption of drinks with added sugar. Global companies like Coca-cola, PepsiCo, Red Bull, etc. have opposed it.

Some experts argue that it is an example of Pigouvian taxation aimed to discourage unhealthy diets and to counter the growing economic costs of obesity. In simple terms, Pigouvian tax means a tax imposed on any market activity to suppress its demand and consumption or to have a desired negative outcome.

This tax is also termed as a policy intervention to tackle the critical problem of obesity and overweight. However, sugar tax has remained a matter of public debate in many countries. Some experts argue that there are no impactful results and medical evidence to support the benefits of a sugar tax on health.

Similar To Tabacco Tax
Tobacco tax was introduced to tackle the problem of cancer caused due to Tobacco. Tobacco tax proved to be successful in many developed countries. Thus, proponents of sugar tax are hopeful that it will help to tackle diabetes. Soft drink companies are also adapting strategies that were implemented by tobacco companies such as funding research that downplays the health risks of their products, introducing alternative products, etc.


  • As per one study, sales of soda in Mexico declined 6% after the imposition of the soda tax in 2014.
  • In 2018 Australian Beverages Council announced that to cut sugar content by 10% by 2020, and by another 10% by 2025.
  • In 2017 United Arab Emirates announced a 50% tax on soft drinks and a 100% tax on energy drinks to tackle health problems
  • In 2016, a comparative study of consumption of soft drink and water before and after the imposition of the soda tax was conducted in Berkeley, San Francisco, and Oakland, a drop of 26% in soda consumption was observed in Berkeley (where sugar tax was imposed) and a 10% increase in San Francisco & Oakland (where sugar tax was not imposed), while water intake increased by 63% in Berkeley and 19% in the two neighboring cities.

Taxation Methods
Countries use different methods to impose Sugar tax. Some countries tax it on the basis of volume. For instance, France applies a tax of 0.0716 euros per litre of regular or diet soft drinks, flavored mineral water, and fruit juices with added sugar. Whereas some countries tax it on the basis of sugar content. For instance, in Britain drinks with total sugar content above 5g per 100 milliliters are taxed at 18 pence per litre and drinks above 8g per 100 milliliters at 24 pence per litre (100 pence = 1 pound).

Did you know that consumption of carbonated drinks in US and some developing countries has been declining over some years, whereas in developing countries its growth is giving positive signs? What could be the reasons? Go read this data-studded piece to understand what soft industry looks like: A Look At Soft Drinks Industry

  • Costa Coffee is the second largest coffeehouse chain in the world and the largest in the UK. Coca-Cola Company acquired Costa Coffee in 2019 for $5.1 billion.
  • Coca-Cola sponsored the 1928 Summer Olympics and has subsequently remained a sponsor to the current time. Coca-Cola Olympic City was an 8-acre plaza in downtown Atlanta, Georgia, built in concurrence with the 1996 Centennial Olympic Games in Atlanta.
  • Campa Cola is a soft drink brand in India. It was a market leader in the Indian soft drink market in the 1970s and 80s in most regions of India until the advent of the foreign players Pepsi and Coca-Cola. Campa Cola was created by the Pure Drinks Group in the 1970s.