Policy rate hike pause by RBI: Inflation Targeting Framework

Context

• In a surprise move, the Indian central bank decided to pause its consecutive rate hikes and keep the benchmark repo rate at 6.50%.
• The decision taken by the monetary policy committee (MPC) is a unanimous one despite inflation still beyond tolerance levels and downside risks from global economic activity.
• Thus, this edition of the burning issue will talk about this hike pause and the mechanism of inflation targeting.

Background: Evolution of Inflation Targeting Framework

Phase One: Non-Statutory Inflation Control By RBI

• Non-statutory: This Phase was marked by a Non-statutory inflation mechanism by RBI which included changes in several policy rates such as cash reserve ratio, and statutory liquidity ratio to maintain inflation.
• Limitation: The mechanism lacked in several points such as lack of transparency in decision-making, uncertainty in the market about rates and inflation, etc. Thus, the government shifted to Inflation targeting.

Phase Two- The MPC and The Beginning of the Inflation Targeting Era

What is the Monetary policy committee (MPC)?

• Monetary policy refers to the policy of the central bank about the use of monetary instruments under its control to achieve the goals specified in the Act.
• Six-member committee: Under Section 45ZB of the amended (in 2016) RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC).
• The primary objective: Section 45ZB of the RBI Act, 1934 sets the objective of the RBI’s monetary policy to maintain price stability while keeping in mind the objective of growth.
• A Monetary policy committee was formed to decide the Key policy rates.
• Objective: Further, Section 45ZB lays down that “the Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target”.

Flexible Inflation Targeting Framework

Now, there is a flexible inflation-targeting framework in India (after the 2016 amendment to the Reserve Bank of India (RBI) Act, 1934).

What is Inflation Targeting?

• Inflation targeting is a central banking policy that revolves around adjusting monetary policy to achieve a specified annual rate of inflation. 
• Inflation targeting was first adopted in New Zealand and subsequently by 33 other countries. India adopted it in 2016.
• The amended RBI Act, of 1934 provided for the INFLATION TARGET (4% +-2%) to be set by the Government of India, in consultation with the Reserve Bank, once in every five years.

3 Stances of RBI under Inflation Targeting

1. ‘Accommodative’

• An accommodative stance means the central bank is prepared to expand the money supply to boost economic growth. The central bank, during an accommodative policy period, is willing to cut interest rates. A rate hike is ruled out.

2. ‘Neutral’

• A ‘neutral stance’ suggests that the central bank can either cut the rate or increase the rate. This stance is typically adopted when the policy priority is equal on both inflation and growth.

3. ‘Hawkish’

• A hawkish stance indicates that the central bank’s top priority is to keep inflation low. During such a phase, the central bank is willing to hike interest rates to curb the money supply and thus reduce the demand.

How inflation and rate hikes are linked?

• When there is a shortage of funds, commercial banks borrow money from the central bank which is repaid according to the repo rate applicable.
• The central bank provides these short terms loans against securities such as treasury bills or government bonds.
• This monetary policy is used by the central bank to control inflation or increase the liquidity of banks.
• The government increases the repo rate when they need to control prices and restrict borrowing.
• An increase in repo rate means commercial banks have to pay more interest for the money lent to them and therefore, a change in repo rate eventually affects public borrowings such as home loans, EMIs, etc.
• From interest charged by commercial banks on loans to the returns from deposits, various financial and investment instruments are indirectly dependent on the repo rate.

Why RBI hiked rates previously?

• Global economic volatility due to the Ukraine war since March 2022 supply chain disruptions for several items.
• Record high inflation throughout a major period during 2022 has prompted the RBI to make multiple policy rate hikes.

Impact:

• The RBI has raised the repo rate by 250 basis points (bps) since May 2022, thereby increasing the External Benchmark Linked Interest Rates, EBLR by 250 bps.
• Banks have also raised the lending rate linked to the marginal cost of funds-based lending rate (MCLR) in the past 11 months.
• Last year, the Consumer price index (CPI) hit its highest of 7.79% in Apr, and the wholesale price index (WPI) reached 15.88% in May 2022.

Why RBI has now paused hikes?

• Decreasing inflation: The country’s retail inflation, which is measured by the Consumer price index (CPI), slipped to a 16-month low of 5.66% in Mar. 2023.
• Inflation data on the Wholesale Price Index (WPI), which calculates the overall prices of goods before selling at retail prices, was at 3.85% in Feb. 2023.
• May slow down growth and consumption: Concerns over slowing consumption and tepid private investment have been emerging in policy quarters, with many seeing high-interest rates as a crucial factor in dampening demand.
• Decrease in crude prices: Also, there has been a decrease in global crude prices and food inflation.
• Still risks are there: The RBI underlined risks from protracted geopolitical tensions, tight global financial conditions, and global financial market volatility to its monetary policy outlook.

Will this pause be helpful or not?

(1) Yes

• The pause by the RBI will help favor the growth-inflation tradeoff towards the former.
• An increase in EMIs for different types of loans will also halt helping the middle class cope with inflation.

(3) No

• Rates to remain high: In the backdrop of many global agencies lowering India’s growth forecasts for this financial year amid expectations of global economic slowdown and monetary tightening by other countries.
• No relief on debts: The interest rates of debts are already high and a pause on a hike will not bring down these interest rates and thus keep the debt costlier.

Effectiveness of Inflation Targeting

Successes

• Average inflation has declined: The average inflation rate measured through the GDP deflator has declined significantly in the inflation targeting regime.
• The average inflation, which was 5.69 percent five years in the pre-inflation targeting period, has declined to 3.47 percent in the last five years.
• CPI declined: Consumer Price Index inflation declined from 8.26 percent during the 2011-2015 period to 4.99 percent in 2016-2019, a 3.27 percentage point fall.
• This is highest among both inflation-targeting countries as well as those that did not adopt it.
• Enhanced transparency:  Monetary policy transparency in India has improved after the adoption of the inflation-targeting framework.

Failures

• Sole focus of inflation: However, some critics of inflation targeting feel that its sole focus on price stability ignores growth imperatives.
• Not much effective in India: In India, the agricultural sector and informal economy have a large share, which is not directly impacted by such rate hikes, thus rendering the hikes less effective.

Way forward

• The review committee should try to find out areas of further improvement in the monetary policy framework which will strengthen the MPC to achieve the inflation target.
• In the present framework, it is not clear which model the RBI uses to forecast inflation and GDP figures, so it should disclose the models used in forecasting as other inflation-targeting countries do.
• Further, the RBI may include a forecast of core inflation in the minutes.

Conclusion

• Central banks including the RBI are often accused of falling behind the curve. However, these are challenging times for central banks. Rate hikes operate with a lag. They also lead to a growth slowdown.
• Thus, RBI has to walk a tightrope to balance growth-inflation dynamics. The accountability measures incorporated in the inflation targeting framework ensure that the focus on inflation management is not lost.

Vibrant Villages Programme

Union Home Minister in Arunachal Pradesh launches the ‘Vibrant Villages Programme’ (VVP) in the border village of Kibithoo. The constant threat along the country’s border amid the ongoing standoff with China has led to a concerted push to upgrade infrastructure in the border areas.

‘Vibrant Villages Programme’ (VVP):

• This village development scheme was first announced in the 2022 Budget. The program’s targets are to provide comprehensive development of villages on the border with China and improvement in the quality of life of people living in identified border villages.
• The development in these villages will help prevent migration, and thus also boost security.
• The Parliamentary Standing Committee in 2018 pointed towards backwardness, illiteracy, and lack of basic facilities and infrastructure in our border areas. The VVP aims to address all these issues.

Coverage of VVP:

• Under this centrally sponsored scheme, 2,967 villages in 46 blocks of 19 districts have been identified for comprehensive development.
• The villages covered in the border areas in the states of Arunachal Pradesh, Sikkim, Uttarakhand, and Himachal Pradesh and the Union Territory of Ladakh.
• In the first phase, around 662 villages have been identified for priority coverage.

Funds allocated for the program:

• A population of about 1.42 lakh people will be covered in the first phase. Under the program, the government has allocated Rs 4,800 crore for infrastructure development and to provide livelihood opportunities in the border areas.
• Out of the total outlay, Rs 2,500 crore will be spent exclusively on the creation of road infrastructure. The total outlay is for financial years 2022-23 to 2025-26.
• There is a conscious effort to not overlap VVP with the Border Area Development Programme.

Objectives of the scheme:

• The scheme aims to identify and develop the economic drivers based on local, natural, human, and other resources of the border villages.
• The centrality of the development of growth centers on the “Hub and Spoke Model” through the promotion of social entrepreneurship, and empowerment of youth and women through skill development.
• The program also intends to leverage tourism potential through the promotion of local, cultural, and traditional knowledge and heritage in the border areas, thus increasing the employment opportunities of the people and, as a result, stemming migration.
• It will promote the development of sustainable eco-agribusinesses on the concept of “One village-One product” through community-based organizations, cooperatives, SHGs, NGOs, etc.
• The scheme envisages that drinking water, 24×7 electricity, connectivity with all-weather roads, cooking gas, and mobile and internet connectivity be made available in the border areas.
  
  

‘Mars’ habitat Unveiled on Earth

Four small rooms, a gym, and a lot of red sand — NASA unveiled its new Mars-simulation habitat, in which volunteers will live for a year at a time to test what life will be like on future missions to Earth’s neighbor. The facility, created for three planned experiments called the Crew Health and Performance Exploration Analog (CHAPEA), is located at the US space agency’s massive research base in Houston, Texas.

More about the habitat

1. Four volunteers will begin the first trial this summer, during which NASA plans to monitor their physical and mental health to better understand humans’ fortitude for such long isolation.
2. With that data, NASA will better understand astronauts’ “resource use” on Mars, said Grace Douglas, lead researcher on the CHAPEA experiments.
3. The volunteers will live inside a 1,700 square-foot (160 square-meter) home, dubbed “Mars Dune Alpha,” which includes two bathrooms, a vertical farm to grow salad, a room dedicated to medical care, an area for relaxing and several workstations.
4. An airlock leads to an “outdoor” reconstruction of the Martian environment — though still located inside the hangar.
5. Several pieces of equipment astronauts would likely use are scattered around the red sand-covered floor, including a weather station, a brick-making machine, and a small greenhouse.
6. There is also a treadmill on which the make-believe astronauts will walk suspended from straps to simulate the red planet’s lesser gravity.
7. Four volunteers will use the treadmill to simulate long trips outside to collect samples, gather data, or build infrastructure, she said.
8. The members of the first experiment team have yet to be named, but the agency stated that selection “will follow standard NASA criteria for astronaut candidate applicants,” with a heavy emphasis on backgrounds in science, technology, engineering, and math.
9. Researchers will regularly test the crew’s response to stressful situations, such as restricting water availability or equipment failures. The habitat has another special feature: it was 3D-printed.
10. That is one of the technologies that NASA is looking at as having the potential to build habitats on other planetary or lunar surfaces.

The Inter-Services Organisations Bill 2023

The government introduced a bill that seeks to empower designated defense heads of inter-services organizations with certain administrative and disciplinary powers over all personnel serving in the command or attached to it.

More about the news:

Inter-services organizations include soldiers from the Army, the Air Force, and the Navy, like joint training institutes National Defence Academy, National Defence College (NDC), Defence Services Staff College (DSSC), and the Andaman and Nicobar Command (ANC).

The logic behind the bill:

• At present, armed forces personnel are governed by the provisions of three separate laws for the three services, the Air Force Act, of 1950, the Army Act, of 1950, and the Navy Act, of 1957.
• Only an officer of the same service holds disciplinary powers over persons governed by the respective Act. As far as inter-services organizations are concerned, this directly impacts command, control, and discipline.
• Since the commander-in-chief of a joint services command and the officer-in-command of any other inter-services organization are not empowered with disciplinary powers, any person accused of an offense has to be sent back to the parent service unit for any disciplinary or administrative action.
• The existing framework is time-consuming and involves financial costs to move the personnel. Proceedings become even more cumbersome when the disciplinary or administrative proceedings arise from the same set of facts and circumstances but involve personnel belonging to different services.
• The proposed legislation aims to address these impediments to ensure discipline is maintained and targets faster disposal of cases, which in turn is likely to save time and public money “without disturbing the unique service conditions or amending the service Acts.”

Key provisions in the Bill:

• While existing inter-services organizations will be deemed to have been constituted under the Bill, the proposed legislation seeks to empower the central government to set up an inter-services organization by notification.
• The superintendence of the inter-services organization will be vested in the Central Government, which “shall have the power to issue directions to each of such organizations, on any matters concerning national security or general administration, if it considers it necessary and expedient so to do in the public interest.”
• All disciplinary and administrative powers in terms of personnel serving or attached to an existing or a future inter-services organization will lie with the commander-in-chief, the officer-in-command, or any other officer specially empowered by the central government.
• While serving in or attached to an inter-services organization, personnel will continue to be governed by their respective service Acts.
• The Centre can notify any force or part of it, which has been raised and maintained in India under the authority of the Government, to which the Bill will apply.
• It will pave the way for “tangible benefits” such as expeditious disposal of cases, saving of time and public money by avoiding multiple proceedings, and greater integration amongst armed forces personnel.

Impact on the tri-services catheterization plan:

• The bill looks to integrate the capabilities of the three services. The theatre commands will have units of the Army, the Navy, and the Air Force, as per the plan, which has the mandate of the government.
• All the units will work as a single entity looking after security challenges in a specified geographical territory under an operational commander.
• The Bill holds the potential to ensure better management of theatre commands once they are operationalized.
  
  

‘Dabba trading’ and its impact

The National Stock Exchange (NSE) issued a string of notices naming entities involved in ‘dabba trading’. The bourse cautioned retail investors to not subscribe (or invest) using any of these products offering indicative/assured/guaranteed returns in the stock market as they are prohibited by law.

More about the news:

It added that the entities are not recognized as authorized members by the exchange.

 ‘Dabba trading’:

• It refers to informal trading that takes place outside the purview of the stock exchanges.
• Traders bet on stock price movements without incurring a real transaction to take physical ownership of a particular stock as is done in exchange. In simple words, it is gambling centered around stock price movements.
• For example, an investor places a bet on a stock at a price point, say ₹1,000. If the price point rose to ₹1,500, he/she would make a gain of ₹500. However, if the price point falls to ₹900, the investor would have to pay the difference to the dabba broker.
• It could be concluded that the broker’s profit equates to the investor’s loss and vice-versa. The equations are particularly consequential during bull runs or bear markets.
• ‘Dabba trading is recognized as an offense under Section 23(1) of the Securities Contracts (Regulation) Act (SCRA), 1956, and upon conviction, can invite imprisonment for a term extending up to 10 years or a fine up to ₹25 crores, or both.

Why does such trading take place?

• The primary purpose of such trades is to stay outside the purview of the regulatory mechanism, and thus, transactions are facilitated using cash and the mechanism is operated using unrecognized software terminals.
• It could also be facilitated using informal or kaccha (rough) records, sauda (transaction) books, challans, DD receipts, and cash receipts alongside bills/contract notes as proof of trading.

Issues associated with it:

• As there are no proper records of income or gain, it helps dabba traders escape taxation. They would not have to pay the Commodity Transaction Tax (CTT) or the Securities Transaction Tax (STT) on their transactions.
• The use of cash also means that they are outside the purview of the formal banking system, which results in a loss to the government exchequer. 
• The primary risk entails the possibility that the broker defaults in paying the investor or the entity becomes insolvent or bankrupt.
• It also implies that investors are without formal provisions for investor protection, dispute resolution mechanisms, and grievance redressal mechanisms that are available within an exchange.
• It could potentially encourage the growth of ‘black money’ alongside perpetuating a parallel economy that translates to risks entailing money laundering and criminal activities.
• It also observed that clients, on entering the dabba ecosystem, were harassed by the broker’s ‘recovery agents’ for default payments and refused payments upon profit.
• Due to aggressive marketing, ease of trading (using apps with quality interfaces), and lack of identity verifications, brokers keep their fees and margins open to negotiation as well.
• The mechanism could potentially translate into ripple effects for the regulated bourse as well by inducing volatility when dabba brokers look to hedge their exposures (take a position in an alternate asset or investment to reduce the risk/loss with the current position).
  
  

Antineutrinos detected

In a lab buried around 2000 kilometers under the ground in Canada, scientists accidentally discovered antineutrinos using extremely pure water for the first time.

What is Antineutrinos

1. Antineutrinos are the antimatter of neutrinos. They have an almost non-existent mass and charge and they rarely if ever interact with other particles.
2. This makes them especially difficult to detect. They are produced as a byproduct when neutrons separate into protons and electrons in nuclear reactors.
3. The Sudbury Neutrino Observatory (SNO) was being upgraded to make it SNO+ when the discovery was made. The scientists detected the antineutrino even before the observatory’s upgrades were completed.
4. As the observatory’s detector’s components were being upgraded in 2018, the observatory was filled with ultrapure water, and the detector was calibrated. While looking through the calibration data, the researchers picked up signals of an antineutrino that came from a nuclear power station hundreds of kilometers away.
5. It intrigues us that pure water can be used to measure antineutrinos from reactors and at such large distances.
6. Usually, to detect antineutrinos, “liquid scintillators” scientists need to use a method called liquid scintillation. Typically, this involves the use of chemicals like linear alkylbenzene.
7. But this discovery suggests that it would be possible to build neutrino detectors using ultrapure water, which is non-toxic, relatively inexpensive, and easy to handle.
8. This could mean that detectors such as SNO+ could be used to monitor the power output of a nuclear plant from a distance.