A month into 2011, one of the biggest swings in asset flows has been the outperformance of previously lagging developed market equities against once red-hot emerging ones.
The chances are that this rotation by investors, encouraged by shifting valuations, inflation concerns and growth spurts in some developed economies, will remain in place for a while -- perhaps six months -- but it is not likely to become a permanent fixture.
Nothing has happened to dilute the overarching view that emerging markets are a long-term, strategic growth story, albeit with somewhat heightened political risk -- as is now being seen in Egypt and Ivory Coast.
Standard & Poor's cutting of Japan's sovereign debt rating on Thursday, meanwhile, was a stark reminder that, in contrast to emerging economies, many developed markets continue suffer from government bank balance problems.
But for the time being, the tale of the tape is clear -- the flows are into developed markets and away from emerging.
So far this year, MSCI's developed market stock index has risen a healthy 3.2 percent -- healthy in the sense that in the highly unlikely event this rate continues, developed market stocks would have the best compounded gain in at least 40 years.
The benchmark emerging market index, however, is in negative territory, having fallen more than three quarters of a percent.
Individual country indexes show the same pattern. The U.S. S&P 500 is up more than 3 percent for the year while the Sensex has lost around 10 percent.
The outperformance goes further. On a day-by-day basis last year, developed markets outperformed emerging markets on just 47 percent of occasions. So far this year, they have done so around 63 percent of the time.
And in terms of beta, a gauge of how a security reacts to moves in the market, emerging markets are moving closer to being in lockstep with developed markets -- meaning that at the moment there is little to be gained for the extra risk they may carry.
Emerging market beta is currently close to 1.0, compared with 1.8 about five years ago.
Friday, January 28, 2011
Tuesday, January 25, 2011
Eight tax saving secrets you should know
The Income Tax Act 1961 is a voluminous piece of legislation. Taxmann Publications’ latest edition of the Act runs into 1,125 pages. It’s enough to intimidate even the most diligent law student and tax expert, leave alone ordinary taxpayers. But hidden away in the 300-odd sections and 14 schedules are clauses that can benefit ordinary taxpayers-provided they know how to claim those benefit.
ET Wealth spoke to a range of tax experts to glean information on little-known tax benefits you may be entitled to. Here are eight deductions that can help you save tax over and above the tax saving investments you make during the year.
1. Use losses in stocks to cut tax
Can you gain from the short-term losses you made on stocks? Yes, says the Income Tax Act. If you have made any long-term capital gains from sale of property, gold or debt funds, you can set them off against short-term capital losses made on stocks and bring down your tax liability. “Short term capital losses can be set off against both shortterm capital gains as well as taxable long-term capital gains,” says Sandeep Shanbhag, director of Wonderland Consultants, a Mumbai-based tax planning and financial consultancy. This can be especially useful for someone who has booked profits on gold ETFs and physical gold this year. Suppose you have sold a property and made a long-term capital gain of Rs 30 lakh after indexation.
At 20%, the tax payable on this long-term capital gain is Rs 6 lakh. However, if you have also sold some junk stocks during the year and made a short-term loss of Rs 3 lakh, you can set this off against the gains from the property. Then the gain from the property will get reduced to only Rs 27 lakh and the tax payable will be Rs 5.4 lakh. However, the law makes a distinction here. One cannot set off short-term gains from stocks against long-term capital losses from the other assets. “Long term capital losses can only be set off against taxable long-term capital gains,” says Shanbhag.
How much tax can you save: Setting off a short-term loss of Rs 3 lakh against longterm gains can help you save Rs 60,000.
Proof required: Keep record of your equity trading account statement with details of the transactions that resulted in losses.
2. Get deduction for rent even without HRA
House rent can account for as much as 40-50% of the total household expense. That’s why the house rent allowance is exempt from tax to a certain limit. But what if your salary does not include an HRA component or you are a self-employed professional or businessman? Under Section 80GG, you can claim deduction of the rent paid even if you don’t get HRA. “Not many people are aware of this deduction,” says chartered accountant Mehul Sheth. But there are stiff conditions to be met. The least of the following three can be claimed as deduction: rent paid less 10% of total income; or Rs 2,000 a month; or 25% of total income. Also, the taxpayer should not be drawing any HRA or any housing benefit.
Besides, he or his spouse or minor child should not own a house in the city where he stays and he should not be claiming tax benefits for some other self-occupied house. Whew. Incidentally, if you are living in your parents’ house, you can pay rent to them. If your parent has no other income or pays a lower tax, this can bring down your tax liability significantly. However, the rent will be taxable as the income of the parent after a 30% standard deduction. This means, you can pay a senior citizen parent up to Rs 3.43 lakh a year.
How much tax can you save: Given the stiff conditions, one can’t claim more than Rs 2,000 as deduction per month under Sec 80GG. But this can bring down your tax by Rs 7,400 a year in the highest tax bracket.
Proof required: Taxpayer has to submit a declaration on form 10-BA that he is paying rent and not receiving HRA.
3. Pay lower tax if someone is ill
The treatment of a chronic illness can be a drain on the finances of a taxpayer. That’s why the Income tax Act allows a taxpayer to claim a deduction of Rs 40,000 if he has a dependent who suffers from any of the ailments specified under Section 80DDB. “The deduction is higher at Rs 60,000 if the patient is a senior citizen,” says chartered accountant Paras Savla. The diseases include, neurological diseases (including dementia, dystonia musculorum deformans, motor neuron disease, ataxia, chorea, hemiballismus, aphasia and Parkinson’s disease), malignant cancers, full-blown AIDS, chronic kidney failure and haematological disorders (haemophilia and thalassaemia). Dependents can include spouse, children, parents and siblings. However, there are a few conditions.
The patient should be wholly or mainly dependent on the taxpayer and should not have separately claimed deduction for the disability. If the amount spent is reimbursed by the employer or an insurance company, there is no deduction. If the taxpayer gets a partial reimbursement of the expenses, the balance can be claimed as deduction.
How much tax can you save: If a dependent is a patient, the taxpayer’s liability comes down by 12,360 in the highest income bracket. If the patient is a senior citizen, the tax is lower by Rs 18,540.
Proof required: One needs a certificate of the illness from a specialist in a government hospital.
4. Claim benefits for your political affiliations
Can you lower your tax if you have political connections? Apparently you can. Any amount contributed to a recognized political party can be claimed as a deduction under Section 80GGC (80GGB for corporates). “This is a new deduction and was introduced in April 2010. The donation can also be made to the electoral trust which works for the purpose of conducting elections,” says Sheth. Interestingly, unlike other deductions, there is no ceiling on the amount that can be claimed as a deduction. Of course, the deduction is available only if the donation went into the party coffers.
Cash given to individuals doesn’t count. Other donations also get you tax benefits. Under Section 80G, donations to charitable organizations get deduction ranging from 50% to 100%. It’s a good idea to know how much deduction would be available before you write a cheque. However, There is a ceiling to the deduction a taxpayer can claim in a year. “The quantum of deduction is limited to 10% of the gross total income of the donor,” says Tapati Ghose, partner at Deloitte Haskins & Sells. Also, only cash donations are taken into account. Food, clothes and medicines do not qualify.
How much tax can you save: In the highest tax bracket, a donation of Rs 1 lakh to a political party can bring down your tax by Rs 30,900.
Proof required: You must have a stamped receipt of the payment from the political party.
5. Use education loan to lower tax
The rising cost of higher education is forcing people to borrow money to pay the fee of their children’s professional courses. The taxman is sympathetic and offers a deduction that can lower the cost of the loan. The interest paid on an education loan is fully deductible from taxable income under Section 80E. Till a few years back, this deduction was available only to the borrower. Now, even a parent or a spouse can avail of it. What’s more, this now includes loans taken for vocational courses. “If a parent or legal guardian takes the loan, he can claim deduction for the interest paid for up to eight successive years, starting from the year in which the interest is first paid,” says Shanbhag.
However, loans taken for siblings and other relatives do not qualify. Also, the lender must be a recognised financial institution; loans from employers or individuals do not count.
How much tax can you save: If you take a Rs 10 lakh education loan at 10% interest for 8 years, you can save Rs 1.41 lakh in tax in the highest tax bracket. This will bring down the effective cost of the loan to 7% per annum.
Proof required: Loan statement from lender.
6. Disabilities can be tax savers
There are other signs to suggest that the taxman is not the heartless Scrooge he is often made out to be. If a taxpayer suffers from a disability, he can claim deduction of Rs 75,000 under Sec 80U. If he has a disabled dependent, he can claim the deduction under Sec 80DD. Disability includes blindness, low vision, leprosy, hearing impairment, loco-motor disability, mental retardation and mental illness and deduction is available only if the impairment is at least 40%. If the disability is severe (80% or above), the deduction is Rs 1 lakh a year. The dependant could include the taxpayer’s spouse, children, parents and even siblings.
Incidentally, the deduction is offered as a lump sum and does not depend on the actual amount that the taxpayer may spend on himself or on the disabled dependent. However, the disabled person should be wholly or mainly dependent on the taxpayer for maintenance, and should not have claimed deduction for the disability under Section 80U separately.
How much tax can you save: A deduction of Rs 75,000 can cut tax by Rs 23,175 in the highest tax bracket. In case of severe disability, the tax is lower by Rs 30,900.
Proof required: A certificate of disability from a civil surgeon or the chief medical officer of a government hospital.
7. Take unlimited deduction for your second home loan
When it comes to buying a second house, the taxman can be very encouraging. Under Section 24b, one can claim deduction of up to Rs 1.5 lakh a lakh for interest paid on a home loan. But if the taxpayer buys a second house through another home loan and gives it on rent, the entire interest paid on the home loan during a given year can be claimed as a deduction. As Savla says, “If you have more than one house, any one is deemed to be rented out. So the interest income on the home loan for that house can be claimed entirely for deduction, provided the rental income or a deemed income is charged to tax.”
How much tax can you save: If you have taken a home loan of Rs 50 lakh at 9.5% for 20 years, your interest payment in the first year will be Rs 4.7 lakh and you can save tax up to Rs 1.09 lakh.
Proof required: Loan account statement from your lender
8. Claim HRA as well as home loan benefits
But you can claim both house rent allowance (HRA) exemption as well as the tax benefits on the interest paid on a home loan. Many organizations do not allow employees to claim both benefits. Their logic is that HRA is exempt if you are paying rent and home loan benefits apply only for a self-occupied house. You can’t be doing both at the same time. But this is a gray area in the Income Tax Act. “In legal terms, silence signifies approval.
In other words, the Act need not expressly allow something. The lack of express disallowance also signifies intention of approval,” says Shanbhag. So given this, HRA and interest on home loan are two separate provisions and claiming one of them as a deduction does not influence the other. As Shanbhag puts it, “The taxpayer may own any number of flats, either in the same city that he works in or anywhere else in the whole of India or for that matter abroad, but that in no way influences the HRA deduction that he is entitled to.”
There are many such examples in the tax laws. Let’s take for instance, Section 80C (PPF, NSC, ELSS etc.) and Section 80D (medical insurance premium). “Everyone will agree that both Section 80C and Section 80D can be separately claimed. But does it expressly say so anywhere?” asks Shanbhag.
How much tax can you save: In the highest tax bracket, a deduction for Rs 1.5 lakh will bring down your tax by Rs 46,350.
Proof required: Loan account statement from your lender
ET Wealth spoke to a range of tax experts to glean information on little-known tax benefits you may be entitled to. Here are eight deductions that can help you save tax over and above the tax saving investments you make during the year.
1. Use losses in stocks to cut tax
Can you gain from the short-term losses you made on stocks? Yes, says the Income Tax Act. If you have made any long-term capital gains from sale of property, gold or debt funds, you can set them off against short-term capital losses made on stocks and bring down your tax liability. “Short term capital losses can be set off against both shortterm capital gains as well as taxable long-term capital gains,” says Sandeep Shanbhag, director of Wonderland Consultants, a Mumbai-based tax planning and financial consultancy. This can be especially useful for someone who has booked profits on gold ETFs and physical gold this year. Suppose you have sold a property and made a long-term capital gain of Rs 30 lakh after indexation.
At 20%, the tax payable on this long-term capital gain is Rs 6 lakh. However, if you have also sold some junk stocks during the year and made a short-term loss of Rs 3 lakh, you can set this off against the gains from the property. Then the gain from the property will get reduced to only Rs 27 lakh and the tax payable will be Rs 5.4 lakh. However, the law makes a distinction here. One cannot set off short-term gains from stocks against long-term capital losses from the other assets. “Long term capital losses can only be set off against taxable long-term capital gains,” says Shanbhag.
How much tax can you save: Setting off a short-term loss of Rs 3 lakh against longterm gains can help you save Rs 60,000.
Proof required: Keep record of your equity trading account statement with details of the transactions that resulted in losses.
2. Get deduction for rent even without HRA
House rent can account for as much as 40-50% of the total household expense. That’s why the house rent allowance is exempt from tax to a certain limit. But what if your salary does not include an HRA component or you are a self-employed professional or businessman? Under Section 80GG, you can claim deduction of the rent paid even if you don’t get HRA. “Not many people are aware of this deduction,” says chartered accountant Mehul Sheth. But there are stiff conditions to be met. The least of the following three can be claimed as deduction: rent paid less 10% of total income; or Rs 2,000 a month; or 25% of total income. Also, the taxpayer should not be drawing any HRA or any housing benefit.
Besides, he or his spouse or minor child should not own a house in the city where he stays and he should not be claiming tax benefits for some other self-occupied house. Whew. Incidentally, if you are living in your parents’ house, you can pay rent to them. If your parent has no other income or pays a lower tax, this can bring down your tax liability significantly. However, the rent will be taxable as the income of the parent after a 30% standard deduction. This means, you can pay a senior citizen parent up to Rs 3.43 lakh a year.
How much tax can you save: Given the stiff conditions, one can’t claim more than Rs 2,000 as deduction per month under Sec 80GG. But this can bring down your tax by Rs 7,400 a year in the highest tax bracket.
Proof required: Taxpayer has to submit a declaration on form 10-BA that he is paying rent and not receiving HRA.
3. Pay lower tax if someone is ill
The treatment of a chronic illness can be a drain on the finances of a taxpayer. That’s why the Income tax Act allows a taxpayer to claim a deduction of Rs 40,000 if he has a dependent who suffers from any of the ailments specified under Section 80DDB. “The deduction is higher at Rs 60,000 if the patient is a senior citizen,” says chartered accountant Paras Savla. The diseases include, neurological diseases (including dementia, dystonia musculorum deformans, motor neuron disease, ataxia, chorea, hemiballismus, aphasia and Parkinson’s disease), malignant cancers, full-blown AIDS, chronic kidney failure and haematological disorders (haemophilia and thalassaemia). Dependents can include spouse, children, parents and siblings. However, there are a few conditions.
The patient should be wholly or mainly dependent on the taxpayer and should not have separately claimed deduction for the disability. If the amount spent is reimbursed by the employer or an insurance company, there is no deduction. If the taxpayer gets a partial reimbursement of the expenses, the balance can be claimed as deduction.
How much tax can you save: If a dependent is a patient, the taxpayer’s liability comes down by 12,360 in the highest income bracket. If the patient is a senior citizen, the tax is lower by Rs 18,540.
Proof required: One needs a certificate of the illness from a specialist in a government hospital.
4. Claim benefits for your political affiliations
Can you lower your tax if you have political connections? Apparently you can. Any amount contributed to a recognized political party can be claimed as a deduction under Section 80GGC (80GGB for corporates). “This is a new deduction and was introduced in April 2010. The donation can also be made to the electoral trust which works for the purpose of conducting elections,” says Sheth. Interestingly, unlike other deductions, there is no ceiling on the amount that can be claimed as a deduction. Of course, the deduction is available only if the donation went into the party coffers.
Cash given to individuals doesn’t count. Other donations also get you tax benefits. Under Section 80G, donations to charitable organizations get deduction ranging from 50% to 100%. It’s a good idea to know how much deduction would be available before you write a cheque. However, There is a ceiling to the deduction a taxpayer can claim in a year. “The quantum of deduction is limited to 10% of the gross total income of the donor,” says Tapati Ghose, partner at Deloitte Haskins & Sells. Also, only cash donations are taken into account. Food, clothes and medicines do not qualify.
How much tax can you save: In the highest tax bracket, a donation of Rs 1 lakh to a political party can bring down your tax by Rs 30,900.
Proof required: You must have a stamped receipt of the payment from the political party.
5. Use education loan to lower tax
The rising cost of higher education is forcing people to borrow money to pay the fee of their children’s professional courses. The taxman is sympathetic and offers a deduction that can lower the cost of the loan. The interest paid on an education loan is fully deductible from taxable income under Section 80E. Till a few years back, this deduction was available only to the borrower. Now, even a parent or a spouse can avail of it. What’s more, this now includes loans taken for vocational courses. “If a parent or legal guardian takes the loan, he can claim deduction for the interest paid for up to eight successive years, starting from the year in which the interest is first paid,” says Shanbhag.
However, loans taken for siblings and other relatives do not qualify. Also, the lender must be a recognised financial institution; loans from employers or individuals do not count.
How much tax can you save: If you take a Rs 10 lakh education loan at 10% interest for 8 years, you can save Rs 1.41 lakh in tax in the highest tax bracket. This will bring down the effective cost of the loan to 7% per annum.
Proof required: Loan statement from lender.
6. Disabilities can be tax savers
There are other signs to suggest that the taxman is not the heartless Scrooge he is often made out to be. If a taxpayer suffers from a disability, he can claim deduction of Rs 75,000 under Sec 80U. If he has a disabled dependent, he can claim the deduction under Sec 80DD. Disability includes blindness, low vision, leprosy, hearing impairment, loco-motor disability, mental retardation and mental illness and deduction is available only if the impairment is at least 40%. If the disability is severe (80% or above), the deduction is Rs 1 lakh a year. The dependant could include the taxpayer’s spouse, children, parents and even siblings.
Incidentally, the deduction is offered as a lump sum and does not depend on the actual amount that the taxpayer may spend on himself or on the disabled dependent. However, the disabled person should be wholly or mainly dependent on the taxpayer for maintenance, and should not have claimed deduction for the disability under Section 80U separately.
How much tax can you save: A deduction of Rs 75,000 can cut tax by Rs 23,175 in the highest tax bracket. In case of severe disability, the tax is lower by Rs 30,900.
Proof required: A certificate of disability from a civil surgeon or the chief medical officer of a government hospital.
7. Take unlimited deduction for your second home loan
When it comes to buying a second house, the taxman can be very encouraging. Under Section 24b, one can claim deduction of up to Rs 1.5 lakh a lakh for interest paid on a home loan. But if the taxpayer buys a second house through another home loan and gives it on rent, the entire interest paid on the home loan during a given year can be claimed as a deduction. As Savla says, “If you have more than one house, any one is deemed to be rented out. So the interest income on the home loan for that house can be claimed entirely for deduction, provided the rental income or a deemed income is charged to tax.”
How much tax can you save: If you have taken a home loan of Rs 50 lakh at 9.5% for 20 years, your interest payment in the first year will be Rs 4.7 lakh and you can save tax up to Rs 1.09 lakh.
Proof required: Loan account statement from your lender
8. Claim HRA as well as home loan benefits
But you can claim both house rent allowance (HRA) exemption as well as the tax benefits on the interest paid on a home loan. Many organizations do not allow employees to claim both benefits. Their logic is that HRA is exempt if you are paying rent and home loan benefits apply only for a self-occupied house. You can’t be doing both at the same time. But this is a gray area in the Income Tax Act. “In legal terms, silence signifies approval.
In other words, the Act need not expressly allow something. The lack of express disallowance also signifies intention of approval,” says Shanbhag. So given this, HRA and interest on home loan are two separate provisions and claiming one of them as a deduction does not influence the other. As Shanbhag puts it, “The taxpayer may own any number of flats, either in the same city that he works in or anywhere else in the whole of India or for that matter abroad, but that in no way influences the HRA deduction that he is entitled to.”
There are many such examples in the tax laws. Let’s take for instance, Section 80C (PPF, NSC, ELSS etc.) and Section 80D (medical insurance premium). “Everyone will agree that both Section 80C and Section 80D can be separately claimed. But does it expressly say so anywhere?” asks Shanbhag.
How much tax can you save: In the highest tax bracket, a deduction for Rs 1.5 lakh will bring down your tax by Rs 46,350.
Proof required: Loan account statement from your lender
How to choose the right health plan
Medical costs are ballooning by the day, even a minor surgery can cost you anywhere between Rs 20,000 and Rs 50,000. Similarly, a cardiac treatment can set you back by Rs 5 lakh, depending upon the city and the hospital you choose.
Save, invest, do whatever you want, there can be no dispute over the need for mediclaim to offset the impact of rising healthcare costs. Given the plethora of options in the health insurance space, it is difficult to make a rational choice.
With life insurance companies entering the health insurance space, customers are spoilt for choice. ET chalks out the differences between traditional mediclaim policies offered by general insurers and the new generation health covers offered by life insurers. Here’s a low-down on the key components of a comprehensive mediclaim:
There are two kinds of medical policies available in India. The first is the indemnity policy, which is the traditional mediclaim policy that general insurers offer. These are largely reimbursement plans, which cover expenses related to hospitalisation.
The claims are settled by the insurer either on a cashless basis through a tie-up with hospitals or by reimbursing bills. Then, there are defined benefit plans, offered by life insurers, which include critical illness policies and payment of a lump sum on the diagnosis of any of the named critical illnesses in the policy document.
“If the insurance company is stipulated to pay Rs 5,000 for a certain critical illness, the company will pay Rs 5,000 irrespective of the size of the claim,” says Rahul Aggarwal, CEO, Optima Insurance Brokers. However, critical illnesses such as cancer, stroke, renal failure or major organ transplants are not standardised and may vary from insurer to insurer. However, the insurers will not cover any of these illnesses if they get diagnosed within 90 days from the effective date of the policy.
“The premiums of both versions of health covers are comparable but life insurers still outsource the service of claim settlement to TPAs.
Among general insurers, most private sector companies have changed this practice and carry out the claim servicing business within the company itself. In a way, the company becomes directly responsible for claim settlement.
Earlier, even when the TPAs carried out the business of claims servicing, the onus was on the insurer to ensure a hasslefree claim settlement for the policyholder,” says Sanjay Datta, head, Health Insurance, ICICI Lombard General Insurance.
“The main difference between health covers offered by general insurers and those of life insurers is the tenure of the cover. The mediclaim has to be renewed annually whereas health covers (offered by life insurers are renewable after three years or more, depending upon the choice of insurance and insurance company).
The premiums are likely to remain unchanged in the three-year period. If the insurer wants to increase the premium within three years, the insurer has to seek the approval of Insurance Regulatory and Development Authority (Irda). If the insurer wants to increase the premium after three years, it works like a regular mediclaim policy which usually revises premiums on an annual basis,” Binay Kumar Agarwala, senior V-P, health business, ICICI Prudential.
Size matters:
You should look at the annual limit of your policy. According to experts, if you hail from a small- or mid-sized town you should look at a cover of Rs 2-3 lakh. If you reside in a metro, then you should not look at covers less than Rs 4-5 lakh.
Insurers have introduced sub limits in mediclaim policies to tackle the rise in healthcare costs. The most common sub-limits are room rents, doctors’ fees and diagnostics.
If you have a sum insured of Rs 1 lakh and the insurer has capped your room rent at 1-1.5% of the sum insured then your room rent cannot exceed Rs 1,000. If it exceeds the specified amount, then you have to pay the balance from your pocket.
“If there is a sublimit on the room rent or the doctors’ fees, the ultimate payout will be much lesser than the sum assured,” Datta adds. Similarly, insurers also impose a sub-limit on doctors’ fee at 25-30% of the bill amount. Check to see that the policy states the date the policy will begin paying (some have a waiting period before the cover begins) and what is covered or excluded from coverage. Moreover, it always makes sense to have an additional mediclaim even if you are covered under your employer’s mediclaim scheme.
This refers to the portion of claim that a policyholder agrees to bear, while the insurance company undertakes to chip in with the rest. “Co-payments happen only in certain reimbursement covers to make the insured more responsible for judicious payments. This clause is seen mostly in health covers designed for senior citizens. It is also common in group mediclaim covers offered by employers, which covers the employees and his/her family members. The co-payment clause is applicable mostly to the family members of the employee,” Aggarwal adds.
The pre-existing diseases clause:
There are mediclaim covers which do not cover pre-existing diseases for four years whereas some which do not cover it for three years. Similarly, ensure there is no ambiguity in the renewal clause of the policy. For example, under an individual mediclaim policy, Apollo Munich covers pre-existing diseases after three continuous policy years. The New India Assurance, on the other hand, covers pre-existing diseases only after four years and covers hypertension and diabetes only if you pay extra premium.
The defined benefit plan could be a handicap for an individual who has signed up for a less sum assured. But it could be a plus for an individual who has signed up for an adequate sum assured. Moreover, you will know how much you will earn from your cover in advance.
Similarly your mediclaim could have caps and limits, which can be well augmented by the health cover. But that doesn’t imply that a stand alone health cover can substitute a mediclaim in your financial kitty,” Aggarwal adds. You can top up your existing mediclaim if you want to increase the sum assured. Indemnity or reimbursement cover should be the ideal base cover for any policyholder as that would come close to the final bill amount of the hospital.
But there are various expenses which include commuting to the hospital, buying medicines post hospitalisation and so on, that fall outside the purview of a traditional reimbursement plan. In such cases, you could top up a traditional reimbursement plan with a defined benefit plan to be able to tackle all the medical-related expenses. After all you have the option of claiming a tax benefit of up to Rs 15,000 under Section 80D.
General insurers
General insurance companies offer indemnity policies or reimbursement health plans Mediclaim has to be renewed on an annual basis. The company can increase the premium at renewal Look for the clause on sub-limits. The most common sub-limits are room rents, doctors’ fees and diagnostics Individuals from a small town should go for a cover of Rs 2-3 lakh, and in metros up to Rs 5 lakh.
Life insurers
Defined benefit plans, mostly offered by by life insurers, pay a lump sum on the diagnosis of any of the named critical illnesses listed in the policy document Insurers usually do not cover the specified critical illnesses if they are diagnosed within 90 days from the effective date of the policy Premiums are usually revised at renewal, which is usually three years or more If the company wants to increase the premium within three years, the insurer has to seek Irda’s approval.
Save, invest, do whatever you want, there can be no dispute over the need for mediclaim to offset the impact of rising healthcare costs. Given the plethora of options in the health insurance space, it is difficult to make a rational choice.
With life insurance companies entering the health insurance space, customers are spoilt for choice. ET chalks out the differences between traditional mediclaim policies offered by general insurers and the new generation health covers offered by life insurers. Here’s a low-down on the key components of a comprehensive mediclaim:
There are two kinds of medical policies available in India. The first is the indemnity policy, which is the traditional mediclaim policy that general insurers offer. These are largely reimbursement plans, which cover expenses related to hospitalisation.
The claims are settled by the insurer either on a cashless basis through a tie-up with hospitals or by reimbursing bills. Then, there are defined benefit plans, offered by life insurers, which include critical illness policies and payment of a lump sum on the diagnosis of any of the named critical illnesses in the policy document.
“If the insurance company is stipulated to pay Rs 5,000 for a certain critical illness, the company will pay Rs 5,000 irrespective of the size of the claim,” says Rahul Aggarwal, CEO, Optima Insurance Brokers. However, critical illnesses such as cancer, stroke, renal failure or major organ transplants are not standardised and may vary from insurer to insurer. However, the insurers will not cover any of these illnesses if they get diagnosed within 90 days from the effective date of the policy.
“The premiums of both versions of health covers are comparable but life insurers still outsource the service of claim settlement to TPAs.
Among general insurers, most private sector companies have changed this practice and carry out the claim servicing business within the company itself. In a way, the company becomes directly responsible for claim settlement.
Earlier, even when the TPAs carried out the business of claims servicing, the onus was on the insurer to ensure a hasslefree claim settlement for the policyholder,” says Sanjay Datta, head, Health Insurance, ICICI Lombard General Insurance.
“The main difference between health covers offered by general insurers and those of life insurers is the tenure of the cover. The mediclaim has to be renewed annually whereas health covers (offered by life insurers are renewable after three years or more, depending upon the choice of insurance and insurance company).
The premiums are likely to remain unchanged in the three-year period. If the insurer wants to increase the premium within three years, the insurer has to seek the approval of Insurance Regulatory and Development Authority (Irda). If the insurer wants to increase the premium after three years, it works like a regular mediclaim policy which usually revises premiums on an annual basis,” Binay Kumar Agarwala, senior V-P, health business, ICICI Prudential.
Size matters:
You should look at the annual limit of your policy. According to experts, if you hail from a small- or mid-sized town you should look at a cover of Rs 2-3 lakh. If you reside in a metro, then you should not look at covers less than Rs 4-5 lakh.
Insurers have introduced sub limits in mediclaim policies to tackle the rise in healthcare costs. The most common sub-limits are room rents, doctors’ fees and diagnostics.
If you have a sum insured of Rs 1 lakh and the insurer has capped your room rent at 1-1.5% of the sum insured then your room rent cannot exceed Rs 1,000. If it exceeds the specified amount, then you have to pay the balance from your pocket.
“If there is a sublimit on the room rent or the doctors’ fees, the ultimate payout will be much lesser than the sum assured,” Datta adds. Similarly, insurers also impose a sub-limit on doctors’ fee at 25-30% of the bill amount. Check to see that the policy states the date the policy will begin paying (some have a waiting period before the cover begins) and what is covered or excluded from coverage. Moreover, it always makes sense to have an additional mediclaim even if you are covered under your employer’s mediclaim scheme.
This refers to the portion of claim that a policyholder agrees to bear, while the insurance company undertakes to chip in with the rest. “Co-payments happen only in certain reimbursement covers to make the insured more responsible for judicious payments. This clause is seen mostly in health covers designed for senior citizens. It is also common in group mediclaim covers offered by employers, which covers the employees and his/her family members. The co-payment clause is applicable mostly to the family members of the employee,” Aggarwal adds.
The pre-existing diseases clause:
There are mediclaim covers which do not cover pre-existing diseases for four years whereas some which do not cover it for three years. Similarly, ensure there is no ambiguity in the renewal clause of the policy. For example, under an individual mediclaim policy, Apollo Munich covers pre-existing diseases after three continuous policy years. The New India Assurance, on the other hand, covers pre-existing diseases only after four years and covers hypertension and diabetes only if you pay extra premium.
The defined benefit plan could be a handicap for an individual who has signed up for a less sum assured. But it could be a plus for an individual who has signed up for an adequate sum assured. Moreover, you will know how much you will earn from your cover in advance.
Similarly your mediclaim could have caps and limits, which can be well augmented by the health cover. But that doesn’t imply that a stand alone health cover can substitute a mediclaim in your financial kitty,” Aggarwal adds. You can top up your existing mediclaim if you want to increase the sum assured. Indemnity or reimbursement cover should be the ideal base cover for any policyholder as that would come close to the final bill amount of the hospital.
But there are various expenses which include commuting to the hospital, buying medicines post hospitalisation and so on, that fall outside the purview of a traditional reimbursement plan. In such cases, you could top up a traditional reimbursement plan with a defined benefit plan to be able to tackle all the medical-related expenses. After all you have the option of claiming a tax benefit of up to Rs 15,000 under Section 80D.
General insurers
General insurance companies offer indemnity policies or reimbursement health plans Mediclaim has to be renewed on an annual basis. The company can increase the premium at renewal Look for the clause on sub-limits. The most common sub-limits are room rents, doctors’ fees and diagnostics Individuals from a small town should go for a cover of Rs 2-3 lakh, and in metros up to Rs 5 lakh.
Life insurers
Defined benefit plans, mostly offered by by life insurers, pay a lump sum on the diagnosis of any of the named critical illnesses listed in the policy document Insurers usually do not cover the specified critical illnesses if they are diagnosed within 90 days from the effective date of the policy Premiums are usually revised at renewal, which is usually three years or more If the company wants to increase the premium within three years, the insurer has to seek Irda’s approval.
Home loan rates set to soar to double digits
Planning to take a home loan? Be prepared to shell out double-digit interest rates soon. Lenders say it's only a matter of time before they are forced to pass on the higher cost of funds to borrowers after the Reserve Bank of India increased key policy rates by 25 basis points on Tuesday.
The rate hike, the seventh successive one since January 2010, is aimed at controlling inflation which the RBI described as a "dominant concern". The rate of inflation as measured by the wholesale price index is now forecast to be at 7% by end-March, much higher than the original estimate of 5%.
At present, new borrowers get loans at close to 9.5%. But borrowers who have availed of home loans around five years back are already paying over 12% following successive increases in prime lending rates. The increase in policy rates may seem modest. But banks are already in deficit mode and borrowing over Rs 1 lakh crore from RBI on a daily basis.
"The liquidity situation is very tight and the cost of funds has gone up for all. Interest rates on home loans would also go up to double digits," said HDFC chairman Deepak Parekh . He pointed out that top corporates were already borrowing at 10% and more.
Higher interest rates should be good news for depositors, though their enthusiasm for fixed deposits is likely to wane since inflationary expectations could discourage savings. Rising interest rates could also restrain real estate prices in the medium term by tempering demand.
Unveiling its quarterly monetary policy review, the RBI on Tuesday hiked the repo and reverse repo, the rates at which it lends to and borrows from banks, to 6.5% and 5.5% respectively. According to bankers, the 25 basis point hike was a moderate step and by itself not disruptive to growth.
Most banks were expecting that the central bank would take further measures to ease liquidity. Many in the financial sector expected the rate hike to be in the order of 50 basis points. "Going forward, higher demand-side pressures emanating from generalized inflation are likely to surface. Not taming inflation could act as an impediment to the economy's 8-9% medium term growth rate objective," said Ajay Srinivasan, chief executive, financial services, Aditya Birla Group .
What ought to worry borrowers is that RBI has told banks in no uncertain terms that they must slow down lending. The biggest concern for the central bank now is that in the third quarter, banks have lent more money than they raised in the form of deposits.
Banks have been at pains to explain this, they had surplus funds from the previous fiscal, were raising funds through issue of bonds, and some of the large loans to telecom and oil companies were a blip in loan growth. However, there is a fear that the 24% growth in bank credit is adding to consumption demand which is one of the drivers of inflation.
"We have definitely moved into a higher rate environment. Globally there are concerns over inflation and there is domestic pressure on rates," said Shikha Sharma, MD, Axis Bank . According to M V Nair, chairman, Union Bank of India , "The intent of the policy is clear. Lending rates should go up, but how much and when would be determined by each bank."
The rate hike, the seventh successive one since January 2010, is aimed at controlling inflation which the RBI described as a "dominant concern". The rate of inflation as measured by the wholesale price index is now forecast to be at 7% by end-March, much higher than the original estimate of 5%.
At present, new borrowers get loans at close to 9.5%. But borrowers who have availed of home loans around five years back are already paying over 12% following successive increases in prime lending rates. The increase in policy rates may seem modest. But banks are already in deficit mode and borrowing over Rs 1 lakh crore from RBI on a daily basis.
"The liquidity situation is very tight and the cost of funds has gone up for all. Interest rates on home loans would also go up to double digits," said HDFC chairman Deepak Parekh . He pointed out that top corporates were already borrowing at 10% and more.
Higher interest rates should be good news for depositors, though their enthusiasm for fixed deposits is likely to wane since inflationary expectations could discourage savings. Rising interest rates could also restrain real estate prices in the medium term by tempering demand.
Unveiling its quarterly monetary policy review, the RBI on Tuesday hiked the repo and reverse repo, the rates at which it lends to and borrows from banks, to 6.5% and 5.5% respectively. According to bankers, the 25 basis point hike was a moderate step and by itself not disruptive to growth.
Most banks were expecting that the central bank would take further measures to ease liquidity. Many in the financial sector expected the rate hike to be in the order of 50 basis points. "Going forward, higher demand-side pressures emanating from generalized inflation are likely to surface. Not taming inflation could act as an impediment to the economy's 8-9% medium term growth rate objective," said Ajay Srinivasan, chief executive, financial services, Aditya Birla Group .
What ought to worry borrowers is that RBI has told banks in no uncertain terms that they must slow down lending. The biggest concern for the central bank now is that in the third quarter, banks have lent more money than they raised in the form of deposits.
Banks have been at pains to explain this, they had surplus funds from the previous fiscal, were raising funds through issue of bonds, and some of the large loans to telecom and oil companies were a blip in loan growth. However, there is a fear that the 24% growth in bank credit is adding to consumption demand which is one of the drivers of inflation.
"We have definitely moved into a higher rate environment. Globally there are concerns over inflation and there is domestic pressure on rates," said Shikha Sharma, MD, Axis Bank . According to M V Nair, chairman, Union Bank of India , "The intent of the policy is clear. Lending rates should go up, but how much and when would be determined by each bank."
Monday, January 24, 2011
ONGC FPO likely to hit market on March 15
The Rs 13,000 crore public offering of state-run Oil and Natural Gas Corp (ONGC) is likely to hit the market on March 15, a government official said today.
"A tentative schedule has been drawn for the follow-on public offer, as per which the first road show will be held in Chennai on February 2 and the public offer will hit the market on March 15," the official said after the kick off meeting of the FPO here today.
ONGC will file the red herring prospectus for the FPO by February 25, by which time it hopes to have five more independent directors on the company's board to meet the SEBI's listing requirement.
The government plans to raise Rs 13,000 crore through sale of five per cent stake in ONGC.
Last week, the Government had appointed Bank of America Corp , Nomura Holdings , HSBC Holdings Plc , JM Financial Services, Citigroup Inc and Morgan Stanley to handle the FPO.
Post offer, the government shareholding in ONGC would come down to 69.14 per cent from the current 74.14 per cent.
ONGC has six functional directors, besides chairman and managing director. It also has two government-appointed nominee directors taking the total strength to nine.
Besides, the company at present has four independent directors and needs five more to meet the SEBI's listing requirements.
As a precursor to the share sale, ONGC will split equity shares with a face value of Rs 10 each into two shares of Rs 5 each. It will also issue a free share to every shareholder.
After the share split and bonus issue, the market value of ONGC's shares will dip to around Rs 275 (a share), as against today's closing price of Rs 1,138.70 on the Bombay Stock Exchange .
ONGC has already appointed two international auditors -- DeGolyer and MacNaughton and Gaffney, Cline and Associates -- to certify its' and its' subsidiary ONGC Videsh Ltd's oil and gas reserves, a prerequisite for any exploration firm going for a public offering.
The company, which usually gets its reserves audited every five years, is getting certification done just after a three-year gap this time because of the planned FPO.
"A tentative schedule has been drawn for the follow-on public offer, as per which the first road show will be held in Chennai on February 2 and the public offer will hit the market on March 15," the official said after the kick off meeting of the FPO here today.
ONGC will file the red herring prospectus for the FPO by February 25, by which time it hopes to have five more independent directors on the company's board to meet the SEBI's listing requirement.
The government plans to raise Rs 13,000 crore through sale of five per cent stake in ONGC.
Last week, the Government had appointed Bank of America Corp , Nomura Holdings , HSBC Holdings Plc , JM Financial Services, Citigroup Inc and Morgan Stanley to handle the FPO.
Post offer, the government shareholding in ONGC would come down to 69.14 per cent from the current 74.14 per cent.
ONGC has six functional directors, besides chairman and managing director. It also has two government-appointed nominee directors taking the total strength to nine.
Besides, the company at present has four independent directors and needs five more to meet the SEBI's listing requirements.
As a precursor to the share sale, ONGC will split equity shares with a face value of Rs 10 each into two shares of Rs 5 each. It will also issue a free share to every shareholder.
After the share split and bonus issue, the market value of ONGC's shares will dip to around Rs 275 (a share), as against today's closing price of Rs 1,138.70 on the Bombay Stock Exchange .
ONGC has already appointed two international auditors -- DeGolyer and MacNaughton and Gaffney, Cline and Associates -- to certify its' and its' subsidiary ONGC Videsh Ltd's oil and gas reserves, a prerequisite for any exploration firm going for a public offering.
The company, which usually gets its reserves audited every five years, is getting certification done just after a three-year gap this time because of the planned FPO.
Saturday, January 22, 2011
Tax-saving options: Be wary of conditions and limits
It is now the time of the year when one should start the tax planning process. With some time in hand, taxpayers can properly plan out their needs. It makes sense to start now, rather than wait for the last-minute rush. Of particular relevance to tax payers are the different options provided under Section 80C of the Income Tax Act.
The section contains various instruments which can be invested in by the taxpayer to save on tax. To encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Under this section, one can invest a maximum of Rs l lakh. In case one is in the highest tax bracket of 30 percent, you save a tax of Rs 30,000.
However, there are certain conditions and limits subject to which the investments can be made in these instruments. Further, the choice of the individual taxpayer would vary as income from these instruments may further be or not be taxable.
One should also keep in mind factors like rate of return, lock in period, taxability of the income earned on the instruments, flexibility of withdrawal in case of need, tenure, inflation and so on. In some cases, one may save on tax in present terms, but may erode capital in the long term given the rates of inflation.
So evaluate the various factors before taking a decision. Some options under this section include:
Public Provident Fund (PPF) A PPF account can be opened with a nationalized bank or Post office. The interest of 8 percent is taxfree and the maturity period is 15 years. The minimum contribution is Rs 500 and the maximum is Rs 70,000.
Provident Fund (PF) and Voluntary Provident Fund (VPF)
Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution.
While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards Section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5 percent per annum and interest earned is tax-free.
Life insurance
Any amount that you pay towards life insurance premium for yourself, your spouse or your children can be included in section 80C deduction. If you are paying premium for more than one insurance policy, all the premiums can be included.
Besides this, investments in unit-linked insurance plans (ULIPs) that offer life insurance with benefits of equity investments are also eligible for deduction.
Five-year bank fixed deposit
Tax-saving fixed deposits (FDs) of scheduled banks with a tenure of five years are also entitled for section 80C deduction.
National Savings Certificate
These are six-year smallsavings instrument, where the rate of interest is 8 percent and is compounded halfyearly. The interest accrued every year is liable to tax but the interest is also deemed to be reinvested and thus eligible for Section 80C deduction.
Equity-linked savings scheme
Mutual funds offer you specially-created tax saving funds called equity-linked savings schemes (ELSS).
These schemes invest your money in equities and hence, return is not guaranteed. Your investment is locked for a period of three years.
Home loan principal repayment
The principal portion of the EMI qualifies for deduction under Section 80C.
Stamp duty and registration charges
The amount you pay as stamp duty when you buy a house, and the amount you pay for the registration of the documents of the house can be claimed as deduction under section 80C. However, this can be done only in the year of purchase of the house.
Children’s education expenses
These can be claimed as deductions under Section 80C. One would need to keep the receipts to claim the same.
Infrastructure bonds
In addition to the Rs 1 lakh limit above, one can also claim an additional deduction of Rs 20,000 by investing in infrastructure bonds issued by specified financial institutions. The interest earned on these bonds is subject to tax.
The section contains various instruments which can be invested in by the taxpayer to save on tax. To encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Under this section, one can invest a maximum of Rs l lakh. In case one is in the highest tax bracket of 30 percent, you save a tax of Rs 30,000.
However, there are certain conditions and limits subject to which the investments can be made in these instruments. Further, the choice of the individual taxpayer would vary as income from these instruments may further be or not be taxable.
One should also keep in mind factors like rate of return, lock in period, taxability of the income earned on the instruments, flexibility of withdrawal in case of need, tenure, inflation and so on. In some cases, one may save on tax in present terms, but may erode capital in the long term given the rates of inflation.
So evaluate the various factors before taking a decision. Some options under this section include:
Public Provident Fund (PPF) A PPF account can be opened with a nationalized bank or Post office. The interest of 8 percent is taxfree and the maturity period is 15 years. The minimum contribution is Rs 500 and the maximum is Rs 70,000.
Provident Fund (PF) and Voluntary Provident Fund (VPF)
Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution.
While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards Section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5 percent per annum and interest earned is tax-free.
Life insurance
Any amount that you pay towards life insurance premium for yourself, your spouse or your children can be included in section 80C deduction. If you are paying premium for more than one insurance policy, all the premiums can be included.
Besides this, investments in unit-linked insurance plans (ULIPs) that offer life insurance with benefits of equity investments are also eligible for deduction.
Five-year bank fixed deposit
Tax-saving fixed deposits (FDs) of scheduled banks with a tenure of five years are also entitled for section 80C deduction.
National Savings Certificate
These are six-year smallsavings instrument, where the rate of interest is 8 percent and is compounded halfyearly. The interest accrued every year is liable to tax but the interest is also deemed to be reinvested and thus eligible for Section 80C deduction.
Equity-linked savings scheme
Mutual funds offer you specially-created tax saving funds called equity-linked savings schemes (ELSS).
These schemes invest your money in equities and hence, return is not guaranteed. Your investment is locked for a period of three years.
Home loan principal repayment
The principal portion of the EMI qualifies for deduction under Section 80C.
Stamp duty and registration charges
The amount you pay as stamp duty when you buy a house, and the amount you pay for the registration of the documents of the house can be claimed as deduction under section 80C. However, this can be done only in the year of purchase of the house.
Children’s education expenses
These can be claimed as deductions under Section 80C. One would need to keep the receipts to claim the same.
Infrastructure bonds
In addition to the Rs 1 lakh limit above, one can also claim an additional deduction of Rs 20,000 by investing in infrastructure bonds issued by specified financial institutions. The interest earned on these bonds is subject to tax.
Trading Call
Buy Insecticides India around 252-240 -target 287 stop 237-
Buy Arvind-around 60-63 appreciation-10-15%
Buy Arvind-around 60-63 appreciation-10-15%
Friday, January 21, 2011
BIG BOY Reliance-Result Awaited
The flagship company of Reliance Group, Reliance Industries, RIL has announced its third quarter results. The company's Q3 net profit was up 28.14% at Rs 5,136 crore versus Rs 4,008 crore.
Its net sales were up 5.15% at Rs 59,789 crore versus Rs 56,856 crore.
Excerpts from Reporter's Diary on CNBC-TV18 Watch the full show »
SP Tulsian, sptulsian.com says, the numbers are slightly above than what he was expecting on the bottom-line. On top-line, the numbers are flat, he adds. "I think Q4 is likely to be better than Q3."
He is quite positive on the petchem segment in the next two to three quarters.
According to him, the gross refining margins (GRMs) could be close to USD 9.5 per barrel in the fourth quarter. "I expect a GRM of close to USD 9.5 per barrel, provided crude remains at USD 90 per barrel," he adds.
Tulsian says, till expiry, RIL share should rule in the range of Rs 970 to Rs 1,000.
Here is a verbatim transcript of the exclusive interview. Also watch the accompanying videos.
Q: What is your initial take on the numbers?
A: I had estimated a profit after tax (PAT) of Rs 5,060 crore and the company has reported Rs 5,136 crore. I had estimated net sales of Rs 59,450 crore and company reported net sales at Rs 59,789 crore. So, I don’t think that there is too much variation atleast as per the expectations on the top-line. But, yes, on the bottom-line, it is marginally up may be by about Rs 75 crore which all could come largely because of the lower depreciation or may be some tax adjustments or may be slight increase in the other income.
GRM, I was expecting at USD 8.9 per barrel. So, I think broadly if you really ask me, it is slightly above than what I was expecting on the bottom-line, on top-line it is flat. The market was expecting probably at Rs 5,200 crore, so there may be a little disappointment. But, overall, I don’t think that there should be any disappointment to the market from these results.
Q: Petchem margins, what’s the expectation going forward, are they expected to improve from here on?
A: If you take the present scenario, whether on the polymer front or may be the polyester front and especially the polyester intermediate, when you talk to the yarn makers or the textile makers, they say that they are sitting with the demand draft and asking for polyester staple fiber from the company. The delivery period as of now is two-three months. It has obviously given the selling or the pricing power also to the company. I don’t think that these thing is going to ease out on this atleast on the polyester intermediate front over next six months or so because you cannot really have the production of the cotton getting improved. So, this is going to be the real growth driver for the company.
The margin expansions will keep happening because again as I said 14.81% was my estimation for earnings before interest and tax (EBIT) which has now come to 15.2%. So, this is on the polyester front.
Even if you see on the polymer front also, even there the pricing power has been quite good. The kind of ramp up which we have been seeing in crude, again there I don’t think that even if I take a virtually the status quo on the polymer front or may be the pricing power remaining with the company over polyester, I am quite positive on the petchem segment in the next two to three quarters.
Q: I remember last time on the concall Mr Alok Agarwal saying that mid-cycle margins are seen between USD 9.5-10 a barrel. We have clearly not moved despite Q3 being a very seasonally strong quarter. All the factors being supportive, we haven’t moved really to that. By when do you expect us or Reliance to move towards a mid-cycle margin of say USD 9.5 or do you think there could be a blip up before we can head to that level?
Excerpts from Reporter's Diary on CNBC-TV18 Watch the full show »
A: If the crude prices remains at this level, may be at about USD 90 per barrel, I don’t think that the company will really be in a position to ramp it up beyond USD 9.1 or 9.2 per barrel. The only scope where they can really ramp it up may be beyond USD 9.5 per barrel is the light heavy crude differentials because again we have seen the gap between light and heavy crude differentials widening in the global market. Reliance being the refineries with the highest Nelson complexity, they should be able to take advantage of that.
If you take the case of USD 9 per barrel, which they have reported for this quarter, I think may be the contribution of about 30-40 cents must have come because of that. But this has started at the fag end because if you see the trend that has started happening from the December month onwards. I am quite positive that for January- March quarter the company should be able to enjoy the light heavy differentials of atleast 50 cents to may be 70 cents. So, I should expect a GRM of close to USD 9.5 per barrel provided crude remains at USD 90 per barrel. If it falls, obviously it will have the prorata effect. If it moves up, to that extent the increase in the crude prices can get added to the GRM. But yes going ahead the trigger for expansion in the GRM margin would be the light heavy crude differentials.
Q: Where do you see the stock price headed? Do you think Reliance is going to continue to underperforming streak for the time being or you think there could be some value buying that could emerge and then take the stock higher from these levels?
A: To sum up, I think Q4 should be better than Q3. I don’t think that there should be any disappointment by the market barring the technical factors which you see ahead of the expiry. So, may be it should be able to hold a level of Rs 970-975. But, yes, equally it will have a resistance also at Rs 1,000. So, it is more the technical factor because we have seen huge shorts built up not in Reliance, otherwise also in all frontline counters. So, it is difficult to take how the market will see the short covering on Monday, Tuesday and Thursday because Wednesday being a holiday. So, in a nutshell for next three days, till expiry the share should rule in the range of Rs 970 to Rs 1,000. I don’t see any reason for disappointment by the market on the pricing front for the share and Q4 is likely to be better.
Its net sales were up 5.15% at Rs 59,789 crore versus Rs 56,856 crore.
Excerpts from Reporter's Diary on CNBC-TV18 Watch the full show »
SP Tulsian, sptulsian.com says, the numbers are slightly above than what he was expecting on the bottom-line. On top-line, the numbers are flat, he adds. "I think Q4 is likely to be better than Q3."
He is quite positive on the petchem segment in the next two to three quarters.
According to him, the gross refining margins (GRMs) could be close to USD 9.5 per barrel in the fourth quarter. "I expect a GRM of close to USD 9.5 per barrel, provided crude remains at USD 90 per barrel," he adds.
Tulsian says, till expiry, RIL share should rule in the range of Rs 970 to Rs 1,000.
Here is a verbatim transcript of the exclusive interview. Also watch the accompanying videos.
Q: What is your initial take on the numbers?
A: I had estimated a profit after tax (PAT) of Rs 5,060 crore and the company has reported Rs 5,136 crore. I had estimated net sales of Rs 59,450 crore and company reported net sales at Rs 59,789 crore. So, I don’t think that there is too much variation atleast as per the expectations on the top-line. But, yes, on the bottom-line, it is marginally up may be by about Rs 75 crore which all could come largely because of the lower depreciation or may be some tax adjustments or may be slight increase in the other income.
GRM, I was expecting at USD 8.9 per barrel. So, I think broadly if you really ask me, it is slightly above than what I was expecting on the bottom-line, on top-line it is flat. The market was expecting probably at Rs 5,200 crore, so there may be a little disappointment. But, overall, I don’t think that there should be any disappointment to the market from these results.
Q: Petchem margins, what’s the expectation going forward, are they expected to improve from here on?
A: If you take the present scenario, whether on the polymer front or may be the polyester front and especially the polyester intermediate, when you talk to the yarn makers or the textile makers, they say that they are sitting with the demand draft and asking for polyester staple fiber from the company. The delivery period as of now is two-three months. It has obviously given the selling or the pricing power also to the company. I don’t think that these thing is going to ease out on this atleast on the polyester intermediate front over next six months or so because you cannot really have the production of the cotton getting improved. So, this is going to be the real growth driver for the company.
The margin expansions will keep happening because again as I said 14.81% was my estimation for earnings before interest and tax (EBIT) which has now come to 15.2%. So, this is on the polyester front.
Even if you see on the polymer front also, even there the pricing power has been quite good. The kind of ramp up which we have been seeing in crude, again there I don’t think that even if I take a virtually the status quo on the polymer front or may be the pricing power remaining with the company over polyester, I am quite positive on the petchem segment in the next two to three quarters.
Q: I remember last time on the concall Mr Alok Agarwal saying that mid-cycle margins are seen between USD 9.5-10 a barrel. We have clearly not moved despite Q3 being a very seasonally strong quarter. All the factors being supportive, we haven’t moved really to that. By when do you expect us or Reliance to move towards a mid-cycle margin of say USD 9.5 or do you think there could be a blip up before we can head to that level?
Excerpts from Reporter's Diary on CNBC-TV18 Watch the full show »
A: If the crude prices remains at this level, may be at about USD 90 per barrel, I don’t think that the company will really be in a position to ramp it up beyond USD 9.1 or 9.2 per barrel. The only scope where they can really ramp it up may be beyond USD 9.5 per barrel is the light heavy crude differentials because again we have seen the gap between light and heavy crude differentials widening in the global market. Reliance being the refineries with the highest Nelson complexity, they should be able to take advantage of that.
If you take the case of USD 9 per barrel, which they have reported for this quarter, I think may be the contribution of about 30-40 cents must have come because of that. But this has started at the fag end because if you see the trend that has started happening from the December month onwards. I am quite positive that for January- March quarter the company should be able to enjoy the light heavy differentials of atleast 50 cents to may be 70 cents. So, I should expect a GRM of close to USD 9.5 per barrel provided crude remains at USD 90 per barrel. If it falls, obviously it will have the prorata effect. If it moves up, to that extent the increase in the crude prices can get added to the GRM. But yes going ahead the trigger for expansion in the GRM margin would be the light heavy crude differentials.
Q: Where do you see the stock price headed? Do you think Reliance is going to continue to underperforming streak for the time being or you think there could be some value buying that could emerge and then take the stock higher from these levels?
A: To sum up, I think Q4 should be better than Q3. I don’t think that there should be any disappointment by the market barring the technical factors which you see ahead of the expiry. So, may be it should be able to hold a level of Rs 970-975. But, yes, equally it will have a resistance also at Rs 1,000. So, it is more the technical factor because we have seen huge shorts built up not in Reliance, otherwise also in all frontline counters. So, it is difficult to take how the market will see the short covering on Monday, Tuesday and Thursday because Wednesday being a holiday. So, in a nutshell for next three days, till expiry the share should rule in the range of Rs 970 to Rs 1,000. I don’t see any reason for disappointment by the market on the pricing front for the share and Q4 is likely to be better.
Tata Steel FPO subscribed 6 times
The follow-on public offer of the world's seventh largest steel company Tata Steel, which closed today, has subscribed 5.9 times so far, reports CNBC-TV18.
Qualified institutional investors led the major support to the issue - with their reserved portion subscribed 10.41 times. Retail and non-institutional investors' reserved portion was subscribed 1.27 times and 7.21 times, respectively.
Tata Steel FPO subscribed 6 times
The issue received bids for 29.07 crore equity shares as against issue size of 4.87 crore shares (excluding anchor investors' portion).
The company aims to raise Rs 3,385.8-3,477 crore through the 5.7 crore shares' issue at price band of Rs 594-610 a share.
Tata Steel intends to use issue proceeds for partly financing the company’s share of capital expenditure for expansion of existing works at Jamshedpur; and payment of redemption amounts on maturity of certain redeemable non-convertible debentures issued by the company on a private placement basis.
Qualified institutional investors led the major support to the issue - with their reserved portion subscribed 10.41 times. Retail and non-institutional investors' reserved portion was subscribed 1.27 times and 7.21 times, respectively.
Tata Steel FPO subscribed 6 times
The issue received bids for 29.07 crore equity shares as against issue size of 4.87 crore shares (excluding anchor investors' portion).
The company aims to raise Rs 3,385.8-3,477 crore through the 5.7 crore shares' issue at price band of Rs 594-610 a share.
Tata Steel intends to use issue proceeds for partly financing the company’s share of capital expenditure for expansion of existing works at Jamshedpur; and payment of redemption amounts on maturity of certain redeemable non-convertible debentures issued by the company on a private placement basis.
Thursday, January 20, 2011
Mobile Number Portability is here. But think before you switch
NEW DELHI: With mobile number portability ( MNP )) becoming operational from Thursday, telecom consumers now have the choice of switching their operator without having to change their mobile number. This facility is available to both postpaid and prepaid customers and subscribers of GSM as well as CDMA service. The only restriction is that you can change your operator without changing your number only within your current service area. Which means subscribers cannot take their Delhi number to an operator in Mumbai . They can only change their operator within Delhi.
The cost of porting a number to a new operator is Rs 19, with the maximum porting time capped at 7 working days by telecom regulator Trai except in Jammu and Kashmir, Assam and North East service areas, where it will be 15 working days. However , consumers will have to remain with the new operator for three months before moving on.
Number portability has been delayed by three years, leaving many consumers anxious . Several subscribers, who feel disappointed with billing, customer care, and overall service delivery, have been waiting for this moment . But the real question is whether you should take the plunge and switch loyalties or not. Will the switch really be worth your trouble?
The real reason for change would be to access better quality of service or improved customer care and of course, the proposition of a better tariff package. This, however,will occur only if operators believe that the churn out of their subscriber base will be so high that they need to improve their service or customer care, etc. However , surveys have revealed that the net effect of number portability is practically negligible . This means most large operators gain and lose roughly the same number of subscribers, taking away any incentive to dramatically change quality of service or customer care or pricing owing to the threat of losing subscribers or the option of gaining subscribers.
For the consumer, this could mean you might switch your operator, but based more on a perception of improvement rather than a real difference. Trai’s September 2009 data suggests that at a pan-India level, the call set up success rate was upwards of 97.26%—the lowest being in UP (East) and the highest at 99.99% in Mumbai . Similarly the call drop rate according to Trai is less than 3% across the country with the highest at 1.9% in Rajasthan and the lowest at 0.42% in Orissa. In fact, the difference between GSM and CDMA operators is also negligible .
Further, all operators across the country score upwards of 90% with regards to the parameter called connection with good quality voice with the highest in UP West (CDMA) at 99.99% and the lowest in UP East (GSM) at 95.1%. It is also a well established fact that tariffs are extremely competitive and so moving to a dramatically lower bill is unlikely.
Some consumers who are frequent callers, an equivalent of closed user group—or family members who are currently on different networks could now move to single network to take advantage of attractive tariff packages, including free calls within the same network, etc.But before you make any switch check whether your operator is providing a similar option.
The cost of porting a number to a new operator is Rs 19, with the maximum porting time capped at 7 working days by telecom regulator Trai except in Jammu and Kashmir, Assam and North East service areas, where it will be 15 working days. However , consumers will have to remain with the new operator for three months before moving on.
Number portability has been delayed by three years, leaving many consumers anxious . Several subscribers, who feel disappointed with billing, customer care, and overall service delivery, have been waiting for this moment . But the real question is whether you should take the plunge and switch loyalties or not. Will the switch really be worth your trouble?
The real reason for change would be to access better quality of service or improved customer care and of course, the proposition of a better tariff package. This, however,will occur only if operators believe that the churn out of their subscriber base will be so high that they need to improve their service or customer care, etc. However , surveys have revealed that the net effect of number portability is practically negligible . This means most large operators gain and lose roughly the same number of subscribers, taking away any incentive to dramatically change quality of service or customer care or pricing owing to the threat of losing subscribers or the option of gaining subscribers.
For the consumer, this could mean you might switch your operator, but based more on a perception of improvement rather than a real difference. Trai’s September 2009 data suggests that at a pan-India level, the call set up success rate was upwards of 97.26%—the lowest being in UP (East) and the highest at 99.99% in Mumbai . Similarly the call drop rate according to Trai is less than 3% across the country with the highest at 1.9% in Rajasthan and the lowest at 0.42% in Orissa. In fact, the difference between GSM and CDMA operators is also negligible .
Further, all operators across the country score upwards of 90% with regards to the parameter called connection with good quality voice with the highest in UP West (CDMA) at 99.99% and the lowest in UP East (GSM) at 95.1%. It is also a well established fact that tariffs are extremely competitive and so moving to a dramatically lower bill is unlikely.
Some consumers who are frequent callers, an equivalent of closed user group—or family members who are currently on different networks could now move to single network to take advantage of attractive tariff packages, including free calls within the same network, etc.But before you make any switch check whether your operator is providing a similar option.
Wednesday, January 19, 2011
Black money info can't be made public: PM
Prime Minister Manmohan Singh on Wednesday said there is "no instant solution" to bring back black money stashed in foreign banks and that information with government cannot be made public due to treaty obligations.
"There is no instant solution to bring back what is called black money. We have got some information and that has been provided to us for use in the collection of due taxes," he told reporters at Rashtrapati Bhavan after a rejig of some portfolios and new inductions, the first such exercise in his second term in office.
His comments came close on the heels of the Supreme Court pulling up the government for withholding information on black money stashed in foreign banks, saying it is not just limited to tax evasion but a "mind boggling crime" amounting to "theft" and "plunder" of national wealth having security ramifications.
Noting that he was not aware of what the apex court has said, Singh said "we cannot use the information for any other purposes and that information cannot be made public" as the country cannot violate the obligations under international treaties.
The apex court's observation came while hearing a petition filed by noted criminal lawyer Ram Jethmalani , who along with some retired bureaucrats and police officers, approached it seeking directions to the government to take steps to bring black money to the tune of one trillion dollars stashed in foreign bank back to the country.
The Centre's contention before the court is that it was case of tax evasion and it cannot make public the names of Indian account holders.
"There is no instant solution to bring back what is called black money. We have got some information and that has been provided to us for use in the collection of due taxes," he told reporters at Rashtrapati Bhavan after a rejig of some portfolios and new inductions, the first such exercise in his second term in office.
His comments came close on the heels of the Supreme Court pulling up the government for withholding information on black money stashed in foreign banks, saying it is not just limited to tax evasion but a "mind boggling crime" amounting to "theft" and "plunder" of national wealth having security ramifications.
Noting that he was not aware of what the apex court has said, Singh said "we cannot use the information for any other purposes and that information cannot be made public" as the country cannot violate the obligations under international treaties.
The apex court's observation came while hearing a petition filed by noted criminal lawyer Ram Jethmalani , who along with some retired bureaucrats and police officers, approached it seeking directions to the government to take steps to bring black money to the tune of one trillion dollars stashed in foreign bank back to the country.
The Centre's contention before the court is that it was case of tax evasion and it cannot make public the names of Indian account holders.
Tuesday, January 18, 2011
REPO Rate
CRR
CRR or the Cash Reserve Ratio is the proportion of Bank’s reserves that they have to hold with the RBI. It is mandatory under law for the banks to hold such reserves with the central bank and the RBI is under law, empowered to stipulate this ratio. This amount of reserves that are held with the RBI is known as Required Reserves. It is a percentage of total demand and time liabilities of banks (demand – short term reserves, time – long term reserves).
IMPACT OF CHANGE IN CRR
To understand this, we have to understand the concept of Ordinary Money and High Powered Money.
Ordinary Money (M) is defined as the sum of Currency and Demand Deposits in banks held by public
So, M = C + DD
High Powered Money (H) is money produced by RBI and Government (coins), held by public and banks. It is also called Reserve Money. It is the sum of (i) Currency held by public and (ii) Cash Reserves of Banks.
So, H = C + R
So comparing the two equations, the difference is DD and R, currency being the common factor. This difference arises from the presence of banks as producers of demand deposits, to produce which they have to maintain R, which is a part of H, produced by only RBI and not banks.
So R is the total reserves with the banks. These are further divided into (i) Required Reserves and (ii) Excess Reserves. Required Reserves is explained above. All reserves in excess of Required Reserves are Excess Reserves, which banks are free to hold as “cash in hand”, which banks use to meet their currency drains (net withdrawal of currency by their depositors) and their clearing drains (net loss of cash due to cross-clearing of cheques between banks).
Now the control measure of CRR attempts to affect the stock of money via the impounding (restricting) or release of bank reserves. When the average CRR is revised upwards, banks are required to hold larger reserves or balances with the RBI than before for the same amount of total reserves. Since reserves are a part of H, this amounts to a virtual withdrawal of a part of H from the public equal to the amount of additional reserves impounded.
In the opposite scenario, when the CRR is lowered, this amounts to releasing the reserves so a virtual increase in H.
SLR
The chief role of SLR is to govern the allocation of total bank credit between the government and the commercial sector,. There are two ways in which it plays this role:
- By affecting the borrowings of the government from the RBI
- By affecting the freedom of the banks to sell government securities or borrow against them from the RBI
In both ways the creation of H is affected and thereby variations in the money supply
Under this statutory liquidity requirement, each bank is required statutorily to maintain a prescribed minimum proportion of its daily total demand and time liabilities in the form of designated liquid assets.
The liquid assets consist of
- Excess reserves
- Unencumbered government and other approved securities
- Current account balances with other banks
This SLR is defined as:
SLR = (ER + I + CB)/L
ER = Excess Reserves
I = Investment in unencumbered government and ‘other approved’ securities
CB = Current account balances with other banks
L = Total demand and time liabilities
- Excess reserves are defined as total reserves (Cash on hand plus balances with the RBI) minus statutory or required reserves with the RBI.
- Securities are unencumbered if loans have not been taken against them from the RBI
- Other approved securities are those that enjoy government’s guarantee in respect of payment of interest and principal. E.g. – bonds of IDBI, NABARD, development banks, co-operative debentures, debentures of state electricity boards, state road corporations, port trusts etc.
Bank Rate:
Bank rate is the rate of interest which RBI charges on the loans and advances that it extends to commercial banks and other financial intermediaries.
Repo Rate
Repo or Repurchase rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand they are facing for money (loans) and how much they have on hand to lend.
Both bank rate and repo rate are interest rates at which commercial banks borrow from the RBI. The essential difference is that bank rate is what is used for what is called “clean borrowing” and this is generally for a bit longer-term. For instance, a commercial bank may simply borrow from RBI promising to pay 6% pa on the loan from RBI. This is akin to the normal personal loan that we get from banks except in this case the central bank is the lender.
Repo rate is basically the rate charged on this thing called a repo or “repurchase agreement”. Essentially, a repurchase agreement is an agreement between one party and another in which the former sells a security (like a bond) to the latter with a promise to buy it back after a particular period. For instance, a bank may enter into a repo with RBI, selling a security to RBI and then tell RBI that I will buy this security back from you after 3-months. RBI tells the bank…OK I will pay Rs. 100 for this security now but when you buy it back from me, please pay me Rs. 103. The extra Rs. 3 that RBI charges constitutes the repo rate (translates into 12% pa for this example) Hence, repos are a form of “collateralized or secured borrowings” in which the borrower must place collateral with the lender (in this case RBI). If the borrower does not manage to buy back the security, the lender can redeem its collateral value. Generally, repos are used for managing domestic liquidity in the economy. While a bank rate has a direct impact on borrowing costs for banks, repo rates have a more of a fine-tuning impact. Furthermore, repos are short-term agreements and are entered into by banks to meet short-term shortfalls in their liquidity positions. By raising the repo rate, RBI signals to the commercial banks that …. Hey look, I will still be willing to enter into repurchase agreements with you all but you better pay a higher interest to me. The banks understand this extra cost and cut back on lending to hold more cash or other liquid assets just in case they have liquidity issues as now it’s more expensive to get funding from RBI. Hence, repo rate has an impact on total Money supply and hence inflation.
Essentially, both rates are instruments of monetary policy. The idea is the same for both. They are merely different in how quickly they impact money supply or growth.
“Reverse Repo” rate is just what the name suggests. It’s the reverse of the repo. A reverse repurchase agreement or a ‘reverse repo’ is something like a switch between the buyer and the seller in a repurchase agreement. More specifically it’s a switch in the perspective.
For example in the case of reverse repo, the RBI would be the one selling the security to the commercial bank and telling it….if you give me Rs. 100 for 3 months today, I’ll pay you Rs. 3 as interest on it after 3 months and you give me back this security. So it is actually a ‘repo’ from RBI’s perspective but a ‘reverse’ repo from the commercial bank’s perspective. I hope you see the difference. The interest rate that RBI promises the commercial bank for placing its money with RBI is the reverse repo rate. By hiking the reverse repo rate, RBI can make it attractive for commercial banks to actually enter into reverse repo agreements with RBI thus reducing money supply.
By slashing it, it makes it less attractive for the commercial bank to enter into reverse repo agreement with it. It’s akin to our personal deposits in banks. If deposit rate is high, we’re more likely to keep it with the bank. A closer look-alike of reverse repo in our day to day lives would be a fixed deposit or Certificate of Deposit.
Call money rate is simply another name for ‘inter-bank borrowing’ rate. We need to realize that banks don’t just lend to corporate and individuals like us. They lend to one another. Call money rate generally refers to overnight borrowing and lending among banks. Not all banks are flush with cash all the time. So they have to ask one another for very short-term funding needs like for one a night or a few days. So they will get these funds by borrowing from one another. The lending bank will charge the borrowing bank an interest rate for even a single night (true businessmen, aren’t they?). Call rates are generally the average of all the rates that banks have charged each other overnight. Recently call rates had shot up and banks were charging one another rates as high as 22-24% pa just to lend for one day.
Prime Lending Rate: is a rate fixed by a particular bank which acts as a benchmark for various rates it will charge its customer’s on various loans.
Now a bank borrows funds from various sources and this borrowing has a cost. Now for example the average of this cost works out to be 6%. Now it gives funds to borrowers through many forms: personal loan, car loan, home loan, business loan, term loan etc. every kind of loan has its own risks and returns, some higher and some lower. The bank decides interest rate it will charge on these loans depending upon the risk involved in that particular type of loan. A home loan will be of lower risk so interest rate will be lower than say a personal loan which is riskier because the former is securitized by the purchased home but the latter gives no security to the bank. So these different interest rates will be benchmarked to the PLR, which acts as a guideline. So term loan will be say PLR + 3% and so on.
CRR or the Cash Reserve Ratio is the proportion of Bank’s reserves that they have to hold with the RBI. It is mandatory under law for the banks to hold such reserves with the central bank and the RBI is under law, empowered to stipulate this ratio. This amount of reserves that are held with the RBI is known as Required Reserves. It is a percentage of total demand and time liabilities of banks (demand – short term reserves, time – long term reserves).
IMPACT OF CHANGE IN CRR
To understand this, we have to understand the concept of Ordinary Money and High Powered Money.
Ordinary Money (M) is defined as the sum of Currency and Demand Deposits in banks held by public
So, M = C + DD
High Powered Money (H) is money produced by RBI and Government (coins), held by public and banks. It is also called Reserve Money. It is the sum of (i) Currency held by public and (ii) Cash Reserves of Banks.
So, H = C + R
So comparing the two equations, the difference is DD and R, currency being the common factor. This difference arises from the presence of banks as producers of demand deposits, to produce which they have to maintain R, which is a part of H, produced by only RBI and not banks.
So R is the total reserves with the banks. These are further divided into (i) Required Reserves and (ii) Excess Reserves. Required Reserves is explained above. All reserves in excess of Required Reserves are Excess Reserves, which banks are free to hold as “cash in hand”, which banks use to meet their currency drains (net withdrawal of currency by their depositors) and their clearing drains (net loss of cash due to cross-clearing of cheques between banks).
Now the control measure of CRR attempts to affect the stock of money via the impounding (restricting) or release of bank reserves. When the average CRR is revised upwards, banks are required to hold larger reserves or balances with the RBI than before for the same amount of total reserves. Since reserves are a part of H, this amounts to a virtual withdrawal of a part of H from the public equal to the amount of additional reserves impounded.
In the opposite scenario, when the CRR is lowered, this amounts to releasing the reserves so a virtual increase in H.
SLR
The chief role of SLR is to govern the allocation of total bank credit between the government and the commercial sector,. There are two ways in which it plays this role:
- By affecting the borrowings of the government from the RBI
- By affecting the freedom of the banks to sell government securities or borrow against them from the RBI
In both ways the creation of H is affected and thereby variations in the money supply
Under this statutory liquidity requirement, each bank is required statutorily to maintain a prescribed minimum proportion of its daily total demand and time liabilities in the form of designated liquid assets.
The liquid assets consist of
- Excess reserves
- Unencumbered government and other approved securities
- Current account balances with other banks
This SLR is defined as:
SLR = (ER + I + CB)/L
ER = Excess Reserves
I = Investment in unencumbered government and ‘other approved’ securities
CB = Current account balances with other banks
L = Total demand and time liabilities
- Excess reserves are defined as total reserves (Cash on hand plus balances with the RBI) minus statutory or required reserves with the RBI.
- Securities are unencumbered if loans have not been taken against them from the RBI
- Other approved securities are those that enjoy government’s guarantee in respect of payment of interest and principal. E.g. – bonds of IDBI, NABARD, development banks, co-operative debentures, debentures of state electricity boards, state road corporations, port trusts etc.
Bank Rate:
Bank rate is the rate of interest which RBI charges on the loans and advances that it extends to commercial banks and other financial intermediaries.
Repo Rate
Repo or Repurchase rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand they are facing for money (loans) and how much they have on hand to lend.
Both bank rate and repo rate are interest rates at which commercial banks borrow from the RBI. The essential difference is that bank rate is what is used for what is called “clean borrowing” and this is generally for a bit longer-term. For instance, a commercial bank may simply borrow from RBI promising to pay 6% pa on the loan from RBI. This is akin to the normal personal loan that we get from banks except in this case the central bank is the lender.
Repo rate is basically the rate charged on this thing called a repo or “repurchase agreement”. Essentially, a repurchase agreement is an agreement between one party and another in which the former sells a security (like a bond) to the latter with a promise to buy it back after a particular period. For instance, a bank may enter into a repo with RBI, selling a security to RBI and then tell RBI that I will buy this security back from you after 3-months. RBI tells the bank…OK I will pay Rs. 100 for this security now but when you buy it back from me, please pay me Rs. 103. The extra Rs. 3 that RBI charges constitutes the repo rate (translates into 12% pa for this example) Hence, repos are a form of “collateralized or secured borrowings” in which the borrower must place collateral with the lender (in this case RBI). If the borrower does not manage to buy back the security, the lender can redeem its collateral value. Generally, repos are used for managing domestic liquidity in the economy. While a bank rate has a direct impact on borrowing costs for banks, repo rates have a more of a fine-tuning impact. Furthermore, repos are short-term agreements and are entered into by banks to meet short-term shortfalls in their liquidity positions. By raising the repo rate, RBI signals to the commercial banks that …. Hey look, I will still be willing to enter into repurchase agreements with you all but you better pay a higher interest to me. The banks understand this extra cost and cut back on lending to hold more cash or other liquid assets just in case they have liquidity issues as now it’s more expensive to get funding from RBI. Hence, repo rate has an impact on total Money supply and hence inflation.
Essentially, both rates are instruments of monetary policy. The idea is the same for both. They are merely different in how quickly they impact money supply or growth.
“Reverse Repo” rate is just what the name suggests. It’s the reverse of the repo. A reverse repurchase agreement or a ‘reverse repo’ is something like a switch between the buyer and the seller in a repurchase agreement. More specifically it’s a switch in the perspective.
For example in the case of reverse repo, the RBI would be the one selling the security to the commercial bank and telling it….if you give me Rs. 100 for 3 months today, I’ll pay you Rs. 3 as interest on it after 3 months and you give me back this security. So it is actually a ‘repo’ from RBI’s perspective but a ‘reverse’ repo from the commercial bank’s perspective. I hope you see the difference. The interest rate that RBI promises the commercial bank for placing its money with RBI is the reverse repo rate. By hiking the reverse repo rate, RBI can make it attractive for commercial banks to actually enter into reverse repo agreements with RBI thus reducing money supply.
By slashing it, it makes it less attractive for the commercial bank to enter into reverse repo agreement with it. It’s akin to our personal deposits in banks. If deposit rate is high, we’re more likely to keep it with the bank. A closer look-alike of reverse repo in our day to day lives would be a fixed deposit or Certificate of Deposit.
Call money rate is simply another name for ‘inter-bank borrowing’ rate. We need to realize that banks don’t just lend to corporate and individuals like us. They lend to one another. Call money rate generally refers to overnight borrowing and lending among banks. Not all banks are flush with cash all the time. So they have to ask one another for very short-term funding needs like for one a night or a few days. So they will get these funds by borrowing from one another. The lending bank will charge the borrowing bank an interest rate for even a single night (true businessmen, aren’t they?). Call rates are generally the average of all the rates that banks have charged each other overnight. Recently call rates had shot up and banks were charging one another rates as high as 22-24% pa just to lend for one day.
Prime Lending Rate: is a rate fixed by a particular bank which acts as a benchmark for various rates it will charge its customer’s on various loans.
Now a bank borrows funds from various sources and this borrowing has a cost. Now for example the average of this cost works out to be 6%. Now it gives funds to borrowers through many forms: personal loan, car loan, home loan, business loan, term loan etc. every kind of loan has its own risks and returns, some higher and some lower. The bank decides interest rate it will charge on these loans depending upon the risk involved in that particular type of loan. A home loan will be of lower risk so interest rate will be lower than say a personal loan which is riskier because the former is securitized by the purchased home but the latter gives no security to the bank. So these different interest rates will be benchmarked to the PLR, which acts as a guideline. So term loan will be say PLR + 3% and so on.
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