Negative Impacts of Higher Interest Rates.
However, it needs to be borne in mind that should banks guarantee a
12% interest on fixed deposits, they would need to charge anything
between 15% — 18% on loans given by them. The brunt of this would,
therefore, have to be borne by the borrowers – large corporates, SMEs
and individuals – and result in excessive borrowing costs that would
eventually and inevitably hurt their overall profitability. This again
has a negative impact on stock prices. Moreover, it has been observed
time and again that rising interest rates for longer time periods
negatively impact an economy, and recession happens inevitably. A good
example would be farmers borrowing at high interest rates to lease
and/or buy land, seeds, fertilizers and farming equipment. They would
find it extremely difficult to increase agricultural productivity that
match rising costs. With agriculture being the Indian economy’s
backbone, such higher rates of interest would pose to be a block in the
total growth process.
Impact of Higher Interest Rates in the Short & Long Terms
While speaking of short term impact, it may be said that companies that have a high
debt burden, compounded by higher rates of interest, have reduced
Earnings Per Share (EPS). Their stocks, therefore, would be unattractive
to investors and end up with depleted prices. Higher interest rates
impact certain specific sectors in the long run. Examples of such
sectors are real estate, heavy engineering and automobiles, to name a
few. This again may prevent investors from putting their money in these
sectors, especially if they are burdened with higher interest rates.
No comments:
Post a Comment