Saturday, March 28, 2009

L, V and U Recessions

These are the types of recessions according to economists worldwide; i.e. L-shaped, V-shaped and U-shaped ones.

L-shape recession is a recession that goes down and then stays there for a long period of time without a recovery. It could last for 20 years like it happened in Japan. A V-shape recession goes down pretty fast and recovers in very less time. A U-shape recession goes down slowly and then stays there for a few years before recovering slowly. It could last anywhere from 2-10 years, like in the 70s in US where it lasted for 8 years.

Most of the times, it is the economic policy adopted by a government before recession, which determines what type of recession it is; where wrongly calibrated economic policies leading to L-shape recessions, the worst of all.

Friday, March 27, 2009

Now, EMIs can be covered on Job Loss

The global economic downturn has created uncertainty in employment in India as well. In such a situation, what if one has a couple of EMIs to pay, say home loan and auto loan, when the retrenchment strikes?

Like it exists in other developed countries, ICICI Lombard has introduced in India, a cover that will pay three equated monthly installments (EMIs) on any individual loan when the policy holder faces job loss. Considering the severity of the economic situation, ICICI Lombard is even reviewing the possibility of increasing the three month EMI cover.

The job loss cover is sold as an add-on cover with the company’s critical illness policy. However, one thing to be noted is that the policy does not cover retrenchment due to underperformance, voluntary resignation or early retirement. But then, it’s a great product that came at a crucial time.

Related Articles
- Endowment Policies – when it comes to maximizing returns
- Term insurance to become cheaper
- How to protect yourself from credit card theft or loss?

Thursday, March 19, 2009

Indian Inflation Rate @ 0.44%

India’s WPI inflation rate fell to an recent low of 0.44% for the year ended March 7, 2009. What is more comforting is the fall in prices of food articles, which greatly eluded the public in the previous declines.

Quoting ToI, the higher base effect along with low demand in the economy is expected to keep inflation in negative territory for 5 to 6 months. This, if happened, will make us witness deflation after a very long time.

One thing that I noticed in WPI is the fall in jet fuel prices by 8%. With this it’s high time that the flight operators reduce their fuel surcharge which currently stands at more than 2000 rupees. And, I guess it would require an intervention from the government to reduce the fuel surcharge amount, which masquerades as ‘taxes’ to the government in flight booking receipts.

Related Articles
- Inflation rates of India (2009)
- Inflation rates of India (2008)
- How is WPI inflation rate calculated in India?
- Commodities and their weight-ages in WPI calculation of India
- Base year and number of commodities used for inflation calculation in India
- The magic of Inflation

Monday, March 16, 2009

How do banks make money through credit cards?

Credit cards are ubiquitous substitutes for cash. Ever wondered in how many different ways banks make money through credit cards issued by them?

1. Commission: When we use our credit card at a shop, the shop keeper gets paid by the bank who issued that credit card. But the bank reduces a certain percent (generally 2%) from the transaction amount before paying the money to the shopkeeper. That’s why some shopkeepers give discounts when you use cash instead of credit card for payment, especially on high value purchases such as gold.

2. Interest Charges: Interest charges are levied by the bank from its credit card owner for the revolving credit they maintain. This interest is one of the highest, and in India it can be up to 49%. According to the Reserve Bank of India, the outstanding credit on all the credit cards issued in India stands at Rs. 29,359 Crore at the end of December 2008. This amount, coupled with the high interest rate will give you an idea how much money the banks get from interest charges.

3. Fines & Penalties: Various fines such as late payment fee, check bounce penalty etc. are levied by the bank on its credit card customers. These amounts are also huge (more than 500 bucks).

Related Articles
- Credit card and effective interest rate
- How to best manage your credit card?
- Interest rate on credit cards to increase to 49%

Friday, March 13, 2009

Inflation dips further

India's WPI based inflation rate fell to a 7 year low of 2.43 percent for the year ended on 28 Feb 2009. However, this fall in inflation for the sixth straight week was largely because of the fall in prices of manufactured items like metals, machinery and textiles. Food items are still 8% costlier than what it used to be one year ago.

The inflation rate is expected to fall further. It is likely to reduce below 1% mark next week and closer to zero by end of March. Thus, the new financial year 2009-10 is likely to begin with negative inflation.

Experts say that, the negative inflation that would come is due a steep surge in commodity and fuel prices in the corresponding months last year, which they call high base effect. Once this high base effect wanes in later months of 2009, inflation may enter into a positive territory.

Related Articles
- Inflation rates of India (2009)
- Inflation rates of India (2008)
- How is WPI inflation rate calculated in India?
- Commodities and their weight-ages in WPI calculation of India
- Base year and number of commodities used for inflation calculation in India
- The magic of Inflation

Tuesday, March 10, 2009

How does Short Term Capital Gain/Loss work?

I found this interesting snippet circulated through email by ICICIDirect, which describes in simple anecdotes how Short Term Capital Gain/Loss works in India. I am posting it straight away, without any modifications.

1. Mr. Sharma purchased some securities on May 7, 2008 at a total cost of Rs. 100,000. On July 3, 2008, he sold these securities for Rs. 130,000. Here the Short Term Capital Gain, STCG (gain arising from sale of securities which is less than 12 months old) was Rs. 30,000 (a) and STCG tax (15% as per current laws) for this gain calculated to Rs. 4,500.

2. But Mr. Sharma had also purchased securities worth Rs. 90,000 on June 12, 2008 and had sold them at Rs. 40,000 on February 10, 2009. Hence there is a Short Term Capital Loss (loss arising from sale of securities which is less than 12 months old) and equal to Rs. 50,000 (b).

3. Now as per the tax laws, Mr. Sharma’s Short Term Capital Gain (a) is offset by Short Term Capital Loss (b). Hence there is no Short Term Capital Gains tax payable by Mr. Sharma for the financial year 2008-09. Also, he carried forward Rs. 20,000 loss for offsetting any Short Term Capital Gains he makes in the next 8 years.

Thus a person needs to pay STCG tax only for the difference between Short Term Capital Gain and Short Term Capital Loss if the difference is positive; no tax if the difference is zero or negative. Moreover, if the difference is negative, he can even carry forward and offset the loss to gains in the next 8 years, until the loss is completely used off to offset those gains.

Thanks to

Wednesday, March 4, 2009

RBI cuts repo and reverse repo rates

The Reserve Bank of India lowered its Repo Rate and Reverse Repo Rate by 50 basis points to 5% and 3.5% respectively, with immediate effect. The Repo Rate is the rate at which RBI lends money to banks and the Reverse Repo Rate is the rate at which banks park funds with RBI.

This move will help RBI to maintain enough money in the economy as it will allow banks to reduce their interest rates on various loans, thereby making credit available easily to the population, at lower interest rates.

The inflation rate, which is already low, would come down further with the rate cut. Meanwhile, the central bank has asked banks to monitor their loans and assets quality as concerns grow over non-performing assets in the banking system.

Related Articles
- Effects of CRR hike on Inflation seen through money multiplying effect

Tuesday, March 3, 2009

Top 10 financial centers of Asia

According to the six-monthly Global Financial Centers Index (GFCI) compiled by Z/Yen Group, the top 10 financial centers of Asia are,

1. Singapore
2. Hong Kong
3. Tokyo
4. Shanghai
5. Taipei
6. Kuala Lumpur
7. Mumbai
8. Bangkok
9. Beijing
10. Seoul

More details here.

Related Articles
- Top 10 companies of India
- Best banks of India

Monday, March 2, 2009

The Great Depression

The Great Depression of the 1930s is the economic slow down that everyone often compares with other economic slumps.

ET has compiled this pictorial ride of The Great Depression. Have a look!