I read that increased interest rate attracts foreign investment but discourages domestic investment.
Why does interest rate have different effects on foreign and domestic investments?
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Great question! I know it gets little confusing.
Let's take an example of US and India. I am in the US. India's interest rate (return on investment) is 10%. The US has 8%. Then, I will invest in India -- more ROI. Hence, high-interest rate means more foreign investment.
However, my brother in India wanted to build a building there. Since the interest rate is high, taking loans is more expensive, and hence he will decide not to invest -- not to make that building. So, because of high-interest rate, domestic investment decreases.
