Example - Nominal interest rate with Effective monthly interest rates

Effective interest rate per month with a nominal rate of 10% can be calculated as

i_e = (0.1 + 1)^1/12 - 1

= 0.00797

= 0.797 %

Inflation and its influence on interest rates

Inflation has become a common term in today’s scenario as we hear about it almost every day. The inflation rate changes constantly and is based on the Wholesale Price Index. The rates are published on a monthly basis. The Wholesale Price Index measures the prices of goods and services and the change of percentage in the Wholesale Price Index in a given month is considered as inflation rate. Another index that measures the inflation rate is the food inflation rate and this is reported on a weekly basis

Inflation is not specific to India, but to every country across the globe. Inflation has shot up considerably from the time the global economy has come out of the clutches of recession. The high rate of inflation was a result of various factors including demand and supply and the subsequent rise in prices of the commodities, globally.

The recent inflation was initially triggered by the rise in price of food commodities due to delayed monsoon in many parts of the country and the resulting deficit. Then, the factors like price rise of global commodities and crude oil added to the initial wave. Later, the price rise moved to other segments like non-food articles and manufactured goods.

While controlled inflation is an incentive for the economy as a whole, uncontrolled and high inflation is bad for the economy as it can influence the spending habits of the people. In India, the inflation target is fixed by both the government and the Reserve Bank of India (RBI). If the inflation goes beyond the fixed mark and stays there for a few weeks, then it requires the intervention on the part of the government and RBI.

To control inflation, the government imposes a temporary ban on exports and controls fuel prices. On the other hand, the RBI increases the cash reserve ratio and also the interest rates. This means that the money supply to the banking systems will be reduced, which will ultimately result in tougher norms for disbursal of loans and higher interest. This will bring down the demand and help in reducing the inflation rate.

High interest rates increase the cost of money for individuals and corporate borrowers. The borrowing capacity is reduced, thereby hindering the growth of the economy. The RBI therefore hikes the interest rates in a phased manner. The policymakers are ready to compromise on the growth of the economy to a certain extent to avoid the implications of the inflation among the weaker sections of the society.

Analysts believe that the interest rates have not touched the peak yet. It is expected that a couple of rounds of interest rate hikes by the RBI in the short to medium term will bring the inflation rates under control. When inflation is controlled, the interest rates will touch the peak, and gradually ease in on home loan interest rate.

Дата добавления: 2015-11-16