CURRENCY SWAP
1. Context
Recently, Japan and South Korea agreed to revive a currency swap agreement for times of crisis, in the latest sign of warming ties as the countries work to smooth over historical antagonisms.
Japanese Finance Minister Shunichi Suzuki announced the agreement after meeting with his South Korean counterpart, Choo Kyungho. It was the first time the two countries have held annual financial talks in seven years, though Suzuki and Choo also met in South Korea in May.
2. About Currency Swap
- A currency swap is a financial agreement between two parties to exchange the principal and interest payments on a loan in one currency for the principal and interest payments on a loan in another currency.
- The two parties essentially agree to swap their debt obligations in different currencies.
3. Working of Currency Swap
- In a currency swap or FX swap, the counterparties exchange gave amounts in the two currencies.
- For example, An American company wants to invest in a project in South Korea. It needs to borrow South Korean Won (KRW), but it can get a better interest rate on a U.S. dollar (USD) loan in the United States.
- The company enters into a currency swap with a South Korean bank.
- The Company swaps USD for KRW with the bank and it agrees to pay the bank interest on the KRW loan. The bank agrees to pay the company interest on the USD loan.
- At the end of the swap, the company swaps the KRW back for USD with the bank.
- The currency swap allows the company to borrow KRW at a lower interest rate than it could have gotten by borrowing directly in South Korea.
- The bank benefits from the swap because it gets to earn interest on the USD loan, which is a higher interest rate than it could have gotten on a KRW loan.
4. About Credit Line
- A credit line is a pre-approved loan that a lender makes available to a borrower.
- The borrower can draw on the credit line as needed, up to a specified limit.
- Credit lines are typically used for short-term financing needs, such as covering unexpected expenses or meeting seasonal demand.
5. How does Credit line works?
- When a borrower opens a credit line, the lender agrees to lend them a certain amount of money.
- The borrower can then draw on the credit line as needed, up to the limit.
- The borrower will typically pay interest on the amount of money they have drawn down, but they will not pay interest on the unused portion of the credit line.
- The borrower must repay the credit line in full, plus any interest that has accrued, by the end of the credit line term.
- If the borrower does not repay the credit line in full, they may be charged late fees or other penalties.
6. Map Work-Japan and South Korea
- South Korea and Japan are neighbouring countries in East Asia.
- Geographically, South Korea is located in the Southern part of the Korean Peninsula, while Japan is an island nation located to the east of the Korean Peninsula.
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- The relations between South Korea and Japan have a long and complicated history.
- The two countries have been trading partners for centuries, but they have also been at war twice.
- The first war between Japan and Korea was in 1592. The Japanese invaded Korea and occupied the country for several years.
- The second war was in 1910 when Japan annexed Korea as a colony.
- Korea remained under Japanese rule until the end of World War II in 1945.
- After the war, Korea was divided into two countries: North Korea and South Korea. The two countries have been technically at war since 1953 when the Korean War ended in an armistice.
- Despite the historical tensions, relations between South Korea and Japan have improved in recent years.
- The two countries have signed several economic and trade agreements and they have cooperated on several security issues.
- However, there are still some areas of conflict between the two countries, such as the issue of Japanese war crimes during World War II.
- These issues continue to be a challenge to improving relations between South Korea and Japan.
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For Prelims: Japan, South Korea, North Korea, World War II, Korean War, Korean Peninsula, currency swap, South Korean Won, credit line, East Asia, Korea Strait,
For Mains:
1. Explain the concept of a currency swap? Describe the working of a credit line and highlight its advantages as a flexible form of borrowing for borrowers. (250 Words)
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Previous Year Questions
1. Which one of the following statements best reflects the issue with Senkaku Islands, sometimes mentioned in the news? (UPSC 2022)
A. It is generally believed that they are artificial islands made by a country around South China Sea.
B. China and Japan engage in maritime disputes over these islands in East China Sea.
C. A permanent American military base has been set up there to help Taiwan to increase its defence capabilities.
D. Though International Court of Justice declared them as no man's land, some South-East Asian countries claim them.
Answer: B
2. Currency swap is a method of (UGC Commerce 2019)
A. hedging against foreign exchange risk
B. speculating in foreign exchange
C. leverage instrument used by cooperative banks
D. mode of payment in international trade
Answer: A
3. "Rapid Financing Instrument" and "Rapid Credit Facility" are related to the provisions of lending by which one of the following? (UPSC 2022)
A. Asian Development Bank
B. International Monetary Fund
C. United Nations Environment Programme
D. Finance Initiative World Bank
Answer: B
4. With reference to the "Look East Policy" of India, consider the following statements (UPSC 2011)
1. India wants to establish itself as an important regional player in East Asian affairs.
2. India wants to plug the vacuum created by the termination of the Cold War.
3. India wants to restore the historical and cultural ties with its neighbours in Southeast and East Asia.
Which of the statements given above is/are correct?
A. 1 only B. 1 and 3 only C. 3 only D. 1, 2 and 3
Answer: B
5. Between India and East Asia, the navigation-time and distance can be greatly reduced by which of the following? (UPSC 2011)
1. Deepening the Malacca straits between Malaysia and Indonesia.
2. Opening a new canal across the Kra isthmus between the Gulf of Siam and the Andaman Sea.
Which of the statements given above is/are correct?
A. 1 only B. 2 only C. Both 1 and 2 D. Neither 1 nor 2
Answer: B
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Source: Investopedia
GRAVITATIONAL WAVES
1. Context
Astronomers have made a discovery that confirms the existence of gravitational waves, which sound like the hum at a large gathering. These ripples in space-time were proposed by Albert Einstein over a century go.
2. Gravitational Waves
- Gravitational waves are ripples in the fabric of spacetime. They are disturbances or waves that propagate through space, similar to waves on the surface of a pond.
- Gravitational waves are generated by the acceleration or motion of massive objects, such as colliding black holes, merging neutron stars, or the early moments of the universe's formation.
- According to Eienstein's theory of general relativity, gravity is not simply a force but the curvature of space-time caused by the presence of mass and energy.
- When massive objects accelerate or undergo changes in motion, they create disturbances in spacetime, which propagate outward as gravitational waves.
- Gravitational waves carry energy and momentum and can travel through the universe at the speed of light. They stretch and compress spacetime as they pass through, causing the distances between objects to alternatively increase and decrease.
- However, these changes in spacetime are incredibly small and require highly sensitive instruments to detect them.
- Direct detection of gravitational waves provides a new way to study of the universe.
- By observing and analyzing gravitational wave signals, scientists can gain insights into the nature of massive objects, and the dynamics of cosmic events, and test the predictions of general relativity in extreme conditions.
- Gravitational wave astronomy opens up a new window to explore the cosmos and deepen our understanding of the universe.
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Image Source: DW
3. Gravitational Waves: From Einstein to Recent Detection
Einstein's Proposal (1916):
- Einstein proposed gravitational waves as ripples in spacetime.
- Described gravity as the distortion caused by matter in space and time.
Direct Detection Achieved (2016):
- Scientists successfully detected gravitational waves directly.
- Indirect evidence had been relied upon since the 1970s.
Role of Pulsars in Recent Research:
- Recent research heavily relied on pulsars, dense remnants of exploded stars.
- Pulsars spin at extraordinary speeds and provided crucial data.
Generation and Effects of Gravitational Waves:
- Gravitational waves generated by dense objects in orbital motion.
- Waves physically stretch and compress space-time as they travel.
Data Collection by NANOGrav Collaboration:
- Latest report's data collected by NANOGrav Physics Frontiers Center.
- Comprises over 190 scientists from the United States and Canada.
- Data collected over a 15-year period.
4. Gravitational Wave Background and Black Hole Discoveries
- Universe's gravitational wave background is compared to the hum of a large gathering. Individual voices (waves) cannot be distinguished.
- Gravitational waves generated by distant black holes were initially detected seven years ago.
- Black holes are incredibly dense objects with intense gravity that traps even light.
- Gravitational waves can be produced by the motion of black holes and other massive objects.
- Previous research utilized the Laser Interferometer Gravitational-Wave Observatory (LIGO).
- Recent discovery provides evidence of gravitational wave hum in a smaller frequency range.
- Frequencies are significantly smaller (around 10-12 orders of magnitude) than those detected by LIGO. The wavelengths of these waves span light years.
- The most straightforward explanation involves pairs of supermassive black holes orbiting each other in our cosmic neighborhood.
- Alternative explanations could involve new physics related to the early stages of the universe near the Big Bang (approximately 13.8 billion years ago).
5. About LIGO
- LIGO stands for the Laser Interferometer Gravitational-Wave Observatory. It is a large-scale scientific experiment and observatory dedicated to the detection of gravitational waves.
- LIGO consists of two identical interferometers located in different parts of the United States, one in Livingston, Louisiana, and the other in Hanford, Washington.
- Each LIGO interferometer consists of two perpendicular arms, each measuring 4 kilometers (2.5 miles) in length.
- The interferometers use laser beams split into two and then recombined to create an interference pattern.
- The interference pattern is extremely sensitive to changes in the length of the arms caused by passing gravitational waves.
- When a gravitational wave passes through the observatory, it causes minuscule stretching and squeezing of space, which is detected as changes in the interference pattern of the laser beams.
- LIGO's precise instruments are designed to detect these incredibly tiny changes, allowing scientists to directly observe and study gravitational waves.
- LIGO's groundbreaking detection of gravitational waves in 2015 confirmed Einstein's predictions and opened up a new era of gravitational wave astronomy.
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For Prelims: Gravitational waves, NANOGrav Physics Frontiers Center, Einstein's theory, Black holes, Laser Interferometer Gravitational-Wave Observatory (LIGO).
For Mains: 1. Explain the concept of gravitational waves and their significance in our understanding of the universe. How do they differ from other forms of waves? (250 Words)
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Previous year questions1. Consider the following phenomena: (UPSC 2018)
1. Light is affected by gravity.
2. The Universe is constantly expanding.
3. Matter warps its surrounding space-time.
Which of the above is/are the prediction/predictions of Albert Einstein's General Theory of Relativity, often discussed in media?
A. 1 and 2 only
B. 3 only
C. 1 and 3 only
D. 1, 2 and 3
Answer: D
2. Recently scientists observed the merger of giant 'black holes' billions of light years away from the Earth. What is the significance of this observation? (UPSC 2019)
A. 'Higgs boson particles' were detected
B. 'Gravitational waves' were detected.
C. Possibility of inter-galactic space travel through a 'wormhole' was confirmed.
D. It enabled the scientists to understand 'singularity'.
Answer: B
3. Which of the following statements is/are correct? (UPSC CDS 2017)
1. In June 2016, the LIGO group of scientists announced the detection of a second set of gravitational waves.
2. Gravitational waves were generated due to the merger of two black holes at about 1.4 billion light-years distant.
3. Gravitational waves were inserted due to the collision of two white dwarf stars at about 14 billion light-years distant.
Select the correct answer using the code given below:
A. 1 only
B. 1 and 2 only
C. 2 and 3 only
D. 1, 2 and 3
Answer: B
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Source: The Indian Express
GOVERNOR'S POWER
1. Context
IN AN unprecedented move, Tamil Nadu Governor R N Ravi dismissed V Senthil Balaji from the Council of Ministers, further straining the relationship between the MK Stalin-led DMK government and the Raj Bhavan. Balaji, who was arrested June 14 by the Enforcement Directorate for an alleged job scam in 2015, is currently in judicial custody in a private hospital after having undergone a heart bypass surgery.
2. About Governor
- Part VI of the Constitution deals with the states and lists out the role and responsibility of the Governor of states.
- Article 153 provides for a Governor of every state and is the constitutional head of the state.
- The executive power of the State shall be vested in the Governor and shall be exercised by him either directly or through officers subordinate to him in accordance with this Constitution (Article 154).
- Governor performs the same duties as of President, but as the executive head of a State; the work remains the same as of the office of the President of India.
- A Governor is a nominated head and not an elected representative.
- Dual Role of the Governor as head and representative
- Constitutional head of state; and
- Link between Union and State governments. - His dual role makes him a key functionary in the Indian Constitutional system.
3. Powers of Governor
- Under Article 161 the Governor has the following powers –the power to grant pardons, reprieves, respites, or remissions of punishment; the power to suspend, remit or commute the sentence of any person convicted of any offence against any law relating to a matter to which the executive power of the State extends.
- The Governor makes all executive decisions on behalf of the state government (Article 166(1)).
- The Governor appoints the Chief Minister and other cabinet members. They serve at the pleasure of the Governor (Article 164).
- He may create rules for the efficient execution of a state government's work and its distribution among the ministers. (Article 166(3))
- He appoints the state's advocate general and determines his tenure and conditions of service.
- He has the authority to recommend to the President the declaration of a state of constitutional emergency.
- He may request from the Chief Minister any information about the administration of the state's affairs, as well as legislative suggestions (Article 167).
- The governor appoints the state election commissioner and establishes his term of office and working conditions (Article 243K).
4. Friction points between the States and Governor
- In recent years. these have been largely about the selection of the party to form a government, the deadline for proving the majority, sitting on Bills, and passing negative remarks on the state administration.
- Kerala’s government was dismissed based on a report by the Governor. Several state governments have been dismissed since then, including 63 through President’s Rule orders issued by Governors between 1971 and 1990.
- Kerala Governor in 2020 turned down a request to summon a special sitting of the Assembly to debate the three central farm laws.
- In 2018 J&K Governor dissolved the Assembly amid indications that various parties were coming together to form the government. This paved the way for the Centre to later bifurcate the state into two Union territories, by considering the Governor as the government.
- In 2019 Maharashtra Governor quietly invited the BJP leader and administered his oath as CM. This government lasted just 80 hours. Six months later, the governor refused to nominate CM to the Legislative Council.
- Following the Karnataka polls in 2018, Governor Vajubhai Vala invited the BJP to form the government and gave B S Yeddyurappa 15 days to prove the majority. Challenged by Congress and JDS in the Supreme Court, it was reduced to three days.
5. Reasons for the friction between the Governor and the state governments
- There is no provision for impeaching the Governor, who is appointed by the President on the Centre's advice. While the Governor has a 5-year tenure, he can remain in office only until the pleasure of the President.
- There are no guidelines for the exercise of the Governor's powers, including for appointing a CM or dissolving the Assembly. There is no limit set for how long a Governor can withhold assent to a Bill.
- According to the Constitutional expert, although the Constituent Assembly envisaged the governor to be apolitical. But the truth is, politicians, become Governors and then resign to fight elections.
- The CM is answerable to the people. But the Governor is answerable to no one except the Centre. This is the fundamental defect in the Constitution.
6. Reforms Suggested
Several Panels, the Administrative Reforms Commission of 1968 and the Sarkaria Commission of 1988 have recommended reforms such as
- selection of the Governor through a panel comprising the PM, the Home Minister, the Lok Sabha Speaker, and the CM.
- Apart from fixing his tenure for five years
- Recommendations have also been made for a provision to impeach the Governor by the Assembly.
For Prelims & Mains
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For Prelims: Governor, Chief Minister, Article 153, Article 154, Article 164, and Article 243K.
For Mains: 1. In the context of friction between the state governments and the Governor explain the role and powers of the Governor and what reforms have been suggested so far to end the tussle between the state governments and the Governor.
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Source: The Indian Express
WORLD BANK
1. Context
The World Bank approved $700 million in budgetary and welfare support for Sri Lanka on Thursday, the biggest funding tranche for the crisis-hit island nation since an International Monetary Fund (IMF) deal in March. About $500 million of the funds will be allocated for budgetary support while the remaining $200 million will be for welfare support earmarked for those worst hit by the crisis.
2. World Bank Group
The World Bank Group (WBG) is a family of five international organizations that make leveraged loans i.e. loans given for investment in development to developing countries.
The organizations are
The organizations are
- International Bank for Reconstruction and Development (IBRD).
- International Development Association (IDA).
- International Finance Corporation (IFC).
- Multilateral Investment Guarantee Agency (MIGA).
- International Centre for Settlement of Investment Disputes (ICSID).
3. Structure of World Bank Group
- Among the five international organizations IBRD, IFC and IDA are specialized agencies of the UN while ICSID and MIGA are not specialized agencies.
- The 5 institutions have their own rules and regulations with respect to membership, governing boards, and articles of the agreement but they still work as one to serve partner countries.
- The IBRD and IDA provide loans at preferential rates to member countries, as well as grants to the poorest countries.
- IFC, MIGA, and ICSID focus on strengthening the private sector in developing countries by providing financing, technical assistance, political risk insurance, and settlement of disputes to private enterprises, including financial institutions.
- IFC was formed in 1965 and provides various forms of finance without sovereign guarantees, primarily to the private sector.
- ICSID was created in 1966 and works with governments to reduce investment risk. MIGA established in 1988, provides insurance against certain types of risk, including political risk, primarily to the private sector.
- Each member country in the organization gets voting power according to the shares held in the organization's capital.
- Governing Bodies- The two main governing bodies are the Board of Governors and the Board of Directors. The Board of Governors is appointed by members of the World Bank and meets annually in a joint meeting with IMF's Board of Governors.
- There is a separate Board of Directors for IBRD, IDA, IFC, and MIGA. India is a member of four of the five constituents of the World Bank Group except for ICSID. India is one of the founding members of IBRD, IDA, and IFC.
4. World Bank
- IBRD and IDA are collectively known as World Bank, which provides loans to countries for capital programs.
- They were created at the 1944 Bretton Woods Conference, along with the International Monetary Fund (IMF), and consist of members of 189 member countries.
- The Board of Governors of the respective member countries represents the World Bank and is the main policymaker.
5. Objectives of World Bank
- End extreme poverty i.e decreasing the global population living in extreme poverty to 3 % by 2030.
- Promote shared prosperity i.e. work towards improving the income of the poorest 40 percent of people in every country.
- Work towards sustainable development i.e. the world bank promotes of foreign investment, international trade, and facilitation of capital investment.
6. Initiatives of the World Bank
- Together with the World Health Organisation, the World Bank administers the International Health Partnership (IHP+).
- IHP+ is a group of partners committed to improving the health of citizens in developing countries.
- Clean Air Initiative (CAI) is a World Bank initiative to develop innovative ways to improve air quality in cities through partnerships in selected regions of the world vis shared knowledge and experiences.
7. Reports by World Bank
Doing Business Report, Global Economic Prospects, Global Financial Development Report, International Debt Statistics, World Development Report, World Development Indicators, Poverty and Shared Prosperity.
8. International Bank for Reconstruction and Development (IBRD)
- IBRD has a membership of 189 countries and is the largest global development cooperative bank in the world.
- Its headquarters is in Washington, D.C., USA.
- IBRD was created in 1944 with the objective of providing financial assistance for the reconstruction of European nations devastated during World War II.
- It provides support to the World Bank Group's mission by providing loans, guarantees, risk management products, and advisory services to middle-income and creditworthy low-income countries.
- IBRD provides financial assistance, technical support, and expertise at each stage of a project, across all sectors.
- IBRD places special emphasis on supporting lower-middle-income countries as they move up the economic chain, graduating from IDA to become clients of IBRD.
- It also plays a significant role by contributing to tackling regional and global challenges.
- The Bank's member governments are shareholders which contribute paid-in capital and have the right to vote on its matters.
- In addition to these contributions, the IBRD acquires most of its capital by borrowing on the international capital market through bond issues.
- Each member state of IBRD should also be a member of the International Monetary Fund (IMF) and only members of IBRD can join other institutions within the Bank (such as IDA).
9. International Development Association (IDA)
- The International Development Association (IDA) is an international financial institution that offers concessional loans and grants to the world's poorest developing countries.
- The IDA is a member of the World Bank Group and is headquartered in Washington, D.C., in the United States. It has 173 members.
- It was established in 1960 to complement the existing International Bank for Reconstruction and Development by lending to developing countries that suffer from the lowest gross national income, troubled creditworthiness, or from the lowest per capita income.
- It is considered to be the soft lending window of the World Bank, while the IBRD is considered to be the hard lending window.
- Together, the International Development Association and International Bank for Reconstruction and Development are collectively generally known as the World Bank, as they follow the same executive leadership and operate with the same staff.
Previous year Questions
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1. India’s ranking in the ‘Ease of Doing Business Index’ is sometimes seen in the news.
Which of the following has declared that ranking? (UPSC 2016)
(a) Organization for Economic Cooperation and Development (OECD)
(b) World Economic Forum
(c) World Bank
(d) World Trade Organization (WTO)
Ans: C
2. With reference to ‘IFC Masala Bonds’, sometimes seen in the news, which of the statements given below is/ are correct? (UPSC 2016)
1. The International Finance Corporation, which offers these bonds, is an arm of the World Bank.
2. They are rupee-denominated bonds and are a source of debt financing for the public and private sectors.
Select the correct answer using the code given below:
(a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2
Ans: C
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For Prelims & Mains
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For Prelims: International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), International Centre for Settlement of Investment Disputes (ICSID), World Bank Group, World Bank, Bretton Woods Conference and International Monetary Fund (IMF).
For Mains: 1. What are the functions of the World Bank and IMF? Discuss in Detail.
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