Interest Rates and Infation

Often we come across RBI not in a position to lower interest rates unless inflation eases or something around.
Did a bit of research and could sum up the relation between Interest Rates and Infation.



Inflation is the rise over time in the prices of goods and services.
Inflation is the natural byproduct of a robust, growing economy. No inflation, or deflation (the lowering of prices), is actually a much worse economic indicator. Also, in a healthy economy, wages rise at the same rate as prices.



A standard explanation for the cause of inflation is "too much money chasing too few goods" . This is also called the demand-pull theory. Here's how it works:

1>For several possible reasons, more money is being spent than normal. This could be because interest rates are low and people are borrowing more. Or perhaps the government is spending a lot on defense contracts during a war.

2>There's not enough supply to keep up with the rising demand for homes, cars, tanks, missiles, et cetera. Manufacturers are producing goods at a slower rate than people are demanding goods.

3>When supply is less than demand, prices go up.



Another explanation for inflation is the cost-push theory. Here's how that works:
1> For several possible reasons, the cost of doing business starts to go up independent of demand. This could be because labor unions negotiated a new contract for higher wages, the local currency loses value and the cost of exporting foreign goods goes up, or new taxes have put a strain on the bottom line.

2> It's called cost-push inflation because the rise in the cost of doing business pushes the price of products up.

Like we said earlier, lower interest rates put more borrowing power in the hands of consumers. And when consumers spend more, the economy grows, naturally creating inflation. If the board  finds that the economy is growing too fast-that demand will greatly outpace supply-then it can raise interest rates, slowing the amount of cash entering the economy.


Inflation has hounded India relentlessly, pushing up prices, corroding savings, hurting the poor most and making life difficult for its large middle class.

Much of this hike in food prices is being attributed to rise in rural incomes - wages have grown by 20% annually over the last five years - which is prompting villagers to expand and move towards protein-rich diets.

There is evidence to show that people are spending more on milk, pulses, egg, fish and meat both in the cities and villages.


A lot of food rots in India because of insufficient and low quality storage facilities, leading to shortages in off-peak season.
India can tolerate high inflation if it has equitably distributed high growth.

Filing tax returns? Give more details this year

The tax authorities are seeking more information about your income and expenses in the new forms introduced this year. Find out what you need to provide to avoid errors or invite a tax notice.

The government may be set to change, but the Income Tax Department's drive for in creased compliance continues unabated. The new tax forms notified by the department last month are aimed at seeking more details about your income, exemptions and expenses. Here are some of the changes that you should be aware of.
Details of exempt income Until last year, taxpayers were required to declare their exempt income in the returns, but only had to enter a consolidated figure for the tax-free allowance they received during the year. This time, however, they will have to provide the details as well.
“The new ITR-2 form requires taxpayers to give a detailed break-up of tax-exempt allowance in schedule S (for salary income),“ says Vaibhav Sankla, director of tax consulting firm, H&R Block.
Many employees get house rent allowance (HRA), leave travel assistance (LTA) and travel allowance as part of their salaries. These allowances are exempt if certain conditions are met. Till now, the taxman had no issues if you mentioned a consolidated figure in your return, but now he wants to know how much you received under different heads. “You will have to separately mention the figures for, say, HRA and LTA,“ says Kuldip Kumar, executive director, tax and regulatory services, PwC.

The tax exemptions are increasingly being put under the scanner by the CBDT.
In October last year, it had declared that the salaried taxpayers who claim HRA exemption will have to report their landlord's PAN if the total rent in a year exceeded `1 lakh.
“In case the landlord does not have a PAN, the employee will have to submit a declaration to this effect from the landlord, along with his name and address,“ said the circular issued by the CBDT.

Earlier, you were not required to submit the landlord's PAN details if the total rent paid was less than `15,000 a month. The new rule effectively reduced this limit to `8,333 a month. Though this was meant to plug tax evasion by salaried professionals who submitted fake rent receipts to maximise their HRA exemption, even honest taxpayers had to suffer the collateral damage. The new rule created problems for many employees because landlords are generally reluctant to provide PAN on rent receipt to tenants.
Break-up of capital gains The taxman is not stopping at the exempted income. He also wants you to provide a detailed break-up of the capital gains made during the year. The new ITR-2 asks for information on capital gains under several categories. Capital gains are taxed at different rates depending on the nature of asset and the holding period. Gains from equity funds and listed shares are tax-free after a year, but taxed at 15% if the holding period is less than 365 days. Gains from debtoriented funds, gold ETFs and unlisted shares are treated as long-term gains after a year and taxed at 10% flat or 20% after indexation. In case of property and bullion, the holding period must be at least three years before these are treated as long-term gains.

Since you will be required to mention the gains separately, a broad estimate will no longer work. According to Sankla, the new categories added to the capital gains section will ensure accurate tax calculation on capital gains.

Capital gains from property Property investments are also under scrutiny. If you sell property after three years, any profit made is treated as long-term capital gain and taxed at 20% (with indexation benefit). However, you can avoid paying this if it is reinvested in another property or bonds issued by the NHAI or REC under Section 54. From this year onwards, the ITR-2 seeks details of such transactions as well. “The taxpayers will have to mention the cost of the property or the amount invested in bonds, the date of purchase and investment, as well as the amount deposited in the capital gains saving account scheme,“ says Sankla.
First-time home buyers Serial investors are not the only ones to be asked for such details. Even first-time home buyers are now in the tax net. If you have purchased your first house in the previous financial year with a loan, you will be eligible for an additional deduction of `1 lakh on the interest under Section 80EE. This will be over and above the `1.5 lakh deduction of home loan interest under Section 24(b). “This new provision has now made its way into the ITR forms, which was expected. The new form includes a box for deduction of interest on housing loans taken by first-time home buyers,“ says Vineet Agarwal, director, KPMG India.

However, there is no change in the classification of tax filing forms that are to be used by various categories of taxpayers. If you have an income from salary or pension, own no more than one house and the only other sources of income is interest, you can use form ITR-1 (Sahaj). If you own more than one house or if your earnings include capital gains and other sources, including the winnings from lottery and horse racing, you will have to use ITR-2.

Is your fund charging to much?

Fund houses have hiked the charges for investors.
You might not have noticed it, but your mutual fund investments may have quietly become more expensive.
The traditional way of investing in mutual funds has suddenly become an expensive proposition.
That's a worrisome thought for the long-term investor, who stands to lose a good part of his wealth to the charges levied by the fund houses that manage his money.
If a fund gives annualised returns of 10%, here is what an investment of `1 lakh will grow to in 20 years at various levels of expense ratios.

What investors can do Is there a way out for investors? One way is to identify funds with low expense ratios and invest in them. Index funds and exchange-traded funds (ETFs) typically have lower expense ratios of 1-1.5%, compared to actively managed funds that charge over 2.5%. This may not be a very useful strategy.

Actively managed diversified equity funds charge more, but also deliver higher returns than index funds. In your attempt to save 0.5% in expense ratio, you might forgo the 3-4% higher return from a diversified equity fund.

A well-managed diversified equity fund that can beat its benchmark by a good 2-3 percentage points is certainly a better bet.

For investors, a better option is the direct plan route that market regulator Sebi opened for investors as a New Year gift in 2013. These are sold by fund houses directly to the investor, bypassing the distributors.

Since there is no upfront brokerage or trail commission to be paid to the distributors, these plans have a lower expense ratio as compared to regular plans bought through a distributor.

As the table on the right shows, the difference between the expense ratio of the regular plan and direct plan can be as high as 75 basis points. This is why SIP investors in the direct plan of the  Equity fund have earned a significantly higher return than those who put their money in the regular scheme.

Higher returns from direct plans are an outcome of the lower expense ratio for these plans. Retail investors could start shifting to these plans as awareness about the benefits of these plans increases.

To invest in direct plans, you need to do your own research.Since you are on your own, you need to decide which scheme to choose, the fund house and the amount, whether you wish to pick an SIP or invest a lump sum.

Once you have identified the scheme, you have to take care of the operational aspect. If you are a first-time investor, you will need to complete your KYC (know your customer) formalities. If you have an existing investment in any fund house, the KYC procedure will be easier. Fill up the application form

and submit it to the fund house or its registrar (CAMS or Karvy), along with the investment cheque.

Direct investing is far easier if you are Net savvy. Just visit the AMC office once and apply for Internet access to your account. Once your folio is created and you get a PIN (password), you can transact online with the fund house website. You also need to have a Net banking account for this.All your subsequent investments in the fund house, whether in debt, equity or gold funds, can be done under the same folio.