Interest rate

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Power point presentation
On
INDIAN FINANCIAL
SYSTEM

INDIAN FINANCIAL SYSTEM

2012
INTEREST RATE

VIJAY
INSTITUTE OF BUSINESS
MANAGEMENT
04/05/2012

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

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.

Definitions of Interest:-
•In any case, as in the case of profit, interest is treated in different
ways by different specialists.
•The approach of the economist, for example, is different from
that 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 .

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

loanable funds theory
The 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

STRUCTURE OF INTEREST RATES
The term structure of interest rate, or 'yield curve', as it
is called, may be defined as the relationship between
yields and maturities of bonds in given default risk
classes.
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,

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

India Interest Rate:-
• In India, interest rate decisions are taken by the
Reserve Bank of India's Central Board of Directors.
 The official interest rate is the benchmark
repurchase rate. From 2000 until 2010, India's
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.

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%

S.N 3 Years to < 5
o. Bank 1 Year to < 2 years 2 Years to < 3 years years More than 5
1 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%

Reasons for interest rate change

 Political short-term gain:
 Deferred consumption
 Inflationary expectations:
 Alternative investments
 Risks of investment
 Liquidity preference
 Taxes:

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.

. Why should one invest in Government
securities?
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 bank's liabilities.

Government Bonds and Special
Deposits 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

Definition of Public Deposits
Public deposit is the source of fund for private and non
banking companies. It means to accept fund from public
in the form of deposit. The interest on these deposits is
more than interest which is given by banks and post
offices.

Government Regulation on Public Deposits
Company law 1956’s section 58- A provides
the power to central govt. to make rules and
regulation for controlling public deposits.
Government of India has made Companies
(acceptance of deposits) Rules 1975. From
time to time, these rules are amended.

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 Deposits
Company has to accept deposits from public minimum
for 6 months and maximum for 3years.

Register of Deposits
Like register of shareholder and debenture holder, company
should record all persons’ name, address, deposit cash, date,
maturity date, and rate of interest in register of deposits.

Interest on Deposits
Company can fix rate of interest on deposits money according
to regulations of RBI.

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!

Securities
02 August 2008
prices AV
General: 23

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

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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