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Inflation & Interest Rate

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(Querist)
10 January 2010 How does an inflation trigger interest rate? Can someone please explain by example putting in numbers?
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CA SURENDRA KUMAR RAKHECHA

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CA SURENDRA KUMAR RAKHECHA (Expert)
10 January 2010 Without numbers it can be proved.

Suppose; you want to buy a car for Rs. 5.00 lacs on loan from a bank where interest rate is charged @ 9% (flat reducing).

Due to inflation in the system now car is costing Rs. 6 Lacs so more money will be needed and less will be the saving of the public.

Ultimately saving goes into the system like banks etc.

In recession period; since banks have enough money because of low demand of money; hence rates come down.

When economy is sound; more money is needed due to expansion etc. hence interest rates would go up.

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