Question

how are interest rate determined ? how is interest rate different form a lenders, borrowers and investors point of view? and what are the role of interest rate within our financial system?

Answer 1

Interest rates are determined by mostly demand and supply factors and it will also have a determination by Central Bank of a country because Central Bank of a country will be regularly monetoring its monetary policy in order to match with the monetary flow in the economy and maintain stability so it will be continuously changing the interest rate in the economy and the bankers will be trying to adopt to those interest rates in order to have a higher transparency and uniformity.

Interest rate is different from a lender because lender will always be trying to charge a higher interest rate and borrower will always want a lower interest rate on his loan where as the investors will always be having a choices to make if the interest rates are lower than they will be going for making more investment by borrowing also so it is all dependent upon the choices and the need of various market participants in order to use the fund

Role of the interest rate is immense in the financial system because it will be reflecting the level of demand and it will also reflect the nature of economic cycle and the role of the central bank and it can also play an important role in attraction of the foreign direct investment because when there will be a higher interest rate offered in the other countries there will be a inflow of foreign direct investment and interest rate will also have an implication on the exchange rate of the country.