The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy.

It is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it.

Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding.

Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values. Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing.

Overview

Monetary policy rests on the relationship between the rates of interest in an economy, that is, the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment.

Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals).

The beginning of monetary policy as such comes from the late 19th century, where it was used to maintain the gold standard.

A policy is referred to as contractionary if it reduces the size of the money supply or increases it only slowly, or if it raises the interest rate. An expansionary policy increases the size of the money supply more rapidly, or decreases the interest rate.

Furthermore, monetary policies are described as follows: accommodative, if the interest rate set by the central monetary authority is intended to create economic growth; neutral, if it is intended neither to create growth nor combat inflation; or tight if intended to reduce inflation.

There are several monetary policy tools available to achieve these ends: increasing interest rates by fiat; reducing the monetary base; and increasing reserve requirements. All have the effect of contracting the money supply; and, if reversed, expand the money supply. Since the 1970s, monetary policy has generally been formed separately from fiscal policy.

Even prior to the 1970s, the Bretton Woods system still ensured that most nations would form the two policies separately.

Almost all modern nations, special institutions (such as the Federal Reserve System in the United States, the Bank of England, the European Central Bank, the People’s Bank of China, and the Bank of Japan) exist which have the task of executing the monetary policy and often independently of the executive. In general, these institutions are called central banks and often have other responsibilities such as supervising the smooth operation of the financial system.

The primary tool of monetary policy is open market operations. This entails managing the quantity of money in circulation through the buying and selling of various financial instruments, such as treasury bills, company bonds, or foreign currencies. All of these purchases or sales result in more or less base currency entering or leaving market circulation.

Usually, the short term goal of open market operations is to achieve a specific short term interest rate target. In other instances, monetary policy might instead entail the targeting of a specific exchange rate relative to some foreign currency or else relative to gold.

For example, in the case of the USA the Federal Reserve targets the federal funds rate, the rate at which member banks lend to one another overnight; however, the monetary policy of China is to target the exchange rate between the Chinese renminbi and a basket of foreign currencies.

Types of monetary policy

In practice, to implement any type of monetary policy the main tool used is modifying the amount of base money in circulation. The monetary authority does this by buying or selling financial assets (usually government obligations).

These open market operations change either the amount of money or its liquidity (if less liquid forms of money are bought or sold). The multiplier effect of fractional reserve banking amplifies the effects of these actions.

Constant market transactions by the monetary authority modify the supply of currency and this impacts other market variables such as short term interest rates and the exchange rate.

The distinction between the various types of monetary policy lies primarily with the set of instruments and target variables that are used by the monetary authority to achieve their goals.

Inflation targeting
Main article: Inflation targeting

Under this policy approach the target is to keep inflation, under a particular definition such as Consumer Price Index, within a desired range.

The inflation target is achieved through periodic adjustments to the Central Bank interest rate target. The interest rate used is generally the interbank rate at which banks lend to each other overnight for cash flow purposes. Depending on the country this particular interest rate might be called the cash rate or something similar.

The interest rate target is maintained for a specific duration using open market operations. Typically the duration that the interest rate target is kept constant will vary between months and years. This interest rate target is usually reviewed on a monthly or quarterly basis by a policy committee.

Changes to the interest rate target are made in response to various market indicators in an attempt to forecast economic trends and in so doing keep the market on track towards achieving the defined inflation target.

For example, one simple method of inflation targeting called the Taylor rule adjusts the interest rate in response to changes in the inflation rate and the output gap. The rule was proposed by John B. Taylor of Stanford University.

The inflation targeting approach to monetary policy approach was pioneered in New Zealand. It is currently used in Australia, Brazil, Canada, Chile, Colombia, the Czech Republic, Hungary, New Zealand, Norway, Iceland, India, Philippines, Poland, Sweden, South Africa, Turkey, and the United Kingdom.
Price level targeting

Price level targeting is similar to inflation targeting except that CPI growth in one year over or under the long term price level target is offset in subsequent years such that a targeted price-level is reached over time, e.g. five years, giving more certainty about future price increases to consumers. Under inflation targeting what happened in the immediate past years is not taken into account or adjusted for in the current and future years.

Interest rates can be calculated at a flat rate keeping the outstanding amount (ie, the amount on which interest is calculated) constant throughout the loan tenure or at a reducing balance rate, which lowers the outstanding amount as the loan is paid back.

What’s flat rate?
For instance: If you took a loan of Rs 10,000 with a flat rate of interest of 10 per cent over five years, then you would pay Rs 2,000 + Rs 1,000 (ie, 10 per cent of the loan) = Rs 3,000 every year. Over the tenure of the loan, you would end up paying Rs 15,000.

What’s reducing balance rate?
If instead of a 10 per cent flat rate (in the above example), you were charged a 10 per cent annual reducing balance rate, you would pay Rs 1,000 as interest in the first year, Rs 800 as interest in the second year, Rs 600 as interest in the third year, Rs 400 as interest in the fourth year and by the last year you would only pay Rs 200 as interest. That is, over the tenure of the loan you would end up paying Rs 13,000 ie, Rs 2,000 less than you would have paid with the 10 per cent flat rate.
Tip: An X per cent flat rate is always more expensive than an X per cent annual reducing balance rate. So insist that the bank quotes you a reducing balance rate for all kinds of loans.
What’s ‘rest’?
The term ‘rest’ comes into the picture only for reducing balance loans. A ‘rest’ is the period in which the bank recalculates the loan amount outstanding based upon the amount of loan paid back, and it is also the periodicity of compounding.

Rests can be annual, monthly, weekly and even daily!

Let us understand how the difference in the rest period affects the loan taker.

Annual rest: The bank recalculates the outstanding loan amount at the end of 12 months. That is, even though the borrower pays his EMI every month and the loan balance reduces every month, the outstanding loan amount is not adjusted till the end of the year.

Monthly rest: The bank recalculates the outstanding loan amount at the end of each month. That is, the outstanding loan amount on which the interest is charged goes down every month.

Tip: An X per cent annual reducing balance rate is always more expensive than an X per cent monthly reducing balance rate. So bargain for your loan to be calculated on monthly rest basis.

Here is how they do it:

Step 1
A bank will start by looking at your income statement (salary slips, tax returns, bank statements). It will calculate your total monthly income by adding up your salary, interest income, rental income, if any etc. All these details are available in your bank statement.

Step 2
It will then calculate the amount you save.

Since savings depend on a variety of factors like income level, lifestyle etc, there is a standard thumb rule of 30 per cent that banks apply to arrive at this number.

That means, if your income is Rs 50,000 per month, the bank assumes that you save 30 per cent, that is Rs 15,000 per month.

The higher your income, the more you can save, so it is assumed.

Step 3
If you are already paying some other EMI, that amount will be reduced from the calculated savings. So if your savings per month is Rs 15,000 and you are paying an EMI of Rs 2,400 on your car loan, the bank will arrive at a figure of Rs 12,600 as your net savings.

Step 4
After that, a little backward calculation is done to find out the amount of loan that would result in an EMI equal to the amount that you can save. The bank uses the latest interest rate to calculate this.

So if your monthly net savings is Rs 12,600, the bank assumes that is the amount available to pay off the EMI. If the prevailing interest rate is 10 per cent and you have applied for a loan tenure of 10 years, you will be eligible for a loan of Rs 9.5 lakh.

Disclaimer: While we have made efforts to ensure the accuracy of our content (consisting of articles and information), neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.

Well, for starters, interest outgo on the loan up to Rs 1,50,000 is tax deductible. Moreover, the capital repayments are eligible for Sec 80C deduction up to Rs 1,00,000. Now, if one were to use one’s own funds, these benefits are forgone. There are absolutely no tax benefits available for someone who wants to buy his property outright without taking a loan! This does seem a bit unfair, but that’s the way the law is.

Now taking a step further. How much loan should you opt for? If you take a loan, you pay a higher rate of interest than what you earn on your own funds. So should you use your funds for buying the house? In that case, you lose the tax advantage.

Therefore, you have to weigh the benefit of the tax advantage of taking a loan against the loss due to higher interest outflow. Obviously, there is a break-even point, which can help you in arriving at the optimal mix. The answer would of course depend upon variable parameters like the interest rate on the loan and what your own funds earn outside.

The greatest advantage of taking a loan emanates out of the tax breaks. It is in the interest of the investor to maximize these tax breaks. Using own funds results in foregoing the tax advantage.

Also note that the ceiling of Rs 1,50,000 on interest is only in the case of self-occupied property. In the case of let out property, there is no ceiling on the interest deduction i.e. full interest paid is deductible. In this case, obviously, taking a loan would be advantageous. There is no question of using one’s own funds.

Disclaimer: While we have made efforts to ensure the accuracy of our content (consisting of articles and information), neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.

The system verifies with your issuing bank whether you have sufficient credit to cover the purchase in a few seconds, and approves or rejects the transaction. As soon as approval comes through, you are asked to sign the charge slip. The merchant then verifies your signature with the one at the back of the card.

The charge slip is then forwarded to the acquiring bank, which in turn settles the transaction with the merchant. The issuing bank also proceeds to bill you for payment as per the cardholder agreement. The acquiring bank will settle the transaction with your issuing bank through the network.

Sounds pretty straightforward? Then you’re wondering why credit cards are such accursed instruments? That happens when you delay payments and get caught in an interest cycle. When you use a credit card you have the option to pay only a part of the total amount spent and carry forward the balance. But in such a case you will have to pay interest on all your purchases without any free credit period.

You can save yourself only if you are prompt in paying the balance by the due date. Credit card users get a free period of credit before they reimburse the credit card issuing bank. This may vary from 15 days to 40 days depending on the issuing banks.

So that concludes our session on How Credit Cards Work. If you’re now looking for information on How Snow Leopards Mate then you’re on the wrong site my friend!

Disclaimer: While we have made efforts to ensure the accuracy of our content (consisting of articles and information), neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.

While it may not serve any purpose to know how snow leopards mate or how galangal is grown in Thailand, there are a few things that we would do well to learn about. Credit cards is definitely one of them.

Let’s learn some fast facts:

The Basics

When you apply for a credit card, the bank you apply to carefully screens your application. You cant blame them given that there is always a crook around the corner.

A credit limit is worked out for you, based on your financial capability and other parameters like income levels, educational qualifications, age etc. The bank that issues you the card is called the ‘issuing bank’.

The Business

From the bank’s point of view, credit cards are good business for two reasons.

Banks make money through fees from merchant establishment.

The higher than normal interest rate paid by cardholders for the balance in their card.

So what are these merchant establishments? These form the heart of the business. Merchant establishments can be hotels, shops, travel agencies or any place where money transactions are made. The banks that enroll merchant establishments are called ‘acquiring banks’.

The relationship between the bank and the merchant establishments is run via international networks such as Visa and Master card.

Your credit card is valid in any merchant establishment that accepts your network (ie Master Card or Visa), irrespective of the issuing bank. Most Indian card issuing banks are part of either Master Card network or Visa network, or both. There are others credit card networks like American Express and Diners Club too.

The merchant establishment finds the credit card a safer and efficient payment mode, and brings more business. The merchant establishment pays a fee to the bank that enrolled it for the service.

“Competitors have found it difficult to take market share from Hero,” it said in a note. The investment bank has reiterated its ‘Buy’ rating on Bajaj Auto and added it to its Conviction List as it expects Bajaj’s differentiated strategy, will drive stable market share and margins.

“Moreover, we believe some of the concerns on increasing competition from Japanese competitors is overdone,” the report said.

However, Goldman has downgraded Maruti Suzuki to ‘Sell’ from ‘Neutral’ and cut target price to Rs 922  from Rs 1,042 on back of 32% increase in stock price year-to-date and lower-than-expected sales volume and margin performance in fiscal third quarter.

Competition and technology costs, yen exposure, cyclical weak near-term demand and recent labor issues are some other issue for Maruti, Goldman Sachs said in a note.

It has added Maruti to its Conviction List-Sell.

At 2.04 pm Maruti was quoting up 3.48% at Rs 45.35.

Hero Motocorp shares were up 2.10% at Rs 2,136.90 and Bajaj Auto shares were up 2.09% at  Rs 1,782.65.

You can find a plethora of credit card choices available in the market, which would simply clutter the process of selecting a card. When deciding on a credit card, always remember to select the card that suits you best and fits well into your divergent requirements. Different companies are regularly coming up with tailor-made credit card offers and all that you are required to do is to find authentic information here, on our site, on charges and advantages of cards.

A Credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder’s promise to pay for these goods and services. The issuer of the card creates a revolving account and grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user.

People today, have at least one credit card — and usually two or three. It’s true that credit cards have become important sources of identification — if you want to rent a car, for example, you really need a major credit card. And used wisely, a credit card can provide convenience and allow you to make purchases with nearly a month to pay for them before finance charges kick in.

Credit cards are issued by a credit card issuer, such as a bank or credit union, after an account has been approved by the credit provider, after which cardholders can use it to make purchases at merchants accepting that card. Merchants often advertise which cards they accept by displaying  acceptance marks– generally derived from logos – or may communicate this orally, as in “We take (brands X, Y, and Z)” or “We don’t take credit cards”.

When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates consent to pay by signing a receipt with a record of the card details and indicating the amount to be paid or by entering a  Personal Identification Number (PIN). Also, many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet, known as a Card not present Transaction (CNP).

Electronic Verification systems allow merchants to verify in a few seconds that the card is valid and the credit card customer has sufficient credit to cover the purchase, allowing the verification to happen at time of purchase. The verification is performed using a credit card payment terminal or point of sale(POS) system with a communications link to the merchant’s acquiring bank. Data from the card is obtained from a magnetic stripe or chip on the card; the latter system is called Chip and PIN in the United Kingdom and Ireland and is implemented as an EMV card.

For card not present transactionswhere the card is not shown (e.g., e-commerce,mail order, and telephone sales), merchants additionally verify that the customer is in physical possession of the card and is the authorized user by asking for additional information such as the security code printed on the back of the card, date of expiry, and billing address.

So, in the broad sense, Money can very much pertain to the smaller amount of cash that we/ you carry around in your pockets. The stuff you/we use, handle and spend – everyday. It is personal and practical. For example when you buy cup of coffee or a newspaper you usually pay with money (cash) out of your pocket.

FINANCE

Finance is the science of funds management. The general areas of finance are business finance, personal finance, and public finance. Finance includes saving money and often includes lending money. The field of finance deals with the concepts of time, money and risk and how they are interrelated. It also deals with how money is spent and budgeted.

Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money management agencies through a variety of capital accounts, instruments, and markets created for transacting and trading assets, liabilities, and risks. Finance is conceptualized, structured, and regulated by a complex system of power relations within political economies across state and global markets.

To sum it up. Finance is numbers. Usually large numbers. Numbers which you move around by signing pieces of paper. For example when you buy a house, you sign contracts, mortgages and checks. You don’t usually pay in cash out of your pocket.