Stocks For Intraday

NIFTY LEVELS

Saturday 8 October 2016

Impacts of Higher Interest Rates


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