i have read that interest rates affect the markets and the economy as a whole as the mark faber theory explains but can anyone please elaborate that how in specific sense , it affects the market and what kind of inference we can draw from it. please assist me solving this.
regards,
Hi Investor, Interest Rates impacts stock markets.
Explanation: Every company wants funds to expand, to grow, to diversify into new areas and so on. These companies would need cash for these purposes. It can either go to public and get this money through FPO (Further Public Offer) or if its a new company IPO (Initial Public Offering) or Rights Issue (to its existing shareholders). Or it can go to banks and borrow the money in the form of short term or long term loans.
How a company chooses to borrow money is completely dependent on its manager’s vision. If the interest rate is high, the company would have to pay higher interest to banks and so its net profits will also be impacted. But if the interest rates are low, the interest expense would also be lower and net profits would get a boost. That is how interest rate directly affects the company’s bottom line.
Moreover, if interest rates are low, companies could choose to expand and grow due to lower interest costs but when interest rates are high, companies could postpone expansion plans or else go to public.
Hello,
The RBIs monetary policy regulates the money supply in the economy by controlling interest rates(IR) to improve economic growth.
The RBI manages the Repo rate which is the rate at which commercial banks borrow from the RBI and the bank in turn decides its lending rate based on this repo rate.
An increase in IR will harm anyone who has borrowed money from a bank.
When the IR is low, companies borrow money from banks to expand their business and generate larger profits. When there IR is high, companies stall expansion and exercise cost cutting. This also reduces job opportunities and slows down the economic growth.
Companies who borrow money from banks at higher IR are hit by a reduction in profits due to an increase in the interest paid to the banks.
Also, retail investor participation reduces in the market as a higher IR ensures that investor money is parked in fixed return assets such as FDs and even MFs. This reduces overall domestic market participation and slows down economic growth to a larger extent.