Question

Suppose an Indian company borrowed 300 dollars from a foreign bank at the beginning of the year and repaid it in dollars along with the agreed interest rate of 12 percent per annum. At the time of borrowing, the exchange rate was Rs. 70 per dollar. Assuming zero inflation rate in both the countries, the real cost of borrowing will be zero if the exchange rate is Rs. per dollar at the time of repayment (rounded off to one decimal place).

Answer 1

Correct Answer: 62

\[ \text{The total repayment in dollars is:} \] \[ 300 \times 1.12 = 336 \] \[ \text{The repayment in rupees is } 336 \times E, \] \[ \text{where } E \text{ is the exchange rate at the time of repayment.} \] \[ \text{For the real cost of borrowing to be zero, the repayment in rupees should be equal to the original borrowing in rupees:} \] \[ 300 \times 70 = 21,000 \] \[ \text{Thus, we set up the equation:} \] \[ 336 \times E = 21,000 \] \[ E = \frac{21,000}{336} = 62.5 \] \[ \text{Hence, the exchange rate } E \text{ should be } 62.5 \text{ for the real cost of borrowing to be zero.} \]