Modelling the Effects of Changing Borrowing Costs on Business and the Economy

Abstract

This paper studies how changes in interest rates affect borrowing cost, profitability and investment decisions. It also checks, at a descriptive level, whether Indian inflation and policy-rate data for 2010-2020 support the Fisher Effect. The two company cases are constructed examples, so they are used to explain mechanisms rather than to make claims about real firms. The company results suggest that a capital-intensive manufacturing firm is more exposed to higher rates than a growth-oriented technology firm. The Fisher calculation shows a positive but weak relationship between CPI inflation and year-end repo rates, with a correlation of 0.43 and an estimated slope of 0.20. The evidence therefore supports the direction of the Fisher Effect, but not a complete one-for-one adjustment in nominal rates.