How does inflation affect a business

How Does Inflation Affect a Business?

Ronald Reagan, former US president once said, inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man. An individual is aware about inflation when buying day-to-day consumption products. Companies consume a lot of goods and services too. In a highly competitive market, inflation can eat into profits. 

What Causes Inflation

There are two major causes of inflation: Demand-Pull inflation and Cost-Push inflation. Demand-Pull inflation simply means that market demands drive prices of goods and services. Cost-Push inflation, on the other hand, means an increase in price levels due to increase in input costs.

In either case, the underlying concept of inflation is simple—it erodes the value of your money. For example, you have Rs. 1,000 and you put it in FD with 10% interest. At the end of the year, you will have Rs. 1,100 with you, which sounds great. However, inflation in the economy represented by the consumer price inflation rate or CPI, is 11%. So, an item that cost Rs. 1,000 earlier will now cost Rs 1,110. However, you have just Rs 1,100 to buy the item. Thus, a higher inflation rate forces you to add money to buy goods.

How Companies Are Affected

From a business perspective, a high rate of inflation (ideally 3% or more) would imply an increase in the input costs. This raises a dilemma for the business owners:

  • Increase prices of the product and thereby pass the rising input costs to the consumers

or

  • Retain the product price and take a profit cut.

If they increase the product prices, companies may lose market share. This, in turn, would take a toll on the profit. Thus, one major impact of inflation would be an amplification of the effects of fierce competition. However, if companies absorb the high input cost and keep prices low for customers, they have to take a cut in profits. 

Inflation and The Economic Cycle

Effects of inflation will also include an impact on the sales volume. The consumers will be forced to buy fewer goods. This could create lower demand. Companies would then cut production and put a halt to any future expansion. This leads to a slowdown in the economic activity as more companies try to reduce production of goods and services.

We can say that a high inflation rate leads to a vicious cycle that hampers the business.

However, a benign inflation rate can work wonders for the business. Though there is no ideal inflation rate, an inflation rate just above 2% can cause an inflationary spiral. If you were a student of economics, you would be aware of the importance of a benign inflation rate.

In this case, the price of the product has increased. However, since it is still under check, the demand for the goods would also increase. The businesses would have to hire more or do salary increments to meet the increased demands. This would, in turn, lead to a revival of the economy that is hurt by a persistently high inflation rate.

Thus, inflation if kept under check, can contribute to the growth of the business.  

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Fixed Deposit Interest Rates

Why Do Fixed Deposit Rates Fluctuate?

Yash Desai, a sales executive from Pune, wanted to lock his money in a fixed deposit. When he approached his bank, he was told the FD would be made at a rate of 7%. This was surprising because his friend had made a similar investment just a couple of months back at a rate of almost 9%.

Confused?

Yash asked the bank executive about the discrepancy and she explained that the RBI had decreased the repo rate recently, which resulted in a drop in the FD rates.

There are many factors that contribute towards the fluctuations in FD rates. In this article, we explain the various reasons so that you get a better understanding of how the fixed deposits work. Take a look.

What is a Fixed Deposit?

To begin with, let us understand what a fixed deposit is. A fixed deposit is a financial scheme where you lock in a particular sum of money at a fixed rate of interest. You cannot withdraw the money before the term ends. The money fetches you interest. The fixed deposits are protected against any fluctuations in interest rates. Therefore, they are considered to be one of the safest investment tools.

How Do Fixed Deposits Work?

Banks and NBFCs are in the business of money.

You give them money through deposits. In return, the financial company promises to pay an interest. The rate of interest differs with the tenure of the deposit. The longer you promise to deposit the money, the higher the rate.

This is because it allows the financial company to use the money more easily. It lends this money. The borrower promises an interest on this loan. This rate is higher than the interest rate promised on the deposit.

Once the money is returned along with the due interest, the financial company pays the depositor his/her interest along with the principal amount.

The interest rate on the loan is higher than the interest on the deposit. This is where the financial company earns its money.

Additional Read : Loans Against Fixed Deposits – All You need to Know

So when the interest rate on the loan changes, the deposit interest rates too change.

Factors That Affect the Fixed Deposit Interest Rates

Now let us take a look at the factors that affect the FD interest rates.

  1. RBI repo rate: The Reserve Bank of India (RBI) lends money to all the other banks in the country. The rate at which the money is given is known as the repo rate. When the RBI repo rate is lower, the lenders have to reduce their loan interest rates. So, the FDs interest rate too falls.
  2. Credit demand: The demand and supply of the credit in the economy also plays a role here. When there is a high demand for credit, the financial companies usually increase the FD rates to get in more cash into their vaults. Similarly, when the credit demand is low, the FD rates are slashed.
  3. Economic standing: Another factor that affects the FD interest rates is the economic condition of the nation. During a poor economic phase, the RBI cuts interest rates to allow banks and NBFCs easy access to cash. This in turn lowers the interest rate in the markets, stimulating borrowing and demand. At such a time, FD rates rise to encourage depositors.
  4. Type of FD: The kind of fixed deposit you opt for will also determine the overall interest you earn. If you opt for a cumulative fixed deposit, you earn interest on your interest payments. This increases your overall return.

The bottom line:

Fixed deposits are wonderful saving options but as the rates of interest do fluctuate over time. The key, therefore, is to keep investing over time.

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FD- ET blog

Bajaj Finance Slashes Minimum Fixed Deposit Amount to Rs. 25,000

Bajaj Finance, India’s top most NBFC, has announced a reduction in the minimum investment amount for Fixed Deposits from Rs.75,000 to Rs.25,000. In an intend to maximise the returns for its customers, Bajaj Finance will offer an annual cumulative interest rate of 8.05% for a tenor of 36-60 months on the reduced amount.

Taking into consideration the huge demand from the existing customers, the minimum investment amount in fixed deposits has been revised from Rs.75,000 (in Mumbai and Delhi) and Rs.50,000 (for the remaining parts of the country) to Rs.25,000 by Bajaj Finance.

With this move, Bajaj Finance aims to double its deposit base rate to about Rs. 8,000 crore from Rs. 4,100 crore. The move also puts Bajaj Finance in the same bracket of Housing Development Finance Corporation in terms of minimum deposits.

Speaking to The Economic Times, Sachin Sikka, the company’s business head of Fixed Deposits, said: “We are excited to reduce the minimum investment size as an effort to exploit the opportunity as a retail deposit player.” He also added, “Our new offering will allow small depositors to earn higher returns through traditional and “triple A rated” savings product.

What is on offer?

Bajaj Finance already offers a higher rate of interest on Fixed Deposit as compared to leading banks. Bajaj Finance offers 7.8% interest on a one-year deposit as compared to 6.9% interest rate from State Bank of India on a similar maturity.

Senior citizens would get an additional 0.25% for deposits up to Rs 1 crore.

Bajaj Finance offers a maximum annual cumulative interest of 8.05% on its fixed deposits of a tenure of 36-60 months. This is higher than the average deposit rates available today.

The new minimum cap of Rs. 25,000 has come into effect from 3rd April, 2017.

The news has been making rounds in the media and was covered by Economic Times. Click here to read the full article. 

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Why early 30s is the right age to invest_edited

Why Your Early 30s Is the Right Age to Invest

Stepping into your 30s is a crucial step for any individual. By now, you ought to have figured out your career prospects. You should have a steady income as well. A big change in life, such as wedding or kids, may have already happened. Or it may be around the corner. Your early 30s is an ideal time for you to take stock of your finances. You can now build a solid investment plan to secure your future. Here is how to go about it:

Review Your Insurance Cover:

Your responsibilities may have increased by the time you hit your 30s. Your spouse and kids now depend on you. So, it is time to adjust your insurance cover. What was adequate when you were single may not be adequate now. At this age, you may be able to get some good deals on term insurance policies online. The more you delay buying your life insurance, the heftier your premium becomes. Also, go over your health insurance policy once again. Ensure that you and your family have enough financial protection.

Protect Yourself Against Emergencies:

Life is uncertain. A job loss or any other unpleasant life event may derail your financial plans. Thus, it is wise to enhance your emergency fund at this stage. You should have started building an emergency fund in your 20s. Investing in a bank fixed deposit (FD) or a mutual fund would have been perfect. If you have not done so yet, begin now. It is best to keep things simple by investing in a five-year FD. This will take care of six to nine months of your living expenses and liabilities. You can earn an interest of 7.15–8% on such an FD. You can also link it to your savings account. Then you can make a withdrawal in case of an emergency.

Additional Read : Pros and Cons of Fixed Deposit

fd-infographics

Build A Balanced Investment Portfolio:

As you advance in age, your financial needs, ambitions, and risk profile change. Your investment portfolio should reflect these changes. At 30, you need to think of your home loan, children’s education, tax planning, and you’re your retirement plan. Your asset allocation at this stage should be 75% in equities and 25% in debt.

You might have invested in a systematic investment plan (SIP) in your 20s. You can now invest more in SIPs. Link them to your financial goals. Perhaps you wish to buy property or fund your children’s education. You can also include short- or medium-term goals. These include milestone birthday or anniversary celebrations. Or, you could plan an exotic vacation with your family. It is prudent to use a SIP calculator. You will know exactly how much you need to save each month to meet your financial goals. But do pick the right equity fund as per your risk appetite.

The 30s are also the time when you need to make an effective tax-saving plan. The Public Provident Fund (PPF) remains a popular tax-saving avenue. It is used for long-term investments. Equity-linked savings schemes (ELSS) may also prove to be tax-efficient. They carry the benefit of capital appreciation as well.

Finally, it is time to look at retirement plans. The earlier you start allocating funds towards retirement, the better. This increases your chances of leading a good second innings. Consider products such as the National Pension Scheme (NPS). This has mostly delivered inflation-adjusted returns. NPS also provides tax benefits under Section 80C.

It is of utmost importance to set your financial goals and invest as per your plans. Here’s a handy guide of which investment option suits different goals.

The Bottom Line:

Taking control of your finances in your early 30s puts you in the driver’s seat. This can ensure lifelong financial security.

Invest in FD @8.05% High Interest Rate

Home Loan Balance Transfer

When Should You Do Home Loan Balance Transfer?

Do you have an existing Home Loan? Are you finding it difficult to pay the high EMIs? Home Loan balance transfer can be your solution.

You’ve put in so much time and energy in applying for a Home Loan, that it may seem like a hassle to have your existing Home Loan transferred. After all, we bet you are not keen to go through the entire loan application procedure again, submitting new forms and extensive amount of documentation.

But if you are willing to look beyond this obvious inconvenience, a Home Loan balance transfer can benefit you in various ways. For one, you can avail of lower interest rate with a different lender. This makes all the difference to your EMI. A higher interest rate means that more often than not, you end up paying more interest than the actual amount of the loan.

Thus, getting a Home Loan balance transfer becomes a good option when you want to save money on the EMI. The amount you save in interest can be invested in something else. If you choose to keep the EMI the same, by choosing a balance transfer, you can reduce your tenure.

However, you should be aware of the right time to get a Home Loan balance transfer. This is usually when the interest rate in the market is down, which will help you save. The documents required for a balance transfer are: proof of identity and residence, proof of income, official letter by your current lender with a list of property documents, official letter by your existing lender stating the current outstanding amount and a photocopy of the property documents.

Here is an infographic that will guide you when is the right time for you to transfer your Home Loan to a new lender:

 

When should you do home loan balance transfer

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What You Need to Know Before Applying for a Home Loan

Applying for a Home Loan is a serious affair, which needs to be carried out with caution and in-depth knowledge of what you are getting yourself into. You need to study the process as well as the terms and conditions carefully before you sign the loan documents.

Ideally you should know everything like the charges you are paying for processing, the down payment and pre-payment procedure, the collateral policy, how the EMI is calculated, how to deal with a financial difficulty or crisis, the availability of options in such cases, etc.

Calculate your monthly expenses not only to be able to pay the monthly EMI on your Home Loan but also find out if you can pay the required down payment. What is the down payment on the loan? It is the amount you pay towards your home by yourself, since only a maximum of 90% of your home’s value is funded by lenders.

Be smart and use a Home Loan EMI Calculator so that you are not taken by surprise later. What is the EMI calculator? It is a tool provided by Bajaj Finserv to calculate your EMI, based on your income, loan amount, tenure, etc.

Once you have chosen the Home Loan that is most suitable for your requirements, you need to pay attention to the application procedure.

Take a look at this infographic that explains everything you need to know before applying for a Home Loan:

 

What you need to know before applying for a home loan

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Tax Exemptions on Popular Loans

Tax Exemptions on Popular Types of Loans

Tax is a worrisome thing for everybody out there. If you want to reduce the tax amount you’re paying every year, opt for loans which provide tax exemption benefits. The loans which come with tax benefits include Home Loans, education loans, car loans and some kinds of personal loans. These loans may not necessarily exempt you from paying tax, but will definitely reduce the amount you have to pay. The best thing: You not only save up on tax, but are also building an asset when you take a loan for buying a home, car, etc.

Did you know that Home Loans have the maximum tax benefit? The tax exemption you will get will depend on the kind of Home Loan you opt for, as well as the loan amount and tenure, and whether you are a first-time homebuyer.

There are different sections of the Income Tax Act that deal with loans. Under section 24 of the Income Tax Act, you can get a deduction on Home Loan repayment. Under section 80C, you may claim exemption on the principal part of the Home Loan. Under Section 80E, the interest paid on education loans is tax-deductible depending on the kind of loan and the time period it has been borrowed for. So, to find more about how you can reduce you tax burden, make sure you study these sections.

For more help, take a look at this infographic which rightly explains the tax exemptions on different types of loans:

 

Tax exemptions on popular types of loans

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RBI Guidelines for Home Loan

Mandatory RBI Guidelines that Everyone Should Know Before Applying for a Home Loan

When you’re taking a Home Loan, it is important to be aware of RBI guidelines for Home Loans to ensure that your lender is keeping true to government policies and not overcharging you. Since a Home Loan facilitates your dream home, it is important to be careful and pay attention to each little detail before signing on the dotted line.

According to the latest reports, the Reserve Bank of India has set new guidelines for Home Loans. To encourage Home Loans and make them more affordable and customer friendly, RBI has increased LTV (Loan to value ratio) from 80% to 90% for Home Loans below 30 lakhs. This means that 90% of your home value may be funded by lenders, making it easier for you to purchase a home via a Home Loan.

RBI further suggests that stamp duty, registration charges and other documentation charges should not be included while calculating LTV, thus lowering the 10% payment that the borrower has to make upfront.

RBI Guidelines for Home Loan Prepayment Charges are also very important. The RBI has abolished prepayment charges to encourage borrowers to pay off the loan in case of an increase in their income. Prepayment can either help you reduce your tenure or reduce your EMIs, which is very beneficial.

RBI has set guidelines for Home Loan takeover as well so you can refinance your Home Loan at lower interest rates with EMIs and a tenure that suits you. RBI has also waived off foreclosure charges, thus benefiting the borrower.

Here is an infographic that explains the mandatory RBI guidelines and will help you choose the right Home Loan:

 

Mandatory RBI guidelines that everyone should know before applying for a home loan

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