Suppose you took a loan of ₹100 a month ago at 10% interest per month to produce a product worth ₹150 in market. High inflation means that by the time you sell the product it's market price will be more than ₹150, say ₹160. So that ₹100+₹10 will hurt you lesser when you earn ₹160 than when you earned ₹150. The ₹110 you return to lender is worth lesser than what it would have been without inflation. This is how inflation makes loans cheaper, debtors benefit and lenders suffer
Hey bro.
Glad to see you active here again, that too after a long span of time.
You gave a very good example and I am considering it from demand side POV as we are the ones taking a loan.
Now, trying to substantiate from a supply side POV, let me know if my line of thought stands correct or not.
It is said that inflation erodes the value of money at hand, so people might consider depositing their money in banks to hedge out the inflationary risks. Now as the banks have got more deposits, simultaneously, their loan creating capacity also increases as a result of increase in the deposits.
Due to this increase in loan creating capacity, they may decide to lower the interest rates that are being charged on the newly created loans(economies of scale at play).
And hence, the initial high inflation in the economy ultimately lead to low borrowing cost in terms of lower interest rates charged by the banks.
Does this supply side substantiation stand correct? Ya fir mai raita faila diya? 🥲
Indeed it is 👌🏼
