One word you see echoing everywhere in the media around you, that is Inflation and especially daunting food inflation. I would like to give some respite to the readers by this post.
It might seem funny to say that inflation brings free money because the raising cost generally eats away the pocket. Very true. But the statement in the title is also not irrational. There is an interesting argument for this with in some limitations for this.
Let me explain this,
Suppose you take a loan of 1000rs today at an interest rate of 10%. One year hence, you should pay 1100rs to the lender.
Now if the inflation is 14%, 1000rs today is equivalent to 1140rs later. Or in other words 1100rs after 1 year is equivalent 964.9rs today.
So in today’s terms, the lender is giving you (1000-964.9) = 35.1rs free money.
What an Irony!
By the way, there are some limitations.
1. This is applicable when lending rates are lower than inflation rates.
2. Inflation, Interest rates keep on changing and do not remain constant throughout the year
We are facing a similar situation in India now. Thanks to Subbarao! ;)
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