Taking Interest in Inflation

Courtesy: Farhan Elias article in the newsletter of the Ernakulam Branch of Southern India CA students assocation of ICAI- Sept 2006.

What is interest ?

It is the money that you pay back when you borrow money or receive when you invest money. You invest Rs. 1000 in a bank at 6% interest. A year later you get Rs.1060. This Rs. 60(1060-1000)is your interest received. Right? No, WRONG! This is just your nominal interest. You should always look at the real rate of interest.


The Real Interest Rate = Nominal Interest Rate- Inflation.

Assuming a inflation rate of 5% your return is only 1% (6%- 5%- 1%) Note that the RBI takes a hardening or softening stand( i.e, increases or decreases) on interest rates based on various factors ,the most important of which is inflation.

What is inflation?

It is a general rise in the prices of goods and services in an economy resulting in a fall in the value of money. That is what your parents mean when they say, 'In our times, a loaf of bread used to cost 50 paise, and now it costs Rs.11.50.That is to say 50 paise had value enough three decades ago to buy you a loaf of bread, whereas today it will take twenty- three of such 50 paises to buy you the same thing. Obviously, when inflation goes up, there is a decline in the purchasing power of money.


The two major types of inflation are:

1. Demand- pull inflation: This happens when demand exceeds supply. i.e, a situation of too much money chasing too few goods,causing an increase in prices.

2. Cost- push inflation: This happens when costs rise and producers are forced to increase prices in order to maintain their profit margins. Costs can increases due to rise in output costs, higher wages, or higher taxes.

Inflation is measured with the help of a price index which would typically consist of a number of goods that are important in the particular economy. Most countries across the world use the Consumer Price Index (CPI) to gauge inflation. But here in India, RBI relies on the Wholesale Price Index (WPI).


Interest And Inflation

Central banks look upon inflationary figures as significant factors to initiate changes in interest rates.

A rise in interest rates would cause money to be sucked out of the economy. The reason is that bank deposits grow more attractive, and purchasing power goes down, thereby leading to a dearth of money supply. This in turn causes inflation to come down. It also causes a slow down in economic growth. It’s a time when CASH is King.

A reduction in interest rates would cause money to get flooded into the system. Bank deposits are no longer attractive. Companies start investing more as loans are cheaper. Consumer spending is on the rise. Economy becomes robust as both toplines and bottom lines surge. It’s a time when CASH IS TRASH.

This is a balancing act that central banks have to perform to keep the economy functioning properly.

The Indian Scenario today

‘Inflation hits 5%’. That’s what Reuters reported on the 8th of September. The Finance Minister says that he is confident of containing the inflation at 4.5 to 5%. And also that further efforts will be undertaken by the government to bring the inflation under 4%. Now the inflation rates in India have been marching northwards for quite sometime, from 4.1% in March end to 4.7% at the beginning of July. Our central bank reacted the way any other central bank would have- by raising the interest rates. The benchmark short term rate was raised in last July to 6% up by 25 basis points. This is the third time the interest rates have been hiked this year to curb the inflationary pressures.

But a question arises. Are higher interest rates the answer to increasing inflation? Is it as simple as that? To answer that question, we have to look deeper into the reason behind the inflation. As explained earlier, there are two types of inflation, and the kind we are facing today is clearly ‘cost-push’ inflation. The predominant reason for the inflationary pressures faced by the Indian economy today is the oil price hike followed by the rising prices of primary products mainly vegetables and pulses. Lets consider each of these contributors to the rising inflation. First and formost is the oil price. We are an oil importing nation and therefore price-takers. Any volatility in the politically unstable Middle East can shoot up the prices. Increasing the interest rates is not going to help bring down prices or demand for fuel. Perhaps the government should aim at making India self-sufficient in its energy needs. Promoting the use of alternate fuels, more exploration within the country, or buying oil fields in other parts of the world and, of course, setting up a proper price mechanism for petrol are needs of the hour.

Next the rise in food prices. The reason, supply-side constraints, as pointed out by the Finance Minister. Therefore the rise in prices was on account of supply problems, not because of any demand spurt. Is an interest rate hike the remedy to this? A much better option would be to solve the logistics and storage problems on that front.
As per my viewpoint, last week potato prices were Rs. 12/- and this week it was Rs. 24/- so also the prices of other vegetables, pulses etc. Thuvar dal today cost Rs. 60/- per kg… So also the cost of Rice…True, there was no sufficient stock, to add to that bus/lorry strikes etc. So the above is true, but also as farming/agriculture seems not to be a profitable business, people use the agricultural land for real estate business. There is increase in population and decrese in production. So to some extend there is a demand pull inflation too.

But what can RBI do when the Fed Chairman Mr. Ben Bernanke has been on a rate increase spree? Though he seems to have stopped doing it for some time now. Perhaps they should concentrate on internal issues more than Mr. Bernanke’s Views. However, this is a time when India, on its way to becoming the 3rd largest economy by 2050 (according to Godman Sachs BRIC report), has to look abroad before taking its economic footsteps.

Conclusion

To conclude, the interest rates and the inflation rates have a profound effect on the direction that the economy takes. That also have an effect on our daily lives. Rise or fall in these rates need not necessarily be good or bad. It could very well depend on your personal situation. If your income grows faster than the inflation, you are pretty comfortable. In the long run, investments in the stock market could be a good protection against inflation. If your income is from business, you would prefer low interest rates, but a pensioned individual would like the government to increase interest rates. Understanding interest and inflation are important as they can help you structure your investments in such a way that the changes in their rates would hurt you the least.

STOCK MARKET

(Dedicated to Moitrayee, for her inspiration and inquisition to know about this, which made me right it, and with Thanks to V Pattabhi Ram Sir, for his book on MAFA, and helping me know all this.) As is said, where to invest depends on whether you want to eat well or sleep well. And if you are not afraid to take the risk, what better place to venture than the stock market….Have sharp focus on this market and you can get richer over night. Today the wealth creators of India, like Ratan Tata, Narayan Murthy, Ambanis, Azim Premji, Kiran Majumdar, Kumaramangalam Birla, have made us proud that we are Indians. To run business you need money. Not only to run business, even to leave today, we need money, as we do not follow the barter system anymore. And with the advent of company form of organization there is divergence of ownership from management and the promoters. So far as some companies are concerned you can identify each of them. If somebody ask you, can you name the Owner/Manager/Promoter of L & T? Difficult, right? To run big businesses you need big money, in business terms called the Capital. There are people who have money and would like to invest it somewhere. That part of the capital of the company to which each member/investor is entitled is called his share in the company. And the salient feature of most company form of organization is that the liability of the members are limited to the extend of the unpaid amount of capital. Market is a place where goods are brought and sold. Security market also known as the bull and bear market is a market dealing in equity and equity linked securities. Share culture was introduced and familiarized in India by Dirubhai Ambani, with the introduction of various stock trading instruments. Having invested in the shares of the company, the return I get can be by way of Dividend. Appreciation in the value of shares. Look at it this way. If a company retains earnings instead of giving it out as dividend, the shareholder enjoys capital appreciation equal to the amount of earnings retained. If the company distributes earnings by way of dividends instead of retaining it, the shareholder enjoys dividends equal to the amount by which his capital would have appreciated had the company chosen to retain its earnings. Hence, the division of earnings between dividends and retained earnings is irrelevant from the point of view of the shareholders. But some go by the old adage: A bird in the hand is worth two in the busy. Here immediate dividend is bird in the hand, and distant dividend is two in the bush. As per the news in Economic Times: ‘Quarterly dividends turn the vogue in India….’ Earlier dividend used to be restricted to annual and interim dividends. Among the companies, which have recently declared quarterly dividends are Marico, Godrej Consumer Products and Reliance Energy. ……..A company official says that though there is no official dividend policy it would not wish to keep excess cash on its books. Since the company uses Economic Value Added (EVA) extensively for internal decision-making such excess cash could have an impact on that figures. Is it true that companies which don’t distribute dividends would not command a good price? Microsoft, the worlds most happening software company, has not declared a penny of dividend till date. Yet Microsoft is the darling of Wall street. Dividend is what the company pays. You make use of the stock market, to buy/sell these securities. The players here are: · FUND SEEKERS: (Need to keep funds for long capital investments) There are more than 20,000 listed companies doing good. · FUND PROVIDERS: (Based on ability to retrieve their savings in time) Ø 50 million individual investors. Ø Bankers and financial institutions. Ø Mutual Funds. Ø Foreign instutional investors (around 450) INTERMEDIARIES: Ø Merchant Bankers (around 200 nos) Ø Registrar to an issue. Ø Brokers. Ø Portfolio Managers. Ø Underwriters. Ø Credit Rating Agencies. Ø Depository participants. INSTRUMENTS: Ø Shares, Stocks (consolidated shares), Bonds (Desi version of debentures), debentures, etc. Ø Derivatives. Ø Units or other instruments issued by collective investment scheme to investors (like Mutual funds) Ø GDRs, ADRs etc. REGULATIONS: Ø Quantitative aspects : ROC, statutory bodies like RBI, IT etc. Ø Qualitative aspects: SEBI, SCRA etc. These regulatory bodies are in order to ensure and to strive the objective of: ‘Let us make this world a better place to live in’. In the 90’s there were lot of issues, and consequently suicides and deaths in the stock market, due to failure of issues. The reason was that the companies raised huge amount of capital from the market at a fantastic premium for projects, which were not taken over by companies. There was no proper monitoring, rules and regulations. Also huge amount was eaten up by middlemen like brokers, merchant bankers etc. The tip of the iceberg as is known is the Natwar Sing scam and the Harshad Mehta scams. With effect from 20th Seot. 95, the Depository system was introduced to ensure and safeguard the interest of investors. Depository is an organization where the securities are held in electronic form through the medium of depository participants and which provide various other services. Eg. National Security Depository Limited. (NSDL) The financial market can be classified into/based on: ü Nature of claim: Debt market & Equity Market. ü Maturity of claim: Money Market & Capital Market. ü Seasoning of claim: Primary Market & Secondary Market. ü Timing of delivery: Cash or spot Market & Forward or future Market. ü Organizational Structure: Exchange traded market & Over the counter market. Planning the stock market game: How does any one decide whether to buy or sell a security? Does the movement of share price give any indication over time?? There are two schools of thoughts: 1. No: Random Walk Theory: As the name suggests, you can compare the behavioural patter of prices like how drunken man walks in a blind lane. Prices in stock market can never be predicted. Note: Beware of funds with recent hot records. In a rising market any one can make money. In a falling market too it is possible to make money. The toughest ones are the markets that move sideways. The following story, not apocryphal that happened in the US proves this point. At the height of the market boon nine mutual fund managers with impeccable record were asked to participate in a game whose rule was simple. Each was given a notional capital of 10 million dollars to invest. At the end of each day for a 6 month period each would make his buy-sell-hold decision in respect of his portfolio. The one with the highest portfolio value at the end of the 6-month period was to be declared the winner. Also participating in the game was a monkey which would make its choice by throwing a dart on a board that had buys stocks on the left and sell stocks on the right and the selection would be made based on where the dart fell. At the end of the 6-month period the monkeys portfolio finished second. A mutual fund manager had managed to save the face of the industry. 2. Yes: Careful Fundamental Analysis (FA) and Technical Analysis (TA) needed. In Fundamental analysis, you need to look into Macro Economic Factors, Industry Specific Factors and Company Specific Factors. Technical Analysis rests on the premises that price movement do not have direct co relation with intrinsic value of shares. While FA 90% logical and 10% psychological. TA 10% logical and 90% psychological. Technical analysis employ a variety of tools and techniques to evaluate the movement of share prices like Dow Jones Theory. Other factor determining the price of shares is the attitude of the investors. They can be classifed into: 1. Bear: An investor or trader who takes the view that prices are likely to fall and accordingly sells securities or goes short, thereby anticipating a profit by buying them back at a lower price. A bear tend is one where prices are falling. So a bear market, is a market perceived to be on a trend of falling prices. 2. Bull: An investor or trader who takes the view that prices are likely to rise and buys securities hoping to make a profit by subsequently selling at a higher price. A bull trend is a series of generally increasing prices, also called a bull run. So a bull market is perceived to be on a trend of rising prices and generally optimistic. So ready to buy stock: Do consider the business, company, promoters, finances, risk, price and the objective of the issue. In short look before you leap. You can watch NDTV profit, CNN and many other channels to know more about this. Also in orkut there is a community for stock exchange. Would like to take up professional qualification in this? You can go for NCFM (NSE certification in financial Market) which conducts online tests. Online registration fee is Rs. 1,000/- So interested in Stock Markets!! Best wishes!! Be careful!! Trick of the trade is no doubt what our grandparents said: Don’t put all your eggs in one basket.

Language.....

Languages are standardised, shapes (for writing) and sounds (speech), with attributed pronouncements, used in combination or isolations, for ease of quantifying and distinguishing things...

There are various languages, used through out the world, and modified, over a period of time, to suite the time.

Now that there is a tend toward universality...And English in basics is just one of the language, and used as synonimus as Doordarshan was used for Television...

Mathematics...

How do you find nth root of x
•Step 1: Take square root of x 15 times.
•Step 2: Subtract 1 from step 1
•Step 3: Divide by n
•Step 4: Add 1 to step 3.
•Step 5: Press * and = 15 times on calculator.




However much we learn there is still more beyond our view……This is because unknown things are so large that we can never hope to visit all of its many rooms. As my father always says even if we take ten births, we will not be able to learn or know everything. So leave alone one life.

What we know is like drops in the ocean, what we have to learn is vide like the sea before.

After 10th my parents asked me what next? I said commerce…They asked me why not science? I said all that I have learned in school. I want to learn something new. Now when I look back to what I know in Maths, one of the first subjects that we learn in school, I realize, its just A, B and C..and I do not know D to Z.

While reading about complex numbers, a thought came to my mind. Life is beautiful. We need to keep it simple. It becomes complex, when we introduce more, complex thoughts, imaginary ideas.
Saw Moitrayee with a book ‘Mathematical Sorcery’ revealing the secrets of numbers by Calvin C. Clawson…Actually this book should be read while in school. But cannot understand, why it is not there in the libraries.

We talked about WHAT MATHS IS?? Many have tried but nobody has really succeeded in defining mathematics, it is always something else. It is as much as art form as is art and music. It deserves to be taught by teachers who love it, just as music teachers love music and art teachers love art. It is interesting, electrifying, astounding.

The relationship between mathematics and music is rather intriguing.
Ø Both are linear- depending on sequence of events, instead of everything happening at once.
Ø Greatest joy is in redoing and sense of anticipation.
Ø Both allow for complexity.
Ø In both there is a sense of perfection.
Ø And there is a potential for related themes.


It is there since the time of ancient Greeks for more than 2500 years. Most other subjects are of recent origin. Maths entertains us, strengthens our mind, enriches us with its aesthetic appeal, and extends our understanding of universe. Mathematics is not a kind of secret knowledge, but by its very nature is democratic. It is a cornerstone of human knowledge.

Mathematics helps us understand truths, which reach beyond even the universe. A hierarchy of universality exists for truths. Some truths have almost no universality. Eg. My own name and address. Other truths enjoy more universality. The truth that water at sea level boils at 100 degree Celsius is particular to our own planet, but not on Jupiter. However Newton’s and Einstein’s law of motion enjoy a much border reach for they work everywhere in the universe.

The best that humans have to offer is indeed Mathematics. Is mathematics a complex game, invented by humans that will disappear completely when we are all gone, or is it part of the very script that writes the universe and is into existence?


We came to the conclusion that Maths was mans desire to quantify things precisely.

HISTORY

There is no written evidence as to what is the origin of maths. It is under continuous evaluation. Maths would have begun with counting. There were no numbers. Writing wasn’t invented until approximately 3100 B.C. It is belived that men then leaved on huntings, as maths is needed even for agriculture. It may be that maths was there, and there was some destruction, which would have destroyed everything. Sumerians full fledged writing dated ways back to ABC 3100 is available.

Earlier there was development of synbolisam to allow us to record and manipulate numbers. It is believed that earlier Sumerians and Babylons used Hexadecimal system, and by 2000 BC, calender of 360 days, divided into 12 months, 30 days,with extra month every 6 yrs was developed. That is why days 24 hrs, hrs. 60 minuts, and 60 seconds, all based on sexagesimal facts.

The Egyptians it is belived to have evolved two sets of symbols to represent numbers.

The first large expansion of number system was the introduction of fractions.

The Babylon’s where the first to find positive roots of quadratic equation, like ax2+bx+c=0.

Multiplication is repeated addition.

When there was developments going on in Sumeria, Babylon and Egypt, simultaneous independent developments where going on in China, India, and Central America.


To Be continued……….









Standardisation:\- To the power of....
million = 10\6
billion = 10\9
trillion = 10\12
quadrillion = 10\15
quintillion = 10\18
hexillion = 10\21
heptillion = 10\24
octillion = 10\27
nonillion = 10\30
decillion = 10\33
unodecillion = 10\36
duodecillion = 10\39