Real vs Nominal Interest rate
Real interest rate is the interest rate which takes inflation
into consideration. To get the real interest you would need inflation rate and nominal
interest rate.
Eg:
A person borrows Rs 1,00,000 as loan for building house from
SBI with one year as loan period. Assume rate of interest is 10% (which is the
nominal interest rate). If the inflation during the period is 6 percentage.
Then, the real interest rate is 4 percentage.
The concept of real vs nominal is very basic to understanding
the way money works with time. You may be seeing offers where NCDs offer 10
percentage or above interest on the deposits. What really matters would be real
interest (real growth) which would be arrived after deducting tax, inflation ,
processing fees etc.
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