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Interest Rate Parity concept states that the interest rates in different countries cannot be compared on an apple to apple basis.
Let’s take an example to understand this better. Let’s say you take a $100k loan at a 10% interest rate from both a US 🇺🇸 & an Indian 🇮🇳 bank. This is roughly around 80 lakhs (assuming $1 = ₹80). Let’s assume that the repayment period is 3 years. In those 3 years the rupee would have depreciated against the dollar to an average of ₹86 (₹80 to ₹92). Also the loan amount accumulated including interest would be $132k or ₹1.05 Cr. Now when you repay the US bank you have to repay the entire $132k. But when you repay the Indian bank you have to repay ₹1.05 Crs / ₹86 = $122k. See the magic? You save $8,000 which is about 6.4 lakhs. If you consider a longer repayment period, the savings are even more.
So that’s why a 10% interest rate US loan is not equal to a 10% interest Indian loan. It’s actually equivalent to a 15% interest rate Indian loan. Opt for a US loan only if the difference in interest is greater than 5%.
So effectively you would be able to save a lot of money if you opt for the Indian bank loan at 10% interest rate as opposed to US bank with 8% interest rate even though it looks smaller on paper.
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