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### Interest rate

1. 1. Group no11 Welcomes you allPower point presentation On INDIAN FINANCIAL SYSTEM
2. 2. INDIAN FINANCIAL SYSTEM 2012 INTEREST RATE VIJAY INSTITUTE OF BUSINESS MANAGEMENT 04/05/2012
3. 3. contents Covered by Introduction,Definition,Level of Interest rate :- Vandana Structure & Type of Interest rate, Policy Rate & Resurve Ratio in RBI:- Vijay Reasons for interest rate change Factors Affecting Market Interest Rate Government securities Visnu Definition of Public Deposits Government Regulation on Public Deposits Main features of Public Deposits:- Vikash Inflation & Interest rates Interest Rates & Bond Prices Characteristics of Business Cycles:- Syam
4. 4. INTRODUCTION External Environment: Interest rates An interest rate is the cost of borrowing money or the return for investing money. For example, a bank charges interest on amounts loaned out or on the balance of an overdrawn bank account. A bank will also pay interest to the owner of an account with a positive balance. Interest rates vary depending on the type and provider of borrowing.
5. 5. Definitions of Interest:-•In any case, as in the case of profit, interest is treated in differentways by different specialists.•The approach of the economist, for example, is different fromthat of the lawyer. LEVEL OF INTEREST RATES:- Interest is the price the borrowers must pay to lenders to obtain the use of money for a period of time. We discuss briefly three such theories about interest rates 1)The classical theory . 2)The loanable funds theory. 3) The keynesian .
6. 6. THE CLASSICAL THEORY This theory is assosiated with the names of Ricardo, Fisher and some others . It is a static theory , and, according to it , the rate of interest, is a real phenomenon in the sense that it is determuned by the real factors . It is the supply of savings and the demand for investment that determine the equilibrium rate of interest . The aggregate saving is the difference between the total national income and the total consumption expenditure . The savings may be effected by individuals , households, business and Government
7. 7. loanable funds theoryThe loanable funds theory of interest rate determination makes certain importance modifications in classical theory.• through interest is paid in money terms on money loans and assets the level of interest is nothing to do with the levels of money and prices .• the commercial banks are mere conduit for the more efficient channeling of saving into the best investment outlets
8. 8. STRUCTURE OF INTEREST RATESThe term structure of interest rate, or yield curve, as itis called, may be defined as the relationship betweenyields and maturities of bonds in given default riskclasses.In addition to changes in the level of interest rate changes in the rate of inflation, unusual risk premiums, changing credit conditions, there are changes,
9. 9. TYPES OF INTEREST RATESThe prime rate is the best known of the various interest rates that are utilized. This non-fluctuating rate is the one usually employed by banks when it makes short term loans to large borrowers such as corporations.Other important interest rates that are used in making capital investment decisions include.• Discount Rate• Treasury Bill Rate• Treasury Bond Rate• Corporate Bond Rate
10. 10. India Interest Rate:-• In India, interest rate decisions are taken by the Reserve Bank of Indias Central Board of Directors. The official interest rate is the benchmark repurchase rate. From 2000 until 2010, Indias average interest rate was 5.82 percent reaching an historical high of 14.50 percent in August of 2000 and a record low of 3.25 percent in April of 2009. This page includes: India Interest Rate chart, historical data and news. The benchmark interest rate in India was last reported at 8.5 percent.
11. 11. Policy rates and reserve ratios IN RBI Policy rates, Reserve ratios, lending, and deposit rates as of 17 April, 2012 Bank Rate 9.00% Repo Rate 8.00% Reverse Repo Rate 7.00% Cash Reserve Ratio (CRR) 4.75% Statutory Liquidity Ratio (SLR) 24.0% Base Rate 10.00%–10.75% Reserve Bank Rate 4% Deposit Rate 8.50%–9.25%
12. 12. S.N 3 Years to < 5o. Bank 1 Year to < 2 years 2 Years to < 3 years years More than 51 Allahabad Bank 8.75% 8.50% 8.50% 8.00%2 Andhra Bank 9.25% 8.50% 8.60% 8.00%3 Axis Bank 9.25% 8.50% 8.50% 8.50%4 Bank of Baroda 9.35% 9.00% 8.50% 8.50%5 Bank of India 9.25% 8.25% 8.25% 7.00%6 Bank of Maharashtra 8.30% 8.60% 8.60% 8.30%7 Canara Bank 9.10% 9.25% 8.75% 8.75%8 Central Bank of India 9.25% 8.75% 8.80% 8.80%9 Dena Bank 9.00% 9.00% 9.00% 8.75%10 HDFC Bank 8.50% 9.25% 8.25% 8.25%11 ICICI Bank 9.25% 9.25% 8.75% 8.75%12 IDBI Bank 9.25% 9.25% 9.00% 9.00%13 Indian Bank 9.50% 8.50% 8.50% 8.00%14 Indian Overseas Bank 9.25% 8.75% 9.00% 9.00%15 Indus Ind Bank 9.00% 8.75% 9.50% 8.75%16 J&K Bank 9.50% 8.75% 8.50% 8.50%17 Karnataka Bank 9.75% 9.50% 9.25% 8.75%18 Karur Vysya Bank 10.25% 9.75% 9.00% 9.00%19 Kotak Bank 9.25% 9.40% 9.25% 9.25%21 Punjab and Sind Bank 9.55% 9.60% 9.05% 8.75%22 South Indian Bank 9.75% 8.75% 8.75% 8.25%23 State Bank of Hyderabad % 9.25% 8.75% 8.75%24 State Bank of India 8.75% 9.25% 8.25% 8.50%25 State Bank of Patiala 9.00% 9.75% 8.50% 8.50%26 State Bank of Travancore 9.50% 9.60% 9.25% 9.00%27 Syndicate Bank 9.25% 9.25% 9.00% 8.60%28 UCO Bank 9.00% 8.50% 8.50% 8.00%29 Union Bank of India 8.60% 9.25% 8.75% 9.40%30 Vijaya Bank 9.35% 9.25% 8.50% 8.25%
13. 13. Reasons for interest rate change Political short-term gain: Deferred consumption Inflationary expectations: Alternative investments Risks of investment Liquidity preference Taxes:
14. 14. FACTORS AFFECTING MARKET INTEREST RATES:- Three other factors that can be important are:  Saving by individuals,  International capital flows, and  Amount of premium required by investors to compensate for interest rate risk.
15. 15. . Why should one invest in Governmentsecurities?Holding of cash in excess of the day-to-day needs of a bank does not give any return to it. Investment in gold has attendant problems in regard to appraising its purity, valuation, safe custody, etc. Investing in Government securities has the following advantages: Besides providing a return in the form of coupons (interest), Government securities offer the maximum safety as they carry the Sovereign’s commitment for payment of interest and repayment of principal. They can be held in book entry, i.e., dematerialized/ scripless form, thus, obviating the need for safekeeping. Government securities are available in a wide range of maturities from 91 days to as long as 30 years to suit the duration of a banks liabilities.
16. 16. Government Bonds and SpecialDeposits support fiscal deficit for Government Bonds are used  deficit financing 120000 9.00%  Central and State Governments 8.00% run large deficits 100000 7.00%  Government has been running 80000 6.00% revenue deficit with high 5.00% consumption expenditure financed Rs Cr 60000 4.00% by borrowing 40000 3.00%  In old funds, almost 90% of funds 2.00% are with government 20000 1.00%  Pay as you go system in 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 0.00% substance Revenue Defict Fiscal Deficit % of Fiscal Deficit to GDP  Does Investment Pattern encourage government deficit?  Banks and LIC are biggest subscribers of Government Bonds  Banks invest more than SLR requirements in Government Bonds
17. 17. Definition of Public DepositsPublic deposit is the source of fund for private and nonbanking companies. It means to accept fund from publicin the form of deposit. The interest on these deposits ismore than interest which is given by banks and postoffices.
18. 18. Government Regulation on Public Deposits Company law 1956’s section 58- A providesthe power to central govt. to make rules andregulation for controlling public deposits.Government of India has made Companies(acceptance of deposits) Rules 1975. Fromtime to time, these rules are amended.
19. 19. Main features of Public DepositsCeiling on Deposits-a) Company can accept public deposits up to the 25% of the total of payable capital and free reserves.b) Company can accepts public deposits from existing shareholders or debenture holders up to 10% of total of payable capital and free reserves.Maturity of DepositsCompany has to accept deposits from public minimumfor 6 months and maximum for 3years.
20. 20. Register of DepositsLike register of shareholder and debenture holder, companyshould record all persons’ name, address, deposit cash, date,maturity date, and rate of interest in register of deposits.Interest on DepositsCompany can fix rate of interest on deposits money accordingto regulations of RBI.
21. 21. Inflation & Interest rates  Inflation Trajectory  Medium Term: Down to normal level in a year  Short Term: Depends on Oil prices  Real Interest rates  Short term: Decline  Medium Term: U shaped pattern to normal in a year  Aggregate Inflation: Who is hurt  Poor- unskilled wage lag.  Every one cannot be hurt unless GDP declines! Securities02 August 2008 prices AV General: 23
22. 22. Interest Rates & Bond Prices What’s the difference between a bond price and an interest rate? They are both relative prices  Interest Rate = Price of a current \$ in terms of foregone future dollars.  Bond Price = Price of a Future \$ in terms of foregone current dollars
23. 23. Characteristics of Business Cycles All recessions/expansions “look similar”, that is, there seems to be consistent statistical relationships between GDP and the behavior of other economic variables.  Correlation (procyclical, countercyclical)  Timing (leading, coincident, lagging)  Relative Volatility
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