• Invest
    Investment Suite
    Stocks
    Mutual Funds
    Future and Options
    IPO
    Exchange Traded Funds
    Commodity
    Stockcase (Stock Baskets)
    Currency
    Non Convertible Debentures
    Sovereign Gold Bond
    Exclusive
    NRI Account
    Private Client Group
    Features
    SipIt
    MTF
    Investment Suite
    Exclusive
    Features
  • Platform
    Product Suite
    Kotak Neo App & Web
    Nest Trading Terminal
    NEO Trade APIs
    Features and Tools
    MTF
    Securities Accepted as Collateral
    Margin Requirements
    Payoff Analyzer
    Calculators
    SIP Calculator
    Lumpsum Calculator
    Brokerage Calculator
    Margin Calculator
    MTF Calculator
    All Calculators
    Product Suite
    Features and Tools
    Calculators
  • Pricing
  • Research
    Research Calls
    Long Term calls
    Short Term calls
    Intraday calls
    Derivatives calls
    Pick of the week
    Top Monthly Picks
    Research Reports
    Fundamental Research Report
    Technical Research Report
    Derivative Research Report
    Research Calls
    Research Reports
  • Market
    Stocks
    Market Movers
    Large Cap
    Mid Cap
    Small Cap
    Indices
    Nifty 50
    Bank Nifty
    FinNifty
    Nifty Midcap India
    VIX
    All Indian Indices
    Mutual Funds
    SBI Mutual Funds
    HDFC Mutual Funds
    Axis Mutual Funds
    ICICI Prudential Mutual Funds
    Nippon India Mutual Funds
    All AMC's
    IPO
    Upcoming IPO
    Current IPO
    Closed IPO
    Recently Listed IPO
    Stocks
    Indices
    Mutual Funds
    IPO
  • Learn
    Resource
    Market Ready
    Kotak Insights
    Infographic
    Podcast
    Webinars
    Youtube Channel
    Quarterly Results
    Investing Guide
    Demat Account
    Trading Account
    Share Market
    Intraday Trading
    IPO
    Mutual Funds
    Commodities
    Currency
    Futures & Options
    Derivatives
    Margin Trading
    Events
    Budget 2024
    Muhurat Trading
    Share Market Holiday
    Market Outlook 2024
    Resource
    Investing Guide
    Events
  • Partner
    Business Associates
    Fund Expert
    Kotak Connect Plus
    Startup connect
  • Support
    FAQs
    Circulars
    Bulletins
    Contact Us
    Forms Download
    Get your Statement
​

How Interest Rates Affect Equity Markets?

  •  3m
  • 0•
  • 14 Feb 2023

Interest rates are set by central banks all over the world. In India, Reserve Bank of India sets the repo rate. This is the rate at which RBI lends to commercial banks. This becomes the benchmark rate. Commercial banks decide borrowing rates for businesses and people like us based on this benchmark rate. On 29 January 2013, RBI will conduct its quarterly review of monetary policy. According to a survey of 10 economists polled by The Economic Times, a business daily, it is expected that RBI would cut repo rates by 0.25 per cent to 7.75 per cent.

Equity markets would watch out for steps taken by the Reserve Bank of India. Here are pointers that highlight the relationship between interest rates and equity markets:

  • High interest rates hurt company profits: In the first half of the financial year 2012-13, companies across sectors paid 3.7% of their sales as interest, according to RBI's monthly bulletin for January 2013. This was just 1.6% four years ago. This ate into company profits. The net profit as a percentage of sales for companies stood at 6.4% in the first half of 2012-13 against 9.2% four years ago

  • Small companies hit most: The RBI study of small, medium and large listed companies suggests that small and medium sized companies are hit hardest due to high interest rates. Banks make small companies pay higher interest rate than large companies. The interest paid as a percentage of sales was 9.2% for small companies, 5.8% for medium companies and 3.3% for large companies. RBI defines small companies as those with sales of less than Rs 100 crore. Medium sized companies have sales between Rs 100 crore to Rs 1,000 crore. Large sized companies are those with sales of over Rs 1,000 crore.

  • High interest rates reduce domestic participation in stock markets: Investors tend to keep their money in fixed deposits or fixed return assets when interest rates are high. Indian investors pulled out money from equity markets in 2012. For January 2013, mutual funds were net sellers to the tune of Rs 2,770 crore, according to Securities and Exchange Board of India. This means investors in India do not feel the need to take any risk and bet on equity markets. In contrast, low interest rates in US and others markets drove foreign institutional investors to risky assets in emerging markets. In January 2013 so far, FIIs have injected $ 3bn in Indian equity markets.

  • High interest rates slow growth: Future growth of companies and expansion is also affected due to persistent high interest rates. Companies struggle to repay existing loans and put on hold expansion plans. This results in fewer jobs than before. Companies also cut spending and consume less. This reduces the demand for goods and services and slows economic growth.

Also Read

  • Understand the impact of low interest rates on equity markets in the developed world Read more

  • Interest rate is an important factor that determines investment in equity markets Read more

Did you enjoy this article?

0 people liked this article.

What could we have done to make this article better?

Read Full Article >
Enjoy Free Demat Account Opening
+91 -

personImage
Enjoy Free Demat Account Opening
+91 -