 In this segment, I'm going to talk about two different, two very important concepts related to interest rate. The first one is the nominal interest rate and the second is the real interest rate. So when you take the quote from a financial institution that you want to borrow some money from them, they will quote a certain rate of interest. They would say that we will be charging you 12% or 18% or 30%. The 30% quote or the rate that you see in the newspaper or any of their brochures that mention interest rate, that is considered as the nominal interest rate. When we adjust the nominal interest rate according to inflation, we said that for example, if inflation tells us that the general price level has gone up to 6% or 5%. So from the nominal interest rate, you take out that particular aspect of inflation when you adjust it for inflation. So the value of the interest rate is called the real interest rate. So if we define the two concepts, we can say that the real interest rate is the adjusted interest rate, which is obtained by subtracting the expected changes in the price level. That is, you have minused inflation from the nominal inflation rate. And then you get the interest rate that will be considered as the real interest rate. And the nominal inflation is present in that and we are quoting the value of the interest rate and we call it the nominal interest rate. The nominal interest rate will be quoted and you will be told, but it is very important that you calculate the real interest rate as well. And according to that, the nominal interest rate and the real interest rate, consider both the values and undertake your investment decisions. So they are two very important concepts. And it is not necessary that if you are getting a nominal interest rate, a high positive rate, then it is not necessary that the real interest rate is also very good. There may be a possibility that when you adjust the nominal inflation rate, then you will get the real interest rate negative. So that is why it is very important that you should not just consider the nominal interest rate and not do your financial decision making. You should also consider the real interest rate. Now when we talk about the real interest rate, we have two types of real interest rates. One we are saying that we have the ex ante real interest rate. And the other we have the ex post real interest rate. So when we talk about ex ante, then this word is used always for the first time. So this means that you are expecting that in the future, how do we define the inflation? We say inflation is the increase in the general price level. Deflation is the opposite of it. The general price level will fall, so we will say deflation has come. Generally you must know that we have a basket of goods and services which are available on the use of a common person. On the average household of a common person, how much amount of ghee, lentils, electricity and other utilities are used. All those things are considered and a basket is prepared. And the value of that basket, all the things that are considered in that basket, what is their value now? And what was their value after 6 months? And what was their value after 1 year? We calculate inflation by calculating its value. So if we assume that after the next 6 months, the value of that basket will increase by 5% then you had a real interest nominal of 15%. You took 5% out of that and said that the real interest rate is going to be 10%. This means that the change in the things is not as much. You are expecting it. So if you are expecting it and considering the expected price level, you have calculated the real interest rate. For example, if the real interest rate is 10%, it means that our expected inflation is 5% and nominal interest rate is 15%. So our expected real interest rate is going to be 10%. You have pre-conceived it. We will say that it is an ex-ante, an ex-ante real interest rate. But after 6 months, you have recorded, the government basically issues that in the last 6 months, or in the last 1 month, or in the last 1 year, the general price level has gone up so much, so you assess that value and see how much was the actual inflation. So when you consider the actual inflation and calculate the real interest rate, we call that real interest rate as exposed. Exposed means later, ex-ante means first. So first ex-ante real interest rate means that you have considered the expected inflation and you have calculated the real interest rate. So it is important that which procedure you have used, you have considered the expected inflation or you have considered the actual inflation. With the help of that, you will know whether your real interest rate is exposed or ex-ante. So in ex-ante, you are already deciding, you have the value of inflation in the exposed, you calculate your real interest rate with the help of that. So when I told you that the inflation rate is minus, the expected prices, so this means that we are going to talk about a standard formula which we use. Do you know the nominal interest rate? Do you know the expected prices? So how will we remove the real interest rate? For that, we have a concept which is called the Fisher Equation. Fisher Equation was developed by Irving Fisher that with the help of this concept, you can calculate the real interest rate. What is it that to calculate the real interest rate, the nominal interest rate, you will subtract the expected price level. So the formula I have written, you can see that there is a small R written with I which is the subscript which represents, symbolizes the real interest rate. And along with that, I have applied an E on the pie. So E is expected and pie is general price level. So when we add the expected price level to the real interest rate, it will become nominal. So if we have to calculate the real interest rate, we will have to subtract the expected price level from the nominal interest rate. So we will be able to come up with the value of real interest rate. When the real interest rate is less, if the value of the real interest rate is less, this means that the borrower will get less cost of borrowing. If he has to pay less, then it is more incentive for him to borrow. So borrower is more incentive for him to borrow. He feels more feasible if your real interest rate is less. But if the real interest rate is higher, this means that the borrower should not buy in this situation. Who will benefit in this situation? The lender. He will get more profit. He will get more profit. In this situation, I am going to tell you a related concept. Whenever the government wants people to invest more and we have more investment on infrastructure, more projects to expand existing projects, then it tries to reduce the interest rate. So when you assess the cost of borrowing, you evaluate your internal rate of return for your business, then you feel that we should borrow more and we should make more investment. Because the value of borrowed money is very less in the form of interest. But when the interest rate is very high, then you see that our investment is squeezed and it becomes less. So the real interest rate, along with borrowing, there is a relationship that borrowing will be more if the real interest rate is low and borrowing will be less if the real interest rate is higher. So there is this important trade-off which we need to understand. Next, we should know that I had mentioned the real interest rate in the beginning. I am emphasizing that on the nominal interest rate, you don't have to make your decision-making, you have to consider the real interest rate. And to discuss this particular aspect, I have shown a graph here for you. In this graph, you can see that we have the data of the real interest rates in USA and the data taken in this is from 1950 to 2010. On such a long time period, you can see that the blue line that you can see is the nominal rate. This blue line is the nominal rate and the black line is showing the real interest rate. So you can see that the blue line is saying that it is very high and the value is continuously above zero. And in the beginning, it was below four, but after that, we can see that its range is going up to 1980. Its value has gone up to eight percent. And after that, in 1978-79, its value has gone up to twelve, it has gone up to fifteen. The nominal interest rate has gone up and then we can see the fall. And then we can see the fluctuations. Overall, wherever you can see, there is a recession. If you see the nominal interest rate in 2007, you can see that the nominal interest rate is going down a lot. But throughout, if you look at this graph from another perspective, you can see that the blue line is significantly above the black line. Now, we have adjusted the inflation of this blue line and we have shown the real interest rate . So, you can see that there are many such points, especially this whole patch in which from 1972-1980, you can see the real interest rate in this entire time period is negative because this is the zero line and here in this entire time period, you can see the real interest rate below the zero line. However, the nominal interest rate is positive in this time period and it has gone up very sharply that I have told you that it has gone up even from 15% but when you adjust it with inflation, you can see that it is going negative in this time period. Similarly, when I told you in 2007, we talk about the recession time period, if you look at the nominal, the decline of the dip in the nominal interest rate there was a recession in 2007 of the financial recession but when you have adjusted it with inflation, you can see that the real interest rate is once again negative. So, if we compare in this whole diagram, if we match the fluctuations of the blue line with the fluctuations of the brown line and you can see that their movement is going together in parallel or not. So, you get to see the amazing differences and they make it clear that when we have to make a financial decision, we don't just look at the nominal interest rate, we have to calculate the value of the real interest rate and consider it because if the nominal interest rate shows very fancy and high values, then when you convert it, then you have seen that there are many such chances in which the real interest rate is going to be negative. So, this particular diagram was explaining the differences in the nominal interest rate and the real interest rate and you can have a better understanding now after having a deeper analysis of this particular diagram that ensures that guarantees that the two are all together different concepts, although they are named but they have different concepts and values and their behavior is completely different over time. So, when you make a decision related to your finances, whatever financial decision making, borrowing, investment, saving, then you don't just have to consider the nominal interest rate, but you have to account for your financial decision making.