Is it correct ? the interest credited to the deposit and the inflation rate should tally, but not tallies Y?

Question

If the inflation rate to a country comes to 9% and the interest on deposit for one lakh should be credited @ 9%, but while calculating, it comes to 8% .. sir, one minit, may i compare the inflation rate to the interest offered in banks ? Whether banks changing the rate of interest based on inflation of economy or not ?

Answer 1

Banks generally keep track of anticipated inflation and set interest rates accordingly. At times inflation will accelerate unexpectedly and the interest rate being paid will be less than inflation, thus there is a slight loss rather than an actual gain in "real money", money adjusted for inflation.

Thus if you place money on deposit at 9% in a country with an inflation rate of 9% you will gain nothing in terms of real money. Likewise if you borrow money at 9% in a country with an inflation rate of 9% you lose nothing in terms of real money. People watch this and set interest rates so that they do get real gains, if they can.

The difficulties of making sane calculations in such crazy conditions is why banks, and other investors, like hard money so much, or at least money that depreciates at a low stable rate, like maybe 2%. In historical periods such as the populist era in the United States, there was political advocacy of soft money and expansion of the money supply in order that debtors, as a class, could pay debts with devalued money.

Answer 2

Banks calculate interest rates in accordance to supply and demand of finances. They often can borrow money cheaper in other banks than from public.

But when they calculate interest for lending money to you - they often try to include inflation in calculation.

So it is common for many countries that deposit interest rates are less than inflation.