20 August Current Affairs – Daily News

20 August Current Affairs – Daily News

CIVIL SNIPPETS

 

Reduce tensions with Pakistan, says Trump- Sriram Lakshman #GS2 #IR

 

In a telephonic conversation with Prime Minister Narendra Modi on Monday, U.S. President Donald Trump sought reduction of tensions between India and Pakistan. The two leaders also discussed regional developments and the ways to “strengthen U.S.-India economic ties through increased trade.

 

Mr. Khan had spoken to Mr. Trump on the same morning as a United Nations Security Council (UNSC)

 

meeting was being held to discuss Kashmir and India’s abrogation of Article 370 (special status for Kashmir) .

 

“In the context of the regional situation, the Prime Minister stated that extreme rhetoric and incitement to anti-India violence by certain leaders in the region were not conducive to peace,” the Ministry of External Affairs said in a statement on the conversation, without referring to Pakistan.

 

The two leaders recounted the June meeting in Japan’s Osaka where they participated in the G20 summit.

 

 

 

NRC may be tackled via legislative route #GS2 #Governance

 

 

 

Assam Chief Minister Sarbananda Sonowal indicated on Monday that any decision to challenge the final National Register of Citizens (NRC) through the legislative route could be discussed in future.

 

Both the Centre and the State have moved the Supreme Court in the past seeking re-verification of the documents of 20% of the 3.29 crore applicants in areas bordering Bangladesh as they suspect wrongful inclusions and exclusions.

 

 

Millions are set to lose citizenship after the publication of the final list. The register, first published in Assam in 1951, is being updated as per the court directions. It is a list to segregate Indian citizens living in Assam from those who had illegally entered the State from Bangladesh after March 25, 1971.

 

The Supreme Court has, in the past fortnight, twice rejected the State’s and the Home Ministry’s plea for re-verification. Around 41 lakh people have been excluded from the draft lists published in July 2018 and June this year. Around 36 lakh have filed claims against their exclusion and objections have been filed against two lakh inclusions. The hearing of these claims and objections are under way.

 

 

Nicotine is now a class A poison in Karnataka- Afshan Yasmeen #GS3 #SnT

 

To strengthen enforcement of the ban on production and sale of electronic cigarettes, the State government has amended the Karnataka Poisons (Possession and Sale) Rules 2015, notifying nictoine as Class A poison under the rules.

 

Highly toxic chemicals, which even in very small quantities as gas or vapour in the air are dangerous to life (such as cyanogen, hydrocyanic acid, nitrogen peroxide, and phosgene), are notified under Class A.

 

A gazette notification was published last month and the new rules are now called the Karnataka Poisons (Possession and Sale) Rules 2019.

 

Electronic cigarettes are small battery-operated devices that vapourise liquid nicotine to provide the same experience as smoking tobacco.

 

Although the Karnataka government had banned the sale and production of e-cigarettes in June 2016, illegal sale and smuggling of nicotine cartridges and e-cigarettes are rampant in the State. They are often marketed as a way to cut down or cut out cigarette smoking altogether, and sold as aids to quit smoking.

 

 

The ban was imposed after a study by the State Health Department and experts that showed that e-cigarettes encourage the younger generation to use conventional cigarettes. While use of two milligrams of nicotine is permitted only in chewable chocolates to help with de-addiction, e-cigarette manufacturers misuse this clause for their sale.

 

The ban — invoking sections of Drugs and Cosmetics Act and Food Safety Act — also ordered the suspension of all kinds of promotion of e-cigarettes, including online promotion.

 

Despite this, we find that illegal sale of e-cigarettes is rampant in the State. The Cybercrime police recently issued notices to e-commerce platforms cautioning them that they cannot sell e-cigarettes online. Also customs officials have been seizing nicotine cartridges and e-cigarettes from people flying into Karnataka from outside.

 

 

 

 

Crucial manoeuvre for Chandrayaan-2 today #GS3 #SnT

 

The moon-bound Chandrayaan-2 spacecraft is scheduled to undergo a crucial orbit manoeuvre around 9.30 a.m. on Tuesday morning as it approaches its destination.

 

To make the spacecraft capture the lunar orbit and start going around the moon, its handlers at the Indian Space Research Organisation (ISRO) will fire its engines briefly to slow it down to capture the moon’s orbit.

 

The move, called the Lunar Orbit Insertion or LOI, is probably one of the two top orbit manoeuvres of the mission, along with the high point: the soft-landing of the Vikram lander on the southern polar region of moon on September 7.

 

Without this move, the spacecraft will go out of the lunar ambit and travel into an unknown and unwanted space realm, according to experts who are conversant with the first Indian lunar orbiter mission, Chandrayaan-1 in 2008.

 

For the first 24 days of its earth-bound phase, the speed and range of the spacecraft were being boosted to push it towards moon. As it nears the moon, its handlers will do the reverse – lower its speed gradually until it circles the moon pole to pole.

 

 

 

Exchange plastic waste for free meal here- Sidharth Yadav #GS3 #Environment

 

Want a free meal in exchange of plastic waste? Head to the segregation unit near the Ambikapur bus stand, get the waste weighed, receive a coupon and relish an Indian thali at the garbage cafe on the opposite side of the road.

 

The Municipal Corporation of Ambikapur, in Surguja district of Chhattisgarh, in a bid to spread awareness of curbing plastic use, feed the homeless and ragpickers, and empower poor women, is going to open the cafe soon. While a kg of waste will fetch one a full meal, half a kg will get one a breakfast.

 

The city is the second cleanest in the country after Indore according to the Swachh Survekshan 2019. Like several stakeholders gave us monetary support for the solid waste management programme launched in 2015, we hope they support this project too.

 

Poor women from both urban and rural areas are Ambikapur’s green warriors. Under a three-tier segregation scheme, women, as part of self-help groups, collect waste door-to-door, segregate waste at the secondary level, before grading it into 156 categories at the last stage.

 

 

Corporation trained poor women on waste segregation, customised waste collection rickshaws to carry segregated waste separately, spread awareness among stakeholders like businessmen and shopkeepers and set up 18 Solid Liquid Resource Management units. Councillors held awareness programmes in the 48 wards on one day.

 

While wet waste in the second stage is sent to a manure unit and sold in the market, plastic granules are made at another unit after the tertiary stage and sold to a contractor willing to pay the most, selected under the tender system.

 

 

 

Environment approvals timing to be further brought down to 60 days: Union Environment Minister #GS3 #Environment

 

Union Minister for Environment, Forest & Climate Change and Information and Broadcasting, Prakash Javadekar attended the inaugural session of the 15th National Convention on “Housing for All By 2022” in New Delhi on 19 August 2019. The minister spoke at length on a range of issues related to environment approvals for building and construction projects.

 

The minister said that environment approvals which used to be a stumbling block before 2014, have now been simplified and standarized. “Before 2014, it used to take 640 days for a proposal to get

 

Environment approval but we have simplified rules and now it takes 108 days for the same and very soon it will be further brought down to 60 days but at the same time without compromising on environment protection.

 

The Environment minister said that we are entrusted with the work of both environment protection and at the same time fostering growth. “Earlier projects costing above Rs 50000 used to be under the purview of centre but now even projects worth Rs 1.5 lakh and above are delegated to states.

 

The minister stated that the efforts of the ministry is towards making rules simpler, making fewer rules but strict implementation of them and the focus is promoting ease of doing responsible business.

 

 

 

Energy likely to be on Modi’s agenda at G7 visit #GS2 #IR

 

India remains politically committed to the completion of the Jaitapur nuclear power project, which is being built in partnership with France. A statement regarding the project was made as the External Affairs Ministry announced that Prime Minister Narendra Modi will attend the outreach session of the G7 meet at Biarritz, France, where India is a special invitee.

 

 

We are politically committed to completing the Jaitapur nuclear power project as soon as possible. In December 2018, we have signed the Industrial Way Forward Agreement. The techno commercial offer is in active discussion between the technical agencies.

 

At the G7 summit, Mr. Modi is expected to highlight climate change and counter-terrorism with partner countries. The interactions with the French leadership is likely to include solar energy and multilateral. The Indian leader is expected to hold several bilateral meeting with global leaders, though the Ministry did not confirm the meetings.

 

 

 

India’s campaign for permanent seat at UNSC slowing down- Kallol Bhattacherjee #GS2 #IR

 

Despite repeated assertions of its right to a permanent seat at the UN Security Council, India’s campaign for expansion of the UNSC has slowed down, available official statements suggest.

 

The slow pace is visible in the fact that India’s campaign did not prompt the UN General Assembly (UNGA) to move towards the resolution for expanding the UNSC four years after the General Assembly in a landmark decision in 2015 had declared plans for the same.

 

Following the September 14, 2015 decision of the UNGA, the Ministry of External Affairs had stated that the negotiations for a resolution of the UNGA would begin from 2016 but initiatives on the ground narrate another tale.

 

India seems to have depended on the argument that it is entitled to a seat at the UNSC because of multiple factors such as population, growing economic stature and growing global responsibilities like peacekeeping.

 

Diplomats here suggest that a more aggressive campaign within the organs of the UN is required to push for a UNGA resolution to expand the UN Security Council.

 

One of the key historic reasons for India’s quest for a permanent seat at the UNSC was to ensure protection of national interest in crucial diplomatic moments when the organ takes up contentious issues such as Kashmir.

 

Yet, four years after the reform process received an initial boost, India stood outside as the UNSC members met for a closed meeting on Kashmir last week. In recent years, India has insisted on getting bilateral assurance from visiting heads of states and governments, but permanent member countries such as the U.K., the U.S., Russia and France have expressed support bilaterally without actively collaborating with India in the UN for expanding the council.

 

Frustration of the Indian diplomats at the slow movement of the process was evident in speeches delivered in meetings in various UN groups.

 

 

Delivering a joint G4 statement on behalf of Brazil, Germany, India and Japan, India’s Permanent Representative Syed Akbaruddin in 2016 stated that the grouping was eager for a forward discussion.

 

Yet recent speeches by the diplomat at the “Plenary on the Intergovernmental negotiations on the question of equitable representation on and increase in the membership of the Security Council and other matters related to the Council” indicate internal delays and differences among members that is hindering India’s quest.

 

Diplomats have blamed China for having quietly carried out a campaign to stop the draft resolution from acquiring speed. Veteran diplomats have said that the latest UNSC meeting on Kashmir which was convened following an initiative from China showed that India will have to show more “stamina” to stop China from using the organ against India’s interest.

 

The issue of expanding the UNSC and the Text Based Negotiation is expected to come up in the next UN General Assembly session in September, which will throw open a new round of multilateral diplomacy.

 

 

 

India, China defence joint working group meets in Beijing- Dinakar Peri #GS2 #IR

 

India and China reviewed the situation on the border and agreed on more port calls by each other’s Navies as part of measures to improve military to military cooperation, at a meeting of the Joint Working Group (JWG) between the Defence Ministries in Beijing last week.

 

The focus of the discussions was on border management, more port calls and activities linked to the celebration of 70 years of diplomatic relations between the two countries between April 2020 and March 2021.

 

The Indian delegation was led by a Joint Secretary from the Defence Ministry along with one star officer each from the three Services.

 

The JWG discussions will be followed by the annual defence and security dialogue headed by the Defence Secretary. There is also a proposed visit of Defence Minister Rajnath Singh to China by year end.

 

In December, the armies of India and China will hold the annual exercise Hand-in-Hand at Umroi near Shillong. The two-week, company-level exercise will take place in the second half of December and the exercise planning conference to finalise the modalities is scheduled this month.

 

 

 

Mood of gloom and doom won’t help, says Das #GS3 #Economy

 

 

Amid the slowdown in economic activity, Reserve Bank of India Governor Shaktikanta Das urged businesses not to be pessimistic, while acknowledging headwinds, and reiterated that growth was the central bank’s highest priority.

 

The RBI Governor reiterated that growth was the highest priority for the central bank. RBI has reduced the repo rate by 110 bps since February to support growth with inflation staying under control.

 

He said the headwinds to financial stability could emanate from various sectors of the economy — the credit market, financial markets, external sector and payment system. On the issue of headwinds from the credit market, particularly from non-banking finance companies, Mr. Das said it would be the RBI’s endeavour not to allow any large, systemically important NBFCs to fail.

 

In October last year, infrastructure conglomerate IL&FS defaulted on a series of payments which led the government to replace the existing board with a new one and started a resolution process through asset monetisation.

 

The RBI Governor welcomed the latest move by banks to link fresh loans to repo rate which would enable faster transmission of interest rates. While a few banks have already linked retail loans like home loans to the repo rate, some others are in the process of rolling out the scheme.

 

The RBI Governor said that he expected the government to infuse capital in the public sector banks at the earliest for not only meeting regulatory requirement but also to fund growth.

 

Our expectation is that the ₹70,000 crore capital that has been provided by the government for public sector banks will be released at an early date, will be released upfront. This will not only be a requirement for regulatory compliance but also meet growth capital needs.

 

 

 

DTC panel submits report #GS3 #Economy

 

The government-appointed task force set up to formulate a new direct tax code to replace the existing Income Tax Act submitted its report to Finance Minister Nirmala Sitharaman.

 

However, the details of the report and its recommendations have not been made public. “Union Minister of Finance and Corporate Affairs Nirmala Sitharaman received the report submitted by Akhilesh Ranjan, Convenor of the Task force constituted by the Government to draft New Direct Tax Law, in New Delhi today.

 

Since the Direct Tax Code is to replace the Income Tax Act, which was enacted in 1961, tax experts expect a wide variety of changes to be brought in to modernise India’s direct tax system.

 

The task force, then under Arbind Modi was initially supposed to submit its report by May 31 but the then Finance Minister Arun Jaitley gave it a two-month extension to complete the exercise.

 

 

The deadline was again extended to August 16, since some members requested more time to give their inputs. The Finance Ministry on August 16 said that the report would be submitted on August 19, which came to pass.

 

The Finance Ministry, had in November 2018, appointed Akhilesh Ranjan, Member (Legislation) of the Central Board of Direct Taxes, as the convenor of the task force following the retirement of Mr. Modi.

 

 

 

Corporate tax to be cut gradually to 25%: Nirmala Sitharaman #GS3 #Economy

 

On a day when the direct tax code task force submitted its report with the government, finance minister

 

Nirmala Sitharaman said on Monday the government would trim the corporate tax rate gradually to 25% for all companies, including the large ones with an annual turnover of over Rs 400 crore. She,

 

however, didn’t give a time frame for this move.

 

The government has, over the last five years, trimmed the rate to 25% from 30% in a phased manner for 99.3% of companies. However, the 0.7% large companies that don’t enjoy this benefit make up for almost 80% of the total corporate tax collection and are subject to as much as a 30% tax.

 

Sitharaman also promised all possible help to “wealth creators”, days after Prime Minister Narendra Modi called “wealth creators” the “wealth of the nation” and stressed their indispensability in nation building.

 

While Modi’s statement on “wealth creators” was to reassure corporate India at a time when several complaints of overreach by taxmen had roiled India Inc, Sitharaman has already lined up plans to tour various cities to hold meetings with the industry and change the perception of “tax terrorism”.

 

As part of this drive, she visited Ahmedabad on August 16 and is planning to go to Varanasi next. The Budget lowered the tax rate to 25% for all companies having an annual turnover of up to Rs 400 crore, instead of Rs 250 crore earlier.

 

If the government walks the talk, as these statements seek to signal, it would mark a decisive shift in its intention to take calculated risks to reverse an economic slowdown, after it shied away from some key reforms in its first term purportedly for fears of the Opposition’s “suit-boot ki sarkar” jibe.

 

These statements also come at a time when buzz about a relief to the foreign portfolio investors from the increase in the super-rich surcharge, which has spooked the stock markets, is gaining momentum.

 

As per the Budget announcement, with the surcharge on categories of taxpayers with income above Rs 5 crore rising by 22 percentage points, long-term capital gains tax on FPIs using the trust structure would now be 14.25%, against 12% earlier, while short-term gains would rise to 21.4% from 17.9%.

 

Earlier this month, Sitharaman had said she would travel around the country to gather feedback through first-hand account of any tax-related harassment of companies. She had also promised to review the

 

 

new corporate social responsibility rules that provide for a jail term up to three years for non-compliance.

 

 

 

Dr. Reddy’s launches cancer drug in India #GS3 #SnT

 

Dr. Reddy’s Laboratories on Monday said it had launched in India Versavo (bevacizumab), a biosimilar of Roche’s Avastin is indicated for the treatment of several types of cancers. Avastin and its biosimilars had India sales of about ₹223 crore moving annual total (MAT) for the most recent 12 months ended December 2018, a Dr. Reddy’s statement on Monday said, citing Ipsos figures.

 

Dr. Reddy’s now has six biosimilar products commercialised in India and various emerging markets and an active development pipeline of several biosimilar products in the oncology and immunology space.

 

Biosimilarity means that the biological product is highly similar to the reference product notwithstanding minor differences in clinically-inactive components; and there are no clinically meaningful differences between the biological product and the reference product in terms of the safety, purity, and potency of the product.

 

 

Tale of two NHPC projects: Bhutan on, India off #GS2 #IR

 

As Prime Minister Narendra Modi inaugurated the Mangdechhu hydroelectric power plant in Bhutan Saturday, on this side of the border, there was a sense of irony.

 

In 2010, the year in which the 720 MW Mangdechhu Project was appraised, the Detailed Project Report (DPR) for a project of similar size was wrapped up on the Indian side of the border — the 520 MW Teesta IV project in Sikkim. But despite starting off the blocks together exactly nine years ago, while Mangdechhu’s first unit has now come on stream, Teesta IV still remains on the drawing board.

 

This is despite Teesta IV being developed by a state-owned utility in India even as Mangdechhu, one of the major projects under Bhutan’s initiative to generate 10,000 MW hydropower by 2020 with India’s support, is being developed almost entirely by Indian utilities in a foreign country.

 

NHPC LTD, the state-owned company executing the project, currently brackets the Teesta IV project in the “awaiting clearances” category. Incidentally, NHPC was the design and engineering consultant for the Mangdechhu hydropower project while Jaiprakash Associates was contracted for the construction of the dam, diversion tunnels, underground powerhouse, shafts and the intake structures and another state-owned company, Bharat Heavy Electricals Ltd, supplied the four 180 MW turbines for the project in Bhutan.

 

 

The reason for Teesta IV not taking off is attributed to NHPC not managing to get the requisite clearances in time and the FRA (clearance under Forest Rights Act) not getting done.

 

Delays in projects such as Teesta IV also bring into focus the role of state governments in committing to expediting clearances. In the case of Teesta IV, NHPC has not been able to hold FRA meetings “on one pretext or the other,’’ an official indicated. “With great difficulty”, now the utility has come up to the level that in all the gram panchayat units, meetings have been held.

 

Of the 10 GPUs, it is only in two GPUs where 50 per cent of the people have said they do not want the project whereas in an overwhelming eight GPUs, almost 100 per cent people have said that this project must come up, officials indicated. Despite that, the project is hanging fire.

 

A scaling up the share of the hydel sector in the country’s overall energy mix is seen as an important pre-requisite in counterbalancing the massive deployment of other renewable capacity.

 

A higher hydel generation in the energy mix makes it easier for grid managers to adjust to the vagaries of solar and wind generation on a daily basis. According to government data updated till April 2018, there are at least 19 hydro power projects in India that are facing time over-runs of five or more years.

 

The broad support for Teesta IV at the gram panchayat primarily stems from another project done just downstream — Teesta V. Following the execution of the project, the Singtam town, a small village before this project came up, scaled up into a full-fledged big town.

 

The Rs 4,500-crore hydroelectric plant in central Bhutan, presented as a Bhutan-India friendship project, is a run-of-river power plant built on the Mangdechhu River in Trongsa Dzongkhag district of the Himalayan nation.

 

It was developed by the Mangdechhu Hydroelectric Project Authority, jointly constituted by the Indian and the Bhutanese governments. Construction of the hydropower project began in June 2012 and the first of the four units of the power plant was commissioned in June 2019.

 

Most of the electricity generated by the Mangdechhu hydropower project will meet the energy requirements of Bhutan and the surplus electricity will be exported to India.

 

The produced electricity is transmitted to the Jigmeling substation in Bhutan by way of two 80-km-long 400kV double-circuit transmission lines. Electricity to the Indian grid would be transmitted from Jigmeling in Bhutan to Salakati in Assam.

 

India and Bhutan signed a protocol in April 2019, formalising the tariff at Rs 2.4 per unit (kWh) for a period of 35 years. The tariff will be increased by 10 per cent every five years until the loan is repaid and 5 per cent thereafter.

 

 

 

PM Modi visit to France: Launch of satellites for maritime surveillance in Indo-Pacific key agenda #GS2 #IR

 

In a bid to keep an eye on Chinese moves in the Indo-Pacific region, India and France are likely to sign a pact on maritime surveillance when Prime Minister Narendra Modi meets French President Emmanuel Macron on August 22 in Paris.

 

Both countries have planned the launch of 8-10 satellites as part of a “constellation” for maritime surveillance in the region. This will be India’s largest space cooperation with any country so far.

 

They said the satellites will focus on the Indian Ocean, a region that has been witnessing increasing Chinese presence. The purpose of the constellation is monitoring sea traffic management, sources said, adding that it would take less than five years to launch the satellites.

 

French Space Agency CNES, in collaboration with Indian Space Research Organisation (ISRO), is also setting up a maritime surveillance centre in the country.

 

Several crucial sea lanes of communications pass through the Indian Ocean, a region critical to the strategic interests of India and France. While the Indian Ocean region is the prime focus for New Delhi, Paris has its territories spread across the Indian Ocean, the Pacific Ocean and the Atlantic Ocean.

 

This will be among the key takeaways from Modi’s two-day visit to France. During his visit, Modi will hold talks with French President Emmanuel Macron to strengthen strategic ties in key sectors such as defence, nuclear energy, maritime cooperation and counter-terrorism.

 

The discussions are expected to broadly focus on reaffirming France and India as the key strategic and like-minded partners, strengthening of the defence partnership — including future defence acquisitions, progress on set up of the Jaitapur nuclear power plant, convergent, strategic and political priorities in the Indo-Pacific and related operational needs.

 

From France, Modi will proceed for bilateral visits to the UAE and Bahrain, and will return to the French city of Biarritz on August 25 to attend the G7 Summit where India has been invited as a partner country.

 

 

 

India biggest emitter of sulphur dioxide: report using NASA data #GS3 #Environment

 

A new report by Greenpeace India shows the country is the largest emitter of sulphur dioxide in the world, with more than 15% of all the anthropogenic sulphur dioxide hotspots detected by the NASA OMI (Ozone Monitoring Instrument) satellite. Almost all of these emissions in India are because of coal-burning.

 

 

The vast majority of coal-based power plants in India lack flue-gas desulphurisation technology to reduce air pollution.

 

The Singrauli, Neyveli, Talcher, Jharsuguda, Korba, Kutch, Chennai, Ramagundam, Chandrapur and Koradi thermal power plants or clusters are the major emission hotspots in India, the report says.

 

In a first step to combat pollution levels, the Ministry of Environment, Forest and Climate Change introduced, for the first time, sulphur dioxide emission limits for coal-fired power plants in December 2015. But the deadline for the installation of flue-gas desulphurisation (FGD) in power plants has been extended from 2017 to 2022.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The report also includes NASA data on the largest point sources of sulphur dioxide. The largest sulphur dioxide emission hotspots have been found in Russia, South Africa, Iran, Saudi Arabia, India, Mexico, United Arab Emirates, Turkey and Serbia.

 

Air pollutant emissions from power plants and other industries continue to increase in India, Saudi Arabia and Iran, the report says. In Russia, South Africa, Mexico and Turkey, emissions are currently not increasing — however, there is not a lot of progress in tackling them either.

 

Of the world’s major emitters, China and the United States have been able to reduce emissions rapidly. They have achieved this feat by switching to clean energy sources; China, in particular, has achieved success by dramatically improving emission standards and enforcement for sulphur dioxide control.

 

 

 

 

Bonds, yields, and inversions #GS3 #Economy

 

Bond yields have featured in news reports both globally and within India in recent months. In India, government bond yields fell sharply in the wake of the Union Budget, although they have come off the lows in the past few weeks. Internationally, US treasury bond yields plummeted last week, but they too have moderated after it became clear that governments almost everywhere have shown the desire to boost economic growth.

 

 

 

What are bonds?

 

 

 

A bond is an instrument to borrow money. It is like an IOU. A bond could be floated/issued by a country’s government or by a company to raise funds. Since government bonds (referred to as G-secs in India, Treasury in the US, and Gilts in the UK) come with the sovereign’s guarantee, they are considered one of the safest investments.

 

As a result, they also give the lowest returns on investment (or yield). Investments in corporate bonds tend to be riskier because the chances of failure (and, therefore, the chances of the company not repaying the loan) are higher.

 

What are bonds yields?

 

Simply put, the yield of a bond is the effective rate of return that it earns. But the rate of return is not fixed — it changes with the price of the bond. But to understand that, one must first understand how bonds are structured. Every bond has a face value and a coupon payment. There is also the price of the bond, which may or may not be equal to the face value of the bond.

 

Suppose the face value of a 10-year G-sec is Rs 100, and its coupon payment is Rs 5. Buyers of this bond will give the government Rs 100 (the face value); in return, the government will pay them Rs 5 (the coupon payment) every year for the next 10 years, and will pay back their Rs 100 at the end of the tenure. In this case, the bond’s yield, or effective rate of interest, is 5%. The yield is the investor’s reward for parting with Rs 100 today, but for staying without it for 10 years.

 

Why and how do yields go up and down?

 

Imagine a situation in which there is just one bond, and two buyers (or people willing to lend to the government). In such a scenario, the selling price of the bond may go from Rs 100 to Rs 105 or Rs 110 because of competitive bidding by the two buyers. Importantly, even if the bond is sold at Rs 110, the

 

 

coupon payment of Rs 5 will not change. Thus, as the price of the bond increases from Rs 100 to Rs 110, the yield falls to 4.5%.

 

Similarly, if the interest rate in the broader economy is different from the initial coupon payment promised by a bond, market forces quickly ensure that the yield aligns itself with the economy’s interest rate. In that sense, G-sec yields are in close sync with the prevailing interest rate in an economy.

 

With reference to the above example, if the prevailing interest rate is 4% and the government announces a bond with a yield of 5% (that is, a face value of Rs 100 and a coupon of Rs 5) then a lot of people will rush to buy such a bond to earn a higher interest rate. This increased demand will start pushing up bond prices, even as the yields fall.

 

This will carry on until the time the bond price reaches Rs 125 — at that point, a Rs-5 coupon payment would be equivalent to a yield of 4%, the same as in the rest of the economy. This process of bringing yields in line with the prevailing interest rate in the economy works in the reverse manner when interest rates are higher than the initially promised yields.

 

What is happening to US govt bond yields at present? What does it signify?

 

The global economy has been slowing down for the better part of the last two years. Some of the biggest economies are either growing at a slower rate (such as the US and China) or actually contracting (such as Germany).

 

As a result, last week, US Treasury bond yields fell sharply as there was confirmation of slowdown in Germany and China. Reason: investors, both inside the US and outside, figured that if growth prospects are plummeting, it makes little sense to invest in stocks or even riskier assets.

 

It made more sense rather, to invest in something that was both safe and liquid (that is, something that can be converted in to cash quickly). US Treasury bonds are the safest bet in this regard. So, many investors lined up to buy US Treasury bonds, which led to their prices going up, and their yields falling sharply.

 

The fall in the yields of 10-year government bonds showed that the bond investors expected the demand for money in the future to fall. That is why future interest rates are likely to be lower. A lower demand for money in the future, in turn, will happen only when growth falters further. So government bond yields falling typically suggests that economic participants “expect” growth to slow down in the future.

 

Of course, the bond yields are just “suggesting” this – they do not “cause” the growth to “reduce” in the future.

 

And what is a yield curve, and what does it signify?

 

A yield curve is a graphical representation of yields for bonds (with an equal credit rating) over different time horizons. Typically, the term is used for government bonds — which come with the same sovereign

 

 

guarantee. So the yield curve for US treasuries shows how yields change when the tenure (or the time for which one lends to the government) changes.

 

If bond investors expect the US economy to grow normally, then they would expect to be rewarded more (that is, get more yield) when they lend for a longer period. This gives rise to a normal — upward sloping — yield curve (see chart).

 

The steepness of this yield curve is determined by how fast an economy is expected to grow. The faster it is expected to grow the more the yield for longer tenures. When the economy is expected to grow only marginally, the yield curve is “flat”.

 

What then is yield inversion, and what does it mean?

 

Yield inversion happens when the yield on a longer tenure bond becomes less than the yield for a shorter tenure bond. This, too, happened last week when the 10-year Treasury yield fell below the 2-year Treasury yield.

 

A yield inversion typically portends a recession. An inverted yield curve shows that investors expect the future growth to fall sharply; in other words, the demand for money would be much lower than what it is today and hence the yields are also lower.

 

How good is yield inversion at predicting a recession?

 

Although US Commerce Secretary Wilbur Ross was quoted as saying Monday that “eventually there’ll be a recession but this inversion is not as reliable, in my view, as people think”, yet US data show historically that barring one episode in the mid-1960s, a yield inversion has always been followed by a recession.