What is the base rate?
When someone borrows money to buy car or house or electrical appliance or any thing else, there is an interest rate that one has to pay to the lender. рдеे base rate is the minimum rate of interest that a bank will lend money at as per RBI guidelines. This is like floor interest rate below which RBI will not allow banks to lend money to any one.
Previously, banks used decide interest rates on the loans they offered, on a complicated system called benchmark prime lending rate (BPLR). Eachbank has its own BPLR which is very difficult for borrowers to compare rates across banks.
Now, with the base rate, it will be easier for everyone to compare across banks and to get a more transparent sense of how the interest rate for the loan is being arrived at.
Is interest rate going to be cheaper? Will my EMI change?
The most important thing to keep in mind is that the cost of money is not changing, i.e., if a car loan cost about 12% or a home loan cost 9%, these rates of interest charged are not going to change.
Its just that the method used to arrive at this will be more clear to everyone. So, interest rates aren't coming down as a result of this base rate implementation.
Following on from this, your EMI on an existing loan is also not going to change. You will continue to pay whatever you were paying up to last month in future months as well.
Should one change to a bank with a lower base rate?
As mentioned above, the cost of money is not changing. Most banks continue to charge a very similar rate of interest as they did before. Just because one bank has a base rate of 7% and another has a rate of 8.5% does not mean one should change to the bank with the lower rate.
On top of base rate there are additional amount of interest that the banks are charging, to cover its cost of doing business, and some compensation for the risk its taking in lending money.
So, after all these additions, its unlikely that the lending rates of one bank are any different to the rate being charged by any other bank. And there is no major advantage to shifting from one bank to another.
How does the base rate affect pre-existing loan?
For existing loans, there is nothing going to change. As mentioned above, interest rates aren't changing in the economy. However, when any loan comes up for renewal, then it will be priced using the base rate formula.
Will the base rate remain fixed forever?
No, the RBI has given guidelines to banks to adjust their base rates depending upon the prevailing market conditions and interest rate policies. Expect to see banks update their base rates every few months if that is required. Banks will then communicate this to all their clients.
What is the base rate?
Portfolio Management Chp 1 and 2
About FRBM
FRBM
The Centre has breached the 45% limit of revenue deficit for the first half of the financial year prescribed by the Fiscal Responsibility and Budget Management (FRBM) Rules. As per the Rules, Union finance minister P Chidambaram will have to make a statement in Parliament during the ongoing winter session, explaining the reasons for the breach and the corrective steps proposed. FE takes a closer look at what is the FRBM Act and why it is important.
What is the FRBM Act?
The FRBM Act was enacted by Parliament in 2003 to bring in fiscal discipline. It received the President’s assent in August the same year. The United Progressive Alliance (UPA) government had notified the FRBM Rules in July 2004.
As Parliament is the supreme legislative body, these will bind the present finance minister P Chidambaram, and also future finance ministers and governments.
How will it help in redeeming the fiscal situation?
The FRBM Rules impose limits on fiscal and revenue deficit. Hence, it will be the duty of the Union government to stick to the deficit targets.
As per the target, revenue deficit, which is revenue expenditure minus revenue receipts, have to be reduced to nil in five years beginning 2004-05. Each year, the government is required to reduce the revenue deficit by 0.5% of the GDP.
The fiscal deficit is required to be reduced to 3% of the GDP by 2008-09.It would mean reduction of fiscal deficit by 0.3 % of GDP every year.
How are these targets monitored?
The Rules have mid-year targets for fiscal and revenue deficits. The Rules required the government to restrict fiscal and revenue deficit to 45% of budget estimates at the end of September (first half of the financial year).
In case of a breach of either of the two limits, the FM will be required to explain to Parliament the reasons for the breach, the corrective steps, as well as the proposals for funding the additional deficit.
What is fiscal deficit?
Every government raises resources for funding its expenditure. The major sources for funds are taxes and borrowings. Borrowings could be from the Reserve Bank of India (RBI), from the public by floating bonds, financial institutions, banks and even foreign institutions. These borrowings constitute public debt and fiscal deficit is a measure of borrowings by the government in a financial year.
In budgetary arithmetic, it is total expenditure minus the sum of revenue receipts, recoveries of loans and other receipts such as proceeds...
Do economies need a fiscal deficit?
Many economists, including Lord Keynes, had advocated the need for small fiscal deficits to boost an economy, especially in times of crises. What it means is that government should raise public investment by investing borrowed funds. This exercise is also called pump-priming. The basic purpose of the whole exercise is to accelerate the growth of an economy by public intervention. Hence, there is nothing fundamentally wrong with a fiscal deficit, provided the cost of intervention does not exceed the emanating benefits.
The darker side of the story is that the borrowed funds, which always remain on tap, have to be repayed. And pending repayment, these loans have to be serviced.
Ideally, the yield on investment on borrowed funds must be higher than the cost of borrowing.
For example, if the government borrows Rs 100 at 10%, it must earn more than 10% on investment of Rs 100. In that situation, fiscal deficit will not pose any problem.
However, the government spends money on all kinds of projects, including social sector schemes, where it is impossible to calculate the rate of return at least in monetary terms. So, one will never know whether the borrowed funds are being invested wisely.
And how grave is the problem of fiscal deficit?
Over the years, public debt has continued to mount and so have interest payments. According to budget figures (revised estimates for 2003-04) the government borrowed Rs 1,32,103 crore. The interest payment during the year was Rs 1,24,555 crore.
What is alarming is that except for a comparatively small sum of about Rs 7,500 crore, more than 94% of borrowed funds are being used to pay interest for past loans. This is what is called the debt trap, where one is compelled to borrow to service past loans.
The other way of looking at the fiscal problem is that more than 66% of government taxes, totalling Rs 1,87,539 crore in 2003-04 were used to pay interest on past borrowings.
Servicing of loans also erodes the government’s ability to spend money on critical areas such as health and education and on essential sovereign functions like policing, judiciary and defence....
ABOUT GST
ABOUT GST
The goods and services tax (GST) is a comprehensive value-added tax (VAT) on goods and services.
Today, it has spread to over 140 countries.
Through a tax credit mechanism, GST is collected on value-added goods and services at each stage of sale or purchase in the supply chain.
GST paid on the procurement of goods and services can be set off against that payable on the supply of goods or services. But being the last person in the supply chain, the end consumer has to bear this tax and so, in many respects, GST is like a last-point retail tax.
Many countries have a unified GST system. However, countries like
In
The central and state governments are discussing the GST system proposed to be implemented in
Representing the statesin the discussions is the empowered committee of state finance ministers.
Here are some questions on GST and their answers:
Will dual GST be levied in addition to the existing taxes?
No. It is proposed that the CGST will subsume central excise duty (Cenvat), service tax, and additional duties of customs at the Central level; and value-added tax, central sales tax, entertainment tax, luxury tax, octroi, lottery taxes, electricity duty, state surcharges related to supply of goods and services and purchase tax at the state level.
What will be the rate of GST?
The combined GST rate is currently being discussed by the Centre and the EC. The rate is expected to be in the range of 14-16 %. Once the total GST rate is determined, the states and the Centre have to agree on the CGST and SGST rates. Today, services are taxed at 10% and the combined incidence of indirect taxes on most goods is around 20%.
Will prices go up after the implementation of GST?
In fact, the prices of commodities are expected to come down in the long run as dealers pass on the benefits of reduced tax incidence to consumers by slashing the prices of goods.
What are the implications of GST on imports and exports?
Imports would be subject to GST. Exports, however, will be zero-rated, meaning exporters of goods and services need not pay GST on their exports. GST paid by them on the procurement of goods and services will be refunded.
What are the benefits of shifting to a dual GST system?
Dual GST is expected to be a simple and transparent tax structure with only one or two rates of taxes. The result would be a reduction in the number of taxes at the Central and state levels, cut in effective tax rate for many goods, removal of the current cascading effect of taxes, reduction of transaction costs for taxpayers through simplified tax compliance, and increased tax collections due to wider tax base and better compliance.
How will dual GST affect the fiscal health of states?
Being a consumption-based tax, dual GST will result in better revenue collection for states with higher consumption of goods and services.
The backward and less-developed states would see fall in collections. The Centre is expected to put in place a mechanism to compensate states for any revenue loss due to GST.
The introduction of the GST system is by far the most important tax reform in
This is a formidable challenge given that we have only limited time left. The Union Budget, which is to be presented on July 3, should lay down a clear roadmap with defined timelines for GST to become a reality on April 1, 2010
Article on Hedging
The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn't prevent a negative event from happening, but if it does happen and you're properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it everyday. For example, if you buy house insurance, you are hedging yourself against fires, break-ins or other unforeseen disasters.
Portfolio managers, individual investors and corporations use hedging techniques to reduce their exposure to various risks. In financial markets, however, hedging becomes more complicated than simply paying an insurance company a fee every year. Hedging against investment risk means strategically using instruments in the market to offset the risk of any adverse price movements. In other words, investors hedge one investment by making another.
Technically, to hedge you would invest in two securities with negative correlations. Of course, nothing in this world is free, so you still have to pay for this type of insurance in one form or another.
Although some of us may fantasize about a world where profit potentials are limitless but also risk free, hedging can't help us escape the hard reality of the risk-return tradeoff. A reduction in risk will always mean a reduction in potential profits. So, hedging, for the most part, is a technique not by which you will make money but by which you can reduce potential loss. If the investment you are hedging against makes money, you will have typically reduced the profit that you could have made, and if the investment loses money, your hedge, if successful, will reduce that loss.
How Do Investors Hedge?
Hedging techniques generally involve the use of complicated financial instruments known as derivatives, the two most common of which are options and futures. We're not going to get into the nitty-gritty of describing how these instruments work, but for now just keep in mind that with these instruments you can develop trading strategies where a loss in one investment is offset by a gain in a derivative.
Let's see how this works with an example. Say you own shares of Cory's Tequila Corporation (Ticker: CTC). Although you believe in this company for the long run, you are a little worried about some short-term losses in the Tequila industry. To protect yourself from a fall in CTC you can buy a put option (a derivative) on the company, which gives you the right to sell CTC at a specific price (strike price). This strategy is known as a married put. If your stock price tumbles below the strike price, these losses will be offset by gains in the put option. (For more information, see this article on married puts or this options basics tutorial.)
The other classic hedging example involves a company that depends on a certain commodity. Let's say Cory's Tequila Corporation is worried about the volatility in the price of agave, the plant used to make tequila. The company would be in deep trouble if the price of agave were to skyrocket, which would eat into profit margins severely. To protect (hedge) against the uncertainty of agave prices, CTC can enter into a futures contract (or its less regulated cousin, the foreward contract), which allows the company to buy the agave at a specific price at a set date in the future. Now CTC can budget without worrying about the fluctuating commodity.
If the agave skyrockets above that price specified by the futures contract, the hedge will have paid off because CTC will save money by paying the lower price. However, if the price goes down, CTC is still obligated to pay the price in the contract and actually would have been better off not hedging.
Keep in mind that because there are so many different types of options and futures contracts an investor can hedge against nearly anything, whether a stock, commodity price, interest rate and currency - investors can even hedge against the weather.
The Downside
Every hedge has a cost, so before you decide to use hedging, you must ask yourself if the benefits received from it justify the expense. Remember, the goal of hedging isn't to make money but to protect from losses. The cost of the hedge - whether it is the cost of an option or lost profits from being on the wrong side of a futures contract - cannot be avoided. This is the price you have to pay to avoid uncertainty.
We've been comparing hedging versus insurance, but we should emphasize that insurance is far more precise than hedging. With insurance, you are completely compensated for your loss (usually minus a deductible). Hedging a portfolio isn't a perfect science and things can go wrong. Although risk managers are always aiming for the perfect hedge, it is difficult to achieve in practice.
What Hedging Means to You
The majority of investors will never trade a derivative contract in their life. In fact most buy-and-hold investors ignore short-term fluctuation altogether. For these investors there is little point in engaging in hedging because they let their investments grow with the overall market.
So why learn about hedging?
Even if you never hedge for your own portfolio you should understand how it works because many big companies and investment funds will hedge in some form. Oil companies, for example, might hedge against the price of oil while an international mutual fund might hedge against fluctuations in foreign exchange rates. An understanding of hedging will help you to comprehend and analyze these investments.
Conclusion
Risk is an essential yet precarious element of investing. Regardless of what kind of investor one aims to be, having a basic knowledge of hedging strategies will lead to better awareness of how investors and companies work to protect themselves. Whether or not you decide to start practicing the intricate uses of derivatives, learning about how hedging works will help advance your understanding the market, which will always help you be a better investor.
Amendment in Bonus Act
Tuesday, October 30, 2007 10:59 [IST]
New Delhi: The Centre has promulgated an ordinance approving changes in the Payment of Bonus Act, which would make workers drawing up to Rs 10,000 monthly salary eligible for annual bonus.
Important terms IN financial market
A type of mortgage that is normally made out to borrowers with
lower credit ratings. As a result of the borrower's lowered
credit rating, a conventional mortgage is not offered because
the lender views the borrower as having a larger-than-average
risk of defaulting on the loan. Lending institutions often
charge interest on subprime mortgages at a rate that is higher
than a conventional mortgage in order to compensate themselves
for carrying more risk
An investment vehicle which is comprised of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market securities and similar assets. Mutual funds are operated by money mangers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
Small cap Refers to stocks with a relatively small market capitalization. The definition of small cap can vary among brokerages, but generally it is a company with a market capitalization of between $300 million and $2 billion.
One of the biggest advantages of investing in small-cap stocks is the opportunity to beat institutional investors. Because mutual funds have restrictions that limit them from buying large portions of any one issuer's outstanding shares, some mutual funds would not be able to give the small cap a meaningful position in the fund. To overcome these limitations, the fund would usually have to file with the SEC, which means tipping its hand and inflating the previously attractive price.
A variable in option pricing formulas showing the extent to which the return of the underlying asset will fluctuate between now and the option's expiration. Volatility, as expressed as a percentage coefficient within option-pricing formulas, arises from daily trading activities. How volatility is measured will affect the value of the coefficient used.
The ability to convert an asset to cash quickly. Also known as "marketability".