As an individual borrower, the rate of interest plays a significant role in determining the tenure and loan amount you wish to borrow. This is because the interest rate is a kind of fee that you pay on borrowed money, which is expressed as a percentage of the total loan amount. Typically, we base our spending on the interest obligation we would have to bear.
Similarly, there is a crucial relationship between the stock market and interest rates. Understanding this can help you to know how interest rate changes can affect your life and thus help you to make smart investment decisions.
In the short run, the sudden rise of interest rate can impact organisations that have high debt in their balance sheets. As the interest rate rises, it further reduces the companies Earnings Per Share (EPS). This can cause a negative sentiment on such stock that can influence a dip in their stock price.
In the long run, a rise in interest rates can impact specific factors. For instance, areas that are greatly affected by an increase in interest rate include automobile sectors, capital intensive industries and the real estate sector. As an investor with a reputed stock broker such as Kotak Securities, you may want to exercise caution before investing in such industries due to high-interest rates and ints impact on such sectors.
Hence, a rise in interest rate may not be an ideal condition for any economy.
On the other hand, if the interest rates are low, investors tend to save less and consume more. Besides, fixed deposits may no longer hold the level of popularity or attractiveness that they once held. As a result, banks are left with less money for lending, which could impact their profit margins. Overall, a low-interest rate could cause a dip in investment activities and consumption across the economy. Under such a scenario, the government of a country would have to print additional currency to inject more capital in the economy. This could further lead to an inflationary position in the country, as inflows trickle due to low-interest rates.
In India, the RBI controls interest rates and makes timely announcements that impact the Indian stock market. Shares signify that loans fund businesses, and hence if there is a rise in the rate of interest, it could reduce the profitability of the company by making the debt more costly that could cut into their profits. Companies will then have to look into servicing their debt that could mean a reduced inflow of capital they receive as an investment. Hence, a rise in interest rates would cause businesses to become less profitable as interest rates on their money rise.
In short, interest rates are contrarily connected to the stock market. This means if the rate of interest rises, investments in the stock market tend to reduce. However, some sectors, such as the IT industry and the pharma sector, are not significantly impacted by interest rates than other areas.
Hence, when setting interest rates, the RBI aims to balance inflation and growth. Hence, for organisations to grow, there is a need to borrow effortlessly that comes with an optimal rate of interest. And if organisations do not improve, the overall economy of a country can fall.
If you are a new investor wanting to know how to invest in stock market, you may want to consider full-service reputed broker such as Kotak Securities to open a Demat and trading account. Expert guidance and analytical research from leading experts and brokers in the industry can go a long way in becoming a successful investor in the Indian stock market.