INTEREST RATES IN BANKS AND ITS ROLE IN ECONOMY

Abstract This artefact discuss briefly about how the different interest rates offered by banks to different customers such as a housing loan borrower or a pensioner or a small businessman. What are the factors that are driving force to define these rates? The phenomenon of coupon rate and yield to maturity in bond market is also inscribed briefly. I have also illustrated How these interest rates are being used as an instrument to control inflation, recession and deflation in the economy. At the end I have scripted about recent rate cuts by Reserve Bank of India to upturn the down sliding economy due to Covid-19 pandemic and its effectiveness.

- Nilotpal Banerjee

What is Interest Rate:

The interest rate is the amount a lender charges for the use of assets expressed as a percentage of the principal and typically noted on an annual basis. Here a common man who does not understand banking much, may ask that what they are getting on their deposits is not an interest, and the answer is yes as in a way in that case the depositor is lending the money to bank and getting paid for it. The only difference is that in this case the depositor cannot decide on this rate rather the banks can. The depositor has the option of choosing the best rate available in the market.

This is the basic definition of interest rate that a layman can understand but interest rate goes much beyond that. There are many questions that one may raise like how this rates are defined, which are the factors affecting the rates, how interest rates can affects our lives and the economy, how the policy makers use it to control the economy etc. So to understand those, first let us see the tools which are used by the policy makers to control the rates which are being offered to the consumers.

Tools used by RBI to decide the interest rate for consumers:

Reserve Bank of India, the central bank of our nation as a part of its monetary policy measures sets the following rate to control the liquidity in the economy.