RBI hikes repo and reverse repo

Yesterday evening the RBI hiked the repo and the reverse repo rates.-- these are the rates by which the central banks take loans and gives loans to banks.

Reason-- simple-- Inflation.

My last post was on inflation and had highlighted the fact that the RBI could hike interest rates in its april 20th meeting-- However , it has done out side of the credit review -- indicating that they are worried about inflation.

Does this mean that there may not be further hikes on April 20th? Hardly. It is expected that the RBI will increase the CRR ( amount that the banks need to keep with the RBI) then.

Monetary policy has a lag effect-- it takes a few months for the impact to be felt on the ground-- but my guess is that markets may go down in the short term-- especially businesses which are rate sensitive-- autos and real estate.-- this may be a good time to pick them up.

Also this will signal the increase in interest rates for home and other loans.  Already banks have started talking about it ( no extention of the HDFC 8.25% loan-- read post here)

Deposit rates could also be hiked-- so looks like short term debt funds may see a nice little bump ( presently evaluating some short term debt funds for my self)

As i said-- Look to understand...


Happy investing.


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Free interest,.... your money doubled!

Thanks to the new policy by the Reserve Bank of India, we will be getting higher returns on our cash that is lying in our account-- actually by a big degree...

When Banks said that the money in our accounts gained an interest of 3.5%-- it was actually not true. The rule was that the 3.5% pa interest which is 0.29% per month was on the MINIMUM amount of the cash that was in the bank from the 10th to the 30th of the month.

So if you made any payment from your bank account anytime in the middle of the month-- you would not get any interest on the money for the days you had it in the bank.

Lets take an example:

Jan 1           10,000
Jan 7           10,000
Jan 12         12,000
Jan 18         8,000
Jan 25         20,000
Jan 29         5,000


So if you look at your passbook in the above example, you would have gotten an interest of 0.29% on 5000 for the month which is 14.58 Rs.

However going forward from the 1st of April, 2010, the RBI has told banks to give interest on the amount that is there in the bank on a daily basis.

If i calculate using the same example on the interest earned on a daily basis -- we would get an interest of Rs 32.41/-  which is 2.2 times the amount of interest earlier!!!

[what you need to do to calculate this is as follows

Daily Interest= 3.65%/ 365= 0.009589 %
No of days in the bank  -- taking the above example
  Date          Amount    No of days        
Jan 1            10,000       7

Jan 7            10,000       5
Jan 12          12,000       6
Jan 18            8,000       7
Jan 25          20,000       4
Jan 29          5,000         2

Now the way to calculate it is
Interest earned =  (10000* 7+ 10000* 5+ 12000*6+ 8000*7+20000*4+ 5000*2)* 0.009589 %
So definately this is going to get you more money earned due to the new way of calculation of interest.... 2.2 times in the above example...


Do I  hear a standing ovation for the RBI?

of course this doesnt mean in anyway that you should have more money in your savings account... 3.5% measely returns are definately not worth it-- especially when the inflation adjusted returns is negative!! ( click here to read what this means)

We should be having only the necessary amount lying as idle funds or cash in the bank ( read how to calculate your emergency funds here)
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Happy investing!