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Interest rate
1. INTEREST RATES
BY
M. Vamsi Krishna-181224
P. Bharat-181229
S.R. Vamsi Krishna-181240
V. Jagadeesh-181247
M. Narasimha Rao- 181250
2. CONTENT
• What is Interest Rate
• Why Interest is Charged
• Interest Rate in India
• Policy Rates
• Types of Interest Rate
• Factors influencing Interest Rate
3. What is Interest Rate
• In simple meaning interest is a payment made by a borrower
to the lender for the money borrowed and is expressed as a
rate percent per year.
• It is usually expressed as an annual rate in terms of money and is calculated
on the principal of the loan. It is the price paid for the use of other’s capital
fund for a certain period of time.
• As Prof. Marshall has said – “The payment made by borrower for the use
of a loan is called Interest.”
4. Why Interest is Paid or Charged
There are two views regarding Interest paid or is charged:
(I) From Debtor’s point of view,
(ii) From Creditor’s point of view.
5. From Debtor’s point of view
• Debtor’s pay interest on capital because he is aware that capital has
productivity and if it can be used in production there can be increase in
income. Therefore, out of the earned income, a part of the income is paid to
the creditor or a lender from whom money has been taken as loan is known
as Interest.
• Use of Capital
• Reward for Risk
• Interest is Reward for Inconvenience
• Expenses in Relation to Management of Business
6. From Creditor’s Point ofView
Creditors or lender of money demands Interest because he has taken pains
in saving money, has suffered inconveniences in postponing his needs and
has taken risk of bad debts. If he will not get Interest or some advantage of
Interest he may loose interest in saving money or he may not be ready to
bear inconveniences. Then, the formation of capital in the market will stop.
Therefore, it can be said that the debtor’s give Interest to creditors as
capital has productivity and creditors demand interest as the lender of
money has taken risk and has faced inconveniences, so he must get some
reward for the pains of inconvenience and risk.
9. BANK RATE
• The rate at which commercial bank borrowing from RBI for a long term
period (more than 90 days)
• Rate decided by RBI.
• Current bank rate is 6.75%
10. REPO RATE REVERSE REPO RATE
• The rate at which commercial
banks borrow money from RBI
and it is short term loan (max 90
days).
• Current REPO RATE is 6.5%
• REVERSE REPO rate is the short
term borrowing rate at which RBI
borrows money from banks.
• Current reverse repo rate is 6.25%.
11. SLR
• SLR stands for statutory liquidity ratio. This is a percentage of the amount of
deposit that a bank receives that it compulsorily has to set aside as a reserve.
• This reserve can be in the form of government securities, treasury bills or cash.
• Current SLR is 19.5%
12. CASH RESERVE RATIO
• CRR is a certain minimum
amount of deposit that the
commercial banks have to hold as
reserve with the CENTRAL
BANK in the form of cash
• CRR is set according to the
guidelines of the CENTRAL
BANK OF INDIA.
• Current CRR is 4%
14. SIMPLE INTEREST
• Interest is the amount paid on the principal amount.
• Interest computed only on principal amount.
• A=P+SI
• SI=PTR/100
where A=Amount, P=Principal, T=Time, R=Rate of interest.
• Example: P=1000 , T=3years, R=10%
• SI=(1000*3*10)/100 = Rs:300/-
• A=1000+200 = Rs:1300/-
15. COMPOUND INTEREST
• COMPOUND INTEREST IS addition of interest to the principal some of a
loan or deposit. In other words interest on interest.
• Interest computed on principal amount plus interest earned.
• CI= P(1+r)^t
• Example: P=1000 , T=3years, R=10%
• CI = 1000(1+.10)^ =Rs:1331/-
16. Nominal vs. Real Interest Rates
• Nominal Interest Rates: the percentage increase in money that the borrower pats
including inflation.
• Nominal Interest Rate is one where the effects of inflation have not been accounted
for.
• Nominal Interest Rates=Real Interest Rates+ expected inflation.
• Real Interest Rates: The percentage increase in purchasing power that a borrower
pays.
• Real Interest Rate is one where the effects of inflation have been factored in.
• Real Interest Rates= Nominal Interest Rates- expected inflation
17. • Suppose your fixed deposit of Rs. 100 earns 10% interest at the end of the year.
This means the Rs. 100 at beginning of the year will become Rs. 110 at the end
of the year. This 10% is the nominal interest rate, as we have not accounted for
inflation.
• Assume that inflation rate is 6%
for the year and your fixed
deposit earns 10% nominal
interest rate. After factoring
in inflation, your deposit
will earn a real interest rate of 4%.
19. CONCLUSION
• The Term Structure of Interest Rates shows the relation between
interest rates for different term-to-maturity loans.
• If Inflation is positive then the real interest rate is lower than the
nominal interest rate.
• If we have deflation and inflation rate is negative ,then the real
interest rate will be larger.
Hinweis der Redaktion
Use of Capital:
Whatever amount is paid to the owner of the capital for the use of the capital is known as Interest. Here, the capital is used in further production and whatever he earns, he pays a part of his earnings to the owner of the capital or the lender of the money.
Reward for Risk:
Loan giving is a risk which lender takes at the time of giving loan or advancing money. Lender exposes himself to risk when he lends money and sometimes the loan become bad-debts. Therefore, it has been said that Interest is the reward for risk taking.
Interest is Reward for Inconvenience:
When a lender gives loan of money he forgets its use for the duration of the loan, if he needs this amount for his personal use, he will have to undergo the inconvenience of arranging it from some other source. Thus, he feels inconvenience.
Expenses in Relation to Management of Business:
For organising and running the business, businessman needs money. Money taken as loan for running and managing business, keeping accounts, maintaining standard of business etc. one has to arrange money and for that has to pay interest over the money.
Economic growth rate vs. underlying trend rate. If the underlying trend rate is 2.5%, economic growth above this target is likely to cause inflationary pressure.
Spare capacity. A key test is the amount of spare capacity in the economy, though this can be difficult to calculate. For example, in a recession how much potential capacity is lost?
Wage inflation. Rising wages lead to higher costs for firms and higher spending. This is a very important factor as it can be self-reinforcing leading to a wage price spiral.
Unemployment. High unemployment tends to depress wage inflation and therefore keep inflationary pressure low.
Commodity prices. Rising commodities will tend to increase inflation. However, some commodities have a tendency to be volatile meaning it is more unreliable as a guide to underlying inflation.
Exchange Rate. A depreciation in the exchange rate will cause inflationary pressures. This is because imports become more expensive, and there will be greater demand for exports.
House prices. House prices don't directly influence the CPI. However, rising house prices causes a positive wealth effect and therefore higher consumer spending
Consumer confidence. Higher confidence leads to higher spending
.
