Current affairs related to economy – This article contains important economy terms which an UPSC aspirant should know.

1. PASSIVE DEBT FUNDS

Passive Funds

• A pass-through fund invests in an asset that follows an index of market value or a certain market segment to decide which market segment to invest in.
• In contrast to an actively managed fund, the manager of the fund doesn’t decide which it will invest in.
• This usually makes passive funds less costly for investment than funds that are active which require fund managers to research and analyzing possibilities to invest in.
• Tracker funds, like ETFs (exchange trade funds) and index funds, fall under the umbrella of passive funds.

Passive debt funds

• Debt funds that are passive fixed-income mutual fund plans which monitor debt or market instruments.
• The funds invest in debt and money market instruments, such as Government Securities (Gilts / G-Secs), State Development Loans (SDL), PSU bonds as well as Tri Party Repos (TPTs) as well as Tri Party Repos (TPTs).
• At present, debt funds in this category only invest on AAA-rated securities.
• The Sebi circular regarding passive funds introduces standards for each type of debt fund with the limits on exposure for each sector, the issuer (based on its rating) and the group.
• Implementation of these provisions could aid in reducing the risk of concentration for debt ETFs or index funds.

What are the various types of debt that are passive in India?

• There are three types of debt funds that are passive in India which are. liquid funds that are passive, Gilt funds, and the target maturity funds.
• Funds that are passive liquid invest in instruments that are overnight whereas they are passive Gilt funds are invested on Government Securities.
• The majority of these passive loans are targeted maturity funds.
• The Target Maturity Funds are passive scheme of debt mutual funds that track an index for bond underlying and have a defined date for maturity.
• At the time of maturity, you’ll get the maturity money which include the value of the bonds in the portfolio as well as accrued interest.

2. STATE DEVELOPMENT LOAN

Tamil Nadu is planning to raise Rs51,000 crore during the 4th period (January-March) of the fiscal year 2022-2023 through auctions of bonds, also known as State Development Loans, according to the Reserve Bank of India’s borrowing calendar.

State Development Loans (SDLs)

• State Development Loans (SDLs) are securities that are dated and that are issued by state governments for satisfying their market borrowing needs.
• The purpose of distributing State Development Loans is to satisfy the budgetary requirements of state government. Every state is able to borrow up to a predetermined amount through State Development Loans.
• The SDL securities that are issued by states can be considered a credible collateral that can meet the requirements of banks for SLR as well as collateral to obtain liquidity under RBI’s LAF including repo.
• A unique aspect for SDL is it’s an instrument that is oriented towards market for states to draw funds from the market. If the state’s fiscal strength is higher the state, less is the rate of interest (yield) it will have to pay for SDL borrowings.
• SDLs are basically securities, and the auctions are conducted off by the RBI via eKuber which is an electronic auction system used for securities issued by the government and different instruments. RBI organizes SDL auctions every fortnight.
• The interest rate as well as the yield on SDL securities is determined through auction.
• The interest rate may be slightly higher than the rate in Central Government securities (G-secs) of a similar duration.
• The participants in SDL are mostly commercial banks and mutual funds as well as insurance companies that are drawn to the higher, but not as high, interest rates of SDL (compared with central government bonds).

3. NEW BANK LOCKER AGREEMENT

RBI have delayed the date to banks to renew agreements with locker customers with existing customers of lockers in the form of a gradual manner until the 31st of December 2023..

Background

• A New Bank Locker Rule has been put into effective from January 1 2023 According to a Reserve Bank of India (RBI) announcement.
• In the last couple of days, a number of Banks have sent out text messages to their customers in order to renew their safe agreement with their deposit lockers. In this regard existing locker depositors were asked to provide evidence of their eligibility to be eligible for an extension of their locker agreement.
• Furthermore these individuals also were legally required to conclude a renewed contract on or before the 31st of December 2022.
• RBI has requested banks to inform their current customers of their lockers regarding the renewal deadline until April 30, 2023.
• Banks must ensure that at at least 50% of their current customers have renewed their contracts on or before June 30, and at least 75 percent by the end of June-September 30, 2023.

What is a locker agreement?

• When the locker is allocated for the facility client, the bank must conclude an arrangement with the client for whom the locker is made available on a form that is which is stamped.
• An original copy of the agreement to hire a locker in duplicate, signed by both parties must be provided to the person who hires the locker to be aware of his or her rights and responsibilities.
• The original Agreement will be stored with the branch of the bank in which the locker is.

New Rules

• At the time the clock is over, banks must send an SMS and email alert to the registered email address as well as mobile number to provide confirmation to inform the client of the time, date and the possibility of remedy in case of an unauthorised access to the locker.
• Banks are capable of paying for the loss or damage to locker contents caused by the bank’s lack of as per the new RBI rules.
• It cannot not be held responsible for any loss or damage of contents in lockers caused by natural disasters as well as acts by God such as flooding, earthquakes, lightning or storms or any other cause that is attributable to the customer’s own fault or negligence as defined by the new guidelines.

In order to ensure timely payment of the locker rental, banks are allowed to apply for the Term Deposit upon allotment which would be able to cover three years of rent as well as the cost of breaking into the locker in the event the worst happens.

4. UNDERSTANDING FINANCIAL MARKETS

Financial market is a market where sellers and buyers take part in trade. It is platform that facilitates traders to buy and sell financial instruments/securities.

• The primary purposes of the financial market include:
• It facilitates interaction between lenders and investors.
• It offers pricing information that results from the exchange between sellers and buyers on the market, when they trade their financial assets.
• It ensures the security of transactions that involve financial asset.
• It provides liquidity by offering the investor with a means to dispose of financial assets.
• It helps to reduce the cost for transactions and data.

Financial markets are comprised of two main segments:

Money Market:

• Market for overnight and short-term instruments and funds that have one year of maturity or less than one year.
• The market covers the trading and issue of short-term non equity debt instruments such as Treasury commercial papers, bills bankers acceptance, deposits certificates and more.
• Money Market consists of all institutions and organisations that facilitate or deal in short-term credit instruments. They comprise RBI cooperative banks, commercial banks, financial companies that are not bank-owned such as LIC, GIG, UTI and special institutions like Discount as well as Finance House of India (DFHI).
• The principal money market instruments also known as securities (financial asset) are as below.
• RBI will be the principal regulator of the money market.

Capital Market:

• Market for long-term fund-both debt and equity that have a maturation time greater than one year.
• On this marketplace, capital funds comprised of debt and equity are issued as well as trade. This also includes private source of debt as well as equity, as well as organised markets such as stock exchanges.
• The SEBI agency is the main regulator of the capital market.
• The market for capital can further be divided into secondary and primary markets.

Primary Market:

• In the primary market, new securities are offered at first. It allows a government or company to establish a relationship with an investor.
• It does not have a distinct physical existence, but is considered to be so for analysis of economics.

Secondary Market:

• Secondary Market is a place where securities that were previously sold are being resold.
• It exists physically, like the Bombay Stock Exchange (BSE) in Dalal Street, Mumbai.
• It provides liquidity and confidence to investors looking to buy new securities on the Primary Market.
• Secondary market can be either an auction or the dealer market. Stock exchange is a component in an auction marketplace Over-the-Counter (OTC) will be part of the market for dealers.

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