Inflation & Interest Rate
This query is : Resolved
Avinasheswar
(Querist)
10 January 2010
How does an inflation trigger interest rate? Can someone please explain by example putting in numbers?
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.
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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