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Rising Interest RatesA Short note on Impacts of it…

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Introduction

Though currently Interest rates are falling thanks to stimulus package of RBI, the blog covers the Effects and Impacts at macro and micro level in economy during Rising interest rates.

And yes…You need not to be economist for knowing all the (un)known facts happening currently in downbeat economy.

Effects on Increase in Interest rates is listed below, though not connected but having vicious cycle which leads either in Low bargaining powers and Unemployment or Steep fall in Demand/Production by business house

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Points to look at ….

Overall Spending Reduces

Financial Assets Value Falls

Foreigners are fascinated for Inflow of funds during that time

Rise in Exchange rate

Fall in Inflation

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Overall Spending Reduces Rise in Interest cost will hamper borrowing cost of the consumer and business in general, Expenditure by Consumers and business will go down.

Lets assume if A is earning 50k Net monthly and using 3 credit cards and having 1 loan currently higher interest will impact his interest on Loan as well as on Credit cards interest. Post interest rise his Interest on Loan will rise and he will have to save as well as spend within lesser amount then earlier. This will leave him for less income to spend and Demand will gradually slowed down.

Fall in spending will have triple impact :Demand will be reduced Low demand will compel the business man to reduce production Low production will ultimately impact cash flows/profit and thus will leave the option to Cost cutting (giving birth to wage cut/unemployment)

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Financial Assets Value Falls

Financial assets will see lowering down its market value at the time of Rising Interest rates.

Lowering Market value will reduce the wealth of Individual and will Save more Rupee and which in turn expenditure will fall. Expenditure fall will generate lowering demand of goods and As mentioned above Fall in Spending will have its tripling effect.

Lets assume, A is having total assets of 10L of which market value comes down to 8lacs, he will save more and spend less assuming that the assets would get worsen in near future.

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Foreigners are fascinated for Inflow of funds during that time

Rising interest rates are like cakebite for Foreign fund houses, they sink their teeth when the economy is having rising interest rate as the Return they will be getting would fetch higher return.

Rise in Overseas Foreign funds will attract speculators to deposit money in the country’s banking and other institutions for high RoR.

Higher Inflow of Foreign funds will increase demand of Rupee and exchange rate will rise

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Rise in Exchange rate

Good inflows of Funds will raise Demand for Domestic Currently (Rupee) which pushes up exchange rate. Rise in Exchange rate will beneficial to the domestic country for lowering down value of Imports and might help in bring down Inflation due to that. However the Exports will see major hit as it will be more expensive than earlier, the EOUs will have tough time during this.

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Inflation falls and below is the impact

Less demand for the product in Economy

New borrowing will be deferred due to High Interest rate

High Exchange Rate will raise Export price

Producer will lower down their production or lower down the pricing

Demand Falls Lowers Sales

Squeezing its Gross margins or by Cut in wage

Cost cutting pressure by Wage cut or Squeezing margins

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