Impact of CRR hike on stock market

Cash reserve Ratio (CRR) in India is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.

For example if bank A collects 10000/- deposit from you then out of the 10000/- he has to keep Rs 500 at the rate of 5% with the RBI. The net amount left with the bank will be 9500/- . if the CRR is getting hiked then RBI will suck the money from the system in order to meet the trade deficit. Same time the bank will have money supply deficit to meet all the loan demand. To fill this money supply deficit banks will increase interest rates on Fixed deposits to get more deposits from customers, increase home loan, Auto, other loans to industries to pass its burden to borrowers.

The increase in CRR rate will directly impact the housing, experts, banks, automobile sell figure etc in the short term. Since market is more sensitive towards the short term reactions it can lead to the fall in the above sectors. The real jerk will be felt in the monthly sales figure  and turnover of the above mentioned sectors. Continuous increase in the CRR may impact the quarterly profitability of the above sectors. Second point is if it is inline with the increase in the interest rate in the cash deposits then it will directly impact the stock market since the big money will flow out from the high risk sector to the low risk sector resulting low participation in the market.

Repo Rate: Repo rate is the rate at which our banks borrow rupees from RBI. This facility is for short term measure and to fill gaps between demand and supply of money in a bank .when a bank is short of funds they borrow from bank at repo rate and if bank has a surplus fund then the deposit the funds with RBI and earn at Reverse repo rate .

Reverse Reporate: is the rate which is paid by RBI to banks on Deposit of funds with RBI.A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive. To borrow from RBI bank have to submit liquid bonds /Govt Bonds as collateral security ,so this facility is a short term gap filling facility and bank does not use this facility to lend more to their customers

Are ULIPs good investment option?

ULIPs are a category of goal-based financial solutions that combine the safety of insurance protection with wealth creation opportunities. In ULIPs, a part of the investment goes towards providing you life cover. The residual portion is invested in a fund which in turn invests in stocks or bonds. The value of investments alters with the performance of the underlying fund opted by you.

ULIPs are wrongly messaged to public by funds as this particular investment type will give both insurance as well as gives good returns over the period of time. But historical data proves it as wrong.

 With the premium you are paying to buy these ULIP units if you buy Term policy for insurance coverage and remaining investing in SIP( Systematic Investment plan ) in any good performing mutual fund you would be getting much higher returns than what ULIPs give you. Also you get good insurance coverage with less premium towards term policies

DTC effect on ULIPS:

The first point is exiting before 10 yrs will badly hurt ULIPs holders  from cost point, as all the Ulip’s are heavily front loaded and exiting before 10 yrs means the total cost is (commissions) turns out to be too much for you. Only if your total premium per year is less than 5% of the Sum assured, you can save yourself from getting taxed. But most of the ULIP plans in the country will not meet that criteria as majority of the policyholder’s pay much more than 5% of sum assured as premiums. A big number of policies have sum assured as 5 times of the premium, as it’s the minimum requirement of a ULIP policy

Fibonacci Retracements

The basic reason people using retracement tools are any stock before further continuing in actual trend it corrects or recovers little and then continues further. Fibonacci retracement is useful in finding this particular stock behavior.

Fibonacci numbers were named after Leonardo of Pisa, also known as Fibonacci, even though they had already been described earlier in India. The best-known Fibonacci numbers are a simple series of numbers that form a sequence. After two starting values, zero and one, each number is the sum of the two preceding numbers.

The Fibonacci sequence of numbers is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. Each term in this sequence is simply the sum of the two preceding terms and sequence continues infinitely. One of the remarkable characteristics of this numerical sequence is that each number is approximately 1.618 times greater than the preceding number.

The key Fibonacci ratio of 61.8% - also referred to as "the golden ratio" or "the golden mean" - is found by dividing one number in the series by the number that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179.

The 38.2% ratio is found by dividing one number in the series by the number that is found two places to the right. For example: 55/144 = 0.3819.

The 23.6% ratio is found by dividing one number in the series by the number that is three places to the right. For example: 8/34 = 0.2352.

Fibonacci retracement is created by taking two extreme points on a chart and dividing the vertical distance by the key Fibonacci ratios. 0.0% is considered to be the start of the retracement, while 100.0% is a complete reversal to the original part of the move. Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels. The first thing you should know about the Fibonacci tool is that it works best when the market is trending.

The idea is to go long (or buy) on a retracement at a Fibonacci support level when the market is trending up, and to go short (or sell) on a retracement at a Fibonacci resistance level when the market is trending down. In order to find these retracement levels, you have to find the recent significant Swing Highs and Swings Lows. Then, for downtrends, click on the Swing High and drag the cursor to the most recent Swing Low. For uptrend, do the opposite. Click on the Swing Low and drag the cursor to the most recent Swing High.

Fundamental Analysis Vs Technical Analysis

Technical analysis and fundamental analysis are the two main streams in the financial markets. Technical analysis looks at the price movement of a security in past history and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at economic factors, known as fundamentals.

At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements by looking at the balance sheet for Profit, Debt etc, a fundamental analyst tries to determine a company's value. Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. Technicians believe that all the information they need about a stock can be found in its charts.

Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used on a timeframe of weeks, days or even minutes, fundamental analysis often looks at data over a number of years. 

Not only is technical analysis more short term in nature that fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach. In general, technical analysis is used for trading purpose, whereas fundamental analysis is used to make a long term investment. Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price

DTC and its impact

DTC – Direct tax code will be applicable in India from April 1^st,2012. The main points from DTC are as follows.

As per DTC tax slabs are as below

INCOME	TAX
Upto 2,00,000	No tax
2,00,000 to 5,00,000	10% amount by which the total  income exceeds 2,00,000
5,00,000 to 10,00,000	30,000+20% amount by which the total income exceeds 5,00,000
more than 10,00,000	1,30,000 + 30% amount by which the total income exceeds 10,00,000

DTC impact on 80C

The DTC will maintain the existing deduction of Rs1 lakh under 80C but DTC removes most of the categories of exempted income like ULIP s, ELSS funds, NSC, Infrastructure bonds, and term deposits. Additionally Tax deduction in principal part of the housing loan under 80C is also removed.

How insurance gets impacted

DTC will have significant impact on insurance. Under DTC, to be eligible for tax deduction, a policy should give life cover of at least 20 times the annual premium. If this condition is not met, you will not get any tax deduction on the premium and even the income from the policy will be taxable.

Right now income received from insurance policies is free. So make sure if you are looking for tax deduction on insurance plan, you buy a policy which offers a bigger cover. This is possible only if term plan is for duration of 20 to 25 years. Bigger the cover, better for the policyholder.

Another not so good news is that tax deduction limit for life insurance will get reduced from present Rs 1 lakh an year to Rs 50,000 an year. This annual limit of Rs 50,000 will include the amount paid for tuition fees of children as well as medical insurance for self and parents. So an insurance policy with a large premium, around Rs 80,000 to Rs1 lakh will fetch maximum tax deduction of only Rs 50,000.

DTC impact on Housing Loans

The repayment of principal of your home loan will not be eligible for tax deduction under the DTC, But  DTC  importantly has retained tax benefit on the interest paid on home loan. Also a bright spot wherein there is removal of tax on notational rent. Right now people who own more than one house have to pay tax on notational rental income even if second house is lying vacant. The DTC will remove this anomaly and make investment in second home more tax efficient.