Daily Current Affairs for UPSC CSE
Topics Covered
- Chagos Island
- Benchmark rate
- Oscar Awards
1 . Chagos Island
Context : Britain has an obligation to end its administration of the Chagos archipelago — home to the U.S. military base of Diego Garcia — and complete the process of decolonisation of Mauritius, the International Court of Justice (ICJ) in The Hague has said in an advisory opinion that is a significant legal victory for Mauritius and other nations, including India, which supported its case.
Background
- The dispute dates back to 1965 when Mauritius attained freedom but UK decided to keep the Chagos Islands which includes the strategic US airbase of Diego Garcia, after Mauritius gained its independence in 1968, effectively paying Mauritius more than £4m for the islands.
- About 1,500 native islanders were deported so the largest island could be leased to the US for the airbase in 1971. They have never been allowed to return home
- In its submission to the ICJ last year, Mauritius argued it was coerced into giving up the Chagos Islands. That separation was in breach of UN resolution 1514, passed in 1960, which specifically banned the breakup of colonies before independence, lawyers for Mauritius said.
Implication
- This is an advisory opinion, not a judgment hence not binding on UK to act accordingly
- The case is seen as having far wider ramifications beyond the two parties immediately concerned as it deals with the legacy of colonialism. It also raises the question of whether agreements struck between colonial powers and their colonies in the final stages their rule could really be seen as legitimate, given the imbalance of power.
2 . Benchmark Rate
Context : Most commercial banks in India are likely to select RBI’s repo rate as the external benchmark to decide their lending rates, from April 1. The repo rate is the key policy rate of the Reserve Bank of India (RBI).
Background
- All loans such as for car and home disbursed from April 1, 2016 are linked to marginal cost of funds based lending rate (MCLR).
- The MCLR-based regime had replaced the earlier base rate regime to provide transparency in the transmission of monetary policy decisions.
- MCLR is an interal benchmark rate that depends on various factors such as fixed deposit rates, source of funds and savings rate. The price of loan comprises the MCLR and the spread or the bank’s profit margin.
The problem with MCLR-based system
- The biggest problem with the current system is the lack of required transmission of policy rates. When the RBI cuts repo rate there is no guarantee a borrower will get the benefit of the rate cut or that it will be transmitted down to him.
- Due to internal benchmarking of loan price, policy rate cuts often don’t reach the borrowers.
- The MCLR system is opaque since its an internal benchmark that depends on the way a bank does its business.
How the new system will work
- Under the new system which will come into effect from April 1, 2019, banks will have to link their lending rates with an external benchmark instead of MCLR. The RBI has given these options to banks: RBI repo rate, the 91-day T-bill yield; the 182-day T-bill yield; or any other benchmark market interest rate produced by the Financial Benchmarks India Pvt. Ltd.
- One of these benchmarks will be used to decide the lending rate in addition to the spread, Banks will be free to decide their spread value but it will have to be fixed for the tenure of the loan. However, it can change if the credit score of the borrower changes. The interest rates under the new system will change every month.
How it will benefit borrowers
- First, it will help better transmission of policy rate cuts which means an RBI rate cut will immediately reach the borrower in the current system in which internal benchmark is not influenced solely by the policy rate cut but depends on a variety of factors.
- Second, it will make the system more transparent since every borrower will know the fixed interest rate and the spread value decided by the bank. It will help borrowers compare loans in a better way from different banks.
- Under the new system, a bank is required to adopt a uniform external benchmark within a loan category so that there is transparency, standardisation and ease of understanding for the borrowers. This would mean that same bank cannot adopt multiple benchmarks within a loan category.
Repo Rate
- Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.
About Financial Benchmark India Pvt. Ltd (FBIL)
- Reserve Bank of India set up a Committee on Financial Benchmarks in June 2013 to review the existing systems governing major financial benchmarks in India.
- The Committee headed by Shri Vijaya Bhaskar, the then Executive Director, Reserve Bank of India made wide-ranging recommendations to reform the benchmark administration in India.
- These were accepted by the Reserve Bank of India in early 2014, who identified FIMMDA and FEDAI as the benchmark administrators for the Indian rupee interest rates and Forex benchmarks respectively.
- It was suggested that these associations may jointly or independently form a separate entity to administer the benchmarks. This is the first major step for formation of Financial Benchmark India Pvt. Ltd (FBIL) as an independent benchmark administrator for interest rates and foreign exchange.
- The FBIL, jointly owned by FIMMDA, FEDAI and IBA, was formed in December 2014 as a private limited company under the Companies Act 2013.
Functions
- Its aim is to develop and administer benchmarks relating to money market, government securities and foreign exchange in India.
- It is responsible for all the aspects relating to the benchmarks to be issued by it, namely, collection and submission of market data and information including polled data , formulation, adoption and periodic review of benchmark calculation methodologies, calculation, publication and administration of benchmarks confirming to the highest standards of integrity, transparency and precision
3 . Oscar Awards