Impact of Rate Hikes in the Real Economy

It is noteworthy that the rate of Inflation is increasing around the world after Covid-19 Pandemic. To control this inflation rate, most of the Developed and Emerging economy nations are increasing the Bank Interest rate.

Let's see how the rising interest rates will play in the economy of Developed and Emerging economies and it's impact in the Equity(Stock) Market.

Generally, the Higher interest rate pegs High cost of borrowing for the Investors and Customers. It also increase the cost of borrowing for consumption. It leads to the Reduction of Spending. On the business side, the higher interest rate affects the future revenue growth of the respective companies. So, finally it would impact the Stock price of a listed companies.

On the other side, if there is a falling interest rate - an individual consumer gets loan at a cheaper interest rate. It also encourages the Spending that what we have seen in the Uncertainty times in the Real economy. Few asset prices can gain due to increasing demand on consumption. 

For the Economy side, it helps to get more investments for the business. Lower cost of borrowing and change on Fiscal Deficit would happen for the Government. Commonly, it would help to boost the economy and the future growth.

Rate hikes are very common for the Developed and Emerging economies in the Economy Life Cycle. The Developed economies can play with the Higher interest rates against the Inflation. They can pull their Foreign investments and back to home, when there is a Higher interest rate. 

For the Emerging economies, the higher interest rate leads to requirement of more funds to expand its growth. Higher interest rates would dent the Real economy in the Emerging Countries. It may weaken the Currency and Trade also. Regular investment inflow is required for these markets.

'Future Cash Flow is discounted' at a higher rate, when there is a Higher interest rate. Generally, when the interest rates are higher, the bond prices would fall and vice-versa. Bond and Bank interest rates have a inverse Relationship in the Economy.

"Floating interest bonds' are favorable in the Interest rate hike Scenario, however it would fall when there is a rate cuts.

In the Equity Market history, Increased rate hikes often coincide with the Bull Market trend and provides more investment opportunity when the market corrects in its way.

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