Intrest rate fluctuation

Jun 28th, 2015
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Abilene Christian University
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Lending and borrowing are the two main operations of the financial intermediries and financial intermedieries are the major component of the financial system of any country.Theory of financial intermedieries aurged that banks and other financial institutions mainly take the funds from the surplus units of the system and lend it to the deficit units(Allen & Sontemero).In lieu of it the surplus units demand compensation for the deffered use of the funds and the deficit unit ,who now have the funds from the surplus units would pay compensation for the redily use of these funds.This compensation is actually the opputunity cost of the money and this cost is known to be a intrest rate (Faboozi & Peterson).

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INTEREST RATE TERM STRUCTURE The interest rate term structure is the relationbetween the interest rate and the time tomaturity of the debt for a given borrower in agiven currency. In India, interest rate decisions are taken by theReserve Bank of India's Central Board ofDirectors. The official interest rate is thebenchmark repurchase rate. ,From 2000 until2010, India's average interest rate was 5.82percent reaching an historical high of 14.50percent in August of 2000 and a record low of3.25 percent in April of 2009.LAST 10 YR DATA OF INTEREST RATESTRUCTURE 2000-2010 ( IN %)REPO RATE Whenever the banks have any shortage offunds they can borrow it from RBI. Reporate is the rate at which our banks borrowrupees from RBI. A reduction in the repo rate will help banksto get money at a cheaper rate. When the repo rate increases, borrowingfrom RBI becomes more expensive.REVERSE REPO RATE Reverse Repo rate is the rate at which Reserve Bankof India (RBI) borrows money from banks. Banks are always happy to lend money to RBI sincetheir money are in safe hands with a good interest. An increase in Reverse repo rate can cause the banksto transfer more funds to RBI due to this attractiveinterest rates. It can cause the money to be drawn outof the banking system. Due to this fine tuning of RBI using its tools of CRR,Bank Rate, Repo Rate and Reverse Repo rate ourbanks adjust their lending or investment rates forcommon man.Ca

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