Prajna Capital - An Investment Guide

Instead of waiting till March to make tax-saving investments, take advantage of the attractive prices in the stock markets now Only two things, they say, are certain - death and taxes. Oddly, both topics are usually avoided in polite society. The annual ritual of year-end investing to save on taxes is almost five months away. So why bring up this dreadful talk about taxes now? It's not March already, by any chance, is it? No, don't bother to look at your calendar. It's only November. But there are attractive investment opportunities available today, if you plan to look at tax-saving equity options - equity-linked savings schemes ( ELSS ) or unit-linked insurance plans ( ULIPs ). The recent drop in equity markets has brought stock valuations down to compelling levels. Mutual fund NAVs have plunged, some by as much as 50 percent over the past three months. While this is obviously unfortunate for existing investors, it's extremely good news for those who are evaluating ...

A further drop in home loan interest rates is not expected as the inflation rate is under control now The unpredictable rate movements, the Reserve Bank of India's ( RBI ) moves and mixed response from the lenders has put borrowers in some confusion. The inflation monster which had pushed prices to unimaginable highs has finally been tamed. From as high as 12.91 percent this year, the inflation rate has almost come down to half of that. Does this mean borrowers can expect banks to reduce their home loan rates, if this trend persists? What is inflation? Inflation is an increase in prices and/or decline in purchasing power. An increase in the amount of currency in circulation results in a relatively sharp and sudden fall in its value, and rise in prices. It can also be defined as a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of availab...

Analysis on the status of debt options in the present market conditions Considerable action was seen on the monetary policy front over the last six weeks. The Reserve Bank of India (RBI) announced sharp cuts in the cash reserve ratio (CRR) and the repo rate. There has been a 3.5 percent cut in the CRR - 1.5 percent cut in the last one month. This is one of the sharpest cuts in key monetary policy parameters in such a short span of time. The intention of the RBI and the government is to ease the liquidity crunch and provide a boost to consumer sentiments by way of low interest rates. The inflation rate is also coming under control due to the slowdown and dip in the rates of many essential goods such as crude oil, metals and manufacturing products. Softer monetary policy measures are expected to influence the returns from debt instruments, but investors should weigh different options carefully before making any changes in their portfolios. Outlook on debt options: Bank fixed deposi...

THE present banking system is called a “fractional reserve banking system”, as the banks are required to keep only a fraction of their deposit liabilities in the form of liquid cash with the central bank for ensuring safety and liquidity of deposits. The Cash Reserve Ratio ( CRR ) refers to this liquid cash that banks have to maintain with the Reserve Bank of India ( RBI ) as a certain percentage of their demand and time liabilities. For example if the CRR is 10% then a bank with net demand and time deposits of Rs 1,00,000 will have to deposit Rs 10,000 with the RBI as liquid cash. How is CRR used as a tool of credit control? CRR was introduced in 1950 primarily as a measure to ensure safety and liquidity of bank deposits, however over the years it has become an important and effective tool for directly regulating the lending capacity of banks and controlling the money supply in the economy. When the RBI feels that the money supply is increasing and causing an upward pressure on inflat...

A loan to purchase or build a house is available at around the 10 percent level. It used to be around seven percent a couple of years ago. Also, the interest rates remained quite volatile over the last few quarters. However, this is a cyclical phenomenon. Over a long loan tenure, it will move upwards and downwards. The average rate and tax incentive together add up to make it good for the borrower. Here are some factors that influence interest rate movements: Inflation Inflation plays a significant role in influencing the monetary policy of the Reserve Bank of India ( RBI ). It forces the central bank to hike the interest rates. Currently, inflation has gone up over 11 percent (way above the RBI's mandated inflation level of around five percent per annum). The main reasons for this high inflation rate are a sharp rise in prices of basic commodities, and hike in rates of petroleum products (petrol, diesel and cooking gas). The RBI has announced a repo rate hike twice this month itse...

Prime Lending Rate (PLR) PLR or prime lending rate is a benchmark against which the lender sets his rate of interest. Cash Reserve Ratio (CRR) This is the portion of funds that banks have to retain with the Reserve Bank of India ( RBI ). When the RBI increases this percentage, the amount actually available with the commercial banks comes down. The RBI increases the CRR to draw out excessive money from the banking system and thus checks increase in prices. Bank Rate This is the rate at which the RBI lends to other banks. If the RBI increases its lending rate, the ripple effect will be felt across all the other banks that will hike lending rates to continue making profits. Repo Rate If banks face any shortfalls in funds they borrow from the central bank. Repo rate is the rate at which banks borrow money from the RBI. If the RBI reduces the repo rate, it will be cheaper for banks to borrow money. On the other hand, if the repo rate goes up, borrowing becomes expensive. Reverse Repo Rate T...

It's time to visit your portfolio and weed out investments whose inflation-adjusted returns is low or negative On June 4, the central government announced a price hike of Rs 6 per litre of petrol, Rs 3 on diesel and Rs 50 per LPG cylinder, together with customs and excise duty cuts in an attempt to save the oil marketing companies from bankruptcy. Oil marketing companies buy crude oil from the international markets and distribute it in India. India imports 73 percent of its petroleum needs as the production of crude oil here is very little. The price of crude oil in the international markets has nearly doubled from a low of $60 per barrel in May 2007 to $130 a barrel in May 2008. The retail price of crude in India, administered by the government, has not been raised since 2004. Hence, these oil marketing companies have been running a very unprofitable business of buying crude at high prices and selling it to domestic consumers at low prices. In this process, they have accumulated m...

An increase in the repo rate has put small businesses on the back foot yet again. How will they cope this time? IT is well known that small and medium enterprises ( SMEs ) are among the worst affected, when interest rates rise rapidly. Accordingly, these companies have been starved of funds of late, with the surge in interest rates in the last few months threatening to cripple their growth. In such a scenario, further rise in interest rates was the last thing these companies were expecting. But, contrary to such hopes, the Reserve Bank of India ( RBI ) early in June hiked the repo rate—the rate at which banks borrow from the central bank for short-term—as part of its attempts to contain inflation. The hike at 25 basis points raised the repo rate to 8% has resulted in the banks’ lending getting costlier. This has left SMEs fuming as it comes at a time when they are coping with rising raw material costs and an uncertain business outlook. Domestic apparel supplier Bang Overseas is among ...