Effects of Interest Rate Fluctuations

Interest Rate Fluctuations can happen due to many factors. Such factors may be analysed and summed up as follows

Demand & supply forces

Whenever there is increase in demand for funds & fund availability is on downtrend, interest rates drive up. Reverse is the case when demand tends to be low & banks have idle funds with them, interest rates fall down.

Monetary policy

It consists of various measures like CRR (Cash Reserve Ratio), Repo rate, Reverse Repo Rate. If government reduces CRR, Repo rate or raises Reverse repo rate, then it would inject more funds into economy. This would boost the supply of funds & would definitely make the interest rates fall.

Inflation

Inflation limits the purchasing power, which increases demand against limited availability of funds. This will boost the interest rates to its peak.

Impact of interest rate fluctuations

Reasons & effects of interest rate fluctuations are a vicious circle. For e.g. Decrease in demand boosts interest rates & Increase in interest rates in turn again reduces the demand.

Consumer purchasing power gets affected due to interest rate fluctuations
Rise in interest rates further fuels up inflation rate as increase in interest would add up to cost index

Monitory policy helps to control demand & supply of money in the economy. But in reality interest rates play an important role in determining CRR, repo rate etc. Hence Interest rate fluctuations are important component for determining & devising monitory policy.