Daily Prelims Notes 8 June 2024

Daily Prelims Notes

8 June 2024

1. Sticky inflation: Why is RBI refusing to cut interest rates?

Sub: Eco

Sec: Monetary Policy 

Context:

• The Reserve Bank of India (RBI) unveiled its latest bi-monthly monetary policy review and for the eighth time in a row RBI decided that it would not change the benchmark policy rate.

More on news:

• The repo rate was raised sharply between May 2022 and February 2023 but it has stayed stagnant at the 6.5% level since then.
• Repo rate has stayed within the so-called “comfort zone” of the RBI ,anywhere between 2% and 6% — since September 2023 and the RBI has not changed the repo rate since February 2023.
• The RBI’s policy statement predicts that inflation is likely to fall below the 4% target in the near future but that fall would only be due to temporary reasons.

What is Repo Rate and Reverse 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.
• The repo rate is the interest rate at which the RBI lends money to commercial banks.
• Reverse repo rate is the rate at which the RBI borrows money from commercial banks within the country.

What is the goal of RBI’s monetary policy?

• The primary goal is to maintain price stability in the economy. 
• The RBI aims to ensure that prices do not fluctuate beyond a reasonable degree. 
• This fluctuation is measured by the retail inflation rate and the rate of price rise that is faced by the average individual consumer.
• The RBI is required to target an inflation rate of 4%, which means that the general price level should go up by 4% from one year to another.

Why is the RBI not cutting interest rates?

• The retail inflation rate has been coming down closer to the 4% mark. 
• Despite keeping the repo rate consistently high, the retail inflation has not dropped to touch the 4% mark since January 2021.
• The RBI has expressed its concern over the stickiness of inflation. 
• In the first four months of 2024, the inflation rate has been10%, 5.09%, 4.85%, and 4.83%, respectively.
• The RBI does not cut the repo rate as soon as the overall inflation rate falls to (or below) the 4% target in any one month. 
• The RBI typically cuts the repo rate when it finds that economic activity needs a boost.
• India’s gross domestic product (GDP) growth rate has been surprisingly strong over the past year in particular. 
• Most economists are waiting to see how the political compulsions of a coalition government will impact the Centre’s commitment to fiscal deficit i.e. the amount of money the government intends to borrow from the market.
• Higher than anticipated fiscal deficit has implications for both inflation (if more fresh money is printed) or interest rates (if there is less money for the private sector to borrow).

What is Sticky Inflation?

• Sticky inflation refers to a phenomenon where prices do not adjust quickly to changes in supply and demand, leading to persistent inflation.
• Sticky inflation is an undesirable economic situation where there is a combination of stubbornly high inflation, (and often stagnant growth). 
• Sticky inflation is often associated with cost-push factors, i.e. factors which cause a rise in the inflation rate but also lead to lower spending and economic growth.
• A basis point is one hundredth of a percentage point.
• The federal funds rate is the rate at which banks lend balances to each other overnight.

2. What to know about Russia’s growing footprint in Africa

Sub: IR

Sec: Places in news

Russia’s Influence Expansion in Sub-Saharan Africa:

• Russia is increasing its influence in Africa, particularly in the sub-Saharan Sahel region, through military assistance and security partnerships, primarily displacing traditional Western allies like France and the United States.

Sab Saharan Africa:

• Sub-Saharan Africa, Subsahara, or Non-Mediterranean Africa is the area and regions of the continent of Africa that lie south of the Sahara.
• These include Central Africa, East Africa, Southern Africa, and West Africa.

Sahel region:

• The Sahel region or Sahelian acacia savanna is a biogeographical region in Africa.
• It is the transition zone between the more humid Sudanian savannas to its south and the drier Sahara to the north.
• The Sahel has a hot semi-arid climate and stretches across the southernmost latitudes of North Africa between the Atlantic Ocean and the Red Sea. 
• Although geographically located in the tropics, the Sahel does not have a tropical climate.

Recent Diplomatic Efforts:

• Russian Foreign Minister Sergey Lavrov toured Guinea, the Republic of Congo, Burkina Faso, and Chad.
• Lavrov’s visits signify Moscow‘s intention to strengthen military cooperation with African nations.
• Military Cooperation:
  • Russia uses private security companies like Wagner and its potential successor, Africa Corps, to provide military support.
  • Russian mercenaries assist in protecting African leaders and combating extremist groups.
  • The Polish Institute of International Affairs highlighted Russia’s creation of the Africa Corps to assertively expand its military presence in Africa.
• Political Dynamics:
  • Russia seeks political support or neutrality from African nations regarding its invasion of Ukraine.
  • African nations, forming the largest voting bloc at the United Nations, have shown divided stances on resolutions condemning Russia’s actions in Ukraine.
  • Russian-linked entities have been spreading disinformation to undermine African ties with the West, as documented by the Africa Center for Strategic Studies.

Reasons for African Nations Turning to Russia:

• Political unrest and dissatisfaction with former colonial powers, especially France, have led some African countries to seek new alliances.
• Military coups in Mali, Niger, and Burkina Faso ousted pro-Western governments, turning to Russia for non-interfering security assistance.
• Moscow exchanges military support for access to mineral resources.

Resources and Economic Interests:

• Africa’s rich mineral resources, including cobalt, lithium, gold, diamonds, and oil, are central to global economic and national security.
• Russia has secured mining deals in countries with limited governance, such as gold and diamonds in the Central African Republic, cobalt in Congo, and uranium in Namibia.
• Despite its growing role in the oil and mining sectors, Russia remains a minor trading partner for Africa, with less than 1% of Africa’s exports going to Russia compared to 33% to the European Union.

Russian Mercenary Operations in Africa:

• Wagner’s presence in Africa began in 2017 in Sudan, supporting then-President Omar al-Bashir in exchange for gold mining concessions.
• Russian contractors supported Libyan commander Khalifa Hifter and provided security in the Central African Republic in exchange for access to gold and diamond mines.
• Military juntas in Mali, Burkina Faso, and Niger, critical of the West, have expelled Western forces and invited Russian military support.
• Niger’s junta recently ordered the US to withdraw its troops and close a significant military base, leading to the arrival of Russian trainers and new defence equipment.

Source: IE

3. The 80th anniversary of D-Day

Sub: IR

Sec: Places in news

Context:

• Events are taking place around the world to commemorate the 80th anniversary of the D-Day landings in Normandy, France.

Details:

• On June 6, 1944, tens of thousands of Allied troops landed on five stretches of the Normandy coastline, codenamed Utah, Omaha, Gold, Juno and Sword.
• It was the largest amphibious invasion in history and launched a campaign that laid the foundations for the Allied defeat of Nazi Germany in World War II.

Normandy Landings:

• Date: 6 June 1944
• Codename: Operation Neptune, commonly known as D-Day
• Context: Part of Operation Overlord during World War II
• Significance: Largest seaborne invasion in history; began the liberation of France and Western Europe, contributing to Allied victory on the Western Front.

Planning and Deception:

• Planning Initiation: 1943
• Operation Bodyguard aimed to mislead Germans about the invasion date and location.
• The invasion was delayed by 24 hours due to poor weather; a further delay would have postponed the operation by at least two weeks due to specific requirements for the moon phase, tides, and time of day.

Commanders:

• German Forces: Field Marshal Erwin Rommel, under Adolf Hitler’s command, fortified the Atlantic Wall.
• Allied Forces: Major General Dwight D. Eisenhower, appointed by U.S. President Franklin D. Roosevelt.

Invasion Details:

• Initial Assault: Extensive aerial and naval bombardment, followed by the landing of 24,000 American, British, and Canadian airborne troops.
• Amphibious Landings: Began around 06:30 on a 50-mile (80 km) stretch of the Normandy coast, divided into five sectors: Utah, Omaha, Gold, Juno, and Sword.
• Challenges: Strong winds displaced landing crafts, and troops faced heavy fire, mines, and obstacles such as wooden stakes, metal tripods, and barbed wire.

Beach Sectors and Outcomes:

• Utah and Omaha: Landing crafts were significantly displaced eastward.
• Omaha: Highest casualties due to high cliffs and heavy fortifications.
• Gold, Juno, and Sword: Fortified towns were cleared with house-to-house fighting; specialised tanks disabled major gun emplacements at Gold.

First-Day Goals and Casualties:

• Unachieved Goals: Key towns (Carentan, Saint-Lô, Bayeux) and the major objective Caen (captured on 21 July) remained in German hands.
• Beachhead Connection: Only Juno and Gold linked on the first day; all five connected by 12 June.
• Casualties: German casualties estimated at 4,000 to 9,000; Allied casualties documented at least 10,000, with 4,414 confirmed dead.

Outcome:

• Despite not achieving major objectives on the first day, the operation established a foothold that the Allies expanded in the following months.

Source: CNN

4. RBI Maintains Status Quo, Raises FY25 GDP Growth Forecast to 7.2%

Sub: Eco

Sec: Monetary Policy

Key Highlights:

• Policy Repo Rate: The Reserve Bank of India (RBI) decided to keep the policy repo rate unchanged at 6.5%, with a majority vote of 4:2.
• Monetary Policy Stance: The RBI continues with the stance of withdrawal of accommodation.
• Growth Forecast: Revised FY25 GDP growth forecast to 7.2% from the previous estimate of 7%.

Monetary Policy Committee (MPC) Decision:

• The six-member MPC maintained the repo rate at 6.5%.
• External members Ashima Goyal and Jayanth Varma voted for a rate cut of 25 basis points (bps) and a change in stance to neutral. Other four members voted in favor of maintaining the current rate and stance.

Inflation and Economic Outlook:

• Inflation Trends: Inflation is moderating, mainly driven by the core component, although food inflation remains elevated.
• Price Stability: The RBI aims to ensure inflation aligns with the target on a durable basis while maintaining economic growth.
• CPI Inflation Projection: Retained at 4.5% for FY25, with quarterly projections of Q1 at 4.9%, Q2 at 3.8%, Q3 at 4.6%, and Q4 at 4.5%.

Remarks by RBI Governor Shaktikanta Das:

• Highlighted that domestic economic activity has shown resilience, with a revival in rural demand driven by improving farm sector activity.
• Emphasized the need for price stability and monetary policy’s flexibility in addressing inflation.
• Clarified that RBI’s decisions are primarily driven by domestic growth-inflation conditions, despite monitoring global economic policies.

Perspectives:

• Nomura: The RBI’s policy decision was expected, but the vote split indicates growing divergence within the MPC.
• Goldman Sachs: Anticipates a shallow easing cycle with total 50 bps rate cuts from the RBI, likely in Q4 CY24 and Q1 CY25.
• State Bank of India: Liquidity management will be critical, and RBI may need innovative tools for liquidity augmentation.

Future Projections:

• GDP Growth: Revised upward to 7.2% for FY25.
• Rate Cut Expectations: Economists expect the first rate cut in the Oct-Dec quarter of 2024, with cumulative easing of 75 bps in FY25.

Concluding Note:

• The RBI remains focused on price stability while supporting economic growth, with inflation control being a key priority. The central bank continues to adapt its policies to meet domestic economic needs amidst global uncertainties.