PM IAS JULY 08 CURRENT EVENTS

Exit of Foreign Portfolio Investors

Context:   

June 2022 witnessed the worst Exit of Foreign Portfolio Investor (FPI) selloff since March 2020 when India announced a nationwide lockdown at Rs. 50,000 crore.

• June was also the ninth on the trot that FPIs had sold net of their assets i.e. sold more than they had purchased.

Relevance:

GS III- Indian Economy (Capital Market)

Dimensions of the Article:

1. What is FPI?
2. What are the categories of FPIs?
3. Significance of FPI
4. How Big are FPI In India?
5. Why have FPIs been selling India holdings?
6. What Impact Does an FPI Selloff Have?

What is FPI?

• Foreign portfolio investors are those that invest funds in markets outside of their home turf.
  • Examples of FPIs include stocks, bonds, mutual funds, exchange traded funds, American Depositary Receipts (ADRs), and Global Depositary Receipts (GDRs).
• FPI is part of a country’s capital account and is shown on its Balance of Payments (BOP).
• The FPI system is regulated by SEBI.
• The Foreign Institutional Investor (‘FII’) and Qualified Foreign Investor (‘QFI’) regimes were merged into the FPI regime as a standardised path for foreign investment in India.
• FPI is often referred to as “hot money” because of its tendency to flee at the first signs of trouble in an economy. FPI is more liquid, volatile and therefore riskier than FDI.

Regulations

• Permitted Instruments: Shares of listed Indian companies, non-convertible debt, units of domestic mutual funds, government securities, derivatives.
• A single FPI’s investment must be less than 10% of the Indian investee company’s post-issue paid-up share capital, and a collective investment must be less than 24%.
• An FPI’s (including linked FPIs) investment in a corporate bond issue must be less than 50%.
• Minimum residual maturity of more than one year for corporate bonds, subject to the condition that short-term corporate bond investments (less than one year residual maturity) do not exceed 20% of that FPI’s total corporate bond investment.

What are the categories of FPIs?

Cat I: Government and government related foreign investors such as Central Banks, Sovereign Wealth Funds.

Cat II: Funds, which are broad based and (i) appropriately regulated, or (ii) whose investment manager is appropriately regulated. Includes mutual funds (‘MF’), investment trusts, insurance / reinsurance companies. Also includes banks, Asset Management Companies, investment managers / advisors, portfolio managers, broker dealers and swap dealers, University funds, and Pension funds.

Cat III: Endowments, Charitable societies, Corporate bodies, Trusts, Family offices, Individuals**

** Non-resident Indians (NRIs) are not permitted to register as FPIs, however they can invest in FPIs, subject to conditions

Significance of FPI:

• Investors may be able to reach an increased amount of credit in foreign countries, enabling the investor to utilize more leverage and generate a higher return on their equity investment.
• As markets become more liquid, they become more profound and broader, and a more comprehensive range of investments can be financed.
• As a result, investors can invest with confidence knowing that they can promptly manage their portfolios or sell their financial securities if access to their savings is required.
• Increased competition for financing leads to rewarding superior performance, prospects, and corporate governance.
• As the market’s liquidity and functionality evolve, equity prices will become value-relevant for investors, ultimately driving market efficiency.

How Big are FPI In India?

• FPIs are the largest non-promoter shareholders in the Indian market and their investment decisions have a huge bearing on the stock prices and overall direction of the market.
• Holding of FPIs (in value terms) in companies listed on National Stock Exchange stood at Rs. 51.99 lakh crore as on 31st March 2022, a decrease of 3.36% from Rs. 53.80 lakh crore as on 31st December 2021 due to the sustained sell-off since October 2021.
• FPIs hold sizeable stakes in private banks, tech companies and big caps like Reliance Industries.
• The US accounts for a major chunk of FPI investments at Rs. 17.57 lakh crore as of May 2022, followed by Mauritius Rs. 5.24 lakh crore, Singapore Rs. 4.25 lakh crore and Luxembourg Rs. 3.58 lakh crore, according to data available from the National Securities Depository Ltd (NSDL).

Why have FPIs been selling India holdings?

Effects of the Pandemic:

• The recovery of the Indian economy following the Pandemic has been uneven.
• In 2021, the second Covid-19 pandemic wave wreaked havoc on people’s lives and livelihoods.
• When a third, albeit less severe, wave began to spread early in 2021, the economy stumbled once more.
• As the pandemic abated, pent-up demand began to surface in economies all over the world, which caused problems as the speed of recovery caught suppliers off guard and led to supply-side shortages.
  • Pent-up demand is the term used to describe a sudden rise in demand for a good or service, usually after a period of slow expenditure.

Russia Ukraine Conflict:

• The availability of sunflower and wheat in these two countries was affected, which increased the price of these products globally.
• Globally constricted supply led to an increase in commodity prices and a quickening of inflation overall.
• The Reserve Bank’s upper comfort level of 6 percent was consistently exceeded by the rate of price growth in India for five consecutive months, reaching a peak of 7.8 percent in April before declining to a somewhat less aggressive 7.04 percent the following month.
• The S&P Global India Manufacturing Purchasing Managers’ Index (PMI) dropped from 54.6 in May to 53.9 in June, the lowest reading in nine months. According to survey data, this was caused by inflation pressures, which also caused business confidence to decline to its lowest level in 27 months in June.

US Federal Reserve:

• In its fight against surging inflation, the US Federal Reserve recently announced the most aggressive interest rate rise in in 30 years, raising the benchmark borrowing rate by 0.75 percentage points.
• The capacity of investors to obtain healthy returns is damaged when the difference between interest rates in the U.S. and other markets narrows, especially if such a development is accompanied by a strengthening of the dollar.
• An investor can earn fewer Dollars for a given amount of Rupee assets sold if the Dollar appreciates against the Rupee.
• Investors frequently sell off assets that are viewed as “risky,” such those in developing nations like South Africa, India, or Brazil.
• The rupee has been falling in value against the dollar.
  • The rupee touched its record low of 79.33 against the greenback in July 2022.

What Impact Does an FPI Selloff Have?

Local Currency:

• The local currency suffers when FPIs sell their assets and repatriate money to their home markets.
• Investors exchange their home market currency for the sale of rupees.
• The rupee’s value decreases as the amount available on the market increases.
• We have to spend more money to import the same amount of goods as a result.

Regarding exports and imports:

• India is one of the world’s major consumers of crude oil.
• Crude oil imports become more expensive when the rupee depreciates against the dollar, which may cause cost-driven inflation to spread throughout the entire economy, particularly in sectors that are particularly vulnerable to changes in the price of crude oil.
• On the other hand, India’s exports, particularly those related to IT and IT-enabled services, may somewhat gain from a stronger dollar relative to the rupee.
• Due to intense competition in the export industry, exporters might not completely benefit from the same thing.

Reserves:

• India’s foreign exchange reserves have fallen USD46 billion in the last nine months to USD596.45 billion as on 10th June 2022, mainly due to the dollar appreciation and FPI withdrawals.
• Other Effects:
• Foreign investors pulling out can result in a decline in stocks and equity mutual fund investments.
• Lowering the value of the rupee relative to the dollar keeps import costs higher, driving inflation even higher than it already is.
• Increased inflation is bad for the market as a whole. Another drawback is that FPI outflows would persist if the rupee does not rise.
• It will cost more rupees for travellers and students studying abroad to purchase dollars from banks.

Sub-Categorisation of OBCs

Context:

Recently, the Centre extended the tenure of The Commission to Examine Sub-categorisation of Other Backward Classes (OBCs) headed by Justice G Rohini, former Chief Justice of Delhi High Court.

• The Commission, constituted nearly five years ago, has got 10 extensions so far, and now has until January 31 next year to submit its report.

Relevance:

GS II- Polity and Governance

Dimensions of the Article:

1. What is sub-categorisation of OBCs?
2. What is the Commission’s brief?
3. What progress has it made so far?
4. What have its findings been so far?
5. What is the extent of OBC recruitment in central jobs?

What is sub-categorisation of OBCs?

• The idea is to create sub-categories within the larger group of OBCs for the purpose of reservation.
• OBCs are granted 27% reservation in jobs and education under the central government.
• This has been a legal debate for other reservation categories too: in September 2021, a Constitution Bench of the Supreme Court reopened the debate on sub-categorisation of Scheduled Castes and Scheduled Tribes for reservations.
• For OBCs, the debate arises out of the perception that only a few affluent communities among the over 2,600 included in the Central List of OBCs have secured a major part of the 27% reservation.
• The argument for creating sub-categories within OBCs is that it would ensure “equitable distribution” of representation among all OBC communities.
  • It was to examine this that the Rohini Commission was constituted on October 2, 2017.

What is the Commission’s brief?

It was originally set up with three terms of reference:

1. To examine the extent of inequitable distribution of benefits of reservation among the castes or communities included in the broad category of OBCs with reference to such classes included in the Central List.
2.  To work out the mechanism, criteria, norms and parameters in a scientific approach for sub-categorisation within such OBCs.
3. To take up the exercise of identifying the respective castes or communities or sub-castes or synonyms in the Central List of OBCs and classifying them into their respective sub-categories. A fourth term of reference was added on January 22, 2020.
4. To study the various entries in the Central List of OBCs and recommend correction of any repetitions, ambiguities, inconsistencies and errors of spelling or transcription.

This was added following a letter to the government from the Commission on July 30, 2019, in which it flagged “several ambiguities in the list as it stands now”.

What progress has it made so far?

• In its letter on July 30, 2019, the Commission wrote that it is ready with the draft report on sub-categorisation. Following the new term of reference added in January 22, the Commission began studying the list of communities in the central list.
• Among the challenges it has faced, one has been the absence of data for the population of various communities to compare with their representation in jobs and admissions.
• The Commission wrote to Minister of Social Justice and Empowerment on December 12, 2018, requesting for an appropriate Budget provision for a proposed all-India survey for an estimate of the caste-wise population of OBCs.
• On August 31, 2018, then Home Minister had announced that in Census 2021, data of OBCs will also be collected, but since then the government has been silent on this, whereas groups of OBCs have been demanding enumeration of OBCs in the Census.

What have its findings been so far?

• In 2018, the Commission analysed the data of 1.3 lakh central jobs given under OBC quota over the preceding five years and OBC admissions to central higher education institutions, including universities, IITs, NITs, IIMs and AIIMS, over the preceding three years.
• The findings were: 97% of all jobs and educational seats have gone to just 25% of all sub-castes classified as OBCs; 24.95% of these jobs and seats have gone to just 10 OBC communities; 983 OBC communities — 37% of the total — have zero representation in jobs and educational institutions; 994 OBC sub-castes have a total representation of only 2.68% in recruitment and admissions.

What is the extent of OBC recruitment in central jobs?

• According to data tabled in Parliament by MoS for Personnel, Public Grievances and Pensions, in Rajya Sabha on March 17, the total number of Group A to Group C employees (including safai karmacharis) was 5.12 lakh (see table).
  • Of these, 17.70% are SC, 6.72% ST, 20.26% OBC (Other Backward Classes), and 0.02% EWS (Economically Weaker Sections).
  • In Group-A, the highest tier among these, the representation of SCs is just 12.86%, of STs 5.64% and of OBCs 16.88%. Reservation for these communities is 15%, 7.5% and 27% respectively.
• These data cover 43 departments and government offices including Cabinet Secretariat, UPSC and Election Commission, but excluding the largest central government employers such as Railways and Department of Posts.
• Among Secretaries and Special Secretaries, only six belong to SCs and STs, and, “no data regarding OBC is maintained”.
• Out of 91 Additional Secretaries, the number of officers belonging to SC/ST and OBC communities are 10 and 4 respectively and out of 245 Joint Secretaries, the number of officers belonging to SC/ST and OBC communities are 26 and 29 respectively in various Ministries/Departments under Central Staffing Scheme.

Direct Seeding of Rice

Context:

Recently, the state of Punjab was unable to achieve its target in the water-saving method (direct-seeded rice).

Relevance:

GS III- Agriculture

Dimensions of the Article:

1. What is DSR?
2. How much water can DSR help save?
3. Advantages of DSR tech
4. Disadvantages of DSR tech

What is DSR?

Direct Seeding of Rice (DRS):

• Direct Seeded Rice(DSR), also known as the ‘broadcasting seed technique,‘ is a water-saving method of sowing paddy.
• In DSR, a tractor-powered machine drills the pre-germinated seeds straight into the field.
• This procedure does not require nursery preparation or transplantation.
• Farmers only need to level their soil and apply pre-sowing irrigation once.

Normal Paddy Transplanting:

• Farmers create nurseries where paddy seeds are first sowed and nurtured into young plants before transplanting paddy.
• The nursery seed bed takes up 5-10% of the transplanted area.
• These seedlings are then pulled and transplanted on the puddled land 25-35 days later.

How much water can DSR help save?

• According to an analysis by the Punjab Agriculture University, DSR technique can help save 15% to 20% water. In some cases, water saving can reach 22% to 23%.
• With DSR,15-18 irrigation rounds are required against 25 to 27 irrigation rounds in traditional method.
• Since area under rice in Punjab is almost stagnant around 3 million hectares for the last three to four years, DSR can save 810 to 1,080 billion litres water every year if entire rice crop is brought under the technique.

Advantages of DSR tech:

• Solve labour shortage problem: Like the traditional method it does not require a paddy nursery and transplantion of 30 days old paddy nursery into the main puddled field. With DSR, paddy seeds are sown directly with machine.
• Offers avenues for ground water recharge: It prevent the development of hard crust just beneath the plough layer due to puddled transplanting and it matures 7-10 days earlier than puddle transplanted crop, therefore giving more time for management of paddy straw.
• Higher yield: A PAU study said that results from research trials and farmers’ field survey have also indicated that yield, after DSR, are one to two quintals per acre higher than puddled transplanted rice.

Disadvantages of DSR tech;

• Suitability: This is the most significant element since farmers must not seed it in light textured soils because this approach is only suitable for medium to heavy textured soils such as sandy loam, loam, clay loam, and silt loam, which make up around 80% of the state’s land.
  • Avoid using this approach in fields that were previously planted with crops other than rice (such as cotton, maize, or sugarcane), as DSR on these soils is more likely to suffer from iron deficiency and weed problems.
• Compulsory Laser and Leveling: The field should be levelled with a laser.
• Herbicide Spraying: Herbicide spraying must be done at the same time as sowing and the initial irrigation.

Bharat NCAP

Context:

Recently, the  Ministry of Road Transport and Highways approved the draft GSR notification to introduce Bharat NCAP (New Car Assessment Program).

• Bharat NCAP (New Car Assessment Program) will be rolled out from April 1, 2023.

Relevance:

GS II- Governance

Dimensions of the Article:

1. About Bharat NCAP
2. Feature
3. Significance

About Bharat NCAP

• It is a new car safety assessment programme which proposes a mechanism of awarding ‘Star Ratings’ to automobiles based upon their performance in crash tests.
• Bharat NCAP standard is aligned with global benchmarks and it is beyond minimum regulatory requirement.
• The US was the first country to start a programme that provided information on car safety with regard to crashes to customers in 1978. Later, a number of similar programmes were started across regions.

Feature:

• The proposed Bharat NCAP assessment will allocate Star Ratings from 1 to 5 stars.
• The testing of vehicles for this programme will be carried out at testing agencies, with the necessary infrastructure.
• Bharat NCAP (New Car Assessment Program) will be applicable on type approved motor vehicles of category M1 with gross vehicle weight less than 3.5 tonnes, manufactured or imported in the country.
  • M1 category motor vehicles are used for the carriage of passengers, comprising eight seats, in addition to the driver’s seat.
• Auto firms in India follow AIS-145 (automotive Indian standard-145), which enforces safety features for vehicles such as seatbelts tell-tale, passenger airbags, and the speed limit alarm.

Significance

• Bharat NCAP will encourage manufacturers to participate voluntarily in the safety testing assessment programme and incorporate higher safety levels in new car models.
  • It aims to reduce 50 per cent road accident deaths by 2024.
• Bharat NCAP will also promote a healthy competition among original equipment manufacturers (OEMs) in India to manufacture safer vehicles.
• Bharat NCAP will ensure structural and passenger safety in cars, along with increasing the export-worthiness of Indian automobiles.
• Bharat NCAP will prove to be a critical instrument in making our automobile industry Aatmanirbhar with the mission of making India the top automobile hub in the world.

What is a Derecho?

Context:

Recently, States of Nebraska, Minnesota and Illinois in the US were hit by a storm system called a derecho.

Relevance:

GS I- Geography

Dimensions of the Article:

1. What is a derecho?
2. Why did the sky turn green during the derecho that hit US recently?
3. Are there different types of derechos?
4. Where do derechos usually occur?

What is a derecho?

• A derecho, according to the US’s National Weather Service is “a widespread, long-lived, straight-line windstorm” that is associated with a “band of rapidly moving showers or thunderstorms”.
  • The name comes from the Spanish word ‘la derecha’ which means ‘straight’.
• Straight-line storms are those in which thunderstorm winds have no rotation unlike a tornado.
• These storms travel hundreds of miles and cover a vast area.
• Being a warm-weather phenomenon, a derecho generally – not always – occurs during summertime beginning May, with most hitting in June and July.
• However, they are a rare occurrence as compared to other storm systems like tornadoes or hurricanes.
• For a storm to be classified as a derecho it must have wind gusts of at least 93 km per hour; wind damage swath extending more than 400 km.
• According to University of Oklahama’s School of Meteorology, the time gap between successive wind damage events should not be more than three hours.

Why did the sky turn green during the derecho that hit US recently?

• Severe thunderstorms result in a ‘green sky’ due to light interacting with the huge amount of water they hold.
• A report in the Washington Post said that it is believed that the big raindrops and hail scatter away all but the blue wavelengths due to which primarily blue light penetrates below the storm cloud.
• This blue then combines with the red-yellow of the afternoon or the evening sun to produce green, the report said.

Are there different types of derechos?

They fall into three categories –

• A progressive derecho is associated with a short line of thunderstorms that may travel for hundreds of miles along a relatively narrow path. It is a summer phenomenon.
• A serial derecho, on the other hand, has an extensive squall line – wide and long – sweeping across a large area. It usually occurs during spring or fall.
• Hybrid ones have the features of both progressive and serial derechos.

Where do derechos usually occur?

• They mostly occur across central and eastern parts of the United States.
• The May 8, 2009 “Super Derecho” was one of the “most intense and unusual derechos ever observed” in the US as it swept from Kansas to Kentucky with wind speeds reaching up to 170 km/hr.
• Derechos have also been documented elsewhere across the world.
  • In 2010, Russia witnessed its first documented derecho.
  • They have also swept through Germany and Finland, and more recently in Bulgaria and Poland.