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(a) Assume 1-year interest rates in India and Singapore are 3% and 6%, respectively

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(a) Assume 1-year interest rates in India and Singapore are 3% and 6%, respectively. Clearly, the interest rate in India is much lower than the interest rate in Singapore by 3%. Due to the significant interest rate differences between these 2 countries, several firms in Singapore have decided to borrow INR to finance their expansions rather than to get the borrowings from their home country. The current spot rate is INR54.0410/SGD.

Required:

(i) Do you agree with the strategy made by those Singaporean firms? You are required to comment from the International Fisher Effect (IFE) theoretical perspective. (6 marks)

(ii) What can you say about the inflation rates in both countries? Your answer must be supported by the impact on purchasing power of consumers for both countries. (8 marks)