One of the best answers I have read on this, so simple explanation of an economics

question
Let us say you are a farmer and you have mango plantation (keeping in line with the
season's favorite :P). You do hard labor and work day and night and grow 100 kg mangoes
every year.
Now, one cannot live his life eating only mangoes, And since mango is a good seasonal
fruit, good for health, and not to mention utterly delicious, there would be others who'd
happily trade their farm products, say wheat, for some of your mangoes. Realising this,
you decide to exchange your mangoes for other products. You tell about it to your friend
who has wheat farms. Incidentally, he happens to be a mango lover like me and together
you develop a rate of exchange, with mutual understanding of course in this example, say,
5 kg mangoes for 10 kg of wheat. You give him 10 kg mangoes and get 20 kg wheat for
your family, which you assume should suffice for 6 months. You do the same thing with
your other friends as well in exchange for pulses, rice, vegetables etc.
Now, past 6 months comes winter, and your supplies have started to diminish. Moreover,
you do not have any mangoes to offer in exchange for wheat and other commodities. But
without the commodities you wont survive for next six months. Now what should, or
rather, what could you trade in exchange for wheat?
You find a solution. You go to your best friend who trusts you a lot, and you promise to
give him 5 kg of mangoes next summer for 10 kg of wheat right now. He thinks about it
for a while. There are of course things to be concerned here. What if you refuse to give
him mangoes later? What if the mangoes you give him aren't good quality? What if next
year is a drought and there are no mangoes?
Let us say for the sake of simplicity here that your friend here thinks about it but on
goodwill and years of friendship, he trusts you and agrees. Similarly, you go to your other
friends, gain their confidence and promise them some mangoes next summer for
providing you with supplies right now. Now, what you have done here is that you have
developed a trading system wherein you trade items and commodities for other items and
commodities. And the trading currency is none other than the "items and
commodities".
But now, since you are trading with so many different people at different time, it is
getting difficult for you to keep track of how much mangoes you owe to whom. So what
you do is that you start handing over promissory notes to the people you trade with, with
your sign on it and the amount of mangoes you owe them. So next summer, whenever
you have mangoes harvested, people come to you, show you the promissory note with
your sign on it, and take the mangoes.
But there is a problem with this system: you are promising X kg of mangoes which you

have not harvested yet, i.e., which do not exist. Similarly you would have supplied
mangoes to someone for a certain commodity he'll have in future but doesn't have it now.
And then there is always a risk factor, i.e., next year maybe a dry one and you may not
have enough mangoes to trade.
Realising this, you are worried now. You need a damage control. You consult this with
your trusted friend and ask him how to avoid possible damage. Now this friend of yours is
quite a trader himself and has traveled many cities and traded with many people. He tells
you not to worry about it and that he'll let you on a little secret. He explains it to you
how people will need mango no matter what: after all it is a seasonal fruit and very
delicious. Now if there is less growth of mangoes next year, then he can ask to negotiate
exchange rates in his favor, i.e., more commodities for same amount of mangoes. Simply
put, due to scarcity, his mangoes will become costly.
You get it a little bit, but you are still confused. You wonder how will you negotiate rates
when you do not know how much mangoes you are going to harvest next year; how can
you negotiate when there is uncertainty? Your friend smiles, and tells you that you can.
He suggests you to issue only a certain value of promissory notes, lets say 1000, and then
do the trading with these notes after declaring their new meaning to the traders. These
1000 notes will represent 100% of your harvest, no mater how much you harvest. So if
there is a guy with your promissory notes valuing to 100, he''ll have 10% of your harvest
next summer, no matter how much you harvest. He can also decide to not exchange it for
mangoes next year when there is a drought, and wait for next to next year hoping for
more amount of mangoes then. Lets call your promissory notes as Mango Currency (MC)
All goes good and the mangoes, being good quality and sweeter than its competitors, are
valued more. People want to buy mangoes from you even if they have to pay more. This
means the value of MC gets more, only a few people can afford it. The very lower class,
who wants to eat mangoes but cannot get hold of MC due to its high value is suffering.
This also causes you loss in business since people are now holding MC instead of trading
it for mangoes since the value is increasing. Since mangoes are not being traded, they are
rotting in the collecting compound with very less people to buy them, causing you huge
loss. You now need to keep the value of MC in check so that people do not hold up to it.
You go to your friend again and consult him on how to keep value of MC in check. He
tells you to simply issue more promissory notes. Since the total sum of promissory notes
is equal to 100 % of your harvest, if you issue 1000 more promissory notes in addition to
the initial 1000 that you've had, the value of MC would be halved. 100 MC that was 10% of
the harvest would now only be 5% of your harvest. (This is also how RBI keeps the
value of Rupee under check, else Economic activity of country would go down)
Now you have developed a good trade system and also know how to keep the value of MC
under check by regulating the supply of promissory notes. Now you decide to expand
your business. You go to your best friend who deals in wheat and has currency WC

(Wheat Currency). He is already doing very good in business and has surplus money. You
tell him about your plans to expand our business and your requirement of more money
for expansion purpose. He listens to you and agrees to lend you some money at certain
interest rate: he already has enough money and extra money sitting at home isn't earning
him anything, so lending it to you for certain interest seems a good deal.
You borrow 500 WC from him. Now WC is quite strong in market. So much that 500 WC
costs around 1000 MC (how much % of wheat harvest it represents doesn't matter).
Now, you use up all the WC for expansion but suffer heavy losses. All the WC went down
into the drain. You bought some stuff from it and have it still, but it is not bringing you
any revenue and nobody is ready to buy it back. You are now left with only a few MC
(remember, your currency is also floating in the market; you have maybe 1200 MC at
hand). To pay back 500 WC, you need 1000 MC. But if you give 1000 MC right now, your
remaining business will not be able to sustain itself with only 200 MC at disposal and
you'll eventually end up bankrupt.
You now think about possible way out. You plan to issue 2000 MC more, exchange 1000
MC for WC and return the loan. But if you issue more MC, the value of MC will be halved.
Moreover, you can not think of cheating because the value of various currencies is now
checked by Association of Auditors and you need to report any more printing of currency
to them before it can be floated in the market, and all the currencies are numbered to
keep the authenticity in check
Basically, you are now left with only one option: to try to get your act together and grow
your business back to what it was, and then further more to get enough MC with
sufficient value, to be able to return the loan amount.
Now in the above scenario, lets replace you with our country India, and replace mangoes
you harvest with the economic activity that takes place in country; and replace your
promissory notes, valuing to 100% of your harvest, to 100% of the economic activity in the
country.
Now, back to your question: What happens when RBI prints more money to pay off
bank loans? You should be able to guess it. More the money printed, lesser the value
of currency. Money flowing in the country is nothing but standardised promissory notes
issued by RBI. They are equivalent to the total economic activity of the country. If the
economic activity does not increase in proportion to the money printed by RBI, the value
of Indian Rupee will go down.
And obviously, value of MC will go down with respect to promissory notes issued by other
people for other commodities. So when value of Rupee goes down, it does w.r.t other
currencies, USD being one of them.

Its not difficult to guess that loans provided by World Bank are in USD. If money is
printed to pay off the loan, value of Rupee goes down, which means you need more
Indian Rupee to buy USD. As you can see, you can not repay the loan unless
you actually have the money, over and above what you'll need to run the country.