Groww Digest

6 Day Course

Theme: understanding interest rates

Oct 10 to Oct 16, 2022

6 Day Course is a part of our newsletter

series, Groww Digest - all things personal
finance.

Want to get Groww Digest in your email?

Click here: Get Groww Digest

Day 1: Monday
6 Day Course | Theme: understanding interest rates

When you take a loan, you are charged an

interest rate.

When you keep your money in the bank in the

form of a deposit or even just in the account,
the bank pays you an interest rate.

This week, we’ll dive into the world of interest

rates.

You have some money. You could use that

money. But if you give it to someone, you
cannot use that money till they return it.

This is why you ask for a ‘fee’. It is the

compensation for not having money. This is
what interest is.

When you keep your money with the bank,

you’re essentially giving them a loan — that’s
why they pay you interest.

Page: 2
Day 2: Tuesday
6 Day Course | Theme: understanding interest rates

One of the biggest factors affecting interest rates is

the interest rate set by central banks.

All banks and lending companies borrow and/or

keep their money with the central bank of the
country they’re in.

So in India, that’s RBI. Similarly in the US, it is the

Federal Reserve also called the Fed.

Central banks decide the rate of interest based on

their economic goals.

If they want to increase economic activity in a

country, they lower interest rates. If they want to
reduce economic activity and control inflation, they
increase interest rates.

In India, this rate set by the RBI is called the repo

rate.

This rate has the biggest effect on loan and

deposits interest rates.

If the repo rate goes up, loan and FD rates go up

(and vice versa).

Page: 3
Day 3: Wednesday
6 Day Course | Theme: understanding interest rates

Another factor affecting any interest rate is

risk.

For any loan or deposit considered higher risk,

a higher return is required.

This is why the interest rates for different

loans are different.

In fact interest rates for different people also

vary.

Example: home loans usually have lower

interest rates than personal loans.

People with a better track record are usually

given lower interest rates when taking a loan.

Likewise, to compensate for the risk, newer

banks give higher rates on their FDs than
established banks — since newer banks are
less stable than established banks.

Page: 4
Day 4: Thursday
6 Day Course | Theme: understanding interest rates

Interest rates of any kind are heavily

influenced by the duration.

If the duration of the loan or deposit is longer,

the interest rate offered is higher.

This is why FD rates are higher when you

promise to keep your money in the bank for a
longer period of time.

The idea behind this is again linked to risk.

The longer the amount is being borrowed for,

the higher the chance something may go
wrong and the borrower won’t return the
money.

This includes the risk of the interest rate itself

changing.

Page: 5
Day 5: Friday
6 Day Course | Theme: understanding interest rates

There is also supply and demand.

When there are more people demanding

loans and less money in the economic system,
the interest rates climb.

When there are fewer borrowers and more

money in the system, the interest rates fall.

Besides the factors we’ve already covered,

there are more factors affecting interest rates.

Depending on the region and country, the

factors may also change.

The factors mentioned in this course so far

are more or less universal.

Page: 6
Day 6: Sunday
6 Day Course | Theme: understanding interest rates

We’ve reached the end of this week’s course that

started on Monday.

Here’s a test you should take. Get pen and

paper!

Question 1:
When you keep your money in the bank, in a
way you are giving the bank a loan.

-True
-False

Question 2:
When the repo rate is increased,

-Loan interest rates go up

-FD/RD interest rates go up
-Both

Page: 7
Day 6: Sunday
6 Day Course | Theme: understanding interest rates

Question 3:
In giving loans, borrowers are perceived to be
low risk are offered:

-Lower interest rates

-Higher interest rates

Question 4:
Usually, when the period of borrowing goes up,
the interest rates:

-Are lower
-Are higher

Question 5:
When there are more borrowers than there is
money in the economic system,

-Interest rates go up
-Interest rates go down

Page: 8
Day 6: Sunday
6 Day Course | Theme: understanding interest rates

Answers:

Q1: True;
Q2: Both;
Q3: Lower interest rates;
Q4: Are higher;
Q5: Interest rates go up.

Page: 9
 That’s it for this week!

Want to get Groww Digest in your email?

Click here: Get Groww Digest

See you next week!

—Groww Digest Team

Page: 10