stock Market and Interest Rates

POSTED BY rajan.panchal24 ON February 11, 2012 12:52 pm COMMENTS (3)

how increase or decrease in interest rates affects stock market??

3 replies on this article “stock Market and Interest Rates”

  1. rajan.panchal24@gmail.com says:

    Thanks, all.. My question is answered..

  2. Dear Rajan, I do hope from the reply of dear justgrowmymoney, the basic query is answered. If you still have doubt in your mind, please share the same & we ‘ll try to answer it.

    Thanks

    Ashal

  3. That is a very good one:

    Increase in Interest rates =
    Increase in borowing costs (interest payments) for company =>
    Lower Net Income growth [Revenues minus several expenses minus depreciation minus interest minus taxes = Net income]
    Stock markets generally pay a premium for growth
    Lower growth in income = lower stock price accorded to the stock = markets fall

    For interest sensitive sectors like Banks:
    Increase in Interest rates =
    Need to pass the higher costs to customers
    Customers/Retail people may not be able to afford higher interest payments so will postpone decisions like new Car, new Home because EMI will be higher.
    = Revenue growth could be lower inspite of higher interest being charged
    = lower net income

    Thus an interest rate increase impacts the market.

    Interest rate decrease will do the opposite of what I said but when people start spending dealers/manufacturers will hike the price of the products resulting in inflation.

    This is the reason RBI walks a tight rope.
    High interest rate = Slow Growth of economy
    Low Interest rate = High Inflation

    Both the above are bad!

    Regardless of what the interest costs are FMCG items like Soap, Tooth Paste, Shampoo etc.- are all in demand throughout the year. Again tablets, injections and all medical expenses continue to exist for people whether interest rates are high or low. This is the reason FMCG and Pharma stocks generally do well in a down market!

    A not so accurate prediction of an impending bull market is when Pharma and FMCG stocks start to gain lesser than the general market!!

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