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Current Affairs for UPSC IAS Exam – 8 May 2021

Contents

  1. Why RBI wants moderate bond yields?
  2. Tribes in Anamalai reserve unaware of COVID-19
  3. UNEP report on methane emissions

Why RBI wants moderate bond yields?

Context:

The yield on the 10-year benchmark 5.85%, 2030 bond fell by 0.62% and closed at 5.978% (compared to 6.01% on the previous day).

The Reserve Bank of India (RBI) had stepped up purchase of government securities under the government securities acquisition programme (G-SAP) which led to the yield on the benchmark 10-year bond falling below 6%.

Relevance:

GS-III: Indian Economy (Growth and Development of Indian Economy, Mobilization of Resources)

Dimensions of the Article:

  1. What are Bonds?
  2. What is Bond Yield?
  3. How have bond yields moved recently?
  4. Why are bond yields softening?
  5. What has been/will be the impact on markets and investors?
  6. Why is the RBI keen on keeping yields in check?

What are Bonds?

  • A bond is like an IOU. The issuer of a bond promises to pay back a fixed amount of money every year until the expiry of the term, at which point the issuer returns the principal amount to the buyer.
  • When a government issues such a bond it is called a sovereign bond.
  • Governments issue bonds as part of their borrowing programme.
  • By purchasing a debt instrument like bond, an investor becomes a creditor to the corporation (or government).
  • A bond is a financial security issued by a borrower to avail long term funds.
  • Thus, a bond is like a loan: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor). The primary advantage of being a creditor (by purchasing bonds) is that he has a higher claim on assets than shareholders do. That means, in the case of bankruptcy, a bondholder will get his money back before a shareholder.
  • However, the bondholder does not have a share in the profits of a company.

What is Bond Yield?

  • Bond yield is the return an investor realizes on a bond.
  • The bond yield can be defined in different ways.
  • Setting the bond yield equal to its coupon rate is the simplest definition.
  • The current yield is a function of the bond’s price and its coupon or interest payment, which will be more accurate than the coupon yield if the price of the bond is different than its face value.

As bond prices go down – bond yields go up

  • Now, seeing the increased bond yield, more and more buying of the bonds will ensue leading to increased demand of the bonds and we know that increased demand will command a higher price.
  • So, an increased demand will propel the bond prices up thereby leading to a reduction in bond yield, which will further lead to reduction in demand.
Bond Mechanics in a Negative Interest Rate World | Financial Sense

How have bond yields moved recently?

  • The yield on the 10-year benchmark 5.85%, 2030 bond fell by 0.62% and closed at 5.978%. It closed under 6% for the first time since early February 2021.
  • In April 2021, the RBI launched G-SAP under which it said it would buy Rs 1 lakh crore worth of bonds in the April-June quarter and since then he 10-year bond has declined 15 basis points from 6.15% in one month.

How is this significant?

  • Movements in yields, which depend on trends in interest rates, can result in capital gains or losses for investors. If an individual holds a bond carrying a yield of 6%, a rise in bond yields in the market will bring the price of the bond down. On the other hand, a drop in bond yield below 6% would benefit the investor as the price of the bond will rise, generating capital gains.

Why are bond yields softening?

  • The fall in bond yields in India could also be due to a sharp decline in US Treasury yields or the economic uncertainty caused by Covid-19.
  • But the most important driver of the bond market was RBI interventions. The announcement of a bond-buying programme – G-SAP — at the start of the month played a crucial role in turning the market sentiment.
  • The RBI continued to send strong yield signals by cancelling and devolving government debt auctions. In the last month alone, the RBI cancelled more than Rs 30,000 worth of debt auctions.
  • Although part of this amount was offset by availing the green-shoe option (option to accept bids for more than the notified amount of debt auction) in other securities, the decision to buy Rs 35,000 crore worth of bonds in May would help the market absorb a portion of the Rs 1.16 lakh crore market borrowings by the government during the month.

What has been/will be the impact on markets and investors?

  • Experts say the structured purchase programme has calmed investors’ nerves and reduced the spread between the repo rate and the 10-year government bond yield.
  • A decline in yield is also better for the equity markets because money starts flowing out of debt investments to equity investments. That means as bond yields go down, the equity markets tend to outperform by a bigger margin and as bond yields go up equity markets tend to falter.
  • In the past 5 years since late 2012, the benchmark 10-year yields are down by almost (- 17%) and have been moving consistently downward, despite occasional hiccups. At the same time, the Nifty is up by nearly 82%.
  • It says the yield on bonds is normally used as the risk-free rate when calculating the cost of capital. When bond yields go up, the cost of capital goes up.
  • When bond yields go up, it is a signal that corporates will have to pay a higher interest cost on debt. As debt servicing costs go higher, the risk of bankruptcy and default also increases and this typically makes mid-cap and highly leveraged companies vulnerable.

Why is the RBI keen on keeping yields in check?

  • The RBI has been aiming to keep yields lower as that reduces borrowing costs for the government while preventing any upward movement in lending rates in the market.
  • The RBI wants to keep interest rates steady to kick-start investments. A rise in bond yields will put pressure on interest rates in the banking system which will lead to a hike in lending rates.
  • If yields come down, the RBI will be able to bring down the cost of government borrowing for 2021-22, which is set at Rs 12.05 lakh crore.

-Source: The Hindu


Tribes in Anamalai reserve unaware of COVID-19

Context:

Residents of two tribal settlements within the limits of the Anamalai Tiger Reserve (ATR), around 100 km off Coimbatore city, were gearing up for the annual festival of their local deity, Vairapattan.

The Kattupatti and Kuzhipatti settlements of Pulayar community have barely heard of the acronym COVID-19.

Relevance:

Prelims, GS-III: Environment and Ecology (Conservation of Environment, Protected areas), GS-I: Indian Society

Dimensions of the Article:

  1. About Anamalai Tiger Reserve (ATR)
  2. About the tribes in Pulayar Community

About Anamalai Tiger Reserve (ATR)

  • Anamalai Tiger Reserve is a part of the Anamalai Parambikulam Elephant Reserve in the Southern Western Ghats.
  • It is one of the four Tiger Reserves in Tamil Nadu and is surrounded by: Parambikulam Tiger Reserve (Kerala) on the East and Chinnar Wildlife Sanctuary (Kerala) and Eravikulam National Park (Kerala) on the South West.
  • This area has over 4600 Adivasi people from six tribes of indigenous people living in 34 settlements.
  • Important tribes residing here are the Kadars, Malasars, Malaimalasar, Pulaiyars, Muduvars and the Eravallan (Eravalar).
  • Asiatic elephant, Sambar, Spotted deer, barking deer, Mouse deer, Gaur, Nilgiri tahr, Tiger, etc., can be found here.
  • Amaravathi, Udumalpet, Pollachi, Ulandy, Valparai and Manamboli are the ranges found in this reserve.

About the tribes in Pulayar Community

  • The Pulayar, also Pulaya, or Holeya or Cheramar, are a Scheduled Caste in Kerala and Tamil Nadu and are one of the main social groups found in Kerala, Karnataka and in historical Tamil Nadu.
  • Kōlam-thullal (a mask dance which is part of their exorcism rituals) and Mudi-āttam (hair-dance, which has its origins in a fertility ritual) are the dances that Pulayas are noted for.
  • Ayyankali, called as Pulaya King, rode an ox-cart challenging the ‘ban’ on untouchables from accessing public roads by caste-Hindus in 1893 and became a stated protestor for Pulayar rights. In 1907 a decree was issued to confess students from the untouchable network to government schools, due to the protests led by Ayyankali.

-Source: The Hindu


UNEP report on methane emissions

Context:

Global Methane Assessment: Benefits and Costs of Mitigating Methane Emissions report was released by the Climate and Clean Air Coalition and the United Nations Environment Programme (UNEP).

Relevance:

GS-III: Environment and Ecology (Pollution Control and Management, Environmental Degradation)

Dimensions of the Article:

  1. Highlights of the Global Methane Assessment report
  2. Why is Methane Harmful?
  3. Steps taken in India to control Methane Emission
  4. Way Forwards (According to the report)

Highlights of the Global Methane Assessment report

  • Human-caused methane emissions are increasing faster currently than at any other time since record keeping began in the 1980s.
  • Carbon dioxide levels have dropped during the Covid-19 pandemic. However, methane in the atmosphere reached record levels in 2020. This is a cause of concern as methane was responsible for about 30%of warming since pre-industrial times.
  • Oil and gas extraction, processing and distribution accounted for 23% of methane emissions in the fossil fuel sector. Coal mining accounted for 12% of emissions.
  • Landfills and wastewater made up about 20% of emissions in the waste sector.
  • In the agricultural sector, livestock emissions from manure and enteric fermentation constituted for roughly 32% and rice cultivation 8% of emissions.

Why is Methane Harmful?

  • Methane is the simplest hydrocarbon, consisting of one carbon atom and four hydrogen atoms (CH4) – it is also flammable, and is used as a fuel worldwide apart from being a powerful greenhouse gas.
  • Methane is 84 times more potent than carbon and doesn’t last as long in the atmosphere before it breaks down. This makes it a critical target for reducing global warming more quickly while simultaneously working to reduce other greenhouse gases.
  • It is responsible for creating ground-level ozone, a dangerous air pollutant.

Steps taken in India to control Methane Emission

  1. India shifted from Bharat Stage-IV (BS-IV) to Bharat Stage-VI (BS-VI) emission norms – which is a step towards cleaner vehicle emissions and lesser methane pollution.
  2. Central Salt & Marine Chemical Research Institute (CSMCRI) in collaboration with the country’s three leading institutes developed a seaweed-based animal feed additive formulation that aims to reduce methane emissions from cattle and also boost immunity of cattle and poultry.
  3. The India GHG Program led by WRI India (non-profit organization), Confederation of Indian Industry (CII) and The Energy and Resources Institute (TERI) is an industry-led voluntary framework to measure and manage greenhouse gas emissions.
  4. The National Action Plan on Climate Change (NAPCC) was launched in 2008 which aims at creating awareness among the representatives of the public, different agencies of the government, scientists, industry and the communities on the threat posed by climate change and the steps to counter it.

Way Forwards (According to the report)

  • Human-caused methane emissions must be cut by 45% to avoid the worst effects of climate change.
  • Such a cut would prevent a rise in global warming by up to 0.3 degrees Celsius by 2045. It would also prevent 260,000 premature deaths, 775,000 asthma-related hospital visits annually, as well as 25 million tonnes of crop losses. However, cutting methane emissions can rapidly reduce the rate of warming in the near-term as the gas broke down quickly.
  • Fossil fuel industry had the greatest potential for low-cost methane cuts, up to 80% of measures in the oil and gas industry could be implemented at negative or low cost.
  • About 60% of methane cuts in Oil, coal and gas extraction sector could make money as reducing leaks would make more gas available for sale.
  • The waste sector could cut its methane emissions by improving the disposal of sewage around the world.
  • Three behavioural changes — reducing food waste and loss, improving livestock management and adopting healthy diets (vegetarian or with a lower meat and dairy content) — could reduce methane emissions by 65–80 million tonnes per year over the next few decades.

-Source: The Hindu

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