How A Rise Or Fall In Interest Rates Affects Share Prices In India?

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oi-Sunil

By Sunil Fernandes

Published: Tuesday, August 4, 2015, 10:24 [IST]

Each time the Reserve Bank of India (RBI) meets to announce its monetary policy and deciding on raising, cutting or holding interest rates, share prices move depending on the decision of the RBI. Take a look at how share prices move under different scenarios.

Share prices fall when interest rates rise

When interest rates in the economy rise share prices tend to fall. There are many reasons for the same. One is that when interest rates rise by say 100 basis points or one per cent, people might want to switch from shares to fixed deposits, because they are getting better interest rates. Of course, this is just a small reason, but could be one.

The second reason why shares fall when interest rates rise is because borrowing costs of companies go up. Most of the company's in India have debt on their books. When interest rates in the economy go up, borrowing costs tend to affect the bottom line of these companies, thus pushing profits lower. When profit takes a beating, so does the share price. Hence, when interest rates rise, stock markets do not like that too much and may react.

Share prices rise when interest rates fall

When interest rates fall, individuals may move from fixed deposits to shares. Again, when interest rates fall, profits of companies tend to get boosted, as financial costs come down. Hence, when profits of corporate India rises, share prices move in tandem.

Conclusion

Generally a rise in interest rates is not good news for the stock markets. Also, it largely depends on the quantum of rise in rates. A small increase of 25 basis points might not have a significant impact on stock markets. However, a huge rise of say around 100-150 basis points or 1-1.5 per cent over a period of time may definitely affect sentiments in the stock markets.

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