interest-rates 8

When I moved to the UK, I was surprised to see mortgages advertised for 4.9%. ICICI Bank's HiSAVE account was offering 5.15% interest on savings. So if I borrowed at 4.9% and invested at 5.15%, I can make money for nothing! The catch, of course, is that the mortgage was 4.9% APR. Annual Percentage Rate is the total interest you pay on the initial amount you borrow, divided by the number of years. This has nothing to do with the Internal Rate of Return, or the regular interest rate we know of. ...

People act on the spur of the moment, most of the time. So, as you can see from this example below, psychology can be more important than economics. Senthil Mullainathan worked with a bank in South Africa that wanted to make more loans. A neoclassical economist would have offered simple counsel: lower the interest rate, and people will borrow more. Instead, the bank chose to investigate some contextual factors in the process of making its offer. It mailed letters to 70,000 previous borrowers saying, “Congratulations! You’re eligible for a special interest rate on a new loan.” But the interest rate was randomized on the letters: some got a low rate, others a high one. “It was done like a randomized clinical trial of a drug,” Mullainathan explains. ...

Once, we were looking at whether banks made money on demand drafts (DDs). DDs are costly. 90% of a bank’s costs are people-related, and it takes a fair bit of time (hence people) to process DDs. If you pay for DDs in cash, it costs even more because the teller has to count the notes. To recover this cost, banks charge a fee. The fee increases with the size of the DD. A DD for Rs 10,000 may cost Rs 50, while one for Rs 100,000 may cost Rs 200. ...

Greenspan’s defence. On why he couldn’t have raised interest rates earlier and prevented the bubble.

If nothing else, the Moody downgrading and S & P downgrading mean a further slowdown in India, despite any rate cuts.

The Fed lowers interest rates! Certainly hadn’t expected it till the end of the month. Obviously, since this is the first time they changed rates in-between policy meetings. The market was caught short too. Anyway, the NASDAQ has shot up. IT stocks in India are following.

You can use the Fed Futures to get the market’s estimate of whether the Federal Reserve will lower interest rates. My guess, based on the numbers is that it will happen in late January 2001. Buy up stocks before then!

My guess is, with the US market slowdown, the Fed will reduce interest rates, software stocks will pickup again and live happily ever after. Time to buy IT, not sell!