Professional Documents
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INTEREST RATE
MONEY IN ECONOMY
INDUSTRIAL GROWTH
GDP
Interest rate
Credit flow
MS<MD
MS>MD
Interest rate
Credit flow
INFLATION
FINANCIAL SECTOR
UNORGANISED ORGANISED
BANKS
The price of bonds, such as government securities, is inversely related to interest rates. So, when interest rates are expected to increase, the price of bonds drops (and vice versa). Although gilt funds invest primarily in low-risk securities, they are not entirely immune from risk. Interest rate increase can cause poor performance and return from these securities. In 2009, even some of India's highest-returning gilt funds saw negative returns in their first months due to interest rate hikes. Longer average maturity periods can balance out fluctuations and minimize these risks.
Borrowers neither have collateral nor a salary which eventually increases the risk, thereby making the microcredit more expensive. MFIs may operate in areas that are remote or have low population density, making lending more expensive.
Although Microcredit interest rates can be legitimately high, inefficient operations can make them higher than necessary.
On July 28, 2010, SKS Microfinance, India's biggest Microfinance Institution (MFI), made its debut on Bombay Stock Exchange, offering its shares to the general public. SKS's Chairperson and Founder, VIKRAM AKULA, claimed that initial public offering(IPO) has been made to raise more funds so that SKS could reach out to a larger number of poor people. However, others, most notably the father of microfinance Muhammad Yunus, expressed doubt that Vikram Akula will be able to juggle SKS's social mission with the demands of a traditional profit-maximizing business. The main obligation of any public company is to make dividends for its shareholders, while the main obligation of an MFI is to serve the poor. Yunus is afraid that in the end SKS will have to put its shareholders' interests above the ones of the poor. "By offering an IPO, you are sending a message to the people buying the IPO there is an exciting chance of making money out of poor people. This is an idea that is repulsive to me. Microfinance is in the direction of helping the poor retain their money rather than redirecting it in the direction of rich people," Yunus said.
The IPO of SKS MFI, saw it over-subscribed by 15 times; their Ten-Rupee share was priced at a premium of Rs 985 showing how much the market had confidence on their profitability while banking with the poor. MFIs argue that they have to charge high rates to maintain profitability. Profitability, which even private banks couldnt match! Profitability that permits SKS to pay Rs 1 crore as bonus to their just fired CEO!
Implications of Deregulation
Liberalization and de-regulation process started in 1991-92 has made a sea change in the banking system. From a totally regulated environment, we have gradually moved into a market driven competitive system. Our move towards global benchmarks has been, by and large, calibrated and regulator driven. The pace of changes gained momentum in the last few years.
Certain implications for the likely behaviour of Interest Rates in the near future
Interest rates are likely to be higher than in the past . It has been experienced in India that whenever ceiling on any interest rate was removed , the respective rate had tended to increase . The economic units would face a higher degree of risk and earn certainty . The cost of funds would no longer easy to predict. Interest rate risk will be higher on both debt & ownership securities .
The period since 1951 can be divided into the following five phases of interest rates policy (system) in India:
Flexible interest rates system. The system of administered, regulated, and repressed or suppressed (low) interest rates. The beginning of liberalization or the system with inclination or intend towards liberalization and flexibility, or a semi-administered system with the inching up of interest rates.
iii)1986 87 to 1990 91
iv)1991 92 to 1996 97
The system of progressive deregulation and flexibility, and a significant increase in and unprecedentally high interest rates, or the phase of deregulation and dear money.
The system of managed flexibility with nearly complete deregulation, and one of the lowest levels of interest rates in India, or the phase of cheap money.
v) 1997 98 to 2003-04
The Reserve Bank of India (RBI), which is India's central bank and in charge of monetary policy , which has a big impact on liquidity and interest rates in the financial system.
Monetary policy involves regulation of money stock or the short term interest rate to attain monetary policy Objectives.
These objectives are as follows:-
I. II. III.
.
CRR
LAF
REPO/REVERSE REPO
OMO
PLR
INVESTMENT INCREASES
INVESTMENT DECREASES
In its annual monetary policy review for 2010-11, RBI increased its policy rates.
Hike in Repo and Reverse Repo rates by 25 bps with immediate effect Repo rate increased to 6.75% Reverse Repo rate increased to 5.75% SLR retained at 24% CRR kept unchanged at 6%
GDP:
RBI has crucial task of balancing between growth and inflation. The continued interest rate hikes are likely to slowdown industrial activities, therefore putting pressure on achieving the estimated target of 8.6% growth in GDP.